-----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, EzElVSEnz2p/Dn15OX5B2ctenO2MjRNEAVp2ojWbCAY7WQ5ZJl8SBuyPK69NbKPr 1veI9f+uXcH12aCrgZVtIA== 0000950150-96-000233.txt : 19960416 0000950150-96-000233.hdr.sgml : 19960416 ACCESSION NUMBER: 0000950150-96-000233 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960415 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN INTERNATIONAL PETROLEUM CORP /NV/ CENTRAL INDEX KEY: 0000799119 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 133130236 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-14905 FILM NUMBER: 96547248 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 FORM 10-K 1 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, 1995 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 5, 1996 was approximately $15,230,000 (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 12, 1996 was 26,767,464 Documents Incorporated by Reference: None -1- 2 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 pursuant to an agreement and plan of reorganization and merger in April 1982. The Company and its wholly-owned subsidiaries, American International Petroleum Corporation of Colombia ("AIPC-Colombia") and Pan American International Petroleum Corporation ("PAIPC") is engaged in petroleum exploration, drilling, production and marketing operations in Colombia and Peru, South America and in Indonesia. The Company's wholly-owned subsidiary, American International Refinery, Inc. ("AIRI") is the owner of a refinery in Lake Charles, Louisiana, which is currently leased through March 31, 1998 to Gold Line Refining, Ltd. ("Gold Line"), an independent refiner. The term the "Company" or "AIPC" includes AIPC, AIPC-Colombia, PAIPC, and AIRI unless the context otherwise requires. The Company's principal oil and gas properties consist of (i) between 40% and 80% of the working interest in all oil and/or gas wells drilled on approximately 36,000 acres in the Puli Anticline and the Toqui-Toqui Field,located in the Middle Magdalena Region of Colombia, South America, which are part of the Puli Association Contract and (ii) 65% of the working interest in approximately 77,000 acres of exploratory and development contract rights in the Talara Basin in Peru. In December 1995, the Company entered into a Farmout Agreement in Indonesia, whereby the company would to earn a 49% working interest in a Technical Assistance Contract ("TAC") with the Indonesian government oil company ("Pertamina") for the Pamanukan Selatan area of West Java Province, Indonesia. The TAC is subject to government approval. INTERNATIONAL EXPLORATION AND PRODUCTION COLOMBIA, SOUTH AMERICA In 1987, the Company acquired the rights to 45% of the Puli Association Contract Area in the Middle Magdalena Region, from the previous operator. In December 1991, it purchased an additional 35% interest, bringing its total working interest to 80%. Petroleros Del Norte, a Colombian company ("Petroleros"), owns the remaining 20% of the working interest. The Company acts as operator of its Association Contract in Colombia, which is subject to a 20% royalty payable to the Colombian government national oil company ("Ecopetrol") and to certain Colombian taxes. PULI AREA The Puli Association Contract originally covered approximately 92,000 gross acres in the Middle Magdalena Valley. In 1991, the acreage was reduced to approximately 33,000 gross acres under the terms of the Association Contract. Twenty-one productive wells have been drilled on a prospect of approximately 1,900 acres in the Puli Area, all of which were completed as of December 31, 1995. These wells produced an average of 868 gross barrels of oil per day during March 1996. All of the producing wells are located in the Toqui-Toqui Field. In April 1992, Ecopetrol declared the Toqui-Toqui field commercial. As a consequence of declaring the field commercial, Ecopetrol will participate in 50% of the costs of developing the field and must reimburse the Company for 50% of its previous successful drilling costs to date. Production from the field is subject to a 20% royalty payable to the Colombian government. -2- 3 In December 1995, the Company completed the drilling of its TT-34 well in the Toqui-Toqui Field. The TT-34 well was drilled to a total depth of 4,069 feet and encountered 120 feet of net pay, or productive region, in the Doima Sands which is the normal productive sand in the Toqui-Toqui Field. In addition, the well encountered 161 feet of net pay in a newly-discovered zone in the Chicoral Formation (the "Chicoral"). The Company and its independent petroleum engineers ("Huddleston & Co., Inc.") believe the well should have been drilled deeper, and the net pay could have been more than 161 feet. However, further drilling was constrained by the rig's capacity. Huddleston & Co. estimates the potential oil in place in the Chicoral to be approximately 133 million barrels, of which approximately 13%, or 17.1 million barrels, is recoverable. Some of these reserves are included in the Company's proved reserve base at December 31, 1995. Huddleston further estimates that the Chicoral extends over an area of 1,673 acres with an oil reservoir of an average thickness of 113 feet. The drilling of additional wells will be required to adequately define the commercial extension of the Chicoral. The TT-34 well was drilled on a "sole risk" basis, which allows the Company to recover 200% of its costs before its partner, Petroleros, may convert its 20% working interest. The other partner, Ecopetrol, may choose to participate in 50% of the future net profits generated by this discovery by reimbursing the Company 50% of past costs and participating in 50% of future costs associated with this discovery. Presently, the Company maintains a 100% working interest until each of the other parties decide whether or not to participate. If both Petroleros and Ecopetrol decides, to participate, the new discovery will then be owned as follows: 40% AIPC, 50% Ecopetrol and 10% Petroleros. Four wells have been drilled in a separate area of the Puli Association Contract known as the Puli Anticline. The first well was drilled by a third party operator and was not productive. The second well was drilled by the Company to 5,400 feet and completed as a gas discovery. The third well was completed in 1992 as an oil well and is currently shut-in. In August 1993, the Company drilled a fourth well to a target depth of approximately 7,600 feet. This well was not commercially productive. The Company re-entered the second well in mid-1994 and deepened the well without encountering further productive intervals. Further evaluation of the Puli Area's potential is still in progress. LAGUNILLAS In December 1991, the Company signed an Association Contract with Ecopetrol to explore approximately 190,000 acres in the Lagunillas area of the Middle Magdalena Valley. In October 1994, the Company farmed-out a 50% working interest in Lagunillas to a non-affiliated company. In September 1995, the Company entered into a farmout agreement with a separate non-affiliated oil and gas company (the "Farmee"), whereby the Company will transfer all of its remaining interest and obligations at Lagunillas. The Company will remain as operator and 50% working interest owner of this block until the Farmee has been qualified as a petroleum company by the Colombian Ministry of Mines, which is expected in mid-1996. RELINQUISHED BLOCKS During 1995, after completing its technical evaluations of the Viani, Tabacales and Aguablanca Blocks in Colombia (where the Company had previously signed Association Contracts with Ecopetrol), the Company relinquished all of its rights in these Blocks to Ecopetrol. As compensation for the early relinquishment and cancellation of all its obligations in these blocks, the Company paid Ecopetrol approximately $500,000, which was substantially less than the $3.1 million the Company was previously required to invest under the related contractual work programs. -3- 4 Also during 1995, the Company relinquished all of its rights and obligations in the Rio Planas Area of Colombia to a non-affiliated company. PERU, SOUTH AMERICA In October 1993, PAIPC entered into a joint venture agreement with Rio Bravo, a Peruvian corporation ("Rio Bravo"), to participate in the exploration and development of a 77,000 acre block in the Talara Basin under which PAIPC receives a 65% interest in production from exploration and development after recovery of 150% of all drilling costs invested by PAIPC on behalf of Rio Bravo. The agreement also provides PAIPC with an option to participate in the rehabilitation and further development of a producing oil field on the block on a 50/50 basis. In late 1994 and early 1995, PAIPC drilled one exploratory well and two new step-out development wells. However, full evaluation of the potential of those oil reservoirs has been delayed, primarily due to a dispute with Rio Bravo (See "Item 3 - Legal Proceedings"), so the timing or amount, if any, of oil reserves that the Company may add to its reserve base as a result of its drilling in Peru is not presently determinable. In spite of these problems, during 1995, the minimum work program required under the license contract in Peru was completed and certified as complete by the government. Rio Bravo has continuously refused to cooperate in the development program in the block and to honor PAIPC's right to oil production from the Block. Consequently, PAIPC has not received its share of revenues since the unilateral lockout by Rio Bravo in October 1995 (See "Item 3 - Legal Proceedings"). As all relations with the government are joint with PAIPC and its partner, the government cannot act unilaterally to resolve a dispute between the parties. However, the Company continues its efforts to negotiate an amicable settlement to this situation. MANAGEMENT PLANS The Company recently performed an analysis to determine the viability of operating its 16,500 barrel per day Vacuum Distillation Unit to produce vacuum gas oil and asphalt in addition to, but separate from, the operations currently being performed by Gold Line. Preliminary studies utilizing actual pricing scenarios from 1994 and 1995 indicate that such a project could provide the Company with significant amounts of revenues and profits, if appropriate feedstock and end-product contracts, and adequate financing, could be secured. The Company plans to pursue a program of this nature in order to maximize the capability of its Refinery assets, however, the timing for the implementation of such an operation, if any, is indeterminable at this time. The Company has received an offer from an oil company and inquiries from various others regarding a possible farmout of its new Chicoral discovery and its other Colombian properties in return for cash and drilling obligations in the Company's Toqui-Toqui field. Such a transaction could provide the Company with the necessary capital to repay a portion of its recently-issued 10% Debenture, while establishing a plan for the full exploitation of its Chicoral discovery with little or no cost to the Company. Although a farmout would result in a lower overall Company ownership interest of its Colombian reserves, the net result to the Company could be an increase in its oil and gas reserve base, a stronger balance sheet and greater potential for earnings and cash-flow growth. The Company is also engaged in negotiations with Far Eastern Hydrocarbons Ltd., a Hong Kong Corporation ("FEH"), to exchange shares of the Company's common stock in return for 100% of the outstanding common stock of a wholly-owned subsidiary of FEH (See "Indonesian Agreements" below). FEH has indicated a desire to provide the necessary financing, or guarantees for same, to enable the Company to actively participate in the international energy community. In addition, the oil fields owned by FEH are producing significant amounts of cash -4- 5 flow, which could also be utilized to fund the Company's operations, if necessary. However, the Company is not able, as of this writing, to determine if the current negotiations will be successful and, consequently, there can be no assurance when, or if, the share exchange agreement will be consummated. INDONESIAN AGREEMENTS USTRAINDO In January 1995, the Company signed an agreement with P.T. Ustraindo Petrogas ("Ustraindo"), a private Indonesian energy company, whereby the Company agreed to assist Ustraindo in operating all of the concession areas now held by Ustraindo in Indonesia, namely 22 oil and gas fields, including 2,000 wells. In return for providing its technical assistance to Ustraindo, the Company was to receive a reimbursement of all of its related costs, plus a 3% net profits interest in the 22 fields. In addition, the Company received a one-year option to purchase a minimum of 25% working interest in the concessions for $17 million in cash. During the fourth quarter of 1995, the closing of the Ustraindo agreement was suspended due to certain issues of controversy between Ustraindo and Pertamina, which issues are primarily related to Ustraindo's alleged non-performance under their TACs with Pertamina. The Company elected to wait for a resolution of these issues before taking any further action regarding its agreement with Ustraindo. However, at this point, it is very unlikely that any agreement between the Company and Ustraindo will be consummated in the form to which the parties originally agreed. MALACCA STRAIT In November 1995, the Company reached a preliminary agreement with FEH to purchase a portion of the issued and outstanding common stock of Resource Holdings, Inc. ("RHI"), a private Delaware corporation and a wholly-owned subsidiary of FEH, in exchange for common stock of the Company. The Company was also to receive a six-month option to acquire the remainder of RHI's common stock payable with shares of the Company's common stock. In January 1996, the Company and FEH modified the structure of the proposed transaction. Under the new structure, 100% of RHI's shares would be exchanged for an as yet unspecified number of the Company's shares, subject to the signing of a definitive agreement. Because of the large number of shares of common stock required, the transaction is also subject to approval by the Company's shareholders. As of April 5, 1996, the parties were continuing their due diligence processes and, as stated above, no assurance can be given as to when, or if, an agreement will be consummated. RHI's assets consist of its wholly-owned Panamanian corporation, Kondur Petroleum S.A. ("Kondur"), which owns 34.46% of the Malacca Strait PSC Contract ("Malacca") in Sumatra, Indonesia. Kondur is the largest Indonesian-owned domestic operator in Indonesia. The remaining interests in Malacca are owned by China National Offshore Oil Corporation and Novus Petroleum Ltd. Malacca covers an area of 2.7 million acres and contains 16 oil fields operated by Kondur, which are currently producing an aggregate of approximately 20,000 barrels of oil per day. Malacca has an estimated 58 million barrels of proven recoverable oil reserves and 47 billion cubic feet of proven recoverable gas reserves. It also includes an additional 133 million barrels of probable oil reserves. Kondur intends to increase the daily average production rates of Malacca through future development and exploration, which is scheduled to commence during the third quarter of 1996. PAMANUKAN SELATAN -5- 6 In December 1995, the Company entered into a Farmout Agreement with P.T. Pelangi Niaga Mitra Internasional, an Indonesian company ("PNMI"), whereby the Company is expected to earn a 49% working interest in a Technical Assistance Contract ("TAC") with Pertamina for the Pamanukan Selatan area of West Java Province, Indonesia by providing 100% of the funding for the exploration, development and operation of the TAC. Full exploration and development of the TAC is expected to cost between $2 and $3 million over the next three years, of which approximately $700,000 will be required during 1996. As a portion of its obligations under the Farmout Agreement, the Company issued, pursuant to Regulation S of the Securities Act of 1933, 100,000 shares of its common stock to PNMI. The Company will be the operator of the joint operations and the TAC and is to be reimbursed for 175% of all expenditures, pursuant to the cost recovery provisions in the TAC, before any distribution of profits to PNMI can occur. The Company will also be entitled to recoup Indirect Overhead charges up to five percent of total expenditures, which amount will be part of the cost recovery. All monetary obligations the Company may have under the Farmout Agreement are subject to PNMI receiving governmental certification and Pertamina's approval to conduct operations under this TAC, which PNMI expects to occur in May of 1996. In the event the negotiations with FEH, discussed above, are not successful, the Company may reconsider its participation with PNMI. Pamanukan Selatan includes an estimated 16 billion cubic feet of gas reserves. The field's initial well tested at 5.7 million cubic feet of gas per day and is temporarily shut-in pending construction of a 1.3 mile delivery pipeline. In October 1995, the Company signed a Memorandum of Understanding with PNMI, which entitles the Company to a two-year right of first refusal to farm-in to a 49% working interest in any future contracts obtained by PNMI from Pertamina. The Company will have three months to exercise its rights, after receipt of each notification from PNMI, at a cost to be negotiated on a deal-by-deal basis. DOMESTIC OPERATIONS - REFINERY GENERAL In July 1988, AIRI acquired an inactive oil refinery located on a site bordering the Calcasieu River near Lake Charles, Louisiana (the "Refinery"). The Refinery is situated on 30 acres of land. 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 Intracoastal Waterway. Most of the Refinery's feedstock and products are handled through the Refinery's barge dock at the river. After the Company acquired the Refinery, it was recommissioned and then extensively tested during operations between February and July 1989. During that time it processed over a million barrels of Louisiana, North African and West African crude oils and operated at rates of up to 24,000 barrels per day. Numerous modifications were designed to bring the Refinery into compliance with new and existing environmental regulations and to facilitate production of higher value products. Construction commenced during the fourth quarter of 1989, resulting in completion of most environmental compliance projects and a military specification jet fuel ("JP-4") upgrade project in 1990. The Company has continuously leased the Refinery to Gold Line Refining, Ltd. ("Gold Line") since October 1990. (See "Refinery Lease" below). DESCRIPTION OF REFINERY -6- 7 The main unit of the Refinery is a 30,000 barrels per day crude distillation tower suitable for adaption to process sour crude oil. The fractionator is capable of producing light naphtha overhead, and the following side cuts: heavy naphtha, kerosene (for jet fuel), #2 diesel, atmospheric gas oil, and reduced crude oil sold as special #5 fuel oil. In 1989, the Company purchased a 16,500 barrel per day vacuum distillation unit ("VDU") which was dismantled and moved to Lake Charles. 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 is currently in the process of studying the viability of utilizing the VDU to produce asphalt and vacuum gas oil which can be sold to other refineries as a feedstock to manufacture high octane gasoline. The main portion of the plant has the capacity to process 30,000 barrels per day of crude oil. (See "Management Plans" below). Total petroleum storage capacity is 645,000 barrels. Storage tanks on the Refinery's land include 220,000 barrels of crude storage, 345,000 barrels of storage for finished products sales and 80,000 barrels of product rundown storage. The Refinery also has 20,000 barrels of waste water storage. REFINERY LEASE Under its lease, Gold Line is responsible for substantially all costs associated with operating the Refinery. One-half of all lease rental payments to the Company under this or any other lease of the Refinery are to be paid to MG Trade Finance ("MGTF") to retire principal and interest on Refinery debt. (See "Business - Refinery Financing Activities" below. Prior to such lease becoming effective April 1, 1991, the Company arranged certain financing, referred to below, and completed construction of substantially all of certain environmental compliance projects and jet fuel upgrade projects required to produce military jet fuel. As consideration for concessions made in the agreement, Gold Line released the VDU from the property subject to the lease. The VDU has the capacity to utilize the residue fractions remaining after completion of refining operations in the main refinery, or utilize similar product obtained elsewhere, to produce asphalt and vacuum gas oil. All amounts owed to AIRI by Gold Line on October 1, 1992 were restructured and evidenced by a promissory note in the principal amount of $1,244,192 and bearing interest at prime plus 2%, due on September 30, 1995. 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. From December 31, 1992 until March 22, 1995, the note remained unpaid. During 1994 AIRI established a $1,244,192 reserve for potentially uncollectible receivables from Gold Line. In 1994, the lease expired and was not renewed. However, by mutual consent, Gold Line continued to operate the Refinery through mid-December 1994, when Gold Line shut down its operations pending receipt of new financing from its banks. On March 22, 1995 Gold Line obtained a line of credit with NationsBank to finance its obligations at the Refinery, and the Company entered into an amended Lease Agreement with Gold Line, extending the lease term through March 31, 1998. The rental fees, payable monthly, were $.40 for each barrel of feedstock processed through the Refinery by Gold Line through December 31, 1995, and increased to $.50 per barrel from January 1, 1996 through the end of the lease. Also on March 22, 1995, the Company again restructured all past due amounts owed to AIRI by Gold Line and executed a promissory note (to replace the old note) in the principal amount of $1,801,464 (the "Note"), which is subject to a Subordination and Standby Agreement between the Company, Gold Line and NationsBank (the "Subordination Agreement"). Gold Line agreed to amortize the Note by making quarterly payments to AIRI during the term of the lease of approximately $144,000, plus accrued interest at a rate of prime plus 1%. The remainder is to be paid by (i) a series of additional payments during the last 6 months of the lease or (ii) Gold Line will fund and construct a vacuum recovery unit on the Refinery, at which time the Company will reduce the balance due on Gold Line's note by $650,000. Gold Line may not make payments on the Note to -7- 8 AIRI unless it is in compliance with certain covenants included in the Subordination Agreement. Because of the problems mentioned below, and pursuant to the Subordination Agreement, to date, Gold Line has not been permitted to make any payments of principal and interest on the Note to AIRI. During 1995, Gold Line encountered problems in obtaining the financing necessary for it to secure sufficient levels of feedstock to keep the Refinery operating at full capacity. As a result, the lease fees the Company received during 1995 of $1,185,000 were substantially lower than expected. In addition, these problems put Gold Line in a difficult position in obtaining new fuel supply contracts with the United States Defense Fuel Supply Center ("DFSC"). With the objective of assisting Gold Line in securing the necessary financing to ensure renewal of its supply contracts, in February 1996, the Company agreed to reduce the amount of the Note from $1,801,464 to $900,732. All other terms of the Note remain unchanged. In March 1996, Gold Line was successful in obtaining the necessary financing to secure a $45 million fuel supply contract with the DFSC. As a result, Gold Line expects to process higher volumes of feedstock, which should permit it to make payments to AIRI as called for in the Note. REFINERY FINANCING ACTIVITIES Subsequent to the purchase of the Refinery, the Company entered into a series of transactions with 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 all of AIRI's obligations under a 1988 supply agreement of $6,505,000; (ii) repay AIRI's prior loan obligation with MGTF; (iii) fund certain improvements related to environmental regulations and production of J-4 jet fuel; and (iv) 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. AIRI may not, during the term of the Loan Agreement, make a dividend distribution to the Company or repay amounts advanced to it by the Company, and AIRI is limited in the amount of indebtedness it can incur. In the Loan Agreement, the Company granted MGTF warrants to purchase 516,667 shares (as adjusted) of the Company's 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 addition, MGTF's parent company, MG Corp., is entitled to one seat on the Company's Board of Directors without the consent of the Company and a second seat upon the consent of the Company's Board, which consent is not to be unreasonably withheld. One of such Directors is also eligible to be appointed to the Executive Committee, also upon consent of the Company's Board, which consent is not to be unreasonably withheld. MGTF has not nominated any directors to the Board. 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. In addition, MGTF retained the right to lease the Refinery in the event the existing lease with Gold Line is terminated prior to its expiration. 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 -8- 9 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. The expiration date of June 30, 1997 remained unchanged. In March 1995, the Company further amended the Loan Agreement whereby MGTF extended the unpaid balance due by the Company of $2,845,000 to March 31, 1998. Fifty percent of the monthly lease fee proceeds from Gold Line are to be applied to amortize the MGTF loan. To the extent the portion of such lease rental payments is not sufficient to meet accrued interest due on the loan, the Company must advance funds to AIRI to satisfy such obligation. The related interest rate was also reduced to the prime rate plus 1%. OTHER FINANCINGS In January 1993, the Company issued $5.6 million of 12% Secured Debentures, due December 31, 1997, which are secured by all of the issued and outstanding capital stock of its wholly-owned subsidiary AIPC-Colombia. The Company used the proceeds to fund its Colombian drilling, production and marketing operations and to repay certain debt. The Company has $3.6 million of principal payments remaining on its 12% Secured Debentures. (See "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources".) 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. In March 1996, the expiration date of these warrants was extended to March 1, 1997, however the exercise price remains at $4.00 per share. The rights offering resulted in the exercise of 5,957,390 rights for gross proceeds of $17,872,170. Gross proceeds consisted of the surrender of $950,000 of the Company's 12% Secured Debentures, receipt of $16,521,000 cash and issuance of a $400,000 note receivable bearing interest at 10% per annum to an officer of the Company. The Company paid commissions of $1,181,757 from gross proceeds to various placement agents. Additionally, the Company incurred approximately $484,000 of expenses related to the offering. Proceeds from the offering were utilized for general corporate purposes including exploration and development of the Company's prospects in Colombia and Peru, repayment of debt and for working capital. During 1995 and the first quarter of 1996, the Company issued an aggregate of 7,668,318 shares of its common stock in exchange for cash and services rendered to the Company valued at an aggregate of approximately $4,714,000 through various private placements and agreements, most of which were placed in accordance with the safe harbor provided by Regulation S as promulgated by the Securities and Exchange Commission (the "SEC"). In March 1996, the Company received net proceeds of $1,350,000 from the sale of 10% Convertible Subordinated Redeemable Debentures (the "10% Debentures") in a private placement to various foreign buyers under Regulation S. At its option, the Company may redeem any or all of the 10% Debentures prior to conversion by paying to the holder in cash 135% of the then outstanding principal balance of the 10% Debenture plus accrued interest to date. Such payment may also be made by the Company within 15 days of receipt of a conversion notice by the Company from the holder(s). In addition, the Company, at its sole option, may force conversion at any time on and after 120 days from the date of issuance of the 10% Debentures if the average closing bid price for the Company's common stock for five consecutive trading days shall be in excess of $1.50. The holders of the 10% Debentures may convert all or any amount over $25,000 of the original principal amount, commencing May 11, 1996, into shares of the Company's common stock at a conversion price per share equal to the lower of (i) 65% of the average closing bid price of the Common Stock for the five business days immediately preceding the date of receipt by the Company of notice of conversion or (ii) 65% of the average of the closing bid price of the Common Stock for the five business days immediate preceding the date of Subscription by the holders. -9- 10 The Company is utilizing the proceeds from the 10% Debenture to repay debts and for working capital purposes. COMPETITION The oil and gas industry, including oil refining, is highly competitive. In South America and Indonesia, the Company is in competition with numerous major oil and gas companies and large independent companies for prospects, skilled labor, drilling contracts and equipment. Many of the companies operating in South America and Indonesia have greater resources than the Company's. The Company believes, however that despite this intense competition, it will be able to sell all of its production at prevailing market rates. Due to highly volatile crude oil prices and environmental regulation, many oil refineries have ceased or curtailed production. The Company believes, although no assurance 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 competition in the refining business. However, since the Company has leased a portion of the Refinery to Gold Line and, unless it implements its contemplated VDU operations (See "Business - Management Plans", below) it does not stand to benefit or suffer directly from competitive factors in the refinery business (provided such competitive factors do not result in a default by Gold Line under the lease) so long as the Refinery remains under lease. There is no assurance that the Refinery will remain under lease, or that after the termination of the lease, the Company will be able to compete successfully in the refining business should it operate the Refinery itself. RISKS ASSOCIATED WITH THE COMPANY'S FOREIGN OPERATIONS The following are some of the risks that the Company encounters in its foreign operations: Political Risks in Colombia, Peru and Indonesia. The Company's operations could be adversely affected by the occurrence of political instability and civil unrest in Colombia, Peru and Indonesia. Political instability could also change the current operating environment for the Company in these countries through the imposition of restrictions on foreign ownership, repatriation of funds, adverse environmental laws and regulations, adverse labor laws, and the like. Any such changes could significantly affect the ability of the Company to conduct business in these countries, which could (particularly in Colombia) have a material adverse effect on the Company. Risk of Capital Losses Due to Speculative Nature of Oil and Gas Industry. 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. Energy Market Subject to Fluctuation. 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 its oil 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 in South America, Iraq, Kuwait, Iran and other areas. All of the aforementioned factors, coupled with the Company's ability or inability to engage -10- 11 in effective marketing strategies, may affect the supply or demand for the Company's oil or gas and, thus, the price attainable therefore. FINANCIAL INFORMATION RELATING TO FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES The table below sets forth, for each of the last three fiscal years, the amounts of revenue, operating profit or loss and assets attributable to each of the Company's geographical areas, and the amount of its export sales.
Sales to unaffiliated customers: 1995 1994 1993 ----------- ----------- ----------- United States $ 1,403,668 $ 2,094,235 $ 1,783,792 Colombia 1,214,213 1,169,323 2,107,801 Peru 166,069 122,068 - Sales or transfers between geographic areas: United States - - - Colombia - - - Peru - - - Operating profit or loss: United States (518,462) 717,824 478,495 Colombia (299,188) (8,309,950) (10,441,991) Peru 100,928 81,044 - Identifiable assets: United States 13,565,280 14,481,904 15,097,120 Colombia 14,136,257 13,580,190 18,589,440 Peru 4,247,975 2,717,167 - Export sales: - - -
INSURANCE; ENVIRONMENTAL REGULATIONS The Company's operations are subject to all risks normally incident to (i) oil and gas exploratory and drilling activities, including, but not limited to, blowouts, extreme weather conditions, pollution and fires; and (ii) the refining of petroleum products. Any of these occurrences could result in damage to or destruction of oil and gas wells, related equipment, 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 most 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. Because the Company's oil and gas operations are carried out in countries where the cost of environmental compliance is relatively low, such compliance is not expected to have a material effect upon the capital expenditures, earnings or competitive position of the Company. MARKETING During 1993 and for the four months ended April 30, 1994, the Company sold all of its oil production from its Colombian properties to Ecopetrol. Effective May 1, 1994, the Company entered into an agreement with Carbopetrol S.A. to sell all of its crude oil currently produced in Colombia. This contract is a 6-month renewable fixed-price sales contract for all crude oil produced by the Company from the Toqui-Toqui field. Payments are made in Colombian Pesos adjusted for expected exchange fluctuation. Prices are based on the price of local fuel oil -11- 12 and, effective March 1996, are equivalent to a net price to the Company of approximately $8.40 per barrel of oil. (See "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Exploration and Production Activity.") In Peru, a contract with PetroPeru provides 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 the operator of approximately 65% of the world basket price for the field, which, based on a gross price of $16.53 per barrel in January 1996, provided a net price to the Company of approximately $10.75 per barrel of oil. Sales of the Company's crude oil to Carbopetrol S.A. in Colombia accounted for 39% and 18% of the Company's 1995 and 1994 revenues, respectively. Sales to Ecopetrol accounted for approximately 10% and 47% of the Company's 1994 and 1993 revenues, respectively. Lease fees from Gold Line accounted for approximately 42%, 59% and 43% of the Company's 1995, 1994 and 1993 revenues, respectively. There is no assurance that Gold Line will be able to meet its obligations under the lease, however, if Gold Line could not complete its obligations under the Refinery lease, the Company believes it could obtain another lessee on substantially the same terms as Gold Line's lease or operate the Refinery itself. (See "Management Plans"above.) Management does not believe that the loss of Carbopetrol S.A. or PetroPeru as customers would materially adversely effect the Company's operations. In the past, the Company has been approached by other purchasers of oil willing to purchase the Company's production on terms similar to those in effect with its current purchasers. While no assurance can be given, Management believes that it would be able to sell its oil and gas to other persons on terms similar to that being offered from time to time by the Company's present purchasers. In addition, continuing market for the Company's oil and gas 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 purchases all raw materials needed for its operations from major suppliers and manufacturers located throughout the United States, Colombia and Peru. The Company believes that these materials are in good supply and are available from multiple sources. EMPLOYEES As of April 6, 1996, the Company employed 33 persons on a full-time basis: 13 persons who are engaged in management, accounting and administrative functions in the United States, 19 in management, technical and administrative functions in the Company's offices in Bogota, Colombia, and 1 technical person in Lima, Peru. 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 $6,546. In addition, the -12- 13 Company leases approximately 3,400 square feet of office space in Houston, Texas. The lease expires in November 1997 and provides for a monthly rental of $3,570. The Company leases approximately 15,000 square feet of office space in Bogota, Colombia under an annually renewable lease. The Company renewed the lease for one year on March 1, 1996; however it now occupies approximately 3,400 square feet, for which it pays $3,000 per month in rent. The remainder is being sublet at approximately the same rate as the Company's obligation. The Company also owns 87 acres of land in Lake Charles, Louisiana where its oil Refinery is located. In addition to the structure and equipment comprising the Refinery facility, the Refinery assets include an approximately 4,000 square foot office building and three metal building structures serving as work shops, maintenance and storage facilities with an aggregate square footage of approximately 3,800 square feet. OIL AND GAS ACREAGE AND WELLS Gross acreage presented below represents the total acreage in which the Company owns a working interest 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, 1995.
Gross Gross Net Net Developed Undeveloped Developed Undeveloped Acreage Acreage Acreage Acreage ------- ------- ------- --------- Colombia 19,379 13,474 6,201 4,312 Peru - 76,788 - 49,912
The table below indicates the Company's gross and net oil and gas wells as of December 31, 1995. Gross wells represents the total wells in which the Company owns 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 ----- --- ----- --- ----- --- Colombia 20 8.4 20 8.4 - - Peru* 4 2.6 4 2.6 - - - --------------------------
*Still under evaluation -13- 14 OIL AND GAS PRODUCTION The table below indicates the Company's net oil and gas production, by country, for each of the five years in the period ended December 31, 1995, 1994, 1993, 1992, and 1991, 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) -------- ------------------ -------- --------- 1995-Colombia 137,821 $ 8.01 - - -Peru 17,794 9.29 - - 1994-Colombia 121,643 $ 8.91 - - -Peru 17,534 6.94 - - 1993-Colombia 132,756 $14.12 - - 1992-United States 3,570 $20.17 225,247 $1.55 -Colombia 71,236 14.91 - - 1991-United States 5,963 $17.16 345,131 $1.30 -Colombia 82,574 12.55 - -
Average foreign lifting costs in 1995, 1994, 1993, 1992 and 1991 were approximately $2.75, $4.64, $9.02, $9.11, and $4.84 per equivalent barrel of oil, respectively. The Company's average domestic lifting costs for 1992 and 1991 were approximately $10.26 and $8.35 per equivalent barrel of oil, respectively. 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 the Company as of January 1, 1996. As of January 1, 1996, all of the Company's proved reserves were located in Colombia. The report, dated March 22, 1996, is summarized below. Future net revenues were calculated after deducting applicable taxes and after deducting capital costs, transportation costs and operating expenses, but before consideration of Federal income tax. Future net revenues were discounted at a rate of ten percent to determine the "present worth". The present worth was shown to indicate the effect of time on the value of money and should not be construed as being the fair market value for the Company's properties. Estimates of future revenues did not include any salvage value for lease and well equipment or the cost of abandoning any properties.
COLOMBIAN RESERVES Future Net Future Revenues Net Oil Net Discounted (Barrels) Net Gas (mmcf) Revenues at 10% ---------- -------------- -------- -------- Proved Developed Producing 844,000 724 $5,452,000 $ 3,311,000 Proved Developed Non-Producing 169,000 4,376 5,464,000 3,134,000 Proved Undeveloped 3,093,000 6,281 16,317,000 6,379,000 --------- ------ ----------- ----------- TOTAL 4,106,000 11,381 $27,233,000 $12,824,000 ========= ====== =========== ===========
-14- 15 Huddleston & Co., Inc. used the net market price, exclusive of transportation cost, of $8.72 per average barrel of oil and $1.00 per MCF of gas in their report. The oil prices utilized were the prices received by the Company as of December 31, 1995 for oil produced from the Company's leaseholds. The gas prices utilized were based on the Ecopetrol spot price at December 31, 1995. The prices were held constant throughout the report except for where contracts provide for increases. Operating costs for the Company's leaseholds include 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. These reserves may or may not be actually recovered, and, if recovered, the revenues therefrom and the actual costs related thereto could be more or less than the estimated amounts. Because of governmental policies and uncertainties of supply and demand, the actual sales rates and prices actually received for the reserves along with the cost incurred in recovering such reserves, may vary from those assumptions included in the report. The report further states that estimates of reserves may increase or decrease as a result of future operations. 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 maintained on file by the Company. 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.
1995 1994 1993 Gross Net Gross Net Gross Net ----- --- ----- --- ----- --- Exploratory Wells: South America Oil - - 2.00 1.15 - - Gas - - - - - - Dry - - - - 3.00 2.80 ---- ---- ---- ---- ---- ---- TOTAL - - 2.00 1.15 3.00 2.80 Development Wells: South America Oil 2.00 1.30 2.00 1.30 6.00 2.40 Gas - - - - - Dry - - - - - ---- ---- ---- ---- ---- ---- TOTAL 2.00 1.30 2.00 1.30 6.00 2.40 ---- ---- ---- ---- ---- ---- TOTAL 2.00 1.30 4.00 2.45 9.00 5.20 ==== ==== ==== ==== ==== ====
-15- 16 ITEM 3. LEGAL PROCEEDINGS Except as described below, there is no 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 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 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 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, even in light of the findings of the TAM, the IRS Appeals officer has indicated to AIRI that the IRS still wants to negotiate a settlement. As a result, AIRI has scheduled a meeting for April 30, 1996 with the IRS Appeals Office to discuss the situation. Depending upon the results of this meeting, the Company will decide whether to litigate or settle this situation. Regardless of whether the Company decides to litigate or settle, it believes it will incur some form of liability, either in legal expenses or payments to the IRS, or some combination of both. Consequently, it has provided an allowance during 1995 of $250,000 for this potential incurrence of expenditures, although at this time, the Company is unable to determine exactly what liability may arise from this assessment. On January 25, 1994, a lawsuit captioned Paul R. Thibodeaux, et al. v. Gold Line Refinery Ltd. (a limited partnership), Earl Thomas, individually and d/b/a Gold Line Refinery Ltd., American International Petroleum Corporation, American International Refinery, Inc., Joseph Chamberlain individually (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. Responsive pleadings have been filed by AIRI to this action and to the three amendments which added plaintiffs, defendants and restructured the plaintiff's claims (deleting some claims and adding new claims). The lawsuit alleges, 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 seek an unspecified amount of damages, including special and exemplary damages. AIRI continues to vigorously defend such action. In March 1996, the Company and AIRI filed an Exception of Prescription which is expected to eliminate most of the plaintiffs claims. At this time, the Company is unable to determine what, if any, liability may arise from this action. In October 1995, Rio Bravo S.A., the operator of the Company's Lot IV Block in Peru, locked-out PAIPC personnel from access thereto and filed a legal action in Peru against PAIPC claiming damages of $11,695,000 and alleging that PAIPC's License Contract with the government to explore Block IV (the "License Contract") was cancelled by the government due to the fact PAIPC did not complete the minimum work program required under the License Contract. However, because the -16- 17 minimum work program was completed and was certified as complete by the government (the performance bond placed by PAIPC to assure its compliance with the minimum work program has, in fact, been released by the government) and, since the License Contract with the government is still in effect and has not been cancelled, the Company expects the legal action by Rio Bravo will be decided in PAIPC's favor. PAIPC has also filed counter-claims and is in the process of filing liens against Rio Bravo to defend its interests in the Block and License Contract and continues to participate in meetings with the government related to the activities in the Block and in all matters of administration and execution of the obligations in the License Contract. At this time, the Company is unable to determine what, if any, liability or benefits may arise from this action. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None -17- 18 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 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 -------- ------- -------- ------- 1994 First Quarter $2.12 $1.22 $0.40 $0.31 Second Quarter 1.40 0.94 0.25 0.09 Third Quarter 1.44 0.94 0.28 0.12 Fourth Quarter 1.40 1.00 0.25 0.12 1995 First Quarter $1.89 $0.84 $0.34 $0.13 Second Quarter 1.00 0.63 0.16 0.06 Third Quarter 1.28 0.56 0.22 0.09 Fourth Quarter 1.22 0.53 0.22 0.09
At April 1, 1996, the Company had approximately 1,280 shareholders of record of its Common Stock and 79 holders of record of its Class A Warrants. The Company estimates that an additional 10,000 shareholders hold Common Stock in street name. DIVIDEND POLICY Certain covenants set forth in the indentures governing certain outstanding Debentures of the Company prohibit payment of cash dividends. The present 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. (See "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations".) ITEM 6. SELECTED FINANCIAL INFORMATION The following selected financial data for each of the five years in the period ended December 31, 1995 have been derived from the audited consolidated financial statements for those respective years. (See "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations".) The selected financial data should be read in conjunction with the consolidated financial statements of the Company and the related notes included elsewhere herein. -18- 19
For the Years Ended December 31, 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Condensed consolidated statement of operations: Revenues $ 2,811,308 $ 3,508,514 $ 3,990,156 $ 3,381,453 $ 2,491,527 Net loss(1) (4,338,322) (10,966,914) (14,139,737) (4,987,144) (3,651,540) Net loss per share(2 ) (0.20) (0.65) (2.23) (0.90) (0.99)
At December 31, 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Condensed consolidated balance sheet: Working capital deficit $(3,402,541) $ (28,462) $(7,507,056) $(6,476,996) $ (742,157) Total assets 32,640,362 32,229,713 34,996,925 45,391,666 32,938,318 Total liabilities 11,349,670 10,255,687 18,878,148 15,685,931 6,296,958 Long-term debt 5,432,671 6,601,421 7,812,500 5,250,000 10,451,320 Stockholders' equity 21,290,692 21,974,626 16,118,777 29,705,731 16,641,360 Cash Dividends declared 0 0 0 0 0 - --------------------------------
1) Net loss in 1994 and 1993 included a provision for the write down of the carrying costs of oil and gas properties of $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. (See Note 1 to the Consolidated Financial Statements.) ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES During the last three years, the Company has had difficulty generating sufficient cash flow to fund its operations, capital expenditures and required principal payments. As a result, the Company has from time to time operated with limited liquidity or negative working capital. In order to continue operations under such circumstances, the Company has historically relied on outside sources of capital. At December 31, 1995 the Company had an unrestricted cash balance of $162,218 compared to $943,000 at December 31, 1994. During the year ended December 31, 1995, the Company utilized approximately $274,000 for operations. Net loss for the period totalled $4,338,000, including non-cash provisions for depreciation, depletion and amortization of $1,502,000, non-cash provisions for bad debts and a contingent excise tax liability (or for legal expenses related thereto, or both) of $711,000 and $250,000, respectively, and a non-cash charge of $56,000 related to initial employment signing bonuses, and for forgiveness of amounts receivable from an employee stock purchase. Approximately $189,000 was used during the period to increase current assets other than cash, and approximately $1,985,000 was provided by an increase in accounts payable and accrued liabilities. Cash for operations during 1995 was provided, in part, by the issuance of Common Stock in an aggregate amount of approximately $3,723,000. During the years ended December 31, 1994 and December 31, 1993, the Company generated net losses of $10,967,000 and $14,140,000 respectively. There were non-cash charges in 1994 and 1993 of $6,904,000 and $9,975,000, respectively, for reductions in the carrying costs of oil and gas properties due primarily to prior-period reductions in the estimated volume of proven oil and gas reserves for these periods. There was also a non-cash provision of $211,000 in 1994 for an adjustment to the exercise price of certain outstanding warrants. Cash flow provided from operations in 1994 and 1993 totalled $5,110,000 and $3,648,000, respectively. Cash flow from operations was adjusted for depreciation, depletion and amortization of $1,699,000 and $1,136,000 in 1994 and 1993, respectively. -19- 20 Additionally, $277,000 and $228,000 in 1994 and 1993, respectively, were invested in current assets other than cash. Accounts payable increased by $3,234,000 and $847,000 in 1994 and 1993 respectively. Additional uses of funds during the periods included investments in oil and gas properties during 1994 and 1993 of $5,557,000 and $5,680,000, respectively, net of certain recoverable costs, and investment in the Refinery of $289,000 in 1993. Total cash used in operations and investment activity during the years ended December 31, 1994 and 1993 was $10,341,000 and $8,610,000, respectively. Cash was provided primarily from outside sources, including $14,978,000 and $2,646,000 from the issuance of common stock during 1994 and 1993, respectively; $770,000 from the exercise of common stock warrants and options in 1993, and $60,000 and $5,237,000 in 1994 and 1993, respectively, in proceeds from the issuance of long term debt. The Company's 12% Secured Debentures (the "Debentures") require certain principal payments and contain certain restrictive covenants and conditions with which the Company must comply. During the next twelve months approximately $1,229,000 and $421,000 in principal and interest, respectively, are due for payment, of which all of the principal is payable in December 1996 and one-half of the interest is payable in each of June and December 1996. The Company is currently having discussions with the principal holder of the Debentures regarding the possibility of prepaying them at a discount from face value. In the event the Company is not successful in accomplishing a prepayment to MGTF, it believes it will be capable of fulfilling its normal payment obligations under the respective Debenture and Note agreements with MGTF. However, in the event the Company is unable to meet its obligations pursuant to the Debentures in a timely manner, the Company's oil and gas reserves and its operations may be adversely affected. As of March 22, 1995, the Company amended certain terms of its Loan Agreement with MG Trade Finance Corp. ("MGTF"), extending the due date for the unpaid balance from May 31, 1995 to March 31, 1998. In addition, payments on the loan have been reduced from 100% to 50% of the monthly lease fee proceeds the Company receives from Gold Line (See "Item 1 - Business - Refinery Financing Activities"). If lease fees are not sufficient to satisfy all accrued interest and principal when due, the Company is obligated to satisfy any shortfall. The Company may be required to fund future working capital requirements that arise from Refinery operations, including any liability that may arise from any claims or settlements related to the Refinery. (See "Item 3 - - Legal Proceedings"). The Loan Agreement contains certain restrictive covenants and requirements. The Company and MGTF have from time to time amended the Loan Agreement or waived certain events of technical default. During 1995, Gold Line incurred various financial and purchasing problems which resulted in diminished throughput volumes and lower lease fees to the Company and also prevented Gold Line from making its note payments to the Company as scheduled in September and December 1995 (See "Item 1 - Business - Refinery Lease"). These problems resulted in lower cash flow to the Company of up to $1.4 million, which required it to utilize other methods to acquire funds necessary to satisfy its monetary and contractual obligations, including the issuance of equity, as described above. During the first quarter of 1996, the Company issued shares of its common stock in exchange for cash and services rendered to the Company totalling an aggregate of approximately $991,000 placed in accordance with the safe harbor provided by Regulation S as promulgated by the SEC. In March 1996, Gold Line was successful in solving its financial and purchasing problems, and secured a new one-year $45 million fuel supply contract with the DFSC. As a result, Gold Line expects to process higher volumes of feedstock through the Refinery, which should enable it to make its scheduled quarterly principal and interest note payments to the Company beginning in June 1996. In addition, Gold Line's lease fees increased to $.50 per barrel of -20- 21 feedstock in 1996 from $.40 per barrel in 1995. During March 1996, Gold Line processed a high of approximately 18,000 daily barrels of feedstock and was processing an average of 15,500 barrels of feedstock per day. It expects to average 16,000 barrels per day during the remainder of the lease, a level it needs to maintain in order to meet its obligations under its two DFSC contracts. The combination of Gold Line's note payments and increased lease fees could provide the Company with approximately $1.8 million more cash flow during the next twelve months than during the last. Also in March 1996, the Company received net proceeds of $1,350,000 from the sale of 10% Convertible Subordinated Redeemable Debentures (the "10% Debentures") in a private placement to various foreign buyers under Regulation S. At its option, the Company may redeem any or all of the 10% Debentures after issue and prior to conversion by paying to the holder in cash 135% of the then outstanding principal balance of the 10% Debentures plus accrued interest to date. Such payment may also be made at the Company's option within 15 days of receipt of a conversion notice by the Company from the holder(s). In addition, the Company, at its sole option, may force conversion at any time on and after 120 days from the date of issuance of the 10% Debentures if the average closing bid price for the Company's common stock for five consecutive trading days shall be in excess of $1.50. The holders of the 10% Debentures may convert all or any amount over $25,000 of the original principal amount commencing May 11, 1996 into shares of the Company's common stock at a conversion price per share equal to the lower of (i) 65% of the average closing bid price of the Common Stock for the five business days immediately preceding the date of receipt by the Company of notice of conversion or (ii) 65% of the average of the closing bid price of the Common Stock for the five business days immediately preceding the date of Subscription by the holders. The Company is utilizing the proceeds from the 10% Debenture to repay debts and for working capital purposes. The Company has received an offer from an oil company and inquiries from various others regarding a possible farmout of its new Chicoral discovery and its other Colombian properties in return for cash and drilling obligations in the Company's Toqui-Toqui field. Such a transaction could provide the Company with capital to repay a major portion of its recently-issued 10% Debenture, while ensuring that its Chicoral discovery would be fully exploited in the shortest time practicable with little or no cost to the Company. Although a farmout would result in a lower overall Company ownership interest of its Colombian reserves, the net result to the Company could be an increase in its oil and gas reserve base, a stronger balance sheet and greater potential for earnings and cash-flow growth. The Company has no remaining drilling or work obligations in Colombia or Peru. Depending upon available funds, or whether the Company is successful with its farmout plans, the Company estimates it could utilize up to $4,000,000 for exploration and development of its properties and prospects in South America during the next twelve months. In December 1995, the Company entered into a Farmout Agreement with P.T. Pelangi Niaga Mitra Internasional, an Indonesian company ("PNMI"), whereby the Company is expected to earn a 49% working interest in a Technical Assistance Contract ("TAC") with Pertamina for the Pamanukan Selatan area of West Java Province, Indonesia by providing 100% of the funding for the exploration, development and operation of the TAC. Full exploration and development of the TAC is expected to cost between $2 and $3 million over the next three years, of which approximately $700,000 will be required during 1996. As a portion of its obligations under the Farmout Agreement ($100,000), the Company issued, pursuant to Regulation S of the Securities Act of 1933, 100,000 shares of its common stock to PNMI. The Company will be the operator of the joint operations and the TAC and is to be reimbursed for 175% of all expenditures, pursuant to the cost recovery provisions in the TAC, before any distribution of profits to PNMI can occur. The Company will also be entitled to recoup Indirect Overhead charges up -21- 22 to five percent of total expenditures, which amount will be part of the cost recovery. All monetary obligations the Company may have under the Farmout Agreement are subject to PNMI receiving governmental certification and Pertamina's approval to conduct operations under this TAC, which PNMI expects to occur in May of 1996. Under certain circumstances however, the Company could decide not to proceed with the project. The Company intends to meet its capital and operating funds requirements in the near term from revenues generated from operations, and from additional financing as necessary. However, there is no assurance of success of any farmout or financing efforts the Company may pursue or the timing or success of the exploitation of its discoveries in Colombia and Peru, its potential projects in Indonesia, and/or its VDU project. In the event the Company is not able to fund its exploration and development projects on its own in a timely manner, Management believes it will be able to obtain partners for certain projects. 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 receives proceeds from sales of oil and gas in Colombia and Peru in local currency and utilizes these receipts for local operations. Periodically funds are transferred from U.S. accounts to Colombia and Peru and converted into pesos and soles, respectively, when the local currency is insufficient to meet obligations payable in local currency. IMPACT OF CHANGING PRICES The Company's revenues, its ability to repay indebtedness and the carrying value of its oil and gas properties are affected 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. This occurred in 1993, when the prices the Company received for its crude oil declined significantly. As a consequence, a reduction in the carrying value of the Company's oil and gas properties of $9,975,000 was recorded during the fourth quarter 1993. In 1994 however, prices increased, thereby reducing the impact of a reduction of previous estimates of proven reserve quantities by the Company's independent reservoir engineers, whose estimate for that period resulted in a further reduction of the carrying value of the Company's oil and gas assets of $6,904,000 during the fourth quarter of 1994. No reduction in the carrying value of the Company's oil and gas assets was necessary at December 31, 1995. -22- 23 RESULTS OF OPERATIONS The following table highlights the results of operations for the years ended December 31, 1995, 1994 and 1993.
For the Years Ended December 31, 1995 1994 1993 ---- ---- ---- Exploration and Production Activity: Colombia Properties: Revenue - Oil Sales (000's) $ 1,104 $ 1,083 $ 1,874 Lease Operating Expenses (000's) 364 564 1,197 Production Volume - 137,821 121,643 132,756 Average Price per Bbl 8.01 8.91 14.12 Production Cost per Bb 2.65 4.64 9.02 DD&A per Bbl (1) 3.86 5.51 3.82 Peru Properties: Revenue - Oil Sales (000's) $ 166 $ 122 - Lease Operating Expenses (000's) 65 41 - Production Volume - Bbls 17,794 17,534 - Average Price per Bbl 9.29 6.96 - Production Cost per Bbl 3.66 2.34 - DD&A per Bbl(1) - - - Refinery Operations: Refinery Lease Fees (000's) $ 1,185 $ 2,065 $ 1,735 Average Daily Throughput (Bbls) 8,116 14,518 13,874 Average Throughput Fee 0.40 0.39 0.34 - -----------------------------
(1) DD&A does not include provision for reduction of oil and gas properties of $6,904,000 and $9,975,000 in 1994 and 1993, respectively. Also excludes Peruvian activity since all related properties are currently considered "unevaluated". PRODUCTION ACTIVITY For the Year ended December 31, 1995 compared to the Year ended December 1994. Oil production in 1995 increased to 155,615 barrels, a 12% increase over 1994. Average oil prices declined however, by 6% or $.50 per barrel, to $8.16 in 1995 as compared to $8.66 in 1994. The net effect of these occurrences resulted in a $65,000 (5%) increase in the Company's oil revenues in 1995 compared to 1994. Production cost declined by $184,000 (30%) in 1995 compared to 1994, primarily due to transportation costs incurred during the first four months of 1994, which were not incurred after that time. Effective May 1, 1994 the Company sells all of its crude oil directly to an end-user at the well head, eliminating transportation costs. For the Year ended December 31, 1994 compared to the Year ended December 31, 1993. Oil and gas revenues decreased by $791,000, or 42%, in 1994 compared to 1993. Approximately 60% of the decrease resulted from the Company's new crude oil sales contract, which became effective May 1, 1994. Under the terms of the new contract, the Company sells its crude oil directly to an end user at the well - 23 - 24 head. Therefore, the transportation cost, which was included in the selling price during 1993, was excluded from the price under the new agreement. Approximately 30% of the decline was related to a 20% decrease in the average price of the Company's crude oil in 1994 as compared to 1993, reflecting the overall weakness in the world oil market during much of 1994. The remaining portion of the decline was due to an 8% decrease in the total oil produced in 1994 as compared to the previous year. Production costs decreased by $593,000, or 54%, in 1994 as compared to 1993. Approximately half of the decline was due to the elimination of transportation costs, mentioned above. The remainder was due to decreased workover and well maintenance activity in 1994 as compared to 1993. REFINERY OPERATIONS For the Year Ended December 31, 1995 compared to the Year Ended December 31, 1994 The Company leases its refinery to Gold Line Refinery Ltd. As lessee, Gold Line is responsible for all operating costs of the refinery. The Company charges Gold Line a fee for each barrel of feedstock processed at the refinery. The fee during 1995 was $.40 per barrel of throughput, which increased to $.50 per barrel on January 1, 1996. This rate continues until the Lease expires on March 31, 1998. Refinery lease fees declined by approximately 43% in 1995 to $1,185,000 as compared to 1994. The decline relates primarily to financing and purchasing problems encountered by Gold Line during 1995 (See "Item 1 - Business - Refinery Lease"). As a result, Gold Line experienced a 44% decline in its annual throughput in 1995 compared to 1994. However, Gold Line, as previously discussed, has apparently resolved these problems and in March 1996 secured a one-year $45 million fuel supply contract with the DFSC which, when combined with its other contract with the DFSC, is expected to result in Gold Line processing 16,000 barrels of feedstock per day. This increased activity should provide the Company with minimum annual lease fees of approximately $2.9 million. Gold Line has also indicated to the Company that it is attempting to obtain supplemental fuel supply contracts, which would call for an additional 4,000 barrels per day of throughput volume to be processed in the Refinery. There can be no assurance at this time, however, that Gold Line will continue to process an average of 16,000 barrels of feedstock per day or be successful in securing supplemental contracts. For the Year Ended December 31, 1994 compared to the Year Ended December 31, 1993. Refinery lease fees increased approximately 19% to $2,065,000 in 1994 as compared to 1993. The increase was due primarily to a 15% increase in the per-barrel throughput fees charged to Gold Line in the last half of 1994 and a 5% increase in the average daily throughput compared to the previous year. OTHER INCOME Other income increased by $118,000 (50%) during 1995 to $356,000 as compared to 1994. A 60% increase in interest income in 1995 related to the Gold Line note was partially offset by a 10% decrease in 1995 compared to 1994 of foreign exchange gains, primarily due to narrower fluctuations in the currency exchange rates between the United States and Colombia. Other income declined by 38% during the year ended December 31, 1994 as compared to the same period in 1993, primarily due to narrower fluctuations in the currency exchange rates between the United States and Colombia during 1994 as compared to 1993. -24- 25 GENERAL AND ADMINISTRATIVE Total General and Administrative Expenses ("G&A") during 1995 decreased by $564,000, or 14%, compared to 1994. Payroll expenses declined by $255,000 (6%) during 1995 compared to 1994. Decreases also occurred in the following categories during 1995 versus 1994: professional fees, $73,000; travel, $69,000; office rents, $60,000; public relations, $60,000; insurance, $33,000; and office operating expenses, $54,000. Further declines are expected during 1996 as the Company continues its efforts to reduce overhead costs. Total G&A declined by only 1% in the year ended December 31, 1994 as compared to 1993. However, excluding capitalized G&A and G&A reimbursements related to exploration and development projects, which decreased by approximately $420,000, or 46%, in 1994 as compared to 1993, and other non-cash items, the Company's overall G&A declined by approximately $541,000, or 11%, in 1994 as compared to the same period in the previous year. A 21% decrease in payroll of $467,000 and a 30% decrease in investor relations of $120,000 were partially offset by a 76% increase in legal expenses of $130,000, related primarily to an environmental lawsuit and excise tax dispute with the Internal Revenue Service. The reductions in the capitalization and reimbursements of G&A during 1994 as compared to 1993 resulted primarily from reduced exploration and development during 1994 as compared to 1993. INTEREST Interest expense decreased 20% by $262,000 during the year ended December 31, 1995 as compared to 1994. Excluding a decrease in non-cash amortized bond costs of $95,000, which are included in the interest expense category, interest expense decreased by $167,000 during 1995 versus 1994, primarily due to reduced debt balances. Interest expense decreased by $224,000, or 15%, during the year ended December 31, 1994 as compared to 1993, primarily due to reduced debt balances in 1994. ADOPTION OF ACCOUNTING STANDARD On March 31, 1995, the Financial Accounting Standards Board 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. SFAS No. 121 has been adopted by the Company and had no effect on its financial statements for the year ended December 31, 1995. 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. -25- 26 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.
Name Age Position(s) - ---- --- ----------- George N. Faris 55 Chairman of the Board of Directors and Chief Executive Officer Denis J. Fitzpatrick 51 Vice President, Secretary and Chief Financial Officer William L. Tracy 48 Treasurer and Controller Daniel Y. Kim 71 Director Donald G. Rynne 73 Director William R. Smart 75 Director
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 has received a number of patents. Dr. Faris received a Ph.D. in Mechanical Engineering from Purdue University in 1968. Mr. Denis J. Fitzpatrick joined the Company in August 1994 as Vice President, Secretary and Chief Financial Officer. During the previous five years, Mr. Fitzpatrick was the Chief Financial Officer of Nahama & Weagant Energy Company, a publicly traded independent exploration and production company. Mr. Fitzpatrick received a B.S. degree in Accounting from the University of Southern California in 1974. Mr. William L. Tracy has been employed by the Company since February 1992 and was named Treasurer and Controller of the Company in 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. 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. 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. -26- 27 Mr. Donald G. Rynne was elected to the Company's Board of Directors in 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 also Chairman of the Board of Directors of Dynamax Maritime & Resources Ltd., a company engaged in the trading and shipping business, and has served in such capacity since August 1984, and Chairman of the Board of Directors of Centurion Maritime Ltd., a company engaged in the shipping business, and has served in such capacity since August 1984. 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. Mr. William R. Smart has served as a member of the Company's Board of Directors since June 1987. Mr. Smart is currently a director of Executone Information Systems, Inc., an electronics manufacturer, and has served in such capacity since September 1992. Mr. Smart was Chairman of the Board of Directors of Electronic Associates, Inc., a manufacturer of electronic equipment, from May 1984 until May 1992. Since November 1, 1983, Mr. Smart has been Senior Vice President of Cambridge Strategic Management Group, a management consulting firm. Mr. Smart is also 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. The Company's directors and executive officers are elected annually to serve until their respective successors are duly elected and qualified. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT 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, 1995 through December 31, 1995, all filing requirements applicable to its officers, directors and greater than ten percent beneficial owners were complied with, except that one report covering one transaction was filed late by Mr. Kenneth Durham, a former director of the Company. -27- 28 ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE 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 1995.
Annual Compensation Long Term Compensation ------------------------------------------- ------------------------------ Name and Principal Other Annual All Other Position Year Salary Bonus Compensation Options(#) Compensation - ------------------ ---- ------ ----- ------------ ------------ ------------ George N. Faris 1995 $240,000 - $45,103(1) 202,500(2) (3) Chairman of the 1994 246,923 - - $16,250(4) Board and Chief 1993 311,539 $25,134 - - 27,504(4) Executive Officer Kenneth N. Durham 1995 $144,726(5) - - - - President and Chief 1994 169,173 - - - - Operating Officer 1993 21,923(6) - - 30,000(7) - Denis J. Fitzpatrick 1995 $105,000 - 18,497(8)(9) 20,000(2) - Secretary, Vice 1994 38,462(10) - 6,250(9) 20,000(11) - President and Chief 1993 - - - - - Financial Officer ---------------------------------------
(1) $35,503 of this amount constituted forgiveness of interest on a note owed to the Company, the principle of which was repaid to the Company, and $9,600 was paid as a vehicle allowance for Dr. Faris pursuant to his contract. (2) Options issued in substitution for outstanding options. The exercise price was reduced to $1.00 per share. (3) 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). The amendment to the employment agreement is subject to shareholder ratification. If the shareholders do not ratify the amendment at the next annual meeting of shareholders, the Company and Dr. Faris have agreed that the amendment will not be effective. (4) Includes split dollar life insurance premiums of $16,250 in 1994 and $22,960 in 1993 and term life insurance premiums of $4,544 in 1993 paid by the Company on behalf of Dr. Faris. (5) Mr. Durham resigned from employment with the Company effective on November 3, 1995. (6) Mr. Durham joined the Company in November 1993 at an annual salary level of $190,000. (7) Options awarded upon hiring. All such options expired 90 days after Mr. Durham's resignation. (8) Mr. Fitzpatrick was awarded 5,000 restricted shares of Common Stock as a signing bonus, which shares were issued in 1995. (9) Cost of living allowance payable while Mr. Fitzpatrick is based in New York is $15,000 annually. (10) Mr. Fitzpatrick joined the Company on August 15, 1994 at an annual salary level of $105,000. (11) Options awarded upon hiring, 50% of which are exercisable one-year after issuance, the remainder of which are exercisable after two years. STOCK OPTION PLANS The Company has established three employee stock option plans. The three plans provide for the grant of options to qualified employees (including officers and directors) of the Company, independent contractors, consultants and other persons to purchase an aggregate of 3,650,000 shares of Common Stock. The exercise price of the options granted under each plan cannot be less than the fair market value of the shares of Common Stock on the date the option is granted. If an option granted under any of the plans terminates or expires -28- 29 without having been exercised in full, the unexercised shares subject to that option will be available for a further grant of options under such 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. The 1988 Incentive Stock Option Plan (the "Incentive Stock Option Plan") is to be administered by the Board of Directors of the Company or a Committee designated by them. Under the Incentive Stock Option Plan, only full-time employees, including officers and managerial or supervising personnel, are eligible to receive Incentive Stock Options, as defined in Section 422(b) of the Internal Revenue Code of 1986, as amended ("ISO's"). ISO's may not be granted under the Incentive Stock Option Plan after July 1998. 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 110% of the fair market value of the shares of Common Stock on the date of grant. The maximum number of shares of Common Stock reserved for issuance pursuant to the Incentive Stock Option Plan is 100,000. As of April 10, 1996, no options were outstanding pursuant to this plan. The 1988 Non-Qualified Stock Option Plan (the "Non Qualified Stock Option Plan") provides for the grant from time to time to key employees of the Company (including officers and directors of the Company) of options to purchase Common Stock at an exercise price determined by disinterested members of the Company's Board of Directors or by a Stock Option Committee which may be appointed. Options are granted for a five-year period and become exercisable on a pro-rata basis over three years at the end of each month subsequent to the date of grant, provided the optionee is employed by the Company at the end of such month. The maximum number of shares of Common Stock reserved for issuance pursuant to the Non-Qualified Stock Option Plan is 50,000. As of April 10, 1996, no options were outstanding pursuant to this plan. The Company's 1995 Stock Option Plan (the "1995 Plan") was approved by the Board of Directors on November 8, 1995, and it is subject to shareholder approval. If the shareholders do not approve the 1995 Plan, all options issued under the 1995 Plan will be non-qualified stock options. The 1995 Plan is to be 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 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 not be granted under the 1995 Plan after November 7, 2005. 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 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 $100,000. Any additional Common Stock as to which options become exercisable for the first time during any such year are treated as NQSO's. The maximum number of shares of Common Stock reserved for issuance pursuant to the 1995 Plan is 3,500,000. The total number of options granted under the 1995 Plan, as of April 10, 1996 was 302,500, which were merely repriced options granted in substitution for options previously held. -29- 30 OPTION GRANTS IN LAST FISCAL YEAR The table below includes the number of stock options granted to certain executive officers during the year ended December 31, 1995, exercise information and potential realizable value. All of the options granted in 1995 were repriced options granted in substitution for options previously held by such officers.
Individual Grants ----------------- Potential Realizable Number of Percent of Value at Assumed Securities Total Options Annual Rates of Stock Underlying Granted to Price Appreciation Options Employees Exercise Expiration for Option Term Name Granted(#) in Fiscal Year Price($/sh) Date 5%($) 10%($) - ---- ---------- -------------- ----------- ---------- ----- ------ George N. Faris 202,500 82.7% $1.00 12/31/97 -0- -0- Denis J. Fitzpatrick 20,000 8.2% $1.00 8/15/98 -0- -0-
AGGREGATE OPTION EXERCISES IN 1995 AND OPTION VALUES AT DECEMBER 31, 1995 The table below includes the number of shares covered by both exercisable and unvested stock options owned by certain executive officers as of December 31, 1995. Also reported are the values for "in-the-money" options which represent the positive spread between exercise price of any such 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(1) - ---- ----------- -------- ----------------------- ----------------------- Exercisable Unexercisable Exercisable Unexercisable ----------- ------------- ----------- ------------- George N. Faris - - 202,500 - - - Kenneth N. Durham - - 20,000(2) 10,000 - - Denis J. Fitzpatrick - - 10,000 10,000 - -
- ------------------------------- (1) The closing price of the Common Stock on the last day of the year ended December 31, 1995 was $.63. (2) Mr. Durham left the Company on November 3, 1995, and his options expired on February 1, 1996. EMPLOYMENT CONTRACT Effective May 1, 1989, the Company entered into a five-year employment agreement with George N. Faris at an annual salary of $200,000, which agreement was extended, in November 1990, for an additional two years. In November 1991, Dr. Faris' salary was increased to $250,000 effective retroactively to January 1, 1990. Additionally, in February 1992, the Board increased Dr. Faris' salary to $300,000 per year effective January 1, 1992. 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 effective February 1, 1996. Pursuant to the employment agreement, In the event that there is a change in control of the Company which Dr. Faris and a majority of the Company's Board of Directors approve, Dr. Faris will be entitled, upon such change of control, to terminate his employment and receive 2.9 times his fixed compensation as defined in the employment agreement. However, if Dr. Faris opposes a change in control, but the majority of the Board of Directors votes in favor of such change, then Dr. Faris may terminate his employment and receive 2.5 times his fixed compensation. In the event Dr. Faris' employment is terminated prior to the expiration of his contract for reasons other than cause or death, or if such employment agreement is not renewed at termination, the Company must pay -30- 31 severance to Dr. Faris in an amount equal to the product of his number of years of service, beginning with the calendar year 1981, multiplied by $50,000. Such payments are to be made in annual installments of $250,000 beginning on the tenth day after termination or non-renewal. On September 7, 1995, the Board of Directors approved an amendment to Dr. Faris' employment agreement, which was signed by Dr. Faris and the Company on October 13, 1995, and which is subject to shareholder ratification. If the shareholders ratify the amendment, the rights of Dr. Faris described in the previous paragraph would terminate, and Dr. Faris would receive, in exchange, 900,000 shares of restricted stock of the Company. Otherwise, the amendment will not be effective. SALARY REINSTATEMENTS In April 1994, officers of the Company voluntarily reduced their salaries (the Chief Executive Officer by 20% and other officers by 15%) until, in February 1996, the Compensation Committee recommended, and the Board of Directors approved, a reinstatement of these officers' salaries to their previous levels, effective February 1, 1996. The reinstatement was made to provide the necessary incentives to management to continue their efforts under very difficult circumstances and to ensure that the Company maintains a competititive position in the industry regarding the contuity of the employment of its officers. During the past two fiscal years, Management has significantly reduced general and administrative and operating costs (See "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations"). In addition, in 1995, the volume and discounted value of the Company's equivalent oil reserves increased by 44% and 23%, respectively. COMPENSATION OF DIRECTORS During 1995, the Company reimbursed directors for their actual Company-related expenses, including the costs of attending directors' meetings. The Company accrued, for each outside director, $500 per month for serving in such capacity; $500 per each Committee meeting, if such director served on a Standing Committee of the Board of Directors; and $500 for each Board meeting attended in person. A former director, Robert Stobaugh, received 19,000 shares of restricted stock of the Company in payment of director fees accrued but not paid to him. 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. -31- 32 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information, as of April 10, 1996, regarding (i) each person known by the Company to be the owner of more than 5% of the outstanding Common Stock, (ii) each director, (iii) each executive officer named in the Summary Compensation Table above, and (iv) all directors and executive officers as a group. The number of shares beneficially owned by each director or executive officer is determined by the rules of the Securities and Exchange Commission, and the information is not necessarily indicative of beneficial ownership for any other purpose.
Name and Address Amount and Nature of Percent of Beneficial Holder Beneficial Ownership of Class - -------------------- -------------------- -------- George N. Faris 1,082,576(1)(2) 4.0%(2) Daniel Y. Kim 13,500(3) * Donald G. Rynne 307,780(4) 1.1% William R. Smart 117,944(5) * Denis J. Fitzpatrick 25,000(6) * All officers and directors as a group (consisting of 6 persons) 1,547,800 (7) 5.6%
- ----------------------------- * Less than 1% of class (1) Includes 29,800 shares of Common Stock owned by Mrs. Claudette Faris, Dr. Faris' wife, and 488,169 shares of Common Stock issuable upon exercise of stock options and warrants held by Dr. Faris. Also includes 7,600 shares of Common Stock issuable upon exercise of warrants held by Mrs. Faris. (2) Dr. Faris has agreed to accept 900,000 shares of Common Stock, subject to shareholder ratification, in exchange for certain rights under his employment agreement. (See "Item 11--Executive Compensation--Employment Contract.") If shareholders ratify the amendment to Dr. Faris' employment agreement, Dr. Faris would be deemed to beneficially own 7.0% of the Common Stock. (3) Includes 5,500 shares of Common Stock issuable upon exercise of a like number of options owned by Dr. Kim. (4) Includes 99,260 shares of Common Stock issuable upon exercise of a like number of options and warrants owned by Mr. Rynne. (5) Includes 61,986 shares of Common Stock issuable upon exercise of a like number of options and warrants owned by Mr. Smart. (6) Includes 20,000 shares of Common Stock issuable upon exercise of options owned by Mr. Fitzpatrick. (7) Includes all of the shares of Common Stock issuable upon exercise of options and warrants described in Notes (1) through (6) above, plus 1,000 shares of Common Stock issuable upon exercise of options owned by another officer of the Company. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See "Item 11 - Executive Compensation - Employment Contract". -32- 33 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 Sheet - F-6 December 31, 1995 and 1994 Consolidated Statement of Operations - Years Ended December 31, 1995, 1994 and 1993 F-7 Consolidated Statement of Cash Flows Years Ended December 31, 1995, 1994 and 1993 F-8 Consolidated Statement of Changes in Stockholders' Equity - Years Ended December 31, 1995, 1994 and 1993 F-9 Notes to Consolidated Financial Statements F-12 Supplementary Oil and Gas Information F-34
(2) FINANCIAL STATEMENT SCHEDULES. None. (3) EXHIBITS. 3.1 Certificate of Incorporation of the Registrant, as amended. (1) 3.2 Certificate of Amendment to Articles of Incorporation, dated June 29, 1988.(2) 3.3 Certificate of Amendment to Articles of Incorporation, dated August 10, 1988. (2) 3.4 Certificate of Amendment to Articles of Incorporation, dated November 18, 1993. (7) 3.5 By-Laws of the Registrant, as amended. 4.1 Indenture dated January 20, 1993, governing the Registrant's 12% Secured Debentures Due 1997.(6) 4.2 Form of Class A Warrant. (8) 4.3 1995 Stock Option Plan and Form of Option Agreements of the Registrant. 4.4 Form of Debenture and Subscription Agreements dated March 21, 1996 between the Company and purchasers listed on Schedule A attached thereto. 10.1 Employment Agreement, dated May 1, 1989 by and between George N. Faris and the Registrant.(3) 10.2 Loan and Security Agreement ("Loan Agreement") dated December 4, 1990 by and between MG Trade Finance Corp. ("MGTF") and AIRI. (4) 10.3 Schedule of construction and Other Loan Uses attached to the Loan Agreement. (4) 10.4 Schedule of JP-4 Construction Permitted After December 15, 1990 attached to the Loan Agreement.(4) -33- 34 10.5 Corporate Continuing Guarantee of the Registrant to MGTF, dated December 4, 1990. (4) 10.6 Pledge Agreement, dated as of the 4th day of December 1990, by and among the Registrant, AIRI and MGTF. (4) 10.7 Shareholder Distribution Agreement dated as of the 4th day of December 1990, by and between the Registrant, AIRI and MGTF. (4) 10.8 Form of Sale of Indebtedness and Assignment of Collateral Mortgage Notes and Security Documents. (4) 10.9 Form of Collateral Mortgage Note drawn by AIRI. (4) 10.10 Form of Amended and Restated Collateral Pledge Agreement drawn by AIRI (Inventory). (4) 10.11 Form of Amended and Restated Collateral Pledge Agreement drawn by AIRI (Fixed Assets). (4) 10.12 Environment Indemnity Agreement dated December 4, 1990 by and between AIRI, the Registrant and MG. (4) 10.13 Amendment to Loan and Security Agreement, dated as of September 26, 1991. (5) 10.14 Pledge and Security Agreement, dated January 20, 1993, by and between American International Petroleum Corporation and Society National Bank as Trustee. (6) 10.15 Letter Agreement, dated January 4, 1995, by and between American International Petroleum Corporation and P.T. Ustraindo Petrogas.(9) 10.16 Promissory Note, dated March 15, 1995 from Gold Line Refining, Ltd. to American International Petroleum Corporation.(9) 10.17 Amended and Restated Lease Agreement between Gold Line and AIRI dated March 22, 1995.(9) 10.18 Letter Agreement dated March 22, 1995 amending Loan and Security Agreement(9) 10.19 Subordination and Standby Agreement dated March 22, 1995 between NationsBank, Gold Line Refining, Ltd., Citizens Bank and AIRI. 10.20 Intercreditor Letter Agreements dated March 22, 1995 between MGTF, Citizens Bank and AIRI. 10.21 Amendment #1 to Employment Agreement, dated October 13, 1995, between George N. Faris and the Registrant(10). 10.22 Letter dated February 9, 1996 amending Promissory Note between AIRI and Gold Line Refining Ltd. 21.1 Subsidiaries of the Registrant.(9) 27.1 Financial Data Schedule. - ------------------------- (1) Incorporated herein by reference to the Registration Statement on Form S-1, declared effective on February 16, 1988 (File No. 33-17543). (2) Incorporated herein by reference to the Registration Statement on Form S-1 File No. 33-23584 declared effective on January 27, 1989. -34- 35 (3) Incorporated herein by reference to the Registration Statement on Form S-1 declared effective on February 13, 1990. (4) Incorporated herein by reference to the Registrant's Current Report on Form 8-K, dated December 4, 1990. (5) Incorporated herein by reference to the Registration Statement on ForM S-1, declared effective November 9, 1992. (6) Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992. (7) Incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. (8) Incorporated herein by reference to the Registration Statement on Form S-2, declared effective January 13, 1994. (9) Incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. (10) Incorporated herein by reference to Amendment #19 to Schedule 13D of George N. Faris for October 13, 1995. (B) REPORTS ON FORM 8-K None. -35- 36 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of American International Petroleum Corporation In our opinion, based upon our audits and the report of other auditors, the consolidated financial statements listed in the index appearing under Item 14(a)(1) on page 33 present fairly, in all material respects, the financial position of American International Petroleum Corporation and its subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period 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 audits. 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 reflect total assets of $14,136,257 at December 31, 1995 and 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 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 audits 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-1 37 TRANSLATION OF AUDITOR'S REPORT Bogota, March 15, 1996 To the Members of the Board of Directors American International Petroleum Corporation of Colombia I have audited the balance sheet of the Colombian Branch of American International Petroleum Corporation of Colombia as of December 31, 1995 and the corresponding statements of income, changes in the net worth of the Branch, changes in the financial position and cash flows for the year 1995. The presentation of those financial statements and their corresponding notes is the responsibility of the Branch's administration and they reflect its performance. It is among my functions to audit them and to render an opinion about them. The financial statements of the Company for the year 1994 were audited by a different Auditor, who expressed his opinion in his Report. I obtained the necessary information to comply with my functions as Auditor and conducted my work in accordance with generally accepted auditing standards which require that the audit be planned and carried out to make sure that the financial statements reasonably reflect the financial condition of the Company and the results of its operations. An audit of financial statements implies, among other things, to conduct an examination based on selective tests of the evidence that support the figures and disclosures of the financial statements, as well as to evaluate the accounting principles used, the accounting estimates made by the administration and the presentation of the financial reports as a whole. I consider that my audit provides a reasonable basis for the opinion regarding the financial reports as expressed below. In its accounting and in the presentation of the financial statements, the Branch follows accounting principles generally accepted for oil companies, established by the Superintendency of Companies and the Colombian law. In my opinion, the financial statements previously mentioned, which were faithfully taken from the books, present fairly the financial position of the Colombian Branch of American International Petroleum Corporation of Colombia at December 31, 1995, the results of its operations, changes in its financial position and its cash flows for the year then ended, in accordance with and based on accounting principles generally accepted in Colombia. Furthermore, it is also my opinion that the Branch's accounting for the year ended on December 31, 1995 was kept in compliance with the legal norms and accounting practices; the operations registered in the books and the administrator's actions F-2 38 Bogota, March 15, 1996 To the Members of the Board of Directors Page 2 complied with the statutes and the decisions of the Board of Directors of its Home Office; the correspondence and vouchers of the accounts were duly carried out and kept; and adequate measures of internal control and maintenance and custody of the Branch's and third parties' assets in its possession were observed. BERNARDO VILLEGAS PEREZ Auditor Professional Card No. 4962-A F-3 39 INFORME DEL REVISOR FISCAL Santafe de Bogota, D.C. Marzo 15 de 1996 A los senores Miembros de la Junta Directiva de American International Petroleum Corporation Colombia He auditado el balance general de la Sucursal en Colombia de American International Petroleum Corporation of Colombia al 31 de Diciembre de 1995 y los correspondientes Estados de Resultados, de cambios en el patrimonio, de cambios en la situacion financiera y del flujo de efectivo del ano 1995. La presentacion de dichos estados financieros y sus correspondientes notas son responsabilidad de la administracion y estos reflejan su gestion. Entre mis funciones se encuentra la de auditarlos y expresar una opinion funciones se encuentra la de auditarlos y expresar una opinion sobre ellos. Los estados financieros de la Compania correspondientes al ano 1994 fueron auditados por otro Revisor Fiscal, quien en su informe expreso su opinion. Obtuva la informacion necesaria para cumplir mi funcion de Revisor Fiscal y lleve a cabo mi trabajo de acuerdo con normas de auditoria generalmente aceptadas en Colombia; las cuales requieren que la auditoria sea planeada y efectuada para cerciorarse de que los estados financieros reflejan razonablemente la situacion financiera y las operaciones del ejercicio. Una auditoria de estados financieros implica, entre otras cosas, hacer un examen con base en pruebas selectivas de la evidencia que respaldan las cifras y las revelaciones en los estados financieros; ademas evaluar los principios de contabilidad utilizados, las estimaciones contables hechas por la administracion y la presentacion de los estados financieros en conjunto. Considero que mi auditoria provee una base razonable para la opinion que sobre los estados financieros expreso mas adelante. En su contabilidad y en la presentacion de los estados financieros la sucursal observa normas contables de general aceptacion para Companias Petroleras establecidas por la Superintendencia de Sociedades y las leyes colombianas. En mi opinion los estados financieros antes mencionados, que fueron tomados fielment ede los libros, presentan razonablemente la situacion financiera de American International Petroleum Corporation of Colombia al 31 de Diciembre de 1995, los resultados de sus operaciones, los cambios en el patrimonio, en su situacion financiera y en los flujos efectivos del ano terminados en esa fecha de conformidad y con base en los principios de contabilidad generalmente aceptados en Colombia. F-4 40 Santafe de Bogota, D.C. Marzo 15 de 1996 A los se#ores Miembros de la Junta Directiva Pagina 2 Ademas conceptuo que durante el ano terminado en 31 de Diciembre de 1995 la contabilidad de American International Petroleum Corporation of Colombia se llevo de conformidad con las normas legales y la tecnica contable; las operaciones en los libros y los actos de los administradores se ajustaron a los estatutos y a las decisiones de la Junta Directiva de su Casa Matriz; la correspondencia, los comprobantes de las cuentas se llevaron y conservan debidamente; se observaron medidas adecuadas de control interno y conservacion y custodia de los bienes de American Internatioal Petroleum Corporation of Colombia y de terceros en su poder. BERNARDO VILLEGAS PERES Revisor Fiscal Tarjeta Profesional 4962-A F-5 41 AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
December 31, ----------------------------------------- 1995 1994 ---- ---- Assets ------ Current assets: Cash and cash equivalents $ 162,218 $ 943,371 Cash - restricted 226,223 214,630 Accounts receivable, net 1,073,553 1,031,206 Inventory 504,953 951,472 Prepaid expenses 547,509 484,525 --------------- -------------- Total current assets 2,514,456 3,625,204 --------------- -------------- Property, plant and equipment: Unevaluated property 4,998,824 4,467,147 Oil and gas properties 31,566,297 28,903,520 Refinery property and equipment 15,521,995 15,536,279 Other 506,445 540,753 --------------- -------------- 52,593,561 49,447,699 Less - accumulated depreciation, depletion and amortization (22,502,472) (21,167,110) --------------- -------------- Total property, plant and equipment 30,091,089 28,280,589 --------------- -------------- Other long-term assets, net 34,817 323,920 --------------- -------------- Total assets $ 32,640,362 $ 32,229,713 =============== ============== Liabilities and Stockholders' Equity ------------------------------------ Current liabilities: Notes payable $ 66,759 $ - Current portion of long-term debt 1,870,000 1,168,750 Accounts payable 2,363,562 1,383,082 Accrued liabilities 1,616,678 1,101,834 --------------- -------------- Total current liabilities 5,916,999 3,653,666 Long-term debt 5,432,671 6,601,421 --------------- -------------- Total liabilities 11,349,670 10,255,087 --------------- -------------- Stockholders' equity: Preferred stock, par value $3.00, 7,000,000 shares authorized, none issued Common stock, par value $.08, 50,000,000 shares authorized, 24,705,926 shares issued and outstanding at December 31, 1995 and 19,099,048 shares at December 31, 1994 1,976,474 1,527,924 Additional paid-in capital 74,768,272 71,562,434 Stock purchase warrants 1,297,754 1,297,754 Accumulated deficit (56,751,808) (52,413,486) --------------- -------------- Total stockholders' equity 21,290,692 21,974,626 --------------- -------------- Commitments and contingent liabilities (Note 11) - - --------------- -------------- Total liabilities and stockholders' equity $ 32,640,362 $ 32,229,713 =============== ==============
The accompanying notes are an integral part of this statement. F-6 42 AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS
For the years ended December 31, --------------------------------------------------------- 1995 1994 1993 ---- ---- ---- Revenues: Oil and gas production and pipeline fees $ 1,270,164 $ 1,205,424 $ 1,874,020 Refinery lease fees 1,184,864 2,065,437 1,734,605 Other 356,280 237,653 381,531 --------------- --------------- --------------- Total revenues 2,811,308 3,508,514 3,990,156 --------------- --------------- --------------- Expenses: Operating 432,440 615,934 1,303,936 General and administrative 3,572,337 4,136,276 4,073,379 Depreciation, depletion and amortization 1,396,423 1,500,558 1,135,862 Interest 1,037,308 1,299,778 1,429,608 Write-down of oil and gas properties - 6,904,016 9,975,000 Provision for bad debts 711,122 18,866 64,861 Provision for net unrealized loss on noncurrent marketable securities - - 147,247 --------------- --------------- --------------- Total expenses 7,149,630 14,475,428 18,129,893 --------------- --------------- --------------- Net loss $ (4,338,322) $ (10,966,914) $ (14,139,737) =============== =============== =============== Net loss per share of common stock $ (0.20) $ (0.65) $ (2.23) =============== =============== =============== Weighted-average number of shares of common stock outstanding* 21,746,719 16,780,865 6,344,026 =============== =============== ===============
* Reflects the one-for-ten reverse stock split as described in Note 1. The accompanying notes are an integral part of this statement. F-7 43 AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
For the years ended December 31, ---------------------------------------------------------- 1995 1994 1993 ---- ---- ---- Cash flows from operating activities:- Net loss $ (4,338,322) $ (10,966,914) $ (14,139,737) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation, depletion and amortization 1,502,435 1,698,532 1,135,862 Write-down of oil and gas properties - 6,904,016 9,975,000 Provision for bad debts 711,122 18,866 64,861 Warrant price adjustment - 210,588 - Provision for net unrealized loss on noncurrent marketable securities - - 147,247 Compensation expense 55,814 - - Changes in assets and liabilities: Accounts and notes receivable (537,569) 286,491 311,357 Inventory 446,519 (55,864) (174,295) Prepaid and other (98,359) 27,586 (120,837) Accounts payable and accrued liabilities 1,984,574 (3,233,610) (847,300) --------------- --------------- ---------------- Net cash used in operating activities (273,786) (5,110,309) (3,647,842) --------------- --------------- ---------------- Cash flows from investing activities: Additions to oil and gas properties (3,194,454) (5,556,593) (5,680,447) Additions to refinery property and equipment 14,284 - (289,003) Proceeds from sales of marketable securities - 301,201 - Proceeds from sale of interest in well - - 1,000,000 Other (26,753) 25,037 6,998 ------- --------------- ---------------- Net cash used in investing activities (3,206,923) (5,230,355) (4,962,452) ---------- --------------- ---------------- Cash flows from financing activities: Cash - restricted, loan collateral (11,593) (214,630) 539,866 Net increase (decrease) in notes payable 66,759 (535,078) (104,020) Increase (decrease) in notes payable - officers and directors - (50,000) 50,000 Proceeds from long-term debt - 60,000 - Repayments of long-term debt (467,500) (3,374,520) (906,610) Proceeds from issuance of common stock and warrants, net 3,111,858 14,977,922 2,646,449 Proceeds from exercise of stock warrants and options 32 140 769,970 Proceeds from notes receivable for issuance of common stock - 367,064 - Proceeds from issuance of debentures, net - - 5,236,737 --------------- --------------- ---------------- Net cash provided by financing activities 2,699,556 11,230,898 8,232,392 --------------- --------------- ---------------- Net increase (decrease) in cash and cash equivalents (781,153) 890,234 (377,902) Cash and cash equivalents at beginning of year 943,371 53,137 431,039 --------------- --------------- ---------------- Cash and cash equivalents at end of year $ 162,218 $ 943,371 $ 53,137 =============== =============== ================
The accompanying notes are an integral part of this statement. F-8 44 AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
Common stock Additional Stock Notes -------------------- paid-in purchase receivable Accumulated Shares Amount capital warrants for issuance deficit Total ------- ------ ---------- -------- ------------ ----------- ----- Balance, January 1, 1995 19,099,048 $ 1,527,924 $ 71,595,370 $ 1,297,754 $ (32,936) $ (52,413,486) $ 21,974,626 Warrants exercised 8 1 31 - - - 32 Issuance of stock in lieu of current liabilities 728,205 58,256 430,994 - - - 489,250 Issuance of stock for compensation 10,000 800 19,512 - 32,936 - 53,248 Issuance of common stock 4,868,665 389,493 2,722,365 - - - 3,111,858 Net loss for the year - - - - - (4,338,322) (4,338,322) ----------- ----------- ------------ ----------- --------- ------------- ------------ Balance, December 31, 1995 24,705,926 $ 1,976,474 $ 74,768,272 $ 1,297,754 $ - $ (56,751,808) $ 21,290,692 =========== =========== ============ =========== ========= ============= ============
Reflects the one-for-ten reverse stock split as described in Note 1. The accompanying notes are an integral part of this statement. F-9 45 AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
Common stock Additional Stock ------------ paid-in purchase Shares Amount capital warrants ------- ------ ------- -------- Balance, January 1, 1994 7,064,233 $ 565,139 $ 57,000,210 $ - Issuance of stock and warrants 11,382,548 910,603 13,169,565 1,297,754 Conversion of debentures 633,334 50,667 899,333 - Issuance of stock for payment of notes payable 8,525 682 12,105 - Issuance of stock in lieu of current liabilities 10,373 830 14,729 - Issuance of stock for note receivable - - - - Payment received on note receivable - - - - Exercise of warrants 35 3 137 - Adjustment to exercise price of warrants - - 210,588 - Expired stock dividends - Aztec - - 288,703 - Net loss for the year - - - - ----------- ------------ ------------- ------------ Balance, December 31, 1994 19,099,048 $ 1,527,924 $ 71,595,370 $ 1,297,754 =========== ============ ============= ============ Notes receivable for issuance Accumulated of stock deficit Total -------- ------- ----- Balance, January 1, 1994 $ - $ (41,446,572) $ 16,118,777 Issuance of stock and warrants - - 15,377,922 Conversion of debentures - - 950,000 Issuance of stock for payment of notes payable - - 12,787 Issuance of stock in lieu of current liabilities - - 15,559 Issuance of stock for note receivable (400,000) - (400,000) Payment received on note receivable 367,064 - 367,064 Exercise of warrants - - 140 Adjustment to exercise price of warrants - - 210,588 Expired stock dividends - Aztec - - 288,703 Net loss for the year - (10,966,914) (10,966,914) ---------- ------------- ------------- Balance, December 31, 1994 $ (32,936) $ (52,413,486) $ 21,974,626 ========== ============= =============
Reflects the one-for-ten reverse stock split as described in Note 1. The accompanying notes are an integral part of this statement. F-10 46 AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Common stock Additional ------------ paid-in Accumulated Shares Amount capital deficit Total ------- ------ ------- ------- ----- Balance, January 1, 1993 5,945,474 $ 475,638 $ 56,536,928 $ (27,306,835) $ 29,705,731 Stock dividend - Aztec - - (4,956,126) - (4,956,126) Issuance of stock 851,636 68,131 2,578,318 - 2,646,449 Conversion of debt 5,000 400 49,600 - 50,000 Exercise of warrants and options 127,591 10,207 1,759,763 - 1,769,970 Issuance of stock in lieu of current liabilities 28,737 2,299 232,244 - 234,543 Issuance of stock for payment of notes payable 105,795 8,464 799,483 - 807,947 Net loss for the year - - - (14,139,737) (14,139,737) ------------ ------------ ---------------- ---------------- ---------------- Balance, December 31, 1993 7,064,233 $ 565,139 $ 57,000,210 $ (41,446,572) $ 16,118,777 ============ ============ ================ ================ ================
Reflects the one-for-ten reverse stock split as described in Note 1. The accompanying notes are an integral part of this statement. F-11 47 AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES: American International Petroleum Corporation (the "Company") is incorporated in the State of Nevada and, through its wholly-owned subsidiaries, is engaged in petroleum exploration, drilling, production and marketing operations in Colombia, Peru and Indonesia, and is the owner of a refinery in Lake Charles, Louisiana. 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 Corporation of Colombia and Pan American International Petroleum Corporation ("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 drilling commitments in Peru. Subsequent to December 31, 1995, the Company fulfilled its drilling requirements and the cash was released. Inventory Inventory consists of oil and gas equipment and 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 F-12 48 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. Certain geological and general 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 activity in Colombia and Peru and totaled $472,606, $383,004 and $485,494 for the years ended December 31, 1995, 1994 and 1993, 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. As a result of applying this policy, the Company charged $6,904,016 and $9,975,000 to expense in 1994 and 1993, respectively, for the reduction of carrying costs of oil and gas assets. No such charge was required in 1995. On March 31, 1995, the Financial Accounting Standards Board 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 year ended December 31, 1995. Property and equipment - other than oil and gas properties Property and equipment are carried at cost. 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. Earnings per share Earnings per share of common stock are based on the weighted-average number of shares outstanding. Fully diluted earnings per share amounts are not presented because they are anti-dilutive. On October 6, 1993, the Company's Board of Directors approved a one-for-ten reverse split of its common stock. Accordingly, the financial statements and related footnotes have been restated to reflect this reverse stock split where applicable. F-13 49 Foreign currency The U.S. dollar is the functional currency of the Company. 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 collects sales of oil and gas in Colombia and Peru in local currency and utilizes receipts for local operations. Periodically, funds are transferred from U.S. accounts to Colombia or Peru and converted into pesos or soles, respectively, when local currency is insufficient to meet obligations payable in local currency. Foreign exchange gains were $12,544, $34,300 and $230,156 in 1995, 1994 and 1993, respectively. Deferred charges The Company capitalizes certain costs associated with the offering and sale of debentures. Such costs are amortized as interest expense over the life of the related debt instrument. Stock-based compensation 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. AIPC has elected to continue to use the current method of accounting for employee stock compensation plans and, beginning in 1996, will disclose the fair value as defined in SFAS No. 123, which may be materially different from the recorded amount. 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. Reclassifications Certain prior year amounts have been reclassified to conform to the current year presentation. NOTE 2 - MANAGEMENT'S PLANS: The Company has incurred losses of $4,338,322, $10,966,914 and $14,139,737 for the years ended December 31, 1995, 1994 and 1993, respectively. The Company also had negative working capital of $3,403,000 at December 31, 1995, which included approximately $2,122,000 of principal and interest due on its 12% Secured Debentures. During 1995, the lessee of the Company's refinery (Gold Line Refining Inc. ("Gold Line") incurred various financial and purchasing problems which resulted F-14 50 in diminished throughput volumes and lower lease fees to the Company. These events prevented Gold Line from making its scheduled note payments to the Company. This situation, coupled with other operating losses and the negative working capital required the Company to find other sources with which to fund its operations and meet its financial obligations. As a result, the Company issued 5,606,870 shares of its common stock for cash and services rendered to the Company of approximately $3,723,000 during 1995. During the first quarter of 1996, the Company received cash and settled certain liabilities totaling approximately $991,000 from the sales and issuance of its common stock (Note 18). Further, in March 1996, the Company received $1,350,000 in net proceeds from the private placement of 10% Convertible Debentures to certain foreign buyers. Funds from these transactions enabled the Company to make payments of principal and interest on its 12% Secured Debentures and settle certain other obligations outstanding at December 31, 1995 totaling approximately $1,800,000. In March 1996, Gold Line secured the necessary financing to enable it to be awarded a one-year fuel supply contract from the Defense Fuel Supply Center ("DFSC"), valued at approximately $45 million. This contract, when coupled with its other DFSC contract, brings the total of Gold Line's annual contracts to approximately $69 million. These contracts are expected to require Gold Line to process a minimum of 16,000 barrels of feedstock per day through the refinery, which would result in monthly lease fees to the Company of approximately $245,000 and could enable Gold Line to repay its debt to the Company as originally scheduled, approximately $160,000 of principal and interest per quarter. The Company has received one offer and inquiries from various companies regarding a farmout of its new Chicoral discovery and its other Colombian properties in return for cash and drilling on the Company's behalf in the Toqui-Toqui Field. Such a transaction could provide the Company with the necessary capital to repay the recently-issued 10% Debenture, while establishing a plan for full exploitation of the Chicoral discovery over an aggressive timeline with little or no cost to the Company. The Company is currently having discussions with the principal holder of its 12% Secured Debentures, MG Trade Finance Corporation ("MGTF"), regarding the possibility of prepaying the total balance of MGTF's Debentures and Note, which together total approximately $5.5 million as of April 9, 1996. MGTF has been in the process over the past few months of closing its business affairs in the United States and has indicated a desire to negotiate a prepayment of the Company's debts to MGTF at a discount from face value. Concurrent with these discussions, the Company has been meeting with various financial institutions and industry participants who may provide the Company with the capital necessary to allow it to prepay its debts to MGTF and develop its oilfields in South America. The Company is also engaged in negotiations with Far Eastern Hydrocarbons Ltd. ("FEH"), a Hong Kong corporation, to exchange shares of the Company's common stock in return for 100% of the outstanding common stock of a wholly-owned subsidiary of FEH. FEH has indicated a desire to provide the necessary financing, or guarantees for same, to enable the Company to actively participate in the international energy community. In addition, the oil fields owned by FEH are producing significant amounts of cash flow, which could also be utilized to fund the Company's operations, if necessary. F-15 51 Management believes the proceeds generated from its internal operations should be significantly enhanced by the increased operations at its refinery resulting from Gold Line's new contract. This increase in cash flow, combined with the development of its new discovery in Colombia and net borrowings from external sources, should provide the Company with the funds necessary to meet its working capital obligations and operating commitments during the ensuing fiscal year. The Company is also currently having discussions with various banking institutions in the United States and abroad regarding financing for the contemplated operation of the vacuum distillation unit at its refinery to produce asphalt and vacuum gas oil. In addition, the Company has alternative methods of obtaining funds, including private or public equity and debenture or mezzanine financing, some of which it has utilized successfully in the past. In the event the Company is unable to raise sufficient proceeds from debt financing, the exercise of outstanding options and warrants, farmout proceeds, or from the consummation of additional equity financing, of which there is no assurance, the Company may be required to postpone and/or curtail its planned development activities at the refinery and in Colombia, Peru and/or Indonesia (Note 11). NOTE 3 - STOCKHOLDER RIGHTS OFFERING: In March 1994, the Company completed an offering of rights to its stockholders. Each right was exercisable for $3.00 and entitled the holder to two shares of common stock and one redeemable warrant to acquire an additional share of common stock at any time prior to March 1, 1997 at an exercise price of $4.00. The Rights Offering resulted in the exercise of 5,957,390 rights for gross proceeds of $17,872,170. Gross proceeds consisted of the surrender of $950,000 of the Company's 12% secured debentures, receipt of $16,521,000 cash and issuance of a $400,000 note receivable bearing interest at 10% per annum to an officer of the Company, $367,064 of which was repaid in 1994. The Company paid commissions of $1,181,757 from gross proceeds to various placement agents. Additionally, the Company incurred approximately $484,000 of expenses related to the offering. Proceeds from the offering were utilized for general corporate purposes including exploration and development of the Company's prospects in Colombia and Peru, repayment of debt and for working capital. F-16 52 NOTE 4 - ACCOUNTS AND SHORT-TERM NOTES RECEIVABLE: Accounts receivable are shown below:
December 31, ------------ 1995 1994 ---- ---- Accounts receivable - trade $ 939,958 $ 778,274 Note receivable - Gold Line 1,058,971 287,866 Other 139,082 29,927 ----------- ---------- 2,138,011 1,096,067 Less - allowance for doubtful accounts (1,064,458) (64,861) ----------- ---------- $ 1,073,553 $1,031,206 =========== ==========
NOTE 5 - OTHER LONG-TERM ASSETS: Other long-term assets consist of the following:
December 31, ------------ 1995 1994 ---- ---- Note receivable - Gold Line $ 974,583 $ 1,481,524 Unamortized bond issue cost 34,817 105,454 ---------- ----------- 1,009,400 1,586,978 Less - allowance for doubtful accounts (974,583) (1,263,058) ---------- ----------- $ 34,817 $ 323,920 ========== ============
NOTE 6 - ACCOUNTS PAYABLE: Accounts payable at December 31, 1995 and 1994 included $500,000 payable to an individual subcontractor for oil and gas operational services which was paid subsequent to December 31, 1995. F-17 53 NOTE 7 - ACCRUED LIABILITIES: Accrued liabilities consist of the following:
December 31, ------------ 1995 1994 ---- ---- Accrued payroll $ 366,499 $ 173,611 Accrued interest 347,247 404,113 Corporate taxes 275,206 148,798 Excise taxes 250,000 - Property taxes 228,756 299,825 Other 148,970 75,487 ---------- ---------- $1,616,678 $1,101,834 ========== ==========
NOTE 8 - LONG-TERM DEBT: Long-term debt consists of the following:
December 31, ------------ 1995 1994 ---- ---- Note payable to MG Trade Finance Corporation $2,845,171 $2,845,171 12% secured debentures due December 31, 1997 - 25% of original principal due on December 31, 1996 4,207,500 4,675,000 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. 250,000 250,000 ---------- ---------- 7,302,671 7,770,171 Less - current portion 1,870,000 1,168,750 ---------- ---------- $5,432,671 $6,601,421 ========== ==========
Long-term debt of $1,870,000, $2,587,500 and $2,845,171 matures during 1996, 1997 and 1998, respectively. Note payable to MG Trade Finance Corporation On December 4, 1990, AIRI entered into a loan and security agreement (the "Loan Agreement") with 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 F-18 54 Company and the Company pledged 100% of the common stock of AIRI. In the event of a default, whereby AIRI common stock may be sold, MGTF will retain, after satisfying all indebtedness due MGTF, an amount equal to 50% of the amount due MGTF on the date of the default. 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 addition, MGTF's parent company, MG Corp., is entitled to one seat on the Company's Board of Directors without the consent of the Company and a second seat upon the consent of the Company's Board, which consent is not to be unreasonably withheld. One of these seats would then be eligible to be appointed to the Executive Committee, also upon consent of the Company's Board, which consent is not to be unreasonably withheld. MGTF has not made such a request. As long as the Company has any obligations to MGTF, the Company has agreed not to undertake any financial commitments, or acquire or dispose of assets in excess of $250,000 without the unanimous consent of the Executive Committee. MGTF has not nominated any persons to be on the Board. In November 1992, MGTF agreed to modify the Loan Agreement and extend the maturity of a portion of the principal due on May 31, 1993. Under the modified agreement, principal payments of $3,374,520 were made during 1994 and the remaining principal of $2,845,171 was due May 31, 1995. In consideration for the extension, the Company agreed to extend the expiration date of all warrants held by MGTF and its affiliate, Metallegesllschaft, that remain outstanding on December 31, 1993 or June 30, 1994, to June 30, 1997. The exercise price of any warrants subject to the extension was increased to $15.63 per share of common stock. 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. In March 1995, MGTF agreed to further modify the Loan Agreement and extend the maturity of the $2,845,171 principal originally due from the Company on May 31, 1995. Under the modified agreement, the balance of principal is now due on March 31, 1998. Previously, all monthly lease fees received pursuant to the terms of any lease of the refinery were required to be remitted to MGTF in repayment of the loan principal and interest. Under the modified Loan Agreement, one-half of the monthly lease fees are required to be remitted to MGTF and the related interest rate was reduced from prime plus 2.0% to prime plus 1.0%. Pursuant to the Loan Agreement, AIRI granted MGTF an option to lease the refinery for a period of 13 months commencing after the expiration of the current lease (Note 9). Any such lease will call for a rental, net of all operating expenses, of $.45 per barrel for a minimum throughput of 18,000 bbls per day, and $.48 per barrel for any amounts in excess of 18,000 bbls per day. The Loan Agreement with MGTF contains various events of default including, but not limited to, failure to make principal or interest payments in a timely manner, transfers of funds by dividend or other means from AIRI to the Company, age of accounts payable amounts and refurbishment and maintaining adequate insurance coverage. An event of default, if declared and not cured within the allowed time, F-19 55 would permit MGTF to accelerate the loan and demand immediate payment. At various times during 1995, 1994 and 1993, the Company has been in technical default with respect to certain monetary covenants. The Company believes it will continue to be successful in negotiating the resolution of such compliance issues with MGTF. NOTE 9 - 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 instalments equal to 10% of Gold Line's monthly operating cash flow, if such operating cash flow was positive. No amounts were collected pursuant to this 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 instalments 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 $2,039,041 and $1,327,919 at December 31, 1995 and 1994, respectively. In the event Gold Line funds and constructs a vapor recovery unit (the "VRU") at the Refinery, the Company will reduce the principal by $650,000. If Gold Line does not build the VRU, it will pay the Company additional monthly payments of $108,333 during the final six months of the lease term. Lease fees are based on refinery throughput. Terms of the lease called for rental fees of $.40 per barrel of throughput during 1995 and $.50 per barrel from January 1, 1996 through March 31, 1998. The lease also calls for a monthly minimum throughput of 10,000 barrels per day. Fifty percent of the payments to the Company under this lease of the refinery are to be paid to MGTF to retire principal and interest on the note payable to MGTF (Note 8). In the event Gold Line defaults under the lease agreement, such default would adversely affect the Company's ability to satisfy its obligations to MGTF. This situation could then result in a default by the Company thereunder if the Company is unable to pay interest on the MGTF note. NOTE 10 - STOCK OPTIONS AND WARRANTS: Outstanding warrants and options At December 31, 1995, 1994 and 1993, 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. All amounts have been restated to reflect the one-for-ten reverse stock split as described in Note 1. F-20 56
Number of Shares Under Options and Warrants at December 31, --------------------------------------------------------- Exercise Expiration 1995 1994 1993 Price Date ---- ---- ---- ----- ---- 1,500 1,500 1,500 $ 36.2500 April 1, 1996 66,715 66,715 66,715 $ 32.5000 February 26, 1996 5,957,347 5,957,355 - $ 4.0000 March 1, 1996 7,988 7,988 7,988 $ 15.0000 March 10, 1996 3,000 3,000 3,000 $ 30.0000 August 28, 1996 20,000 20,000 20,000 $ 30.6250 July 14, 1997 282,500 - - $ 1.000 December 31, 1997 (2) 150,000 - - $ 2.000 March 31, 1998 20,000 - - $ 1.000 August 3, 1998 (2) - 56,250 56,250 $ 20.0000 December 31, 1995 296,667 50,000 $ 15.6300 June 30, 1997 100,000 100,000 $ 16.8800 June 30, 1997 - 337,500 339,500 $ 4.0000 December 31, 1997 (2) - 20,000 - $ 1.5000 August 3, 1998 - - 9,750 $ 11.0000 April 1, 1994 - - 10,000 $ 20.0000 April 1, 1994 - - 8,500 $ 12.5000 April 1, 1994 - - 3,830 $ 10.0000 April 1, 1994 - - 336,940 $ 1.2500 June 30, 1994 (1) - - 500 $ 34.3000 January 1, 1995 - - 5,000 $ 36.2500 April 1, 1995 - - 5,000 $ 31.8500 December 31, 1995 - - 15,000 $ 35.0000 April 22, 1996 --------------- --------------- --------------- 6,509,050 6,866,975 1,039,473 =============== =============== ===============
(1) The exercise price for the 336,940 warrants was adjusted to $1.25 per share based on an anti-dilutive provision in the respective warrant agreements. (2) Represents options held by employees and directors of the Company. The exercise price and expiration date of such options reflect the adjustments approved by the Company's Board of Directors. Options and warrants to purchase 8, 35 and 238,385 shares were exercised in 1995, 1994 and 1993, respectively, at prices of $4.00, $4.00 and ranging from $6.00 to $25.00, respectively. F-21 57 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. At December 31, 1995, 302,500 Options were granted or outstanding under the 1995 Plan. The 1995 Plan will be submitted for approval to the Company's stockholders at its annual meeting in 1996. If the Plan is not approved, the 302,500 options will be treated as NQSOs. 1988 Plans Under the Company's 1988 Incentive Stock Option Plan, only full-time employees, including officers, are eligible to receive options. A maximum of 100,000 shares may be issued and no options may be granted after July 1998. 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 stockholders 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. There were no options granted under the Incentive Stock Option Plan as of December 31, 1995. No options have been exercised under this plan. The Company's Nonqualified Stock Option Plan provides for the granting to key employees of options to purchase the Company's common stock at a price determined by the Board of Directors. Options are granted for a five-year period. The maximum number of shares reserved for issuance pursuant to the plan is 50,000. There were no options granted under the Nonqualified Option Plan as of December 31, 1995. No options have been exercised under this plan. NOTE 11 - COMMITMENTS AND CONTINGENT LIABILITIES: Drilling commitments The Company has completed all its contractual work commitments in Colombia and Peru. F-22 58 Indonesian agreements Pamanukan Selatan - In December 1995, the Company entered into a Farmout Agreement with P.T. Pelangi Niaga Mitra Internasional ("PNMI"), an Indonesian privately-held limited liability company, whereby the Company is expected to earn a 49% working interest in a Technical Assistance Contract ("TAC") with Pertamina for the Pamanukan Selatan area of West Java Province, Indonesia by providing 100% of the funding for the exploration, development and operation of the TAC. Full exploration and development of the TAC is expected to cost between $2 and $3 million over the next three years, of which approximately $700,000 will be required during 1996. As a portion of its obligations under the farmout agreement, the Company issued, pursuant to Regulation S of the Securities Act of 1933, 100,000 shares of its common stock to PNMI. The Company will be the operator of the joint operations and the TAC and is to be reimbursed for 175% of all expenditures, pursuant to the cost recovery provisions in the TAC, before any distribution of profits to PNMI can occur. The Company will also be entitled to recoup indirect overhead charges up to five percent of total expenditures, which amount will be part of the cost recovery. All monetary obligations the Company may have under the farmout agreement are subject to PNMI receiving governmental certification and Pertamina's approval to conduct operations under this TAC, which are expected to occur by May of 1996. Pamanukan Selatan includes an estimated 16 billion cubic feet of gas reserves. The field's initial well tested at 5.7 million cubic feet of gas per day and is temporarily shut-in pending construction of a 1.3 mile delivery pipeline (unaudited). In October 1995, the Company signed a memorandum of understanding with PNMI, which entitles the Company to a two-year right of first refusal to farm-in to a 49% working interest in any future contracts obtained by PNMI from Pertamina. The Company will have three months to exercise its rights, after receipt of each notification from PNMI, at a cost to be negotiated on a case-by-case basis. Malacca Strait - In November 1995, the Company reached a preliminary agreement with FEH to purchase a portion of the issued and outstanding common stock of Resource Holdings, Inc. ("RHI"), a private Delaware corporation and a wholly-owned subsidiary of FEH, in exchange for shares of the Company's common stock. This agreement also gave the Company a six-month option to acquire the remainder of RHI's common stock, payable with shares of the Company's common stock. In January 1996, the Company and FEH modified the structure of the proposed transaction. Under the new structure, 100% of RHI's shares would be exchanged for an as yet unspecified number of the Company's shares, subject to the signing of a definitive agreement and approval by the Company's shareholders. As of April 9, 1996, the parties were continuing their due diligence processes. F-23 59 RHI's assets consist of its wholly-owned Panamanian corporation, Kondur Petroleum S.A. ("Kondur"), which owns 34.46% of the Malacca Strait PSC Contract ("Malacca") in Sumatra, Indonesia. Kondur is the largest Indonesian-owned domestic operator in Indonesia. The remaining interests in Malacca are owned by China National Offshore Oil Corporation and Novus Petroleum Ltd. Malacca covers an area of 2.7 million acres and contains 16 oil fields operated by Kondur, which are currently producing an aggregate of approximately 20,000 barrels of oil per day. Malacca has an estimated 58 million barrels of proven recoverable oil reserves and 47 billion cubic feet of proven recoverable gas reserves. Kondur intends to increase the daily average production rates of Malacca through development and exploration, which is scheduled to commence during the third quarter of 1996 (unaudited). 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. Subsequent to the issuance of the TAM the IRS Appeals officer indicated to AIRI that the IRS still wants to negotiate a settlement. As a result, AIRI has scheduled a meeting with the IRS Appeals Office on April 30, 1996 to discuss the situation. Depending upon the results of this meeting, the Company will decide whether to litigate or settle this matter. 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. In this instance, the Company has provided an allowance during 1995 of $250,000 for estimated costs, either in the form of legal expenses or payments to the IRS, or some combination of both. As the liability becomes better defined there will be changes in the estimated costs which could have a material effect on the Company's future results of operations and financial condition or liquidity. F-24 60 Environmental lawsuit On January 25, 1994, a lawsuit captioned Paul R. Thibodeaux, et al. v. Gold Line Refinery Ltd. (a limited partnership), Earl Thomas, individually and d/b/a/ Gold Line Refinery Ltd., American International Petroleum Corporation, American International Refinery, Inc., Joseph Chamberlain individually (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. Responsive pleadings have been filed by AIRI to this action and to the three amendments which added plaintiffs, defendants and restructured the plaintiff's claims (deleting some claims and adding new claims). The lawsuit alleges, among other things, that the defendants, including the Company's wholly-owned subsidiary, AIRI, caused or permitted the discharge of hazardous and toxic substances from the Lake Charles refinery into the Calcasieu River. The plaintiffs seek an unspecified amount of damages, including special and exemplary damages. AIRI continues to vigorously defend such action. In March 1996, the Company and AIRI filed an Exception of Prescription which is expected to eliminate most of the plaintiffs' claims. At this time, the Company is unable to determine what, if any, liability may arise from this action. Contract claims In October 1995, Rio Bravo S.A., the operator of the Company's Lot IV Block in Peru, locked out PAIPC personnel from access thereto and filed a legal action in Peru against PAIPC claiming damages of $11,695,000 and alleging that PAIPC's License Contract with the government to explore Block IV (the "License Contract") was canceled by the government due to the fact PAIPC did not complete the minimum work program required under the License Contract. However, because the minimum work program was completed and was certified as complete by the government (the performance bond placed by PAIPC to assure its compliance with the minimum work program has, in fact, been released by the government) and, since the License Contract with the government is still in effect and has not been canceled, the Company expects the legal action by Rio Bravo will be decided in PAIPC's favor. PAIPC has also filed counter-claims and is in the process of filing liens against Rio Bravo to defend its interests in the Block and License Contract and continues to participate in meetings with the government related to the activities in the Block and in all matters of administration and execution of the obligations in the License Contract. At this time, the Company is unable to determine what, if any, liability or benefits may arise from this action. Employment agreements The Company has entered into an employment agreement with its chief executive officer. Total salaries payable under this contract for 1996 are $300,000. In September 1995, the Company's Board of Directors authorized the issuance, subject to shareholder approval, of 900,000 restricted shares (the "Shares") of the Company's common stock to its Chairman and Chief Executive Officer, Dr. George Faris. The Shares were granted to Dr. Faris in consideration for Dr. Faris waiving certain rights under his employment contract, thereby relieving the Company of its obligation to make cash payments to Dr. Faris upon a change of control or involuntary termination. If shareholder approval is obtained, the Company will record the issuance of the shares and the related expense at that time. F-25 61 Lease commitments The Company leases office space under various operating leases expiring in 1997 and 1998. Additional office space is rented on a month-to-month basis. Future minimum payments under operating leases with remaining terms of one year or more consisted of the following at December 31, 1995: 1996 $ 294,759 1997 149,759 1998 104,150 1999 - 2000 - ----------- Total minimum lease payments $ 548,668 ============
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:
1995 1994 1993 ---- ---- ---- Minimum rentals $ 297,502 $ 243,324 $ 252,837 Less - sublease rentals 114,213 - - ------------ ------------ ------------ Total $ 183,289 $ 243,325 $ 252,837 ============ ============ ============
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. NOTE 12 - INCOME TAXES: 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. F-26 62 The Company reported a loss from operations during 1995 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. As a result of previous years' operations, the Company has available unused tax carryforwards of approximately $15,000,000 which expire in years 1996 through 2009. The Company's utilizable tax operating loss carryforwards to offset future income have been restricted in accordance with Section 382 of the Internal Revenue Code. These restrictions will limit the Company's future use of its loss carryforwards due to stock ownership changes that have occurred. The Company's operations in Colombia are subject to taxes on net income levied by the Government of Colombia which may not be offset by net operating losses incurred in other countries. The Company has not generated taxable income in Colombia since it began operations in that country. The net operating loss carryforward from prior years is approximately $641,000. The components of deferred tax assets and liabilities are as follows:
December 31, ---------------------------------------- 1995 1994 ---- ---- Deferred tax assets: Net operating loss carryforwards $ 9,674,000 $ 6,656,000 Reserve for note receivable 877,000 435,000 Depreciation - 481,000 Accrued liabilities 88,000 - Deferred tax liability: Depreciation 461,000 - -------------- -------------- Net deferred tax asset 10,178,000 7,572,000 Valuation allowance (10,178,000) (7,572,000) -------------- -------------- $ - $ - ============== ==============
The valuation allowance relates to the uncertainty as to the future utilization of net operating loss carryforwards. NOTE 13 - CONCENTRATIONS OF CREDIT RISK: Financial instruments which potentially expose the Company to concentrations of credit risk consist primarily of trade accounts receivable. The Company's production of oil and gas in Colombia is sold to one customer. Related trade accounts receivable were $291,043 at December 31, 1995. Although the Company is directly affected by the well-being of the oil and gas industry and the stability of the business environment in Colombia, management believes that a ready market exists for its oil and gas production in the event its current customer does not perform under the existing agreement. Refinery processing fees are earned through lease of the Company's refinery to Gold Line. Trade accounts receivable and notes receivable from Gold Line aggregated $2,537,858 at December 31, 1995, net of F-27 63 reserves for uncollectible amounts of $2,033,554. The Company's ability to collect outstanding amounts from Gold Line and restrictions thereon are subject to agreements between MGTF, Gold Line, NationsBank (a Gold Line creditor), and the Company (Notes 2, 8 and 9). NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS: The estimated fair value of the Company's financial instruments is as follows:
1995 1994 ------------------------------- --------------------------------- Carrying Fair Carrying Fair value value value value ----- ----- ----- ----- Long-term debt $ 7,302,671 $ 7,352,671 $ 7,770,171 $ 8,290,107
For investments, fair value equals quoted market price. Fair value of fixed-rate long-term debt is determined by reference to rates currently available for debt with similar terms and remaining maturities. 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. NOTE 15 - GEOGRAPHICAL SEGMENT INFORMATION: The Company's operations involve a single industry segment, the exploration, development, production, transportation, refining and marketing of oil and natural gas. Its principal oil and gas properties are located in South America. 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. F-28 64 Financial information, summarized by geographic area, is as follows:
Geographic Segment ----------------------------------------------------- Consolidated 1995 United States Colombia Peru 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 expenses 1,922,130 1,513,401 65,141 3,500,672 -------------- ---------------- -------------- --------------- Operating profit (loss) $ (518,462) $ (299,188) $ 100,928 (689,364) ============== ================ ============== General corporate expenses 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 ============== ================ ============== ===============
F-29 65
Geographic Segment ----------------------------------------------------- Consolidated 1994 United States Colombia Peru total - ---- ------------- -------- ---- ----- Sales and other operating revenue $ 2,094,235 $ 1,169,323 $ 122,068 $ 3,385,626 Interest income and other corporate revenues 122,888 --------------- Total revenue 3,508,514 Costs and operating expenses 1,376,411 9,479,273 41,024 10,896,708 -------------- ---------------- -------------- --------------- Operating profit (loss) $ 717,824 $ (8,309,950) $ 81,044 (7,388,194) ============== ================ ============== General corporate expense 2,278,942 Interest expenses 1,299,778 --------------- Net loss $ (10,966,914) =============== Identifiable assets at December 31, 1994 $ 14,481,904 $ 13,580,190 $ 2,717,167 $ 30,779,261 ============== ================ ============== Corporate assets 1,450,452 --------------- Total assets at December 31, 1994 $ 32,229,713 =============== Depreciation, depletion and amortization rate per equivalent barrel of oil* $ - $ 5.51 $ - $ 5.51 ============== ================ ============== =============== Capital expenditures, net of cost recoveries $ - $ 3,200,281 $ 2,307,855 $ 5,508,136 ============== ================ ============== ===============
F-30 66
Geographic Segment ----------------------------------------------------- Consolidated 1993 United States Colombia Peru total - ---- ------------- -------- ---- ----- Sales and other operating revenue $ 1,783,792 $ 2,107,801 $ - $ 3,891,593 Interest income and other corporate revenues 98,563 --------------- Total revenue 3,990,156 Costs and operating expenses 1,305,297 12,549,792 - 13,855,089 -------------- ---------------- -------------- --------------- Operating profit (loss) $ 478,495 $ (10,441,991) $ - (9,864,933) ============== ================ ============== General corporate expenses 2,751,045 Interest expense 1,523,759 --------------- Net loss $ (14,139,737) =============== Identifiable assets at December 31, 1993 $ 15,097,120 $ 18,589,440 $ - $ 33,686,560 ============== ================ ============== Corporate assets 1,310,365 --------------- Total assets at December 31, 1993 $ 34,996,925 =============== Depreciation, depletion and amortization rate per equivalent barrel of oil* $ - $ 3.82 $ - $ 3.82 ============== ================ ============== =============== Capital expenditures, net of cost recoveries $ 289,003 $ 5,683,729 $ - $ 5,972,732 ============== ================ ============== ===============
* Excludes provisions for write-down of oil and gas properties. Transactions with the Company's major customers (greater than 10% of revenue) accounted for 49% and 39% in 1995, 63%, 23% and 13% in 1994 and 43% and 47% of revenue in 1993. F-31 67 NOTE 16 - SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES AND DISCLOSURES OF CASH FLOW INFORMATION: The Company has issued shares of common stock in the acquisitions and conversions of the following noncash transactions:
1995 1994 1993 ---- ---- ---- Conversion of debentures $ - $ 950,000 $ 50,000 Conversion of notes payable - 12,787 807,947 Stock issued in lieu of current liabilities 489,250 15,559 234,543 Conversion of interest in well - - 1,000,000 Issuance of stock for notes receivable, net of amounts collected - 32,936 - Issuance of stock - unearned compensation 20,312 - -
Cash paid for interest, net of amounts capitalized, was $963,609, $647,439 and $1,135,187 during 1995, 1994 and 1993, respectively. Cash paid for corporate franchise taxes was $52,050, $36,001 and $67,677 during 1995, 1994 and 1993, respectively. NOTE 17 - RELATED PARTY TRANSACTIONS: See disclosure regarding transactions with directors of the Company in Notes 3 and 11. NOTE 18 - SUBSEQUENT EVENTS: Regulation S offering During the first quarter of 1996, the Company received cash and settled certain liabilities totaling approximately $991,000 from the sales and issuance of shares of its common stock in accordance with the safe harbor provided by Regulation S as promulgated by the Securities and Exchange Commission. The proceeds were used for working capital purposes. Note receivable In order to enhance the business strength of the lessee of its Refinery and to assist it in securing a new government contract, in February 1996, the Company agreed to reduce the fully reserved principal balance of its note receivable from the lessee to $900,732 from $1,801,464. The lessee was awarded a new one-year contract to provide fuels to the DFSC effective April 1, 1996. Sale of debentures On March 21, 1996, the Company received net proceeds of $1,350,000 from the sale of 10% Convertible Redeemable Subordinated Debentures, issued in accordance with Regulation S. The proceeds are being utilized to repay debt and for working capital purposes. F-32 68 Indonesian agreements In January and February 1996, respectively, the Company and FEH announced their intent to combine into one phase the two phases originally specified in their Memorandum of Understanding dated November 1, 1995, and extended the closing date of the previously-announced share exchange agreement between the Company and FEH to an unspecified future date to allow both companies more time to complete their due diligence procedures. Such procedures were still in progress as of the date of filing of the Company's Form 10-K for the fiscal year ended December 31, 1995. F-33 69 AMERICAN INTERNATIONAL PETROLEUM AND SUBSIDIARIES SUPPLEMENTARY OIL AND GAS INFORMATION FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (UNAUDITED) 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-34 70 AMERICAN INTERNATIONAL PETROLEUM CORPORATION 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 -------------------------------------- ------------------------------------ 1995 1994 1993 1995 1994 1993 ---- ---- ---- ---- ---- ---- Unevaluated property not subject to amortization $ 1,101,277 $ 2,163,201 $ 2,954,000 $3,832,041 $2,303,946 $ - Proved and unproved properties 31,215,040 28,903,520 24,860,074 - - - Accumulated deprecia- tion, depletion and amortization 19,364,606 18,832,617 11,257,744 - - - ----------- ----------- ----------- ---------- ---------- -------- Net capitalized costs $12,951,711 $12,234,104 $16,556,330 $3,832,041 $2,303,946 $ - =========== =========== =========== ========== ========== ======== Costs incurred in oil and gas property acquisition, exploration and development activities Property acquisition costs - proved and unproved properties $ - $ - $ - $ - $ - $ - Exploration costs 744,549 3,016,741 3,813,319 - - - Development costs 527,595 683,532 2,399,993 - - - Results of operations for oil and gas producing activities Oil and gas sales $ 1,104,095 $ 1,083,406 $ 1,874,020 $ 166,069 $ 122,018 $ - ----------- ----------- ----------- ---------- ---------- -------- Lease operating costs 363,600 564,061 1,197,434 65,141 41,022 - Depreciation, depletion and amortization 531,989 670,857 507,129 - - - Provision for reduction of oil and gas properties - 6,904,016 9,975,000 - - - ----------- ----------- ----------- ---------- ---------- -------- 895,589 8,138,934 11,679,563 65,141 41,022 - ----------- ----------- ----------- ---------- ---------- -------- Income (loss) before tax provision 208,506 (7,055,528) (9,805,543) 100,928 80,996 - Provision (benefit) for income tax - - - - - - ----------- ----------- ----------- ---------- ---------- -------- Results of operations $ 208,506 $(7,055,528) $(9,805,543) $ 100,928 $ 80,996 $ - =========== =========== =========== ========== ========== ========
Other Total ------------------------------------- ------------------------------------------ 1995 1994 1993 1995 1994 1993 ---- ---- ---- ---- ---- ---- Unevaluated property not subject to amortization $ 65,506 $ - $ - $ 4,998,824 $ 4,467,147 $ 2,954,000 Proved and unproved properties 351,257 - - 31,566,297 28,903,520 24,860,074 Accumulated deprecia- tion, depletion and amortization 351,257 - - 19,715,863 18,832,617 11,257,744 --------- --------- --------- ----------- ------------ ----------- Net capitalized costs $ 65,506 $ - $ - $16,849,258 $ 14,538,050 $16,556,330 ========= ========= ========= =========== ============ =========== Costs incurred in oil and gas property acquisition, exploration and development activities Property acquisition costs - proved and unproved properties $ - $ - $ - $ - $ - $ - Exploration costs - - - 744,549 3,016,741 3,813,319 Development costs - - - 527,595 683,532 2,399,993 Results of operations for oil and gas producing activities Oil and gas sales $ - $ - $ - $ 1,270,164 $ 1,205,424 $ 1,874,020 --------- --------- --------- ----------- ------------ ----------- Lease operating costs - - - 428,741 605,083 1,197,434 Depreciation, depletion and amortization 351,257 - - 883,246 670,857 507,129 Provision for reduction of oil and gas properties - - - - 6,904,016 9,975,000 --------- --------- --------- ----------- ------------ ----------- 351,257 - - 1,311,987 8,179,956 11,679,563 --------- --------- --------- ----------- ------------ ----------- Income (loss) before tax provision (351,257) - - (41,823) (6,974,532) (9,805,543) Provision (benefit) for income tax - - - - - - --------- --------- --------- ----------- ------------ ----------- Results of operations $(351,257) $ - $ - $ (41,823) $ (6,974,532) $(9,805,543) ========= ========= ========= =========== ============ ===========
F-35 71 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, -------------------------------------------------------- 1995 1994 1993 ---- ---- ---- Columbia: Acquisition costs $ 1,101,277 $ 1,101,277 $ 1,101,277 Exploration costs - 1,061,924 1,775,873 Capitalized interest - - 76,850 ---------------- --------------- --------------- 1,101,277 2,163,201 2,954,000 Peru: Exploration costs 3,832,041 2,303,946 - ---------------- --------------- --------------- Other: Acquisition costs 65,506 - - ---------------- --------------- --------------- $ 4,998,824 $ 4,467,147 $ 2,954,000 ================ =============== ===============
Acquisition costs of unproved properties not subject to amortization at December 31, 1995, 1994 and 1993, respectively, consists mainly of lease acquisition costs related to unproved areas. The Company will continue to evaluate these properties over the lease terms; however, the timing of the ultimate evaluation and disposition of a significant portion of the properties has not been determined. Exploration costs on unproved properties at December 31, 1995, consist mainly of exploration costs of the Peru properties. The Company anticipates completing its evaluation of these properties during 1996. Approximately 32%, 46% and 0% of the balance in unproved properties at December 31, 1995, related to additions made in 1995, 1994 and 1993, respectively. F-36 72 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, 1995, 1994 and 1993. 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, 1993 - - 6,500,747 5,247,000 6,500,747 5,247,000 Revisions of previous estimates - - (2,278,716) 6,317,300 (2,278,716) 6,317,300 Extensions, discoveries and other additions - - - - - - Production - - (132,756) - (132,756) - ----- -------- ---------- ----------- ---------- ----------- December 31, 1993 - - 4,089,275 11,564,300 4,089,275 11,564,300 Revisions of previous estimates - - (1,192,425) (3,244,100) (1,192,425) (3,244,100) Extensions, discoveries and other additions - - - - - - Production - - (121,643) - (121,643) - ----- -------- ---------- ----------- ---------- ----------- December 31, 1994 - - 2,775,207 8,320,200 2,775,207 8,320,200 Revisions of previous estimates - - 1,166,258 - 1,166,258 - Extensions, discoveries and other additions - - 302,836 3,061,200 302,836 3,061,200 Sale of reserves in place - - - - - - Production - - (137,821) - (137,821) - ----- -------- ---------- ----------- ---------- ----------- December 31, 1995 - - 4,106,480 11,381,400 4,106,480 11,381,400 ===== ======== ========== =========== ========== ===========
F-37 73
United States Colombia Total ------------------------- --------------------------- ---------------------------- Oil Gas Oil Gas Oil Gas BBLS MCF BBLS MCF BBLS MCF ---- --- ---- --- ---- --- Net proved developed reserves January 1, 1993 - - 1,712,188 5,247,000 1,712,188 5,247,000 December 31, 1993 - - 992,166 5,155,900 992,166 5,155,900 December 31, 1994 - - 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
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. Revisions to crude oil and gas reserves in 1994 reflect the elimination of the Puli No. 3 K4 formation reserves, which were found to be incapable of production due to formation damage. Recoverable reserves could be included in future estimates in the event this problem can be solved or a new well can be drilled. These revisions were partially offset by an increase in the Toqui reserves due to the lower decline rate demonstrated during 1994 as compared to the 1993 estimate. Revisions to crude oil reserves in 1993 reflect a decrease in proved reserves resulting from unanticipated production declines experienced during 1993 and from the abandonment in 1993 of the eastern most producing oil well in the Toqui field due to water encroaching in that area of the field. Gas reserves were revised upward as a result of the development of a viable gas market for associated gas currently being flared in the Toqui-Toqui field and new seismic data acquired in the Puli Anticline in 1993 that expanded the boundaries of the gas producing reservoir. F-38 74 STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS: 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 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 -------------------------------------------------------- 1995 1994 1993 ---- ---- ---- Future cash inflows $ 46,433,879 $ 33,896,403 $ 63,507,980 Future development costs (10,780,000) (5,977,600) (9,182,847) Future production costs (9,409,442) (7,154,014) (27,989,941) Future income tax expenses - - - ---------------- --------------- --------------- Future net cash flows 26,244,437 20,764,789 26,335,192 Annual discount 10% rate (13,885,290) (10,693,885) (12,732,169) ---------------- --------------- --------------- Standardized measure discounted future net cash flows $ 12,359,147 $ 10,070,904 $ 13,603,023 ================ =============== ===============
Future cash flows in 1995 increased as a result of the upward revision in estimated future recoverable equivalent barrels of oil by approximately 1,166,258 BOE and also to the addition of recoverable equivalent barrels of oil of 813,000 BOE from newly discovered oil reserves and commercial gas in 1995. Estimated future income taxes were eliminated in 1993, 1994 and 1995 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, 1993, 1994 and 1995. F-39 75 CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS: The aggregate change in the standardized measure of discounted future net cash flows was an increase of $2,288,243 in 1995 and a decrease of $3,532,119 and $13,624,693 in 1994 and 1993. The principal sources of change were as follows:
For the years ended December 31, ------------------------------------------------- 1995 1994 1993 ---- ---- ---- Beginning of year $ 10,070,904 $ 13,603,023 $ 27,227,716 Sales and transfer of oil and gas produced, net of production costs (740,495) (519,345) (677,000) Net changes in prices and production costs 135,987 1,660,800 (14,201,150) Extensions, discoveries, additions and improved recovery, less related costs 660,594 - - Previously estimated development costs incurred during the year 527,595 683,532 1,250,611 Changes in estimated future development costs (2,032,144) 1,302,552 (1,436,709) Revisions of previous reserve quantity estimates 3,783,148 (5,751,795) (7,695,873) Purchase of reserves in place - - - Sale of reserves in place - - - Net change in future income taxes - - 9,517,622 Changes in timing and other (1,053,532) (2,268,165) (3,104,966) Accretion of discount 1,007,090 1,360,302 2,722,772 --------------- -------------- -------------- End of year $ 12,359,147 $ 10,070,904 $ 13,603,023 =============== ============== ==============
F-40 76 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 12, 1996 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 12, 1996 --------------------------------------- George N. Faris, Chairman of the Board of Directors and Chief Executive Officer By: /s/ Denis J. Fitzpatrick Date: April 12, 1996 --------------------------------------- Denis J. Fitzpatrick Vice President, Secretary, Principal Financial and Accounting Officer By: /s/ Donald G. Rynne Date: April 12, 1996 --------------------------------------- Donald G. Rynne, Director By: /s/ Daniel Y. Kim Date: April 12, 1996 --------------------------------------- Daniel Y. Kim, Director By: /s/ William R. Smart Date: April 12, 1996 --------------------------------------- William R. Smart, Director 77 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.1 Certificate of Incorporation of the Registrant, as amended. (1) 3.2 Certificate of Amendment to Articles of Incorporation, dated June 29, 1988. (2) 3.3 Certificate of Amendment to Articles of Incorporation, dated August 10, 1988. (2) 3.4 Certificate of Amendment to Articles of Incorporation, dated November 18, 1993. (7) 3.5 By-Laws of the Registrant, as amended. 4.1 Indenture dated January 20, 1993, governing the Registrant's 12% Secured Debentures Due 1997.(6) 4.2 Form of Class A Warrant. (8) 4.3 1995 Stock Option Plan and Form of Option Agreements of the Registrant. 4.4 Form of Debenture and Subscription Agreements dated March 21, 1996 between the Company and purchasers listed on Schedule A attached thereto. 10.1 Employment Agreement, dated May 1, 1989 by and between George N. Faris and the Registrant.(3) 10.2 Loan and Security Agreement ("Loan Agreement") dated December 4, 1990 by and between MG Trade Finance Corp. ("MGTF") and AIRI. (4) 10.3 Schedule of construction and Other Loan Uses attached to the Loan Agreement. (4) 10.4 Schedule of JP-4 Construction Permitted After December 15, 1990 attached to the Loan Agreement.(4) 10.5 Corporate Continuing Guarantee of the Registrant to MGTF, dated December 4, 1990. (4) 10.6 Pledge Agreement, dated as of the 4th day of December 1990, by and among the Registrant, AIRI and MGTF. (4) 10.7 Shareholder Distribution Agreement dated as of the 4th day of December 1990, by and between the Registrant, AIRI and MGTF. (4) 10.8 Form of Sale of Indebtedness and Assignment of Collateral Mortgage Notes and Security Documents. (4) 10.9 Form of Collateral Mortgage Note drawn by AIRI. (4) 10.10 Form of Amended and Restated Collateral Pledge Agreement drawn by AIRI (Inventory). (4) 10.11 Form of Amended and Restated Collateral Pledge Agreement drawn by AIRI (Fixed Assets). (4) 10.12 Environment Indemnity Agreement dated December 4, 1990 by and between AIRI, the Registrant and MG. (4) 78 EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.13 Amendment to Loan and Security Agreement, dated as of September 26, 1991. (5) 10.14 Pledge and Security Agreement, dated January 20, 1993, by and between American International Petroleum Corporation and Society National Bank as Trustee. (6) 10.15 Letter Agreement, dated January 4, 1995, by and between American International Petroleum Corporation and P.T. Ustraindo Petrogas.(9) 10.16 Promissory Note, dated March 15, 1995 from Gold Line Refining, Ltd. to American International Petroleum Corporation.(9) 10.17 Amended and Restated Lease Agreement between Gold Line and AIRI dated March 22, 1995.(9) 10.18 Letter Agreement dated March 22, 1995 amending Loan and Security Agreement.(9) 10.19 Subordination and Standby Agreement dated March 22, 1995 between NationsBank, Gold Line Refining Ltd., Citizens Bank and AIRI. 10.20 Intercreditor Letter Agreements dated March 22, 1995 between MGTF, Citizens Bank and AIRI. 10.21 Amendment #1 to Employment Agreement, dated October 13, 1995, between George N. Faris and the Registrant(10). 10.22 Letter dated February 9, 1996 amending Promissory Note between AIRI and Gold Line Refining Ltd. 21.1 Subsidiaries of the Registrant.(9) 27.1 Financial Data Schedule. - ---------------- (1) Incorporated herein by reference to the Registration Statement on Form S-1, declared effective on February 16, 1988 (File No. 33-17543). (2) Incorporated herein by reference to the Registration Statement on Form S-1 File No. 33-23584 declared effective on January 27, 1989. (3) Incorporated herein by reference to the Registration Statement on Form S-1 declared effective on February 13, 1990. (4) Incorporated herein by reference to the Registrant's Current Report on Form 8-K, dated December 4, 1990. 79 (5) Incorporated herein by reference to the Registration Statement on ForM S-1, declared effective November 9, 1992. (6) Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992. (7) Incorporated herein by reference to the Registration Statement on Form S-2, declared effective January 13, 1994. (8) Incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. (9) Incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. (10) Incorporated herein by reference to Amendment #19 to Schedule 13D of George N. Faris for October 13,1995. EX-3.5 2 BY-LAWS OF THE REGISTRANT, AS AMENDED 1 EXHIBIT 3.5 BYLAWS OF AMERICAN INTERNATIONAL PETROLEUM CORPORATION ARTICLE I - OFFICES Section l. Principal Executive Office. The Corporation shall have a registered office located in the State of Nevada and a principal executive office located at such place within The City of New York, State of New York as may be fixed, from time to time, by the Board of Directors. Section 2. Other Offices. Branch or subordinate offices may be established by the Board of Directors at such other places as may be desirable. ARTICLE II - SHAREHOLDERS Section l. Place of Meeting. Meetings of shareholders shall be held either at the principal executive office of the Corporation or at any other location within or without the State of Nevada which may be designated by written consent of all persons entitled to vote thereat. Section 2. Annual Meetings. The annual meeting of shareholders shall be held at such time and place as the Board of Directors shall designate from time to time. At such meetings, Directors shall be elected by plurality vote, and any other proper business may be transacted. Section 3. Special Meetings. Special meetings of the shareholders may be called for any purpose or purposes permitted under Chapter 78 of Nevada Revised Statutes at any time by the Board, the Chairman of the Board, the President, or by shareholders holding not less than twenty-five percent (25%) of the votes of the shareholders entitled to vote at a meeting. Upon request in writing to the Chairman of the Board, the President or the Secretary, by any person or persons entitled to call a special meeting of shareholders, the Secretary shall cause notice to be given to the shareholders entitled to vote that a special meeting will be held not less than ten (10) nor more than sixty (60) days after the date of the notice. Section 4. Notice of Annual or Special Meeting. Written notice of each annual meeting of shareholders shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each shareholder entitled to vote thereat. Such notice shall state the place, date, and hour of the meeting and (l) in the case of a special meeting the general nature of the business to be transacted, or (2) in the case of the annual meeting, those matters which the Board, at the time of the mailing 2 of the notice, intends to present for action by the shareholders, but, any proper matter may be presented at the meeting for such action. The notice of any meeting at which Directors are to be elected shall include the names of the nominees intended, at the time of the notice, to be presented by management for election. Notice of a shareholders' meeting shall be given either personally or by mail or, addressed to the shareholder at the address of such shareholder appearing on the books of the Corporation. An affidavit of mailing of any notice, executed by the Secretary, Assistant Secretary, or any agent authorized by the Board of Directors shall be prima facie evidence of the giving of the notice. Section 5. Quorum. A majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum at any meeting of shareholders. If a quorum is present, the affirmative vote of the majority of shareholders represented and voting at the meeting on any matter, except as otherwise specifically provided in these Bylaws, shall be the act of the shareholders. The shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the number of shares required as noted above to constitute a quorum. Notwithstanding the foregoing, (l) the sale, transfer and other disposition of substantially all of the Corporation's properties and (2) a merger or consolidation of the Corporation shall require the approval by an affirmative vote of not less than two-thirds (2/3) of the Corporation's issued and outstanding shares. Section 6. Adjourned Meeting and Notice Thereof. Any shareholders' meeting, whether or not a quorum is present, may be adjourned from time to time. In the absence of a quorum (except as provided in Section 5 of this Article), no other business may be transacted at such meeting. It shall not be necessary to give any notice of the time and place of the adjourned meeting or of the business to be transacted thereat, other than by announcement at the meeting at which such adjournment is taken; provided, however, when a shareholders' meeting is adjourned for more than forty five (45) days or, if after adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given as in the case of an original meeting. Section 7. Voting. The shareholders entitled to notice of any meeting or to vote at such meeting shall be only persons in whose name shares stand on the stock records of the Corporation on the record date determined in accordance with Section 8 of this Article. -2- 3 Each shareholder shall be entitled to one vote for each share of stock in his own name on the books of the Company, whether represented in person or by proxy. Section 8. Record Date. The Board may fix, in advance, a record date for the determination of the shareholders entitled to notice of a meeting or to vote or entitled to receive payment of any dividend or other distribution, or any allotment of rights, or to exercise rights in respect to any other lawful action. The record date so fixed shall be not more than sixty (60) nor less than ten (10) days prior to the date of the meeting nor more than sixty (60) days prior to any other action. When a record date is so fixed, only shareholders of record on that date are entitled to notice of and to vote at the meeting or to receive the dividend, distribution, or allotment of rights, or to exercise of the rights, as the case may be, notwithstanding any transfer of shares on the books of the Corporation after the record date. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting unless the Board fixes a new record date for the adjourned meeting. The Board shall fix a new record date if the meeting is adjourned for more than forty five (45) days. If no record date is fixed by the Board, the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. The record date for determining shareholders for any purpose other than as set forth in Section 8 or Section 10 of this Article shall be at the close of business on the day on which the Board adopts the resolution relating thereto, or the sixtieth day prior to the date of such other action, whichever is later. Section 9. Consent of Absentees. The transactions of any meeting of shareholders, however called and noticed, and wherever held, are as valid as though had at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote, not present in person or by proxy, signs a written waiver of notice, or a consent to the holding of the meeting or an approval of the minutes thereof. All such waivers, consents, or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Section 10. Action Without Meeting. Any action which, under any provision of law, may be taken at any annual or special meeting of shareholders, may be taken without a meeting and without prior notice if a consent in writing, setting forth the actions so taken, shall be signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares -3- 4 entitled to vote thereon were present and voted. Unless a record date for voting purposes be fixed as provided in Section 8 of this Article, the record date for determining shareholders entitled to give consent pursuant to this Section 10, when no prior action by the Board has been taken, shall be the day on which the first written consent is given. Section 11. Proxies. Every person entitled to vote shares has the right to do so either in person or by one or more persons authorized by a written proxy executed by such shareholder and filed with the Secretary not less than five (5) days prior to the meeting. Section 12. Conduct of Meeting. The Chief Executive Officer, if one shall be elected, otherwise the President, shall preside as Chairman at all meetings of the shareholders, unless another Chairman is selected. The Chairman shall conduct each such meeting in a businesslike and fair manner, but shall not be obligated to follow any technical, formal or parliamentary rules of procedure. The Chairman's ruling on procedural matters shall be conclusive and binding on all shareholders. Without limiting the generality of the foregoing, the Chairman shall have all of the powers usually vested in the Chairman of a meeting of shareholders. ARTICLE III - DIRECTORS Section l. Powers. Subject to limitation of the Articles of Incorporation, of these Bylaws, and of actions required to be approved by the shareholders, the business and affairs of the Corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board. The Board may, as permitted by law, delegate the management of the day-to-day operation of the business of the Corporation to a management company or other persons or officers of the Corporation provided that the business and affairs of the Corporation shall be managed and all corporate powers shall be exercised under the ultimate direction of the Board. Without prejudice to such general powers, it is hereby expressly declared that the Board shall have the following Powers: (a) to select and remove all of the officers, agents and employees of the Corporation, prescribe the powers and duties for them as may not be inconsistent with law, or with the Articles of Incorporation or these Bylaws, fix their compensation, and require from them, if necessary, security for faithful services; (b) to conduct, manage, and control the affairs and business of the Corporation and to make such rules and regulations therefor not inconsistent with law, with the Articles of Incorporation or these Bylaws, as they may deem best. -4- 5 (c) to adopt, make and use a corporate seal, and to prescribe the forms of certificates of stock and to alter the form of such seal and of such certificates from time to time as in their judgment they may deem best; (d) to authorize the issuance of shares of stock of the Corporation from time to time, upon such terms and for such consideration as may be lawful; (e) to borrow money and incur indebtedness for the purposes of the Corporation, and to cause to be executed and delivered therefor, in the corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages, pledges, hypothecation or other evidence of debt and securities therefor. Section 2. Number and Qualification of Directors. Maximum authorized number of Directors shall be ten (10) until changed by amendment of the Articles or by a bylaw duly adopted by approval of the outstanding shares amending this Section 2; provided however, that whenever all the shares of the Corporation are owned beneficially and of record by either one or two stockholders, the number of Directors may be less than three, but not less than the number of shareholders. Section 3. Election and Term of Office. The Directors shall be elected at each annual meeting of shareholders but if any such annual meeting is not held or the Directors are not elected thereat, the Directors may be elected at any special meeting of shareholders held for that purpose. Each Director shall hold office until the next annual meeting and until a successor has been elected. Section 4. Chairman of the Board. At the regular meeting of the Board, the first order of business will be to select, from its members, a Chairman of the Board whose duties will be to preside at all Board meetings until the next annual meeting and until a successor has been chosen. Section 5. Vacancies. Any vacancy on the Board of Directors occurring by reason of the death, resignation or disqualification of any Director, the removal of any Director from office for cause or without cause, an increase in the number of Directors, or otherwise, may be filled by the vote of a majority of the Directors then in office, through less than quorum, or the sole remaining Director. If no Director is then in office, the Secretary shall promptly call a Special Meeting of Shareholders to elect Directors to fill such vacancies. Unless elected by the Shareholders, each Director elected to fill a vacancy shall hold office until the next meeting of Shareholders at which the election of Directors is in the regular order of business and until his successor is elected and has qualified or until his earlier displacement from office by resignation, removal or otherwise. Each Director elected by the Shareholders to fill a vacancy shall -5- 6 hold office until the next Annual Meeting of Shareholders and until his successor is elected and has qualified or until his earlier displacement from office by resignation, removal or otherwise. Section 6. Place of Meeting. Any meeting of the Board shall be held at any place within or without the State of Nevada which has been designated from time to time by the Board. In the absence of such designation, meetings shall be held at the principal executive office of the Corporation. Section 7. Regular Meetings. Immediately following each annual meeting of shareholders the Board shall hold a regular meeting for the purpose of organization, selection of a Chairman of the Board, election of officers, and the transaction of other business. Call and notice of such regular meeting is hereby dispensed with. Section 8. Special Meetings. Special meetings of the Board for any purposes may be called at any time by the Chairman of the Board, the President, or the Secretary or by any three Directors. Special meetings of the Board shall be held upon at least two (2) days' written notice or twenty-four (24) hours notice given personally or by telephone, telegraph, telex, facsimile transmission or other similar means of communication. Any such notice shall be addressed or delivered to each Director at such Director's address as it is shown upon the records of the Corporation or as may have been given to the Corporation by the Director for purposes of notice. Section 9. Quorum. A majority of the authorized number of Directors constitutes a quorum of the Board for the transaction of business, except to adjourn as hereinafter provided. Every act or decision done or made by a majority of the Directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the Board, unless a greater number be required by law or by the Articles of Incorporation. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of Directors, if any action taken is approved by at least a majority of the number of Directors required as noted above to constitute a quorum for such meeting. Section 10. Participation in Meetings by Conference Telephone. Members of the Board may participate in a meeting through use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another. Section 11. Waiver of Notice. The transactions of any meeting of the Board, however called and noticed or wherever held, are as valid as though had at a meeting duly held after regular call and notice if a quorum be present and if, either before or after the meeting, each of the Directors not present signs a written waiver of notice, a consent to holding such meeting or an -6- 7 approval of the minutes thereof. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Section 12. Adjournment. A majority of the Directors present, whether or not a quorum is present, may adjourn any Directors' meeting to another time and place. Notice of the time and place of holding an adjourned meeting need not be given to absent Directors if the time and place be fixed at the meeting adjourned. If the meeting is adjourned for more than ten (10) days, notice of any adjournment to another time or place shall be given prior to the time of the adjourned meeting to the Directors who were not present at the time of adjournment. Section 13. Fees and Compensation. Directors and members of committees may receive such compensation, if any, for their services, and such reimbursement for expenses, as may be fixed or determined by the Board. Section 14. Action Without Meeting. Any action required or permitted to be taken by the Board may be taken without a meeting if all members of the Board shall individually or collectively consent in writing to such action. Such consent or consents shall have the same effect as a unanimous vote of the Board and shall be filed with the minutes of the proceedings of the Board. Section 15. Committees. The Board may appoint one or more committees, each consisting of two or more Directors, and delegate to such committees any of the authority of the Board except with respect to: (a) the approval of any action which requires shareholders' approval or approval of the outstanding shares; (b) the filling of vacancies on the Board or on any committees; (c) the fixing of compensation of the Directors for serving on the Board or on any committee; (d) the amendment or repeal of Bylaws or the adoption of new Bylaws; (e) the amendment or repeal of any resolution of the Board which by its express terms is not so amendable or repealable by a committee of the Board; (f) a distribution to the shareholders of the Corporation; and (g) the appointment of other committees of the Board or the members thereof. -7- 8 Any such committee must be appointed by resolution adopted by a majority of the authorized number of Directors and may be designated an Executive Committee or by such other name as the Board shall specify. The Board shall have the power to prescribe the manner in which proceedings of any such committee shall be conducted. Unless the Board or such committee shall otherwise provide, the regular or special meetings and other actions of any such committee shall be governed by the provisions of this Article applicable to meetings and actions of the Board. Minutes shall be kept of each meeting of each committee. ARTICLE IV - OFFICERS Section 1. Officers. The officers of the Corporation shall be a President, a Secretary and a Treasurer. The Corporation may also have, at the discretion of the Board, a Chairman of the Board, one or more Vice Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers and such other officers as may be elected or appointed in accordance with the provisions of Section 3 of this Article. Section 2. Election. The officers of the Corporation, except such officers as may be elected or appointed in accordance with the provisions of Section 3 or Section 5 of this Article, shall be chosen annually by, and shall serve at the pleasure of, the Board, and shall hold their respective offices until their resignation, removal or other disqualification from service, or until their respective successors shall be elected. Section 3. Subordinate Officers. The Board may elect, and may empower the President to appoint, such other officers as the business of the Corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these Bylaws or as the Board, or the President may from time to time direct. Section 4. Removal and Resignation. Any officer may be removed, either with or without cause, by the Board of Directors at any time, or, except in the case of an officer chosen by the Board, by any officer upon whom such power of removal may be conferred by the Board. Any officer may resign at any time by giving written notice to the Corporation. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein. The acceptance of such resignation shall not be necessary to make it effective. Section 5. Vacancies. A vacancy of any office because of death, resignation, removal, disqualification, or any other cause shall be filled in the manner prescribed by these Bylaws for the regular election or appointment to such office. -8- 9 Section 6. President; Chief Executive Officer. The President, or the Chief Executive Officer, if one shall be appointed, or their designee shall preside at all meetings of the shareholders. The Chief Executive Officer, if one shall be appointed, or otherwise the President, has the general powers and duties of management usually vested in the chief executive officer, and the President shall be the general manager of the Corporation unless otherwise prescribed by the Board. Section 7. Vice Presidents. In the absence or disability of the President, the Vice Presidents in order of their rank as fixed by the Board or, if not ranked, the Vice President designated by the Board, shall perform all the duties of the President, and when so acting shall have all the powers of, and be subject to all the restrictions that are upon the President. The Vice Presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the President or the Board. Section 8. Secretary. The Secretary shall keep or cause to be kept, at the principal executive office and such other place as the Board may order, a book of minutes of all meetings of shareholders, the Board, and its committees, with the time and place of holding, whether regular or special, and, if special, how authorized, the notice thereof given, the names of those present at Board and committee meetings, the number of shares present or represented at shareholders' meetings and the proceedings thereof. The Secretary shall keep, or cause to be kept, a copy of the Bylaws of the Corporation at the principal executive office of the Corporation. The Secretary shall keep, or cause to be kept, at the principal executive office, a share register, or a duplicate share register, showing the names of the shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation. The Secretary shall give, or cause to be given, notice of all the meetings of the shareholders and of the Board and of any committees thereof required by these Bylaws or by law to be given, shall keep the seal of the Corporation in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the Board. Section 9. Treasurer. The Treasurer shall keep and maintain, or cause to be kept and maintained, adequate and correct accounts of the properties and financial transactions of the Corporation and shall send or cause to be sent to the shareholders of the Corporation such financial statements and reports as are by law or these Bylaws required to be sent to them. -9- 10 The Treasurer shall deposit all monies and other valuables in the name and to the credit of the Corporation with such depositories as may be designated by the Board. The Treasurer shall disburse the funds of the Corporation as may be ordered by the Board, shall render to the President and Directors, whenever they request it, an account of all transactions as Treasurer and of the financial condition of the Corporation, and shall have such other powers and perform such other duties as may be prescribed by the Board. Section 10. Agents. The President, any Vice President, the Secretary or Treasurer may appoint agents with power and authority, as defined or limited in their appointment, for and on behalf of the Corporation to execute and deliver, and affix the seal of the Corporation thereto, to bonds, undertakings, recognizances, consents of surety or other written obligations in the nature thereof and any of said officers may remove any such agent and revoke the power and authority given to him. ARTICLE V - OTHER PROVISIONS Section 1. Dividends. The Board may, from time to time, declare, and the Corporation may pay, dividends on its outstanding shares in the manner and on the terms and conditions provided by law, subject to any contractual restrictions to which the Corporation is then subject. Section 2. Inspection of Bylaws. The Corporation shall keep in its principal executive office the original or a copy of these Bylaws as amended to date which shall be open to inspection by shareholders at all reasonable times during office hours. If the principal executive office of the Corporation is outside the State of Nevada and the Corporation has no principal business office in such State, it shall upon the written notice of any shareholder furnish to such share holder a copy of these Bylaws as amended to date. Section 3. Acquisition of Controlling Interest. The provisions of Section 78.378 through 78.3793, inclusive, of Chapter 78 of the Nevada Revised Statutes do not apply to the Corporation. ARTICLE VI - AMENDMENTS These Bylaws may be altered, amended or repealed either by approval of a majority of the outstanding shares entitled to vote or by the approval of the Board; provided, however, that after the issuance of shares, a Bylaw specifying or changing a fixed number of Directors or the maximum or minimum number or changing from a fixed to a flexible Board or vice versa may only be adopted by the approval by an affirmative vote of not less than two-thirds -10- 11 (2/3) of the Corporation's issued and outstanding shares entitled to vote. ARTICLE VII - INDEMNIFICATION On the terms, to the extent, and subject to the condition prescribed by statute and by such rules and regulations, not inconsistent with statute, as the Board of Directors may in its discretion impose in general or particular cases or classes of cases, (a) the Corporation shall indemnify any person made, or threatened to be made, a party to an action or proceeding, civil or criminal, including an action by or in the right of any other corporation of any type or kind, domestic or foreign, or any partnership, joint venture, trust, employee benefit plan or other enterprise which any director or officer of the Corporation served in any capacity at the request of the Corporation, by reason of the fact that he, his testator or intestate, was a director or officer of the joint venture, trust, employee benefit plan or other enterprise in any capacity, against judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees of any such action or proceeding, or any appeal therein, and (b) the Corporation may pay, in advance of final disposition of any such action or proceeding, expenses incurred by such person in defending such action or proceeding. On the terms, to the extent, and subject to the conditions prescribed by statute and by such rules and regulations, not inconsistent with statute, as the Board of Directors may in its discretion impose in general or particular cases or classes of cases, (a) the Corporation shall indemnify any person made a party to an action by or in the right of the Corporation to procure a judgment in its favor, by reason of the fact that he, his testator or intestate, is or was a director or officer of the Corporation, against the reasonable expenses, including attorneys' fees, actually and necessarily incurred by him in connection with the defense of such action, or in connection with an appeal therein, and (b) the Corporation may pay, in advance of final disposition of any such action, expenses incurred by such person in defending such action or proceeding. ARTICLE VIII - FISCAL YEAR The Fiscal Year of this Corporation shall begin on January l and end on December 31. -11- EX-4.3 3 1995 STOCK OPTION PLAN/FORM OF OPTION AGREEMENTS 1 Exhibit 4.3 AMERICAN INTERNATIONAL PETROLEUM CORPORATION 1995 STOCK OPTION PLAN 1. Purposes. The AMERICAN INTERNATIONAL PETROLEUM CORPORATION 1995 STOCK OPTION PLAN (the "Plan") is intended to provide the employees, directors, independent contractors and consultants of American International Petroleum Corporation (the "Company") with an added incentive to commence employment with the Company, to continue their services to the Company and to exert their maximum efforts toward the Company's success. By thus encouraging employees, directors, independent contractors and consultants, promoting their continued association with the Company and aligning their interests more closely with those of the stockholders of the Company through stock ownership, the Plan may be expected to benefit stock the Company and its stockholders. The 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"; collectively, "Options"). 2. Shares Subject to the Plan. The total number of shares of common stock of the Company, $.08 par value per share ("Common Stock"), that may be subject to Options granted under the Plan shall be 3,500,000, subject to adjustment as provided in Paragraph 8 of the Plan; however, the grant of an ISO or NQSO to an employee together with a tandem SAR shall only require one share of Common Stock available subject to the Plan to satisfy such joint Option. The Company shall at all times, while the Plan is in force, reserve at least such number of shares of Common Stock as will be sufficient to permit the exercise of all outstanding Options granted under the Plan. In the event any Option granted under the Plan shall expire or terminate for any reason without having been exercised in full or shall cease for any reason to be exercisable in whole or in part, the unpurchased shares subject thereto shall again be available for granting of Options under the Plan. 3. Eligibility. ISOs or ISOs in tandem with SARs (provided the SAR meets the requirements set forth in Temp. Reg. Section 14a.422A-1, A-39, (a) through (e) inclusive, under the Code) may be granted from time to time under the Plan to one or more employees of the Company or of a "subsidiary" or "parent" of the Company, as the quoted terms are defined within Section 424 of the Code. An officer is an employee for the above purposes. However, a director of the Company who is not otherwise an employee is not deemed an employee 2 for such purposes. NQSOs and NQSOs in tandem with SARs may be granted from time to time under the Plan to one or more employees of the Company, officers, members of the Board of 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/or of a subsidiary of the Company, including persons who have previously been granted Options under the Plan. 4. Administration of the Plan. (a) 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 Option Committee (the "Committee") which shall be comprised of at least two disinterested persons (the term "disinterested" having the meaning ascribed to it by Rule 16b-3 of the Securities Exchange Act of 1934 (the "1934 Act") appointed by the Board of Directors of the Company. As and to the extent authorized by the Plan, the Committee may exercise the power and authority vested in the Board of Directors under the Plan. Within the limits of the express provisions of the Plan, the Board of Directors or Committee shall have the authority, in its discretion, to determine the individuals to whom, and the time or times at which, Options shall be granted, the character of such Options (whether ISO, NQSO and/or SARs in tandem with ISOs or NQSOs) and the number of shares of Common Stock to be subject to each Option, the manner and form in which the optionee can tender payment upon the exercise of his Option, and to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to the Plan, to determine the terms and provisions of Option agreements that may be entered into in connection with Options (which need not be identical), subject to the limitation that agreements granting ISOs must be consistent with the requirements for the ISOs being qualified as "incentive stock options" as provided in Section 422 of the Code, and to make all other determinations and take all other actions necessary or advisable for the administration of the Plan. In making such determinations, from time to time, the Board of Directors or the Committee may take into account the nature of the services rendered by such individuals, their present and potential contributions to the Company's success, and such other factors as the Board of Directors or the Committee, in its discretion, shall deem relevant. The Board of Directors' or the Committee's determinations on the matters referred to in this Paragraph shall be conclusive. (b) Notwithstanding anything contained herein to the contrary, at any time during the period that the Company's Common Stock is registered pursuant to Section 12(b) or 12(g) of the 1934 Act, the Committee, if one has been appointed to administer the Plan with respect to grants to all persons or solely with respect to persons subject to Section 16 -2- 3 of the 1934 Act, shall have the exclusive right to grant Options to persons subject to Section 16 of the 1934 Act and to set forth the terms and conditions thereof. With respect to persons subject to Section 16 of the 1934 Act, transactions under the Plan are intended, to the extent possible, to comply with all applicable conditions of Rule 16b-3, as amended from time to time (and its successor provisions, if any), under the 1934 Act. To the extent any provision of the Plan or action by the Board of Directors or Committee fails to so comply, it shall be deemed null and void to the extent permitted by law and deemed advisable by the Board of Directors. 5. Terms of Options. Within the limits of the express provisions of the Plan, the Board of Directors or the Committee may grant either ISOs or NQSOs and/or SARs in tandem with ISOs or NQSOs. An ISO or an NQSO enables the optionee to purchase from the Company, at any time during a specified exercise period, a specified number of shares of Common Stock at a specified price (the "Option Price"). The optionee, if granted a SAR in tandem with a NQSO or ISO, may receive from the Company, in lieu of exercising his option to purchase shares pursuant to his NQSO or ISO, during the exercise period of the NQSO or ISO or at any specified time or times fixed for that purpose by the Board of Directors or the Committee, the excess of the fair market value upon such exercise (as determined in accordance with subparagraph (b) of this Paragraph 5) of one share of Common Stock over the Option Price per share specified upon grant of the Option multiplied by the number of shares of Common Stock covered by the SAR so exercised. The character and terms of each Option granted under the Plan shall be determined by the Board of Directors and/or the Committee consistent with the provisions of the Plan, including the following: (a) An Option granted under the Plan must be granted within 10 years from the date the Plan is adopted, or the date the Plan is approved by the stockholders of the Company, whichever is earlier. (b) The Option Price of the shares of Common Stock subject to each ISO and each SAR issued in tandem with an ISO shall not be less than the fair market value of such shares of Common Stock at the time such ISO is granted. Such fair market value shall be determined by the Board of Directors and, if the shares of Common Stock are listed on a national securities exchange or traded on the over-the-counter market, the fair market value shall be the closing price on such exchange, or the mean of the -3- 4 closing bid and asked prices of the shares of Common Stock on the over-the-counter market, as reported by the National Association of Securities Dealers Automated Quotation System (NASDAQ), the National Association of Securities Dealers OTC Bulletin Board or the National Quotation Bureau, Inc., as the case may be, on the day on which the Option is granted or, if there is no closing price or bid or asked price on that day, the closing price or mean of the closing bid and asked prices on the most recent day preceding the day on which the Option is granted for which such prices are available. If an ISO or SAR in tandem with an ISO is granted to any individual who, immediately before the ISO is to be granted, owns (directly or through attribution) more than 10% of the total combined voting power of all classes of capital stock of the Company or a subsidiary or parent of the Company, the Option Price of the shares of Common Stock subject to such ISO shall not be less than 110% of the fair market value per share of the shares of Common Stock at the time such ISO is granted. (c) The Option Price of the shares of Common Stock subject to an NQSO or a SAR in tandem with a NQSO granted pursuant to the Plan shall be determined by the Board of Directors or the Committee, in its sole discretion. (d) In no event shall any Option granted under the Plan have an expiration date later than 10 years from the date of its grant, and all Options granted under the Plan shall be subject to earlier termination as expressly provided in Paragraph 6 hereof. If an ISO or a SAR in tandem with an ISO is granted to any individual who, immediately before the ISO is granted, owns (directly or through attribution) more than 10% of the total combined voting power of all classes of capital stock of the Company or of a subsidiary or parent of the Company, such ISO shall by its terms expire and shall not be exercisable after the expiration of five (5) years from the date of its grant. (e) With respect to the grant of SARs to Officers and Directors of the Company, an SAR may be exercised at any time after six months from the date of the grant thereof during the exercise period of the ISO or NQSO with which it is granted in tandem and prior to the exercise of such ISO or NQSO, but only within the specified 10 business day period referred to in subsection (e)(3) of Rule 16b-3 of the 1934 Act (generally, the 10 business days immediately following the publication of the Company's quarterly financial information) if the Company's Common Stock is registered pursuant to Section 12(b) or 12(g) of the 1934 Act. Notwithstanding the foregoing, the Board of Directors and/or the Committee shall in their discretion determine from time to time the terms and conditions of SAR's to be granted, which terms may vary from the above-described conditions, and which terms shall be set forth in a written stock option agreement evidencing the SAR granted in tandem with the ISO or NQSO. The exercise of an SAR granted in tandem with an ISO or NQSO shall be deemed to cancel such number of shares subject to the unexercised Option as were subject to the exercised SAR. The Board of Directors or the Committee also has the discretion to alter the terms of the SARs if necessary to comply with Federal or state securities law. Amounts to be paid by the Company in connection with a SAR may, in the Board of Director's or the Committee's discretion, be made in cash, Common Stock or a combination thereof. -4- 5 (f) Unless otherwise provided in any Option agreement under the Plan, an Option granted under the Plan shall become exercisable, in whole at any time or in part from time to time, but in no case may an Option (i) be exercised as to less than one hundred (100) shares of Common Stock at any one time, or the remaining shares of Common Stock covered by the Option if less than one hundred (100), and (ii) become fully exercisable more than five years from the date of its grant nor shall less than 20% of the Option become exercisable in any of the first five years of the Option. The Board of Directors or the Committee, in its sole discretion, may at such time or times as it deems appropriate, if ever, accelerate all or part of the vesting provisions with respect to one or more outstanding options. The acceleration of one Option shall not infer that any other Option is or is to be accelerated. (g) An Option granted under the Plan shall be exercised by the delivery by the holder thereof to the Company at its principal office (to the attention of the Secretary) of written notice of the number of full shares of Common Stock with respect to which the Option is being exercised, accompanied by payment of the Option Price for such shares in full, which payment at the option of the holder of the Option shall be in the form of (i) cash or certified or bank check payable to the order of the Company or, (ii) if permitted by the Committee or the Board of Directors, as determined by the Committee or the Board of Directors in its sole discretion at the time of the grant of the Option with respect to an ISO and at or prior to the time of exercise with respect to a NQSO, by the delivery of shares of Common Stock having a fair market value equal to the Option Price or the delivery of an interest-bearing promissory note having an original principal balance equal to the Option Price and an interest rate not below the rate which would result in imputed interest under the Code (provided, in order to qualify as an ISO, more than two years shall have passed since the date of grant and one year from the date of exercise), or (iii) at the option of the Committee or the Board of Directors, determined in its sole discretion at the time of the grant of the Option with respect to an ISO and at or prior to the time of exercise with respect to a NQSO, by any combination of cash, promissory note and shares of Common Stock (subject to the restriction above) that have a fair market value together with such cash and principal amount of any promissory note that shall equal the Option Price, and, in the case of a NQSO, at the discretion of the Committee or Board of Directors, by having the Company withhold from the shares of Common Stock to be issued upon exercise of the Option that number of shares having a fair market value equal to the exercise price and the tax withholding amount due, or otherwise provide for withholding as set forth in Paragraph 9(c) hereof, or in the event an employee is granted an ISO or NQSO in tandem with a SAR and desires to exercise such SAR, such written notice shall so state such intention. The Option Price may also be paid in full by a broker-dealer to whom the holder of the Option has submitted an exercise notice consisting of a fully endorsed Option, or -5- 6 through any other medium of payment as the Board of Directors and/or the Committee, in its discretion, shall authorize. (h) The holder of an Option shall have none of the rights of a stockholder with respect to the shares of Common Stock covered by such holder's Option until such shares of Common Stock shall be issued to such holder upon the exercise of the Option. (i) Options shall not be transferable otherwise than by will or the laws of descent and distribution, and any ISO or SAR in tandem with an ISO granted under the Plan may be exercised during the lifetime of the holder thereof only by the holder. No Option shall be subject to execution, attachment or other process. (j) For any holder, the aggregate fair market value, determined as of the time any ISO or SAR in tandem with an ISO is granted and in the manner provided for by Subparagraph (b) of this Paragraph 5, of the shares of Common Stock with respect to which ISOs granted under the Plan (and any other stock option plan of the Company or its parent or subsidiaries) are exercisable for the first time during any calendar year shall not exceed $100,000. Any grant of Options in excess of such amount shall be deemed a grant of a NQSO. (k) Notwithstanding anything contained herein to the contrary, a SAR which was granted in tandem with an ISO shall (i) expire no later than the expiration of the underlying ISO; (ii) be for no more than 100% of the spread at the time the SAR is exercised; (iii) only be transferable when the underlying ISO is transferable; (iv) only be exercised when the underlying ISO is eligible to be exercised; and (v) only be exercisable when there is a positive spread. 6. Death or Termination of Employment. (a) Subject to the provisions of subparagraph (d) of this Paragraph 6, and except as otherwise determined by the Board of Directors or the Committee in its sole discretion, if the employment of a holder of an ISO or ISO in tandem with an SAR under the Plan shall be terminated for any reason other than cause or the death or disability of the holder or a holder's voluntary termination of his employment with the Company, such holder's ISO or ISO in tandem with an SAR shall expire three (3) months after such termination. Except as otherwise determined by the Board of Directors or the Committee in its sole discretion, if the employment of a holder of an ISO or ISO in tandem with an SAR shall terminate for cause or if a holder shall voluntarily terminate his employment by the Company, then any unexercised Option granted to the holder shall expire at the time of termination. If the employment of a holder of an Option (exclusive of his ISOs) shall be terminated for any reason other than cause or the death or the disability of the holder, such holder's Options, other than his -6- 7 ISOs or ISO in tandem with an SAR, may be exercised during the earlier of (i) the respective terms thereof, or (ii) the subsequent death or disability of the respective holder, subject to the provisions of subparagraphs (b) and (d) of this Paragraph 6, unless the Board of Directors or the Committee shall in its sole discretion shall set forth an earlier termination provision in the holder's Option Agreement. (b) If the holder of an Option granted under the Plan dies (i) while employed by the Company or a subsidiary or parent corporation or (ii) within three (3) months after the termination of such holder's employment, such Options may, subject to the provisions of subparagraph (d) of this Paragraph 6, be exercised by a legatee or legatees of such Option under such individual's last will or by such individual's personal representatives or distributees at any time within such period as determined by the Board of Directors or the Committee in its sole discretion, but in no event for less than six months after the individual's death, to the extent such Options were exercisable as of the date of death or date of termination of employment, whichever date is earlier. (c) If the holder of an Option under the Plan becomes disabled within the definition of section 22(e)(3) of the Code while employed by the Company or a subsidiary or parent corporation, such Option may, subject to the provisions of subparagraph (d) of this Paragraph 6, be exercised at any time within six months after such holder's termination of employment due to the disability. (d) Except as otherwise determined by the Board of Directors or the Committee in its sole discretion, an Option may not be exercised pursuant to this Paragraph 6 except to the extent that the holder was entitled to exercise the Option at the time of termination of employment or death, and in any event may not be exercised after the original expiration date of the Option. 7. Leave of Absence. For the purposes of the Plan, an individual who is on military or sick leave or other bona fide leave of absence (such as temporary employment by the Government) shall be considered as remaining in the employ of the Company or of a subsidiary or parent corporation for ninety (90) days or such longer period as such individual's right to reemployment is guaranteed either by statute or by contract. 8. Adjustment Upon Changes in Capitalization. (a) In the event that the outstanding shares of Common Stock are hereafter changed by reason of recapitalization, reclassification, stock split, combination or exchange of shares of Common Stock or the like, or by the issuance of dividends payable -7- 8 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, in the number of shares of Common Stock issuable upon exercise of outstanding Options and in the Option Price per share. In the event of any consolidation or merger of the Company with or into another company, or the conveyance of all or substantially all of the assets of the Company to another company, each then outstanding Option shall upon exercise thereafter entitle the holder thereof to such number of shares of Common Stock or other securities or property to which a holder of shares of Common Stock of the Company would have been entitled upon such consolidation, merger or conveyance; and in any such case appropriate adjustment, as determined by the Board of Directors of the Company (or successor entity) shall be made as set forth above with respect to any future changes in the capitalization of the Company or its successor entity. In the event that the dissolution or liquidation of the Company is approved by the Board of Directors, all outstanding Options under the Plan will automatically terminate, unless otherwise provided by the Board of Directors of the Company or any authorized committee thereof. (b) Any Option granted under the Plan, unless waived by the Board of Directors or the Committee, may, at the discretion of the Board of Directors of the Company and said other corporation, be exchanged for options to purchase shares of capital stock of another corporation with which the Company or a subsidiary thereof is merged, reorganized or consolidated, or to which the Company sells all or a substantial portion of its property or stock. The terms, provisions and benefits to the optionee of such substitute option(s) shall in all respects be identical to the terms, provisions and benefits of optionee under his Option(s) prior to said substitution. To the extent the above may be inconsistent with Sections 424(a)(1) and (2) of the Code, the above shall be deemed interpreted so as to comply therewith. (c) Any adjustment in the number of shares of Common Stock shall apply proportionately to only the unexercised portion of the Options granted hereunder. If fractions of shares of Common Stock would result from any such adjustment, the adjustment shall be revised to the next higher whole number of shares of Common Stock. 9. Further Conditions of Exercise. (a) Unless the shares of Common Stock issuable upon the exercise of an Option have been registered with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended, prior to the exercise of the Option, an optionee must represent in writing to the Company that such shares of Common Stock are being acquired his own account for investment purposes -8- 9 only and not with a view towards the further resale or distribution thereof, and must supply to the Company such other documentation as may be required by the Company, unless in the opinion of counsel to the Company such representation, agreement or documentation is not necessary to comply with said Act. (b) The Company shall not be obligated to deliver any shares of Common Stock until they have been listed on each securities exchange and trading association on which the Common Stock shall then be listed or until there has been qualification under or compliance with such state or federal laws, rules or regulations as the Company may deem applicable. (c) The Board of Directors or Committee may make such provisions and take such steps as it may deem necessary or appropriate for the withholding of any taxes that the Company is required by any law or regulation of any governmental authority, whether federal, state or local, domestic or foreign, to withhold in connection with the exercise of any Option, including, but not limited to, (i) the withholding of payment of all or any portion of such Option until the holder reimburses the Company for the amount the Company is required to withhold with respect to such taxes, or (ii) the cancelling of any number of shares of Common Stock issuable upon exercise of such Option in an amount sufficient to reimburse the Company for the amount it is required to so withhold (iii) the selling of any property contingently credited by the Company for the purpose of exercising such Option, in order to withhold or reimburse the Company for the amount it is required to so withhold or (iv) withholding the amount due from such employee's wages if the employee is employed by the Company or any subsidiary thereof. 10. Termination, Modification and Amendment. (a) The Plan (but not Options previously granted under the Plan) shall terminate ten (10) years from the earlier of the date of its adoption by the Board of Directors or the date the Plan is approved by the stockholders of the Company, or shall terminate as hereinafter provided, and no Option shall be granted after termination of the Plan. (b) The Plan may from time to time be terminated, modified or amended by the affirmative vote of the holders of a majority of the outstanding shares of capital stock of the Company entitled to vote thereon. (c) The Board of Directors of the Company may at any time terminate the Plan or from time to time make such modifications or amendments of the Plan as it may deem advisable; provided, however, that the Board of Directors shall not, without approval by the affirmative vote of the holders of a majority of the outstanding shares of capital stock of the Company entitled to vote thereon, -9- 10 increase (except as provided by Paragraph 8) the maximum number of shares of Common Stock as to which Options or shares may be granted under the Plan, materially change the standards of eligibility under the Plan or amend any provision hereof which requires stockholder approval in order to preserve the status of the Plan as a plan qualifying under Rule 16b-3 of the 1934 Act if the Plan would otherwise qualify thereunder. Any amendment to the Plan which, in the opinion of counsel to the Company, will be deemed to result in the adoption of a new Plan, will not be effective until approved by the affirmative vote of the holders of a majority of the outstanding shares of capital stock of the Company entitled to vote thereon. (d) No termination, modification or amendment of the Plan may adversely affect the rights under any outstanding Option without the consent of the individual to whom such Option shall have been previously granted. 11. Effective Date of the Plan. The Plan shall become effective upon adoption by the Board of Directors of the Company. The Plan shall be subject to approval by the affirmative vote of the holders of a majority of the outstanding shares of capital stock of the Company entitled to vote thereon within one year before or after adoption of the Plan by the Board of Directors. 12. Not a Contract of Employment. Nothing contained in the Plan or in any option agreement executed pursuant hereto shall be deemed to confer upon any individual to whom an Option is or may be granted hereunder any right to remain in the employ of the Company or of a subsidiary or parent of the Company or in any way limit the right of the Company, or of any parent or subsidiary thereof, to terminate the employment of any employee. 13. Other Compensation Plans. The adoption of the Plan shall not affect any other stock option plan, incentive plan or any other compensation plan in effect for the Company, nor shall the Plan preclude the Company from establishing any other form of stock option plan, incentive plan or any other compensation plan. -10- 11 NON-QUALIFIED STOCK OPTION AGREEMENT AGREEMENT, made as of the ___ day of _________, 1996, by and between AMERICAN INTERNATIONAL PETROLEUM CORPORATION, a Nevada corporation having its principal executive offices at 444 Madison Avenue, New York, New York 10022 (the "Grantor"), and ___________, with an address at _________________________6 (the "Optionee"). W I T N E S S E T H: WHEREAS, the Optionee is presently performing services for the Grantor; and WHEREAS, the Grantor is desirous of increasing the incentive of the Optionee to exert his utmost efforts in improving the business of the Grantor. NOW, THEREFORE, in consideration of the Optionee's continued service to the Grantor, and for other good and valuable consideration, the Grantor hereby grants to the Optionee options to purchase common stock of the Grantor, $.08 par value ("Common Stock"), on the following terms and conditions: 1. Option. Pursuant to its 1995 Stock Option Plan (the "Plan"), the Grantor hereby grants to the Optionee a non-qualified stock option (not qualified as described in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") to purchase, prior to 5:00 p.m. on February 14, 1999, as set forth in Paragraph 3 hereof, up to an aggregate of 100,000 fully paid and non-assessable shares of Common Stock (the "Shares"), subject to the terms and conditions set forth below. 2. Purchase Price. The purchase price shall be $1.00 per Share. The Grantor shall pay all original issue or transfer taxes on the exercise of this option and all other fees and expenses necessarily incurred by the Grantor in connection herewith. 3. Exercise of Option. The options granted hereby are fifty (50%) percent vested, and the other fifty (50%) percent shall vest on the first anniversary of the date hereof. The Optionee shall notify the Grantor in writing in person, by overnight courier or by registered or certified mail, return receipt requested, addressed to its principal office, as to the number of Shares which Optionee desires to purchase under the option herein granted, which notice shall be accompanied by payment (by cash or certified check) of the exercise price therefor as specified in Paragraph 2 above. As soon as -11- 12 practicable thereafter, the Grantor shall cause to be delivered to the Optionee certificates issued in the Optionee's name evidencing the Shares purchased by the Optionee. 4. Option Conditioned On Continued Service. (a) If the Optionee shall be removed as a director for cause, or if the Optionee resigns voluntarily, the option granted to the Optionee hereunder shall expire immediately upon such termination. If the Optionee shall be removed as a director without cause, the option granted to the Optionee hereunder shall immediately vest in full, and such option shall be exercisable until the end of the term hereof. (b) If the Optionee dies (i) while performing services for the Grantor or a subsidiary or parent corporation, or (ii) within three (3) months after the termination of Optionee's service other than voluntarily by the Optionee or for cause, such option may be exercised by a legatee or legatees of such option under such individual's last will or by his personal representatives or distributees at any time within one year after his death, subject to the provisions of subparagraph (d) of this Paragraph 4. (c) If the Optionee becomes disabled within the definition of Section 22(e)(2) of the Internal Revenue Code of 1986, as amended, while performing services for the Grantor or a subsidiary or parent corporation, such option may, subject to the provisions of subparagraph (d) of this Paragraph 4, be exercised at any time within one year after Optionee's termination of service due to the disability. (d) An option may not be exercised pursuant to this Paragraph 4 except to the extent that the Optionee was entitled to exercise the option at the time of termination of service or death, and in any event may not be exercised after the original expiration date of the option. 5. Divisibility and Non-Assignability of the Option. (a) The Optionee may exercise the option herein granted from time to time subject to the provisions of Section 3 above with respect to any whole number of Shares included therein, but in no event may an option be exercised as to less than one thousand (1,000) Shares at any one time, except for the remaining Shares covered by the option if less than one thousand (1,000). (b) The Optionee may not give, grant, sell, exchange, transfer legal title, pledge, assign or otherwise encumber or dispose of the options herein granted or any interest therein, otherwise than by will or the laws of descent and distribution, and the options herein granted, or any of them, shall be exercisable during the Optionee's lifetime only by the Optionee. -12- 13 6. Stock as Investment. By accepting this option, the Optionee agrees for himself, his heirs and legatees that any and all Shares purchased hereunder shall be acquired for investment purposes only and not for sale or distribution, and upon the issuance of any or all of the Shares issuable under the option granted hereunder, the Optionee, or his heirs or legatees receiving such Shares, shall deliver to the Grantor a representation in writing, that such Shares are being acquired in good faith for investment purposes only and not for sale or distribution. Grantor may place a "stop transfer" order with respect to such Shares with its transfer agent and place an appropriate restrictive legend on the stock certificate(s) evidencing such Shares. 7. Restriction on Issuance of Shares. The Grantor shall not be required to issue or deliver any certificate for Shares purchased upon the exercise of any option granted hereunder unless (a) the issuance of such Shares has been registered with the Securities and Exchange Commission under the Securities Act of 1933, as amended, or counsel to the Grantor shall have given an opinion that such registration is not required; (b) approval, to the extent required, shall have been obtained from any state regulatory body having jurisdiction thereof; and (c) permission for the listing of such Shares, if required, shall have been given by any national securities exchange on which the Common Stock of the Grantor are at the time of issuance listed. 8. Registration Rights (a) If, at any time during the exercise period hereof, the Grantor proposes to file a registration statement with respect to any class of securities (other than pursuant to a registration statement on Forms S-4 or S-8 or any successor form) under the Securities Act, the Grantor shall notify the Optionee at least twenty (20) days prior to the filing of such registration statement and will offer to include in such registration statement all or any portion of the Shares. At the written request of the Optionee, delivered to the Grantor within twenty (20) days after receipt of the Grantor's notice, the Optionee shall state the number of Shares that it wishes to sell or distribute publicly under the proposed registration statement. The Grantor will use its best efforts, through its officers, directors, auditors and counsel in all matters necessary or advisable, to cause such registration statement to become effective as promptly as practicable. In that regard, the Grantor makes no representations or warranties as to its ability to have the registration statement declared effective. All registrations requested pursuant to this Paragraph 8 are referred to herein as "Piggyback Registrations." In the event the Grantor is advised by the staff of the SEC, NASDAQ or any self-regulatory or state securities agency that the inclusion of -13- 14 the Shares will prevent, preclude or materially delay the effectiveness of a registration statement filed, the Grantor, in good faith, may amend such registration statement to exclude the Shares without otherwise affecting the Optionee's rights to any other registration statement herein. (i) Primary Registrations. If a Piggyback Registration is an underwritten primary registration on behalf of the Grantor, and if the underwriter thereof advises the Grantor in writing that in its opinion the number of Shares requested to be included in such registration statement exceeds the number that can be sold in such offering without materially adversely affecting the distribution of such securities by the Grantor, then the Grantor will include in such registration statement first, the securities that the Grantor proposes to sell and second, the securities requested to be included in such registration statement, any sales of which shall apportioned pro rata among the Optionee and the holders of any other securities requesting registration according to the amounts of Shares and other securities requested to be registered. Notwithstanding the above, if any such underwriter shall advise the Grantor in writing that the distribution of the Shares requested to be included in the registration statement concurrently with the securities being registered by the Grantor would materially adversely affect the distribution of such securities by the Grantor, then the Optionee shall delay his offering and sale for such period ending on the earliest of (a) 180 days following the effective date of the Grantor's registration statement or (b) such date as the Grantor, managing underwriter and Optionee shall otherwise agree. In the event of such delay, the Grantor shall file such supplements, post-effective amendments and take any such other steps as may be necessary to permit such Optionee to make its proposed offering and sale for a period of ninety (90) days immediately following the end of such period of delay. If any party disapproves of the terms of any such underwriting, it may elect to withdraw therefrom by written notice to the Grantor, the underwriter and the Optionee. Notwithstanding the foregoing, the Grantor shall not be required to file a registration statement to include the Shares pursuant to this Paragraph 8(a)(i) if, in the opinion of counsel for the Grantor, all of the Shares proposed to be disposed of may be transferred pursuant to the provisions of Rule 144 under the Securities Act. (ii) Priority on Secondary Registrations. If a Piggyback Registration is an underwritten secondary registration on behalf of holders of securities of the Grantor, and the underwriter thereof advises the Grantor in writing that in its opinion the number of Shares requested to be included in such registration statement exceeds the number which can be sold in such offering without materially adversely affecting the distribution of such securities, then the Grantor will include in such registration -14- 15 statement the securities requested to be included in such registration statement, any sales of which shall be apportioned pro rata among the Optionee and the holders of any other securities requesting registration according to the amounts of Shares and other securities requested to be registered. (b) In the event of any registration of a security pursuant to this Section 8, the Grantor shall indemnify the Optionee and its officers and directors against all losses, claims, damages and liabilities caused by any untrue statement or alleged untrue statement of a material fact contained in any registration statement or prospectus (and as amended or supplemented) relating to such registration, or caused by any omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they are made unless such statement or omission was made in reliance upon and in conformity with information furnished to the Grantor by the Optionee expressly for use therein. The Optionee shall also indemnify the Grantor, its officers and directors and each underwriter of the Shares so registered with respect to losses, claims, damages and liabilities caused by any untrue statement or omission made in reliance upon and in conformity with information furnished by the Optionee to the Grantor expressly for use in such registration statement or prospectus. (c) All expenses of any registration referred to in this Section 8, except the fees and disbursements of counsel to the Optionee, underwriting commissions or discounts, filing fees and any transfer or other taxes applicable to the Options and/or Shares, shall be borne by the Grantor. 9. Adjustments Upon Changes in Capitalization. (a) In the event of changes in the outstanding Common Stock of the Grantor by reason of stock dividends, stock splits, recapitalizations, mergers, consolidations, combinations, or exchanges of shares, separations, reorganizations, or liquidations, the number and class of Shares as to which the option may be exercised shall be correspondingly adjusted by the Grantor. No adjustment shall be made with respect to stock dividends or splits which do not exceed 10% in any fiscal year, cash dividends or the issuance to shareholders of the Grantor of rights to subscribe for additional Common Stock or other securities. (b) Any adjustment in the number of Shares shall apply proportionately to only the unexercised portion of the option granted hereunder. If fractions of a Share would result from any such adjustment, the adjustment shall be revised to the next higher whole number of Shares so long as such increase does not result in the holder of the option being deemed to own more than 5% of the -15- 16 total combined voting power or value of all classes of stock of the Grantor or its subsidiaries. 10. Effect of Mergers, Consolidations or Sales of Assets. Anything contained herein to the contrary, a merger or consolidation in which the Grantor is not the surviving corporation, or a sale of substantially all of the Grantor's assets or capital stock shall cause the unexercised options to terminate automatically, unless otherwise provided by the Board of Directors. Furthermore, this option may, at the discretion of the Board of Directors of the Grantor and said other corporation, be exchanged for options to purchase shares of capital stock of another corporation which the Grantor, and/or a subsidiary thereof is merged into, consolidated with, or all or a substantial portion of the property or stock of which is acquired by said other corporation or separated or reorganized into. The terms, provisions and benefits to the Optionee of such substitute option(s) shall in all respects be identical to the terms, provisions and benefits of Optionee under his Option(s) prior to said substitution. To the extent the above may be inconsistent with Sections 424(a)(1) and (2) of the Code, the above shall be deemed interpreted so as to comply therewith. 11. No Rights in Option Stock. Optionee shall have no rights as a shareholder in respect of Shares as to which the option granted hereunder shall not have been exercised and payment made as herein provided. 12. Effect Upon Employment. This Agreement does not give the Optionee any right to employment by, or any other relationship with, the Grantor. 13. Binding Effect. Except as herein otherwise expressly provided, this Agreement shall be binding upon and inure to the benefit of the parties hereto, their successors, legal representatives and assigns. 14. Agreement Subject to Plan. Notwithstanding anything contained herein to the contrary, and unless the Plan is not adopted by the shareholders of the Company, this Agreement is subject to, and shall be construed in accordance with, the terms of the Plan, and in the event of any inconsistency between the terms hereof and the terms of the Plan, the terms of the Plan shall govern. If the Plan is not adopted by the shareholders of the Company, this Agreement shall be terminated and of no force or effect. -16- 17 15. Miscellaneous. This Agreement shall be construed under the laws of the State of New York applied to agreements made and to be performed entirely within such State. Headings have been included herein for convenience of reference only, and shall not be deemed a part of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. AMERICAN INTERNATIONAL PETROLEUM CORPORATION By:_____________________________ George N. Faris, Chief Executive Officer ACCEPTED AND AGREED TO: -17- 18 STOCK OPTION AGREEMENT AGREEMENT made as of this ____ day of ___________, 1996 by and between AMERICAN INTERNATIONAL PETROLEUM CORPORATION, a Nevada corporation having its principal executive offices at 444 Madison Avenue, New York, New York 10022 (the "Grantor"), and ___________, with an address at 444 Madison Avenue, New York, New York 10022 (the "Optionee"). W I T N E S S E T H: WHEREAS, Optionee is presently employed by Grantor; and WHEREAS, Grantor is desirous of increasing the incentive of Optionee to exert his utmost efforts to improve the business of the Grantor. NOW, THEREFORE, in consideration of the Optionee's continued service to the Grantor, and for other good and valuable consideration, the Grantor hereby grants the Optionee options to purchase common stock of the Grantor, $.08 par value ("Common Stock"), on the following terms and conditions: 1. Option. Pursuant to its 1995 Stock Option Plan (the "Plan"), the Grantor hereby grants to the Optionee an Incentive Stock Option, as such term is defined in Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code"), to purchase, prior to 5:00 p.m. on February 14, 1999, as set forth in Paragraph 3 hereof, up to 1,000,000 fully paid and non-assessable shares of the Common Stock of the Grantor, par value $.08 per share (the "Shares"), subject to the terms and conditions set forth below. 2. Purchase Price. The purchase price shall be $1.00 per Share. The Grantor shall pay all original issue or transfer taxes on the exercise of this option and all other fees and expenses necessarily incurred by the Grantor in connection therewith. 3. Exercise of Option. (a) The options granted hereby are fully vested and may be exercised at any time prior to expiration as described herein. (b) The Optionee shall notify the Grantor in writing in person, by overnight courier or registered or certified mail, return receipt requested, addressed to its principal office, as to the number of Shares which he desires to purchase under the options herein granted, which notice shall be accompanied by payment (by cash or certified check) of the exercise price therefor, as specified in -18- 19 Paragraph 2 above. As soon as practicable thereafter, the Grantor shall, at its principal office, tender to Optionee certificates issued in the Optionee's name evidencing the Shares purchased by the Optionee. (c) If the aggregate fair market value of all the stock with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year under the Plan and all Incentive Stock Option plans of the Grantor or its affiliates exceeds $100,000.00, the grant of the Incentive Stock Option hereunder shall not, to the extent of such excess, be deemed a grant of an Incentive Stock Option but will instead be deemed the grant of a Non-Qualified Stock Option under the Plan. For purposes hereof, the fair market value of the stock with respect to which an Incentive Stock Option is exercisable shall be the value of such stock at the time that specific option is granted as provided for in Section 422(b)(7) of the Code. 4. Option Conditioned On Continued Employment. (a) If the employment of the Optionee shall be terminated for cause, or if the Optionee leaves such employment voluntarily, the option granted to the Optionee hereunder shall expire immediately upon such termination. If such employment shall be terminated by the Corporation without cause, the option granted to the Optionee hereunder shall immediately vest in full, and such option shall be exercisable until the end of the term hereof. (b) If the Optionee dies (i) while employed by the Grantor or a subsidiary or parent corporation, or (ii) within three (3) months after the termination of his employment other than voluntarily by the Optionee or for cause, such option, subject to the provisions of subparagraph (d) of this Paragraph 4, may be exercised by a legatee or legatees of such option under the Optionee's last will or by his personal representatives or distributees at any time within one (1) year after his death. (c) If the Optionee becomes disabled within the definition of Section 22(e)(3) of the Code while employed by the Grantor or a subsidiary or parent corporation, such option, subject to the provisions of subparagraph (d) of this Paragraph 4, may be exercised at any time within one (1) year after they termination of employment due to disability. (d) Except as specifically provided above, an option may not be exercised pursuant to this Paragraph 4 except to the extent that the Optionee was entitled to exercise the option, or any part thereof, at the time of termination of employment or death, and in any event may not be exercised after the original expiration date of the option. -19- 20 5. Divisibility and Non-Assignability of the Options. (a) The Optionee may exercise the options herein granted from time to time during the periods of their respective effectiveness with respect to any whole number of Shares included therein, but in no event may an option be exercised as to less than one thousand (1,000) Shares at any one time, except for the remaining Shares covered by the option if less than one thousand (1,000). (b) The Optionee may not give, grant, sell, exchange, transfer legal title, pledge, assign or otherwise encumber or dispose of the options herein granted or any interest therein, otherwise than by will or the laws of descent and distribution, and these options, or any of them, shall be exercisable during his lifetime only by the Optionee. 6. Stock as Investment. By accepting this option, the Optionee agrees for himself, his heirs and legatees that any and all Shares purchased hereunder shall be acquired for investment and not for distribution, and upon the issuance of any or all of the Shares the Optionee, or his heirs or legatees receiving such Shares, shall deliver to the Grantor a representation in writing, that such Shares are being acquired in good faith for investment and not for distribution. Grantor may place a "stop transfer" order with respect to such Shares with its transfer agent and place an appropriate restrictive legend on the stock certificate(s) evidencing such Shares. 7. Restriction on Issuance of Shares. The Grantor shall not be required to issue or deliver any certificate for shares of its Common Stock purchased upon the exercise of any option unless (a) the issuance of such shares has been registered with the Securities and Exchange Commission under the Securities Act of 1933, as amended, or counsel to the Grantor shall have given an opinion that such registration is not required; (b) approval, to the extent required, shall have been obtained from any state regulatory body having jurisdiction thereof, and (c) permission for the listing of such shares, if required, shall have been given by NASDAQ and each national securities exchange on which the Common Stock of the Grantor is at the time of issuance listed. 8. Registration Rights (a) If, at any time during the exercise period hereof, the Grantor proposes to file a registration statement with respect to any class of securities (other than pursuant to a registration statement on Forms S-4 or S-8 or any successor form) under the Securities Act, the Grantor shall notify the Optionee at least twenty (20) days prior to the filing of such registration statement and will offer to include in such registration statement all or any portion of the -20- 21 Shares. At the written request of the Optionee, delivered to the Grantor within twenty (20) days after receipt of the Grantor's notice, the Optionee shall state the number of Shares that it wishes to sell or distribute publicly under the proposed registration statement. The Grantor will use its best efforts, through its officers, directors, auditors and counsel in all matters necessary or advisable, to cause such registration statement to become effective as promptly as practicable. In that regard, the Grantor makes no representations or warranties as to its ability to have the registration statement declared effective. All registrations requested pursuant to this Paragraph 8 are referred to herein as "Piggyback Registrations." In the event the Grantor is advised by the staff of the SEC, NASDAQ or any self-regulatory or state securities agency that the inclusion of the Shares will prevent, preclude or materially delay the effectiveness of a registration statement filed, the Grantor, in good faith, may amend such registration statement to exclude the Shares without otherwise affecting the Optionee's rights to any other registration statement herein. (i) Primary Registrations. If a Piggyback Registration is an underwritten primary registration on behalf of the Grantor, and if the underwriter thereof advises the Grantor in writing that in its opinion the number of Shares requested to be included in such registration statement exceeds the number that can be sold in such offering without materially adversely affecting the distribution of such securities by the Grantor, then the Grantor will include in such registration statement first, the securities that the Grantor proposes to sell and second, the securities requested to be included in such registration statement, any sales of which shall apportioned pro rata among the Optionee and the holders of any other securities requesting registration according to the amounts of Shares and other securities requested to be registered. Notwithstanding the above, if any such underwriter shall advise the Grantor in writing that the distribution of the Shares requested to be included in the registration statement concurrently with the securities being registered by the Grantor would materially adversely affect the distribution of such securities by the Grantor, then the Optionee shall delay his offering and sale for such period ending on the earliest of (a) 180 days following the effective date of the Grantor's registration statement or (b) such date as the Grantor, managing underwriter and Optionee shall otherwise agree. In the event of such delay, the Grantor shall file such supplements, post-effective amendments and take any such other steps as may be necessary to permit such Optionee to make its proposed offering and sale for a period of ninety (90) days immediately following the end of such period of delay. If any party disapproves of the terms of any such underwriting, it may elect to withdraw therefrom by written notice to the Grantor, the underwriter and the Optionee. Notwithstanding the foregoing, the Grantor shall not be required to file a registration statement to include the Shares pursuant to this -21- 22 Paragraph 8(a)(i) if, in the opinion of counsel for the Grantor, all of the Shares proposed to be disposed of may be transferred pursuant to the provisions of Rule 144 under the Securities Act. (ii) Priority on Secondary Registrations. If a Piggyback Registration is an underwritten secondary registration on behalf of holders of securities of the Grantor, and the underwriter thereof advises the Grantor in writing that in its opinion the number of Shares requested to be included in such registration statement exceeds the number which can be sold in such offering without materially adversely affecting the distribution of such securities, then the Grantor will include in such registration statement the securities requested to be included in such registration statement, any sales of which shall be apportioned pro rata among the Optionee and the holders of any other securities requesting registration according to the amounts of Shares and other securities requested to be registered. (b) In the event of any registration of a security pursuant to this Paragraph 8, the Grantor shall indemnify the Optionee and its officers and directors against all losses, claims, damages and liabilities caused by any untrue statement or alleged untrue statement of a material fact contained in any registration statement or prospectus (and as amended or supplemented) relating to such registration, or caused by any omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they are made unless such statement or omission was made in reliance upon and in conformity with information furnished to the Grantor by the Optionee expressly for use therein. The Optionee shall also indemnify the Grantor, its officers and directors and each underwriter of the Shares so registered with respect to losses, claims, damages and liabilities caused by any untrue statement or omission made in reliance upon and in conformity with information furnished by the Optionee to the Grantor expressly for use in such registration statement or prospectus. (c) All expenses of any registration referred to in this Section 8, except the fees and disbursements of counsel to the Optionee, underwriting commissions or discounts, filing fees and any transfer or other taxes applicable to the Options and/or Shares, shall be borne by the Grantor. 9. Adjustments Upon Changes in Capitalization. (a) In the event of changes in the outstanding Common Stock of the Grantor by reason of stock dividends, stock splits, recapitalizations, mergers, consolidations, combinations, or exchanges of shares, separations, reorganizations, or liquidations, the number and class of shares as to which the options may be exercised shall be correspondingly adjusted by the Grantor. No adjustment shall be made with respect to stock dividends or splits -22- 23 which do not exceed 10% in any fiscal year, cash dividends or the issuance to stockholders of the Grantor of rights to subscribe for additional shares of Common Stock or other securities. Anything to the contrary contained herein notwithstanding, the Board of Directors of the Grantor shall have the discretionary authority to take any action necessary or appropriate to prevent these options from being disqualified as "Incentive Stock Options" under the United States income tax laws then in effect. (b) Any adjustment in the number of Shares shall apply proportionately to only the unexercised portion of an option granted hereunder. If fractions of a share would result from any such adjustment, the adjustment shall be revised to the next higher whole number of Shares so long as such increase does not result in the holder of the option being deemed to own more than 5% of the total combined voting power or value of all classes of stock of the Grantor or its subsidiaries. 10. Effect of Mergers, Consolidations or Sales of Assets. Anything contained herein to the contrary, a merger or consolidation in which the Grantor is not the surviving corporation, or a sale of substantially all of the Grantor's assets or capital stock shall cause the unexercised options to terminate automatically, unless otherwise provided by the Board of Directors. Furthermore, this option may, at the discretion of the Board of Directors of the Grantor and said other corporation, be exchanged for options to purchase shares of capital stock of another corporation which the Grantor, and/or a subsidiary thereof is merged into, consolidated with, or all or a substantial portion of the property or stock of which is acquired by said other corporation or separated or reorganized into. The terms, provisions and benefits to the Optionee of such substitute option(s) shall in all respects be identical to the terms, provisions and benefits of Optionee under his Option(s) prior to said substitution. To the extent the above may be inconsistent with Sections 424(a)(1) and (2) of the Code, the above shall be deemed interpreted so as to comply therewith. 11. No Rights in Option Stock. Optionee shall have no rights as a shareholder in respect of Shares as to which the option granted hereunder shall not have been exercised and payment made as herein provided. 12. Effect Upon Employment. This Agreement does not give the Optionee any right to continued employment by the Grantor. -23- 24 13. Binding Effect. Except as herein otherwise expressly provided, this Agreement shall be binding upon and inure to the benefit of the parties hereto, their successors legal representatives and assigns. 14. Agreement Subject to Plan. Notwithstanding anything contained herein to the contrary, and unless the Plan is not adopted by the shareholders of the Company, this Agreement is subject to, and shall be construed in accordance with, the terms of the Plan, and in the event of any inconsistency between the terms hereof and the terms of the Plan, the terms of the Plan shall govern. If the Plan is not adopted by the shareholders of the Company, this Agreement shall be terminated and of no force or effect. 15. Miscellaneous. This Agreement shall be construed under the laws of the State of New York applied to agreements made and to be performed entirely within such State. Headings have been included herein for convenience of reference only and shall not be deemed a part of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. AMERICAN INTERNATIONAL PETROLEUM CORPORATION By:_____________________________ Denis J. Fitzpatrick Vice President ACCEPTED AND AGREED TO: -24- EX-4.4 4 FORM OF DEBENTURE AND SUBSCRIPTION AGREEMENT 1 EXHIBIT 4.4 FORM OF DEBENTURE THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED OR SOLD IN THE UNITED STATES (AS DEFINED IN REGULATION S UNDER THE ACT) OR TO, OR FOR THE ACCOUNT OR BENEFIT OF U.S. PERSONS (AS DEFINED IN REGULATION S UNDER THE ACT) EXCEPT PURSUANT TO REGISTRATION UNDER THE ACT OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE ACT AND APPLICABLE STATE SECURITIES LAWS. No. _______ US $__________ AMERICAN INTERNATIONAL PETROLEUM CORP. 10% CONVERTIBLE SUBORDINATED (REDEEMABLE) DEBENTURE DUE APRIL 1, 1998 THIS DEBENTURE is one of a duly authorized issue of Debentures of American International Petroleum Corp., a corporation duly organized and existing under the laws of the State of Nevada (the "Company") designated as its 10% Convertible Subordinated Redeemable Debentures Due April 1, 1998, in an aggregate principal amount not exceeding One Million Five Hundred Thousand Dollars (U.S. $1,500,000). FOR VALUE RECEIVED, the Company promises to pay to ______________________ the registered holder hereof and its successors and assigns (the "Holder"), the principal sum of ______________________ Dollars (US $_________) on April 1, 1998 (the "Maturity Date"), and to pay interest on the principal sum outstanding, at the rate of 10% per annum due and payable quarterly in arrears commencing July 1, 1996. Accrual of interest shall commence on the date hereof and shall continue until payment in full of the outstanding principal sum has been made or duly provided for. The interest so payable will be paid to the person in whose name this Debenture (or one or more predecessor Debentures) is registered on the records of the Company regarding registration and transfers of the Debentures (the "Debenture Register"); provided, however, that the Company's obligation to a transferee of this Debenture arises only if such transfer, sale or other disposition is made in accordance with the terms and conditions of the Offshore Securities Subscription Agreement dated as of __________________ between the Company and ________________________________ (the "Subscription Agreement"). The principal of, and interest on, this Debenture are payable in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts, at the address last appearing on the Debenture Register of the Company as designated in writing by the Holder hereof from time 2 to time. The Company will pay the outstanding principal of and all accrued and unpaid interest due upon this Debenture on the Maturity Date, less any amounts required by law to be deducted or withheld, to the Holder of this Debenture as of the tenth (10th) day prior to the Maturity Date by check or on the Maturity Date by wire transfer and addressed to such Holder at the last address appearing on the Debenture Register. The forwarding of such check shall constitute a payment of outstanding principal and interest hereunder and shall satisfy and discharge the liability for principal and interest on this Debenture to the extent of the sum represented by such check plus any amounts so deducted. This Debenture is subject to the following additional provisions: I. The Debentures are issuable in denominations of One Hundred Thousand Dollars (US$100,000) and integral multiples thereof. The Debentures are exchangeable for an equal aggregate principal amount of Debentures of different authorized denominations, as requested by the Holders surrendering the same but not less than U.S. $25,000. No service charge will be made for such registration or transfer or exchange, except that transferee shall pay any tax or other governmental charges payable in connection therewith. I. The Company shall be entitled to withhold from all payments of principal of, and interest on, this Debenture any amounts required to be withheld under the applicable provisions of the United States income tax or other applicable laws at the time of such payments. II. This Debenture has been issued subject to investment representations of the original purchaser hereof and may be transferred or exchanged in the U.S. only in compliance with the Securities Act of 1933, as amended (the "Act") and applicable state securities laws. Prior to due presentment for transfer of this Debenture, the Company and any agent of the Company may treat the person in whose name this Debenture is duly registered on the Company's Debenture Register as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes, whether or not this Debenture be overdue, and neither the Company nor any such agent shall be affected or bound by notice to the contrary. Any holder of this Debenture, electing to exercise the right of conversion set forth in Section 4(a) hereof, in addition to the requirements set forth in Section 4(a), and any prospective transferee of this Debenture, is also required to give the Company (i) written confirmation that it is not a U.S. Person and the Debenture is not being converted on behalf of a U.S. Person ("Notice of Conversion") or (ii) an opinion of U.S. counsel to the effect that the Debenture and shares of common stock issuable upon conversion or transfer thereof have been registered under the 1933 Act or are exempt from such registration. In the event a Notice of Conversion or opinion of counsel is not provided the Holder hereof 2 3 will not be entitled to exercise the right to convert or transfer the Debentures. III. (a) The Holder of this Debenture is entitled, at its option, at any time commencing 45 days after closing of the Offering hereof to convert all or any amount over $25,000 of the original principal amount of this Debenture into shares of common stock, $0.08 par value per share, of the Company (the "Common Stock"), at a conversion price for each share or Common Stock equal to the lower of (x) 65% of the average closing bid price of the Common Stock for the five (5) business days immediately preceding the date of receipt by the Company of notice of conversion or (y) 65% of the average of the closing bid price of the Common Stock for the five (5) business days immediately preceding the date of Subscription by the Holder accepted by the Company ("Initial Conversion Shares") as reported by the National Association of Securities Dealers Automated Quotation System ("NASDAQ") (the "Conversion Price"). The number of Shares issued under (y) above shall be referred to as (the "Initial Conversion Shares") To the extent that the calculation in (x) above requires the Company to issue more shares than the calculation in (y) above the number of excess shares shall be referred to herein as (the "Additional Conversion Shares"). Such conversion shall be effectuated by surrendering the Debentures to be converted (with a copy, by facsimile or courier, to the Company) to the Escrow Agent with the form of conversion notice attached hereto as Exhibit I, executed by the Holder of this Debenture evidencing such Holder's intention to convert this Debenture or a specified portion (as above provided) hereof, and accompanied by proper assignment hereof in blank. Accrued but unpaid interest shall be subject to conversion. No fractional shares or scrip representing fractions of shares will be issued on conversion, but the number of shares issuable shall be rounded to the nearest whole share. The transferee or issuee shall execute such investment representations or other documents as are respectively required by counsel in order to ascertain the available registration exemption. The date on which notice of conversion is given shall be deemed to be the date on which the Holder has delivered this Debenture, with the assignment and conversion notice duly executed, to the Escrow Agent or, if earlier, the date set forth in such notice of conversion if the Debenture is received by the Company and Escrow Agent within five (5) business days thereafter. The transferee or issuee shall execute such investment representations or other documents as are reasonably required by counsel in order to ascertain the available registration exemption. (b) Notwithstanding the provisions of paragraph 4(a) hereof, the Company may redeem any or all of the Debentures after issue hereof and prior to conversion by paying to the Holder in cash 135% of the then outstanding principal balance of the Debenture plus accrued interest to such date, and shall be less any amounts required by law to be deducted or withheld. Such payment shall be made by delivering immediately available funds in United States Dollars by wire transfer to the Holder, or if no wiring 3 4 instructions have been provided to the company, by cashier's or certified check to the last address of Holder appearing on the Debenture Register. The wiring of such funds or the forwarding of such check shall constitute payment of principal and interest hereunder and shall satisfy and discharge the liability for principal and interest on this Debenture to the extent of the sum represented by such wire or check plus any amount so deducted. Such payment also to be made by the Company within 15 days of receipt of a conversion notice by the Company from the Investor. (c) Notwithstanding the provisions of paragraph 4(a) hereof, at any time on and after 120 days from the date of the issuance of the Debentures, if the average of the closing bid price for the Company's common shares for 5 consecutive trading days shall be in excess of US $1.50 as reported on NASDAQ, the Company may, at its sole option, exercised by five days prior written notice thereof to the holder require the Holders of the Debentures to convert that portion of the principal amount of the Debentures, not previously converted in accordance with the procedures set forth in Section 4(a) hereof, except that for purposes of Section 4(a)(i) the conversion date shall be the date specified in the Company's notice to Holder. IV. No provision of this Debenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, and interest on, this Debenture at the time, place, and rate, and in the coin currency, herein prescribed. V. The Company hereby expressly waives demand and presentment for payment, notice of nonpayment, protest, notice of protest, notice of dishonor, notice of acceleration or intent to accelerate, bringing of suit and diligence in taking any action to collect amounts called for hereunder and shall be directly and primarily liable for the payment of all sums owing and to be owing hereon, regardless of and without any notice, diligence, act or omission as or with respect to the collection of any amount called for hereunder. 7. The Company agrees to pay all costs and expenses, including reasonable attorneys' fees, which may be incurred by the Holder in collecting any amount due under this Debenture. 8. If one or more of the following described "Events of Default" shall occur and continue for 30 days: (a) The Company shall default in the payment of principal or interest on this Debenture; or (b) Any of the representations or warranties made by the Company herein, in the Subscription Agreement, or in any certificate or financial or other written statements heretofore or hereafter furnished by or on behalf of the Company in connection with the execution and delivery of this Debenture or the 4 5 Subscription Agreement shall be false or misleading in any material respect at the time made; or (c) The Company shall fail to perform or observe, in any material respect, any other covenant, term, provision, condition, agreement or obligation of the Company under this Debenture [and such failure shall continue uncured for a period of thirty (30) days after notice from the Holder of such failure]; or (d) The Company shall (1) become insolvent; (2) admit in writing its liability to pay its debts generally as they mature; (3) make an assignment for the benefit of creditors or commence proceedings for its dissolution; or (4) apply for or consent to the appointment of a trustee, liquidator or receiver for its or for a substantial part of its property or business; or (e) A trustee, liquidator or receiver shall be appointed for the Company or for a substantial part of its property or business without its consent and shall not be discharged within thirty (30) days after such appointment; or (f) Any governmental agency or any court of competent jurisdiction at the instance of any governmental agency shall assume custody or control of the whole or any substantial portion of the properties or assets of the Company and shall not be dismissed within thirty (30) days thereafter; or (g) Any money judgment, writ or warrant of attachment, or similar process in excess of One Hundred Thousand ($100,000) Dollars in the aggregate shall be entered or filed against the Company or any of its properties or other assets and shall remain unpaid, unvacated, unbonded or unstayed for a period of fifteen (15) days or in any event later than five (5) days prior to the date of any proposed sale thereunder; or (h) Bankruptcy, reorganization, insolvency or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Company and, if instituted against the Company, shall not be dismissed within thirty (30) days after such instruction of the Company shall by any action or answer approve of, consent to, or acquiesce in any such proceedings or admit the material allegations of, or default in answering a petition filed in any such proceeding; or 5 6 (i) The Company shall have its Common Stock delisted from the over-the-counter market. Then, or at any time thereafter, and in each and every such case, unless such Event of Default shall have been waived in writing by the Holder (which waiver shall not be deemed to be a waiver of any subsequent default) at the option of the Holder and in the Holder's sole discretion, the Holder may consider this Debenture immediately due and payable, without presentment, demand, protest or (further) notice of any kind (other than notice of acceleration), all of which are hereby expressly waived, anything herein or in any note or other instruments contained to the contrary notwithstanding, and the Holder may immediately, and without expiration of any period of grace, enforce any and all of the Holder's rights and remedies provided herein or any other rights or remedies afforded by law. 9. (a) This Debenture represents a general unsecured obligation of the Company. No recourse shall be had for the payment of the principal of, or the interest on, this Debenture, or for any claim based hereon, or otherwise in respect hereof, against any incorporator, shareholder, officer or director, as such, past, present or future, of the Company or any successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issue hereof, expressly waived and released. (b) The rights of any Holder to receive the principal sum or any part thereof, and to receive the interest due on this Debenture is and shall remain subordinate in priority to the payment of the principal of and interest on (i) all future obligations and guarantees of the Issuer for money borrowed from any bank, trust company, insurance company or other financial institution engaged in the business of lending money, for which the Issuer is at the time of determination responsible or liable as obligor or guarantor; (ii) all existing or future obligations of the Corporation secured by a lien, mortgage, pledge or other encumbrance against real or personal property (including common stock of the Corporation or any of its subsidiaries) of the Corporation; (iii) any modifications, renewals, extensions or refunding of the foregoing, except for any of such obligations of the Corporation the payment of which is made expressly subordinate and junior to this Debenture; (iv) indebtedness under the MG Trade Finance Corp. ("MGTF") loan agreement (the "Loan Agreement") or any indebtedness incurred to refinance such 6 7 obligations; (v) other indebtedness of the Corporation existing on the date of this Debenture; and (vi) trade payables incurred in the ordinary course of business of the Corporation or its subsidiaries. 10. The Holder of this Debenture, by acceptance hereof, agrees that this Debenture is being acquired for investment and that such Holder will not offer, sell or otherwise dispose of this Debenture or the Shares of Common Stock issuable upon exercise thereof except under circumstances which will not result in a violation of the Act or any applicable state Blue Sky law or similar laws relating to the sale of securities. 11. In case any provision of this Debenture is held by a court of competent jurisdiction to be excessive in scope or otherwise invalid or unenforceable, such provision shall be adjusted rather than voided, if possible, so that it is enforceable to the maximum extent possible, and the validity and enforceability of the remaining provisions of this Debenture will not in any way be affected or impaired thereby. 12. This Debenture and the agreements referred to in this Debenture constitute the full and entire understanding and agreement between the Company and the Holder with respect to the subject hereof. Neither this Debenture nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument signed by the Company and the Holder. 13. This Debenture shall be governed by and construed in accordance with the laws of New York. Holder hereby waives trial by jury and consents to exclusive jurisdiction and venue in the State of New York. 7 8 IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed by an officer thereunto duly authorized. Dated:__________________________________________________ AMERICAN INTERNATIONAL PETROLEUM CORP. By:________________________________________________________________ Title:___________________________ 8 9 EXHIBIT I NOTICE OF CONVERSION (To be Executed by the Registered Holder in order to Convert the Debenture) The undersigned hereby irrevocably elects to convert $______________ of the above Debenture No. ___ into Shares of Common Stock of American International Petroleum Corp. (the "Company") according to the conditions set forth in such Debenture, as of the date written below. The undersigned represents that it is not a U.S. Person as defined in Regulation S promulgated under the Securities Act of 1933, as amended, and is not converting the Debenture on behalf of any U.S. Person and the representations contained in the Subscription Agreement are true. If Shares are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. Date of Conversion*________________________________________________________ ___________________________________________________________________________ Applicable Conversion Price______________________________________________________________________ ___________________________________________________________________________ Signature__________________________________________________________________ ___________________________________________________________________________ [Print Name of Holder and Title of Signer] Address:___________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ Medallion Signature Guaranty * This original Debenture and Notice of Conversion must be received by the Company by the fifth business date following the Date of Conversion. 9 10 OFFSHORE SECURITIES SUBSCRIPTION AGREEMENT THIS OFFSHORE SECURITIES SUBSCRIPTION AGREEMENT dated as of ___________, 1996 (the "Agreement"), is executed in reliance upon the exemption from registration afforded by Regulation S ("Regulation S") as promulgated by the Securities and Exchange Commission ("SEC"), under the Securities Act of 1933, as amended. Capitalized terms used herein and not defined shall have the meanings given to them in Regulation S. This Agreement has been executed by the undersigned "Buyer" in connection with the private placement of 10% Convertible Debentures of American International Petroleum Corp., a corporation organized under the laws of the State of Nevada, with its principal executive offices located at 444 Madison Avenue, Suite 3203, New York, New York 10022 (hereinafter referred to as "Seller"). Buyer hereby represents and warrants to, and agrees with Seller: THE SECURITIES OFFERED HEREBY HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER (THE "1933 ACT"), AND MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES (AS DEFINED IN REGULATION S OF THE 1933 ACT) OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS (AS DEFINED IN REGULATION S OF THE 1933 ACT) EXCEPT PURSUANT TO REGISTRATION UNDER OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE 1933 ACT. VI. Agreement To Subscribe; Purchase Price. (a) Subscription. The undersigned Buyer hereby subscribes for and agrees to purchase the Seller's 10% Convertible Debentures substantially in the form of the Debentures attached as Exhibit A hereto and having an aggregate original principal amount of up to U.S. $1,500,000 (singly, a "Debenture," and collectively, the "Debentures"), at an aggregate purchase price as set forth in subsection (b) herein. (b) Payment. The aggregate Purchase Price for the Debentures shall be __________________________ United States Dollars (U.S. $___________) (the "Purchase Price"), which shall be payable pursuant to paragraph C herein by delivering immediately available funds in United States Dollars by wire transfer to the designated depository Barry B. Globerman, Esq., as Escrow Agent ("Escrow Agent") for closing by delivery of securities versus payment. (c) Closing. Subject to the satisfaction of the conditions set forth in Sections 7 and 8 hereof, payments of the Purchase Price may be made from time to time in denominations of not less than $100,000 but all payments hereunder, in any event must be completed on or before ___________, 1996, or such earlier or later date as is mutually agreed to in writing by Buyer and Seller. 10 11 VII. Buyer Representations and Covenants; Access to Information. Offshore Transaction. In connection with the purchase and sale of the Debentures, Buyer represents and warrants to, and covenants and agrees with Seller as follows: (i) Buyer is not a natural person and is not organized under the laws of any jurisdiction within the United States, was not formed by a U.S. Person (as defined in Section 902(o) of Regulation S) for the purpose of investing in Regulation S securities and is not otherwise a U.S. Person. Buyer is not, and on the closing date will not be, an affiliate of Seller; (ii) At the time the buy order was originated, Buyer was outside the United States and is outside of the United States as of the date of the execution and delivery of this Agreement; (iii) No offer to purchase the Debentures or the common stock of Seller issuable upon conversion of the Debentures (collectively, the "Securities"), was made by Buyer in the United States; (iv) Buyer is purchasing the Securities for its own account and Buyer is qualified to purchase the Securities under the laws of its jurisdiction of residence, and the offer and sale of the Securities will not violate the securities or other laws of such jurisdiction; (v) All offers and sales of any of the Securities by Buyer prior to the end of the Restricted Period (as hereinafter defined) shall be made in compliance with any applicable securities laws of any applicable jurisdiction and in accordance with Rule 903 and 904, as applicable, of Regulation S or pursuant to registration of securities under the 1933 Act or pursuant to an exemption from registration. In any case, none of the Securities have been or will be encumbered, offered, sold or otherwise transferred by Buyer to, or for the account or benefit of, a U.S. Person or within the United States until after the end of the forty (40) day period commencing on the later of (x) the date of closing of the offering of the Securities or (y) the date of the first offer of the Securities to persons other than distributors (the "Restricted Period"), as calculated pursuant to Regulation S and certified by Buyer to Seller and thereafter only pursuant to a Registration Statement or an applicable exemption from the registration provision of the 1933 Act; 11 12 (vi) The transactions contemplated by this Agreement (a) have not been and will not be pre-arranged by Buyer with a purchaser located in the United States or a purchaser which is a U.S. Person, and (b) are not and will not be part of a plan or scheme by Buyer, to evade the registration provisions of the 1933 Act; (vii) Buyer understands that the Securities are not registered under the 1933 Act and are being offered and sold to it in reliance on specific exclusions from the registration requirements of Federal and State securities laws, and that Seller is relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgments and understandings of Buyer set forth herein in order to determine the applicability of such exclusions and the suitability of Buyer and any purchaser from Buyer to acquire the Securities; (viii) Buyer shall take all reasonable steps to ensure its compliance with Regulation S and shall promptly send to each purchaser who acts as a distributor, dealer or a person receiving a selling concession, fee or other remuneration in respect of any of the Securities, who purchases prior to the expiration of the Restricted Period referred to in subparagraph (v) above, a confirmation or other notice to the purchaser stating that the purchaser is subject to the same restrictions on offers and sales as Buyer pursuant to Section 109(c)(2)(iv) of Regulation S; (ix) Buyer has not conducted or permitted and shall not conduct or permit on its behalf any "directed selling efforts" as that term is defined in Rule 902(b) of Regulation S; nor has Buyer conducted any general solicitation relating to the offer and sale of any of the Securities in the United States or elsewhere; (x) Buyer has the full right, power and authority to enter into this Agreement and to consummate the transaction contemplated herein. This Agreement has been duly authorized, validly executed and delivered on behalf of Buyer and is a valid and binding agreement in accordance with its terms, subject to general principles of equity and to bankruptcy or other laws affecting the enforcement of creditors' rights generally; (xi) The execution and delivery of this Agreement and the consummation of the purchase of the Securities, and the transactions contemplated by this Agreement do not and will not conflict with or result in a breach by Buyer of any of the terms of provisions of, or constitute a default under, the articles of incorporation or by-laws (or similar constitutive documents) of Buyer or any indenture, mortgage, deed of trust, or other material 12 13 agreement or instrument to which Buyer is a party or by which it or any of its properties or assets are bound, or any existing applicable law, rule or regulation of the United States or any State thereof or any applicable decree, judgment or order of any Federal or State court, Federal or State regulatory body, administrative agency or other United States governmental body having jurisdiction over Buyer or any of its properties or assets; (xii) All invitation, offers and sales of or in respect of, any of the Securities, by Buyer and any distribution by Buyer of any documents relating to any offer by it of any of the Securities will be in compliance with applicable laws and regulations and will be made in such a manner that no prospectus need be filed and no other filing need be made by Seller with any regulatory authority or stock exchange in any country or any political sub-division of any country; (xiii) Buyer will not make any offer or sale of the Securities by any means which would not comply with the laws and regulations of the territory in which such offer or sale takes place or to which such offer or sale is subject or which would in connection with any such offer or sale impose upon Seller any obligation to satisfy any public filing or registration requirement or provide or publish any information of any kind whatsoever or otherwise undertake or become obligated to do any act; and (xiv) Neither the Buyer nor any of its affiliates has entered, has the intention of entering, or will during the Restricted Period enter into any put option, short position or other similar instrument or position with respect to any of the Securities or securities of the same class as the Securities. (xv) the Buyer (or others for whom it is contracting hereunder) has been advised to consult its own legal and tax advisors with respect to applicable resale restrictions and applicable tax considerations and it (or others for whom it is contracting hereunder) is solely responsible (and the Company is not in any way responsible) for compliance with applicable resale restrictions and applicable tax legislation. (xvi) No Government Recommendation or Approval. Buyer understands that no Federal or State or foreign government agency has passed on or made any recommendation or endorsement of the Securities. (xvii) Current Public Information. Buyer acknowledges that it and its advisors, if any, have been 13 14 furnished with all materials relating to the business, finances and operations of Seller and all materials relating to the offer and sale of the Securities which have been requested by Buyer, all of which contain a legend as required under Section 10 hereof. Buyer further acknowledges that it and its advisors, if any, have received complete and satisfactory answers to such inquiries. (xviii) Buyer's Sophistication. Buyer acknowledges that the purchase of the Securities involves a high degree of risk, including the total loss of Buyer's investment. Buyer has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of purchasing the Securities. Buyer understands that the Securities are not being registered under the 1933 Act, and therefore Buyer must bear the economic risk of this investment for an indefinite period of time. (xix) Tax Status. Buyer is not a "10-percent Shareholder" (as defined in Section 871(h)(3)(B) of the U.S. Internal Revenue Code) of Seller. VIII. Seller Representations and Covenants. (a) Reporting Company Status. Seller is a "Reporting Issuer" as defined by Rule 902 of Regulation S. Seller has registered its Common Stock, $.08 par value per share (the "Common Stock"), pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the Common Stock is listed and trades on NASDAQ. Seller has filed all material required to be filed pursuant to all reporting obligations under either Section 13(a) or 15(d) of the Exchange Act for a period of at least twelve (12) months immediately preceding the offer or sale of the Securities (or for such shorter period that Seller has been required to file such material). (b) Current Public Information. Seller has furnished Buyer with copies of its most recent reports, as amended, filed under the Exchange Act referred to in Section 2(xvii) above, and other publicly available documents requested by Buyer. (c) Offshore Transaction. Seller has not offered any of the Securities to any person in the United States, any identifiable groups of U.S. citizens abroad, or to any U.S. Person, as such terms are used in Regulation S. (i) At the time the buy order was originated, Seller and/or its agents reasonably believe the Buyer was outside of the United States and was not a U.S. person, based on the representations of Buyer. 14 15 (ii) Seller and/or its agents reasonably believe that the transaction has not been pre-arranged with a buyer in the United States, based on the representations of Buyer. (iii) No offer to buy or sell the Securities was or will be made by Seller to any person in the United States. (iv) The sale of the Securities by Seller pursuant to this Agreement will be made in accordance with the provisions and requirements of Regulation S provided that the representations and warranties of Buyer in Section 2 hereof are true and correct. (v) The transactions contemplated by this Agreement (a) have not been and will not be pre-arranged by Seller with a purchaser located in the United States or a purchaser which is a U.S. Person, and (b) are not and will not be part of a plan or scheme by Seller to evade the registration provisions of the 1933 Act. (d) No Directed Selling Efforts. In regard to this transaction, Seller has not conducted any "directed selling efforts" as that term is defined in Rule 902 of Regulation S nor has Seller conducted any general solicitation relating to the offer and sale of any of the Securities in the United States or elsewhere. (e) Concerning the Securities. The issuance, sale and delivery of the Debentures have been duly authorized by all required corporate action on the part of Seller, and when issued, sold and delivered in accordance with the terms hereof and thereof for the consideration expressed herein and therein, will be duly and validly issued, fully paid and non-assessable. The Common Stock issuable upon conversion of the Debenture has been duly and validly reserved for issuance and, upon issuance in accordance with the terms of the Debentures, shall be duly and validly issued, fully paid, and non-assessable and will not subject the holders thereof, if such persons are non-U.S. persons, to personal liability by reason of being such holders. There are no pre-emptive rights of any shareholder of Seller. (f) Subscription Agreement. This Agreement has been duly authorized, validly executed and delivered on behalf of Seller and is a valid and binding agreement in accordance with its terms, subject to general principles of equity and to bankruptcy or other laws affecting the enforcement of creditors' rights generally. (g) Non-contravention. The execution and delivery of this Agreement and the consummation of the issuance of the Securities and the transactions contemplated by this Agreement do not and will not conflict with or result in a breach by Seller of 15 16 any of the terms or provisions of, or constitute a default under, the articles of incorporation or by-laws of Seller, or any indenture, mortgage, deed of trust, or other material agreement or instrument to which Seller is a party or by which it or any of its properties or assets are bound, or any existing applicable law, rule or regulation of the United States or any State thereof or any applicable decree, judgment or order of any Federal or State court, Federal or State regulatory body, administrative agency or other United States governmental body having jurisdiction over Seller or any of its properties or assets. (h) Approvals. Seller is not aware of any authorization, approval or consent of any U.S. governmental body which is legally required for the issuance and sale of the Debentures and the Common Stock issuable upon conversion thereof to persons who are non-U.S. Persons, as contemplated by this Agreement. Seller is relying entirely upon Buyer and Distributor with respect to foreign consents and approvals. IX. Exemption; Reliance on Representations. Buyer understands that the offer and sale of the Securities are not being registered under the 1933 Act. Seller and Buyer are relying on the rules governing offers and sales made outside the United States pursuant to Regulation S. X. Irrevocable Treasury Orders and Transfer Agent Instructions. (a) Irrevocable Treasury Orders. Upon issuance of the Debentures, the Company will issue to the Escrow Agent Irrevocable Treasury Orders in the form of Exhibit B hereto which shall be submitted to the Company's transfer agent upon conversion of the Debentures pursuant to the Escrow Agreement attached hereto as Exhibit C. The Common Stock to be issued upon conversion shall not have any restrictive legend other than any Additional Conversion Shares. (b) Debentures. Upon the conversion of the Debentures, the holder thereof shall submit such Debenture together with a notice of conversion to the Escrow Agent, and Seller and the Escrow Agent shall instruct Seller's transfer agent to issue one or more Certificates representing that number of shares of Common Stock into which the Debenture or Debentures are convertible in accordance with the provisions regarding conversion set forth in Exhibit A hereto. The Seller shall act as Debenture Registrar and shall maintain an appropriate ledger containing the necessary information with respect to each Debenture. (c) Common Stock to be Issued Without Restrictive Legend. Upon the conversion of any Debenture up to the total of the "Initial Conversion Amount" (as defined in the Debenture) and 40 days after the issuance of any "Additional Conversion Amount" (as defined in the Debenture) by a person who is a non-U.S. Person, Seller shall instruct Seller's transfer agent to issue Stock 16 17 Certificates up to the total of the "Initial Conversion Amount" (as defined in the Debenture) and 40 days after the "Additional Conversion Amount" (as defined in the Debenture) without restrictive legend in the name of Buyer upon receipt of an opinion of Buyer's Counsel to remove such legend (or its nominee (being a non-U.S. Person) or such non-U.S. Persons as may be designated by Buyer prior to the closing) and in such denominations to be specified at conversion representing the number of shares of Common Stock issuable upon such conversion, as applicable. Seller warrants that no instructions other than these instructions and instructions to impose a "stop transfer" instruction with respect to the certificates until the end of the respective Restricted Period of the Initial Conversion Shares and Additional Conversion Shares, if any, have been given or will be given to the transfer agent and that the Common Stock shall otherwise be freely transferable on the books and records of Seller. Nothing in this Section 5, however, shall affect in any way Buyer's or such nominee's obligations and agreements to comply with all applicable securities laws upon resale of the Securities. XI. Registration. If upon conversion of Debentures effected by the Buyer pursuant to the terms of this Agreement the Company fails to issue certificates for shares of Common Stock issuable upon such conversion (the "Underlying Shares") to the Buyer bearing no restrictive legend (after the applicable Restrictive Period of the Initial Conversion Shares or Additional Conversion Shares, if any) for any reason other than the Company's reasonable good faith belief that the representations and warranties made by the Buyer in this Agreement or the Notice of Conversion were untrue when made, or if the restricted period under Regulation S is extended, or if Additional Conversion Amount Shares are required to be issued, then the Company shall be required, at the request of the Buyer and at the Company's expense, to effect the registration of the Underlying Shares and/or Additional Conversion Shares issuable upon conversion of the Debentures under the Act and relevant Blue Sky laws as promptly as is practicable. The Company and the Buyer shall cooperate in good faith in connection with the furnishing of information required for such registration and the taking of such other actions as may be legally or commercially necessary in order to effect such registration. The Company shall file such a registration statement within 30 days of Buyer's demand therefor and shall use its best efforts to cause such registration statement to become effective as soon as practicable thereafter. Such best efforts shall include, but not be limited to, promptly responding to all comments received from the staff of the Securities and Exchange Commission, providing Buyer's counsel with a contemporaneous copy of all written communications from and to the staff of the Securities and Exchange Commission with respect to such registration statement and promptly preparing and filing amendments to such registration statement which are responsive to the comments received from the staff of the Securities and Exchange Commission. Once declared effective by the Securities and Exchange Commission, the Company shall cause such registration statement to remain effective until the earlier of (i) the sale by the Buyer of 17 18 all Underlying Shares registered or (ii) 120 days after the effective date of such registration statement. In the event the Company undertakes to file a Registration Statement on Form S-3 in connection with the Common Stock, upon the effectiveness of such Registration, Buyer shall have the option to sell the Common Stock pursuant thereto. The foregoing shall not in any way limit Buyer's rights in connection with the Common Stock pursuant to Regulation S. XII. Delivery Instructions. The Debentures being purchased hereunder shall be delivered to the Escrow Agent at such time and place as shall be mutually agreed by Seller and Buyer. XIII. Conditions To Seller's Obligation To Sell. Seller's obligation to sell the Debentures is conditioned upon: (a) The receipt and acceptance by Seller of this Agreement as executed by Buyer. (b) Delivery into the closing depository of good funds by Buyer as payment in full of the purchase price of the Debentures. (c) All of the representations and warranties of the Subscriber contained in this Agreement shall be true and correct on the Payment Date with the same force and effect as if made on and as of the Payment Date. The Subscriber shall have performed or complied with all agreements and satisfied all conditions on its part to be performed, complied with or satisfied at or prior to the Payment Date. (d) No order asserting that the transactions contemplated by this Agreement are subject to the registration requirements of the Act shall have been issued, and no proceedings for that purpose shall have been commenced or shall be pending or, to the knowledge of the Company, be contemplated. No stop order suspending the sale of the Debentures shall have been issued, and no proceedings for that purpose shall have been commenced or shall be pending or, to the knowledge of the Company, be contemplated. (e) No action shall have been taken and no statute, rule, regulation or order shall have been enacted, adopted or issued by any governmental agency that would prevent the issuance of the Debentures. No injunction, restraining order or order of any nature by a federal or state court of competent jurisdiction shall have been issued that would prevent the issuance of the Debentures. XIV. Conditions To Buyer's Obligation To Purchase. Buyer's obligation to purchase the Debentures is conditioned upon: (a) The confirmation of receipt and acceptance by Seller of this Agreement as evidenced by execution of this Agreement by the duly authorized officer of Seller. 18 19 (b) Delivery of the Debentures to the Escrow Agent. XV. Offering Materials. All offering materials and documents used in connection with offers and sales of the Securities prior to the expiration of the Restricted Period referred to in Section 2(a)(v) hereof shall include statements to the effect that the Securities have not been registered under the 1933 Act or applicable state securities laws, and that neither Buyer, nor any direct or indirect purchaser of the Securities from Buyer, may directly or indirectly offer or sell the Securities in the United States or to U.S. Persons (other than distributors) unless that Securities are registered under the 1933 Act any applicable state securities laws, or any exemption from the registration requirements of the 1933 Act or such state securities laws is available. Such statements shall appear (1) on the cover of any prospectus or offering circular used in connection with the offer or sale of the Securities, (2) in the underwriting section of any prospectus or offering circular used in connection with the offer or sale of the Securities, and (3) in any advertisement made or issued by Seller, Buyer, any other distributor, any of their respective affiliates, or any person acting on behalf of any of the foregoing. XVI. No Shareholder Approval. Seller hereby agrees that from the Closing Date until the issuance of Common Stock upon the conversion of the Debentures, Seller will not take any action which would require Seller to seek shareholder approval of such issuance unless such shareholder approval is required by law or regulatory body (including but not limited to the NASDAQ Stock Market, Inc.) as a result of the issuance of the Securities hereunder. XVII. Miscellaneous. (a) Except as specifically referenced herein or in the Distribution Agreement, this Agreement constitutes the entire contract between the parties, and neither party shall be liable or bound to the other in any manner by any warranties, representations or covenants except as specifically set forth herein. Any previous agreement among the parties related to the transactions described herein is superseded hereby. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties hereto. Nothing in this Agreement, express or impled, is intended to confer upon any party, other than the parties hereto, and their respective successors and assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided herein. (b) Buyer is an independent contractor, and is not the agent of Seller. Buyer is not authorized to bind Seller, or to make any representations or warranties on behalf of Seller. (c) Seller makes no representations or warranty with respect to Seller, its finances, assets, business prospects or 19 20 otherwise. Buyer will advise each purchaser, if any, and potential purchaser of the Securities, of the foregoing sentence, and that such purchaser is relying on its own investigation with respect to all such matters, and that such purchaser will be given access to any and all documents and Seller personnel as it may reasonably request for such investigation. (d) All representations and warranties contained in this Agreement by Seller and Buyer shall survive the closing of the transactions contemplated by this Agreement. (e) This Agreement shall be construed in accordance with the laws of New York applicable to contracts made and wholly to be performed within the State of New York and shall be binding upon the successors and assigns of each party hereto. Buyer hereby waives trial by jury and consents to exclusive jurisdiction and venue in the State of New York. This Agreement may be executed in counterparts, and the facsimile transmission of an executed counterpart to this Agreement shall be effective as an original. (f) Buyer agrees to indemnify and hold Seller harmless from any and all claims, damages and liabilities arising from Buyer's breach of its representations and/or covenants set forth herein. AMOUNT SUBSCRIBED FOR $_______________________________________________ [The remainder of this page is intentionally left blank.] 20 21 IN WITNESS WHEREOF, the undersigned has executed this Agreement as of the date first set forth above. Official Signatory of Seller: American International Petroleum Corp. By:___________________________________________________________________________ Title:________________________________________________________________________ Accepted this ____ day of March, 1996 Official Signatory of Buyer: __________________________________________ By:_________________________________________________ Title:______________________________________________ Address of Buyer: ____________________________________________________ ____________________________________________________ ____________________________________________________ Fax No.:____________________________________________ Tel No.:____________________________________________ 21 22 EXHIBIT 4.4 - SCHEDULE A SCHEDULE OF HOLDERS AMERICAN INTERNATIONAL PETROLEUM CORPORATION 10% CONVERTIBLE SUBORDINATED REDEEMABLE DEBENTURES
HOLDER COUNTRY AMOUNT - ------ ------- ------ Rachel Shtern Israel $ 250,000 Madison Trading Switzerland $ 100,000 Pokaras, Inc. Switzerland $ 300,000 Shalom Steinberg Israel $ 200,000 RBB Bank AG Austria $ 650,000
22 EX-10.19 5 SUBORDINATION AND STAND-BY AGREEMENT 1 EXHIBIT 10.19 SUBORDINATION AND STANDBY AGREEMENT This Subordination and Standby Agreement ("Agreement") is executed by and among NATIONSBANK OF TEXAS, N.A. ("NationsBank"), GOLD LINE REFINING, LTD., a Texas limited partnership ("Debtor") and CITIZENS BANK AND TRUST COMPANY, a Missouri bank ("Citizens Bank"), effective as of the effective date specified hereinbelow, as follows: Definitions "Citizens Bank" means Citizens Bank and Trust Company, a Missouri bank with its principal place of business located in Chillicothe, Missouri. "Citizens Bank Letter of Credit" means the certain Letter of Credit dated on or about even date herewith issued by Citizens Bank for the account of Debtor and for the benefit of NationsBank in the face amount of $1,700,000.00, and any and all renewals, extensions, amendments, modifications, supplements or replacements thereof. "Citizens Bank Obligations" means all obligations and indebtedness, including without limitation reimbursement obligations, accrued interest, fees, costs, expenses and other amounts now or hereafter owing by Debtor to Citizens Bank under the Citizens Bank Reimbursement Agreement, or otherwise in connection with the Citizens Bank Letter of Credit, and any and all renewals, amendments, modifications or extensions thereof. "Citizens Bank Reimbursement Agreement" means, collectively, the certain Loan and Reimbursement Agreement dated as of November 2, 1990 by and among Debtor, Citizens Bank and Guarantors, as amended by (i) the certain First Amendment and Supplement to Loan and Reimbursement Agreement dated as of November 14, 1990 among the same parties, (ii) the certain Second Amendment and Supplement to Loan and Reimbursement Agreement dated as of April 15, 1991 among the same parties, and (iii) the certain letter dated November 7, 1991 from Citizens Bank to Debtor and Guarantors (excluding Gold Line Services, Inc.), and (iv) the certain Third Amendment and Supplement to Loan and Reimbursement Agreement dated as of March 22, 1995, among the same parties (excluding Gold Line Services, Inc.), and any and all other agreements or instruments between Borrower and Citizens Bank in respect of the Citizens Bank Letter of Credit, and any and all renewals, amendments, modifications, extensions or replacements thereof, respectively, provided, that "Citizens Bank Reimbursement Agreement" does not include any guaranty, pledge agreement, security agreement or other agreement between Citizens Bank and any Guarantor (other than Earl L. Thomas) to which Debtor is not a party and under which neither Debtor nor any of its property are bound. "Debtor" means Gold Line Refining, Ltd., a Texas limited partnership with its principal place of business located at 7324 Southwest Freeway, Suite 600, Houston, Texas 77074, "Guarantor" means any of Gold Line Services, Inc., a Texas corporation, JWP Capital, Inc., a Texas corporation, Marceline Investors, Inc., a Missouri corporation, Earl L. Thomas (in his capacity as a party to any agreements with Citizens Bank) and wife Rosiland H. Thomas, Jerry W. Porter and wife Mary A. Porter, Don O. Walsworth and wife Audrey Walsworth, and "Guarantors" collectively means all of such parties. "NationsBank" means NationsBank of Texas, N.A., a national bank with its principal place of business located at NationsBank Plaza, 901 Main Street, Dallas, Texas 75202. "NationsBank Collateral" means all "Collateral" defined in the NationsBank Credit Agreements (which definition hereby is incorporated herein by references, including without limitation all of Debtor's accounts, chattel paper, general intangibles, inventory, equipment, documents and instruments, now owned and hereafter acquired, and all proceeds of any of the foregoing (provided, that notwithstanding the terms of the NationsBank Credit Agreements, as the same may be amended from time to time, for purposes of this Agreement "NationsBank Collateral" does not include any property owned by any Guarantor other than Earl L. Thomas and in which Debtor has no interest). "NationsBank Credit Agreements" means the certain Financing and Security Agreement dated on or about even date herewith between NationsBank and Debtor and all "Loan Documents" as defined therein, as the same may be amended, supplemented or extended from time to time. "NationsBank Obligations" means all "Obligations" defined in the NationsBank Credit Agreements (which definition hereby is incorporated herein by reference, including without limitation all obligations and indebtedness for loans, accrued interest, fees, costs and expenses 1 2 under the NationsBank Credit Agreements, as the same may be renewed, modified, or extended (provided, that notwithstanding the terms of the NationsBank Credit Agreements, as the same may be amended from time to time, for purposes of this Agreement "NationsBank Obligations" is limited to NationsBank Obligations owing by Debtor). Recitals It is proposed that Debtor and NationsBank enter into the NationsBank Credit Agreements to establish a credit facility for loans by NationsBank to Debtor, subject to the terms thereof, reference to which is hereby made. The NationsBank Obligations will be secured by continuing security interests granted by Debtor to NationsBank in the NationsBank Collateral. In connection with the NationsBank Credit Agreements, NationsBank has required Debtor to deliver to NationsBank the Citizens Bank Letter of Credit, in form satisfactory to NationsBank, as additional credit in support of the credit facilities available to Debtor under the NationsBank Credit Agreement, provided, that all reimbursement and repayment obligations in connection therewith now or hereafter owing by Debtor to the issuer of such letter of credit be subordinated in right of payment and claim to the prior payment and performance in full of the NationsBank Obligations. Debtor proposes to deliver to NationsBank the Citizens Bank Letter of Credit. As a condition to entering into the NationsBank Credit Agreements, NationsBank has required that the Citizens Bank Obligations be subordinated as provided hereinbelow. Citizens Bank acknowledges that it will benefit from its issuance of the Citizens Bank Letter of Credit and the credit accommodations available to Debtor under the NationsBank Credit Agreements, and has determined that execution of this Agreement is in its best interest. NOW THEREFORE, for value consideration, the receipt of which hereby is acknowledged, and in consideration of the mutual benefits and agreements provided herein, Citizens Bank, Debtor and NationsBank hereby agree as follows: Agreement 1. Citizens Bank and Debtor each agrees that the Citizens Bank Obligations shall be and hereby are deemed to be fully subordinated in right of payment and claim in favor of the NationsBank Obligations. Until termination of this Agreement, Citizens Bank agrees that it will not request, demand, accept or receive from Debtor, and Debtor agrees that it will not pay or deliver to Citizens Bank, whether by payment, prepayment, setoff or otherwise, any payment, amount, credit or reduction of all or any part of the Citizens Bank Obligations, of any security therefor, except as specifically allowed pursuant to paragraph 2 below. 2. Notwithstanding any other provision of this Agreement, Debtor may pay to Citizens Bank and Citizens Bank may receive and retain from Debtor Citizens Bank's customary letter of credit fees in consideration of, and reimbursement of reasonable attorneys fees and reimbursable disbursements incurred in connection with, Citizens Bank's issuance of the Citizens Bank Letter of Credit as specifically provided in the Citizens Bank Reimbursement Agreement and provided further, that, subject to paragraph 13, Citizens Bank may accept and receive from any Guarantor (other than Earl L. Thomas) and any Guarantor (other than Earl L. Thomas) may pay and deliver to Citizens Bank, by way of payment, prepayment, set off or otherwise, any payment amount, credit or reduction of any and all Citizens Bank Obligations guaranteed by any such Guarantor, and Citizens Bank may foreclose upon and may pursue any other remedies it may have, at law or in equity, against any Guarantor (other than Earl L. Thomas) and any and all assets and collateral pledged by any such Guarantor to Citizens Bank to secure such Guarantor's guarantee: and Citizens Bank shall have no obligation to pay to NationsBank, or otherwise account to NationsBank, for any such amount. 3. Until termination of this Agreement, Citizens Bank and Debtor each agrees with NationsBank as follows: a. In the event of any liquidation or dissolution of Debtor, whether partial of complete, voluntary or involuntary, by operation of law or otherwise, or in the event of any receivership, insolvency or bankruptcy proceedings by or against Debtor under any bankruptcy or insolvency laws, any and all payments or distributions of any kind or character made by or on behalf of Debtor or its estate, whether in cash, securities, or other property, which thereafter shall be payable or deliverable to Citizens Bank upon or with respect to any portion of the Citizens Bank Obligations shall immediately be paid or delivered directly to NationsBank for application (as liquidated) in reduction of the NationsBank Obligations, whether or not then due or mature, in such manner as NationsBank shall determine in its sole discretion; 2 3 b. In the event of any bankruptcy or insolvency proceedings or any assignment to or for the benefit of creditors respecting Debtor, or in the event a receiver is appointed for Debtor or its property, NationsBank shall have the right to file a claim in such proceedings respecting it rights under this Agreement, and to collect and receive all distributions that may be declared or become payable under the Citizens Bank Obligations (up until full payment of the NationsBank Obligations). c. Citizens Bank shall not assign or transfer the Citizens Bank Obligations or the Citizens Bank Reimbursement Agreement, or any claim thereunder, unless such assignment or transfer is made by Citizens Bank and accepted by the assignee or transferee expressly in writing expressly subject to this Agreement after prior written notice thereof to NationsBank; and d. Citizens Bank shall not make demand on Debtor under the Citizens Bank Reimbursement Agreement, or file suit to enforce or collect same, without the prior written consent of NationsBank. 4. Notwithstanding anything to the contrary (if any) as may be provided in the Citizens Bank Reimbursement Agreement, until termination of this Agreement no payment of any Citizens Bank Obligations shall be demanded by Citizens Bank or made by Debtor, except as expressly allowed by paragraph 2 of this Agreement. Any payment of the Citizens Bank Obligations except as expressly allowed by paragraph 2 of this Agreement are expressly prohibited without the prior written consent of NationsBank. Citizens Bank and Debtor agree, and represent to NationsBank, that there are no Citizens Bank Obligations except as evidenced by the Citizens Bank Reimbursement Agreement. 5. The Citizens Bank Reimbursement Agreement hereby is deemed to be subject to all of the terms and provisions of this Agreement. The execution and delivery by Citizens Bank of this Agreement shall be deemed to amend and supplement the Citizens Bank Reimbursement Agreement to the extent provided herein, provided, that such amendment and supplement shall not inure to the benefit of or be enforceable by any Guarantor. Debtor and Citizens Bank agree that they will not modify, amend, restructure, renew, or otherwise change the Citizens Bank Reimbursement Agreement, or any of the terms thereof, or the obligations evidenced thereby, without the prior written consent of NationsBank, other than amendments that do not change the terms of payment or increase the amount of Debtor's obligations or the extent of Citizens Bank's interests thereunder, it being understood that all of such amended or changed terms shall remain subject to the terms of this Agreement. 6. Citizens Bank and Debtor each agrees that NationsBank's continuing rights in and to the NationsBank Collateral are and shall be first, senior and prior to any rights now or hereafter claimed by Citizens Bank with respect to any property included therein. Any and all security interests, liens, mortgages, or other rights now or hereafter claimed by Citizens Bank with respect to any of such property shall be and hereby are expressly subordinated and made junior to any and all security interests, liens, mortgages, or rights now or hereafter claimed by NationsBank with respect to the NationsBank Collateral. Citizens Bank represents that it has no interest in the NationsBank Collateral other than as provided by the Citizens Bank Reimbursement Agreement as the same exists as of the effective date of this Agreement, and Debtor and Citizens Bank each agrees that Debtor hereafter shall not grant to Citizens Bank any additional security interest, lien or other interest in any property included within the NationsBank Collateral without the prior written consent of NationsBank. 7. Until termination of this Agreement Citizens Bank agrees that it will not (i) take any action to foreclose, repossess, marshal, control, or exercise remedies with respect to any property included within the NationsBank Collateral, or take any other action with respect to Debtor or any of its property which could reasonably be expected to interfere with the daily operation of Debtor's business or (ii) make any contact or communications, directly or indirectly (including but not limited to notification or confirmation) with any account debtor or obligor on any accounts, chattel paper, instruments, general intangibles or other property included within the NationsBank Collateral, without the prior written consent of NationsBank. Citizens Bank agrees that if it from time to time comes into possession of any payments, distributions, property, security, or proceeds in respect of obligations owing by any such account debtors, all of such amount shall be held in trust for the benefit of NationsBank and shall be paid forthwith to NationsBank for the account of Debtor. 8. In the event any payment, prepayment, distribution, instruments, checks or other items, property or security, or proceeds thereof, at any time is received by Citizens Bank from Debtor, or in respect of any property of Debtor, in respect of the Citizens Bank Obligations other than as expressly allowed pursuant to paragraph 2 above, Citizens Bank agrees forthwith to deliver same to NationsBank in the form received, with any necessary endorsement or assignment by Citizens Bank (without recourse, which Citizens Bank agrees to provide upon request by NationsBank), for application in reduction of the NationsBank Obligations, whether or not due or mature, and until so delivered, the same shall be held in trust by Citizens Bank for the benefit of NationsBank as the property of NationsBank, for the account of Debtor. In the absence of any necessary endorsement or assignment 3 4 by Citizens Bank, NationsBank is irrevocably appointed as attorney-in-fact with full power of substitution, coupled with an interest, with full authority for the limited purpose to make any such endorsement or assignment on behalf of Citizens Bank as may be necessary to collect or enforce same (provided, that it is agreed that any such endorsement or assignment shall be deemed to be without recourse against, or warranty by, Citizens Bank). 9. It is understood and agreed that NationsBank may release any person or entity now or hereafter liable upon any of the NationsBank Obligations, or permit substitutions, withdrawals or release of any of the NationsBank Collateral or any other security or collateral at any time securing same, or renew, extend or accept partial payments upon any of the NationsBank Obligations, or amend or modify the terms of any instrument or agreement evidencing or securing same, or any part thereof, in such manner and at such times from time to time, as NationsBank may determine in its sole discretion, without notice to or consent from Citizens Bank and without in any manner impairing the rights and obligations under this Agreement. NationsBank shall not at any time be required to institute suit or exercise or exhaust remedies against any person or entity obligated to pay any of the NationsBank Obligations, or against the NationsBank Collateral, the Citizens Bank Letter of Credit or any other security or credit support for the NationsBank Obligations, prior to exercising its rights or receiving the benefits of this Agreement. NationsBank shall be entitled to exercise and pursue rights and remedies, or defer or refrain from exercising same, from time to time, in such order and in such manner as NationsBank may determine in its sole discretion. 10. The subordinations and priorities specified in this Agreement are applicable irrespective of the validity or the time or order of attachment or perfection of the security interests referred to herein, the time or order of filing of financing statements, the acquisition of purchase money or other security interests, or the time of giving or failure to give notice with respect to any purchase money or other security interests. Without limiting the foregoing, Citizens Bank agrees that, contemporaneously upon execution hereof, Citizens Bank shall deliver to NationsBank for filing an executed UCC-3 statement of amendment relative to each presently effective financing statement maintained by Citizens Bank covering any property included within the NationsBank Collateral, therein expressly stating as follows: "Secured Party's rights under the above referenced financing statement, and all interests claimed by Secured Party in the collateral described therein, are subordinate to the interests of NationsBank of Texas, N.A. as provided by the certain Subordination and Standby Agreement dated March 22, 1995 among Debtor, Secured Party NationsBank of Texas, N.A. (as may be amended from time to time), reference to which hereby is made." 11. This Agreement is an irrevocable and continuing agreement of subordination, and NationsBank may continue to rely upon same in lending money, extending credit, and making other financial accommodations to or for the account of Debtor, without notice to Citizens Bank, pursuant to the terms of any agreements now or hereafter existing between NationsBank and Debtor. 12. Debtor and NationsBank agree that, to the extent allowed by law, Citizens Bank shall be subrogated to all rights of NationsBank in respect of the NationsBank Obligations and the NationsBank Collateral to the extent of payments, if any, recovered by NationsBank from claims owing by Debtor to Citizens Bank as provided by paragraph 3(a) and paragraph 3(b), provided that Citizens Bank shall have no right to pursue or enforce any such subrogation rights, or demand or receive any payments in respect thereof, until termination of this Agreement, subject to the provisions of paragraph 15, and provided further, that NationsBank makes no representations or warranties in respect of the NationsBank Obligations, the NationsBank Collateral, Citizens Bank's subrogation rights, if any, or the priority thereof, in respect of any person. 13. Citizens Bank and Debtor each agrees that all obligations and indebtedness now or hereafter owing to Citizens Bank by Earl L. Thomas (Earl Thomas) or any other person or entity serving as general partner of Debtor shall be and hereby are deemed to be fully subordinated in right of payment and claim in favor of the NationsBank Obligations. Until termination of this Agreement, Citizens Bank agrees that it will not request, demand, accept or receive from Earl Thomas or any such other person or entity serving as general partner of Debtor, whether by payment, prepayment, suit, setoff or otherwise, any payment, amount, credit or reduction of, or in respect of, all or any part of such obligations and indebtedness owing to Citizens Bank, or the Citizens Bank Obligations, or any security therefor. Until termination of this Agreement Citizens Bank agrees that it will not take any action to foreclose, repossess, marshal, control, or exercise remedies with respect to any property (including without limitation the general partner interest) now or hereafter owned by Earl Thomas or any other person or entity serving as general partner of Debtor, or take any other action with respect to Earl Thomas or such other person or entity which could reasonably be expected to interfere with the daily operation of Debtor's business. Subject to the foregoing, however, nothing in this Agreement shall restrict the rights and remedies of Citizens Bank against any Guarantor other than Earl Thomas who is not now or hereafter a general partner of Debtor. 4 5 14. Any notice or demand by one party to another under this Agreement shall be in writing and shall be deemed made and received upon delivery (via personal delivery, courier, telecopy or other electronic transmission) to the address specified below, or on the third day following deposit in the United States mail, postage prepaid, addressed as specified below: Citizens Bank: Citizens Bank and Trust Company 700 Jackson Chillicothe, Missouri 64601-0050 Attention: Mr. Edward Douglas, President Debtor: Gold Line Refining, Ltd. 7324 Southwest Freeway Suite 600, Houston, Texas 77074 Attention: Mr. Earl Thomas, General Partner NationsBank: NATIONSBANK OF TEXAS, N.A. P.O. Box 830732 Dallas, TX 75283-0732 Attn: Business Credit/Regional Manager--URGENT Address for hand delivery: NATIONSBANK OF TEXAS, N.A. NationsBank Plaza, 6th Floor 901 Main Street Dallas, TX Attn: Business Credit/Regional Manager--URGENT 15. This Agreement shall terminate upon payment in full of the NationsBank Obligations and termination of the NationsBank Credit Agreements; provided however, that in the event, following any such termination, any amount previously applied in reduction of the NationsBank Obligations is subsequently set aside, avoided, declared invalid or recovered by Borrower or any trustee or in bankruptcy, or in the event NationsBank is otherwise required to refund or repay any such amount pursuant to any applicable law, then the NationsBank Obligations, and all rights of NationsBank under the NationsBank Credit Agreements, shall automatically be deemed to be reinstated to the extent of such amount and the same shall continue to be secured by the NationsBank Collateral as if such amount had not been so applied; and in such event, all rights and obligations under this Agreement shall likewise be reinstated and, until such amount has been recovered by NationsBank, all amounts, if any, received by Citizens Bank in respect of the Citizens Bank Obligations after such termination likewise shall be governed by the provisions of this Agreement as if the same had not been terminated. 16. No waiver shall be deemed to have been made by NationsBank of any of its rights hereunder unless such waiver is in writing and signed by NationsBank, and any such written waiver shall be limited to the specific instance specified therein. The rights of NationsBank hereunder are cumulative of all other rights of NationsBank under any other agreement with Debtor and Citizens Bank, respectively, or as otherwise provided by law, 17. If any provision of this Agreement is for any reason held invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability will not affect any other provision of this Agreement. 18. This Agreement is binding upon and inures to the benefit of the parties hereto and their respective assignees, transferees, and successors. THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS. 19. This Agreement may be executed in counterparts, each of which shall be an original, but all of which, taken together, shall constitute one and the same instrument. A telecopy of any such executed counterpart shall be deemed valid as an original. 20. This Agreement is binding upon, and is solely for the benefit of, NationsBank, Citizens Bank and Debtor, and their respective successors and assigns and no other person shall have any rights or benefits under this Agreement. 5 6 Signed effective as of the 22nd day of March, 1995. NATIONSBANK OF TEXAS, N.A. By: /s/Dan Lane ------------------------------------ Dan Lane Vice President CITIZENS BANK AND TRUST COMPANY By: /s/Edward D. Douglas ------------------------------------ Edward D. Douglas President GOLD LINE REFINING, LTD. By: /s/Earl Thomas ------------------------------------ Earl Thomas, General Partner THE STATE OF TEXAS ) ) COUNTY OF DALLAS ) BEFORE ME, the undersigned authority, on this day personally appeared Dan Lane, known to me to be the person and officer whose name is subscribed to the foregoing instrument, and acknowledged to me that the same was the act of said NATIONSBANK OF TEXAS, N.A. and that he executed the same for the purposes and considerations therein expressed. GIVEN UNDER MY HAND AND SEAL OF OFFICE this the 22nd day of March, 1995. /s/Sherri D. Bender ------------------------------------ NOTARY PUBLIC IN AND FOR THE STATE OF TEXAS My Commission Expires: - ------------------------------------ /s/Sherri D. Bender [STAMP] Notary Public, State of Texas, My Commission Expires 03/14/96 ------------------------------------ Printed Name THE STATE OF MISSOURI ) ) COUNTY OF LIVINGSTON ) BEFORE ME, the undersigned authority, on this day personally appeared Edward D. Douglas, known to me to be the person and officer whose name is subscribed to the foregoing instrument, and acknowledged to me that the same was the act of said Citizens Bank and Trust Company and that he executed the same for the purposes and considerations therein expressed. GIVEN UNDER MY HAND AND SEAL OF OFFICE this the 20th day of March, 1995. /s/Rosemary Beck ------------------------------------ NOTARY PUBLIC IN AND FOR THE STATE OF MISSOURI My Commission Expires: May 10, 1996 - ------------------------- Rosemary Beck ------------------------------------ (Printed Name of Notary) 6 7 THE STATE OF TEXAS ) ) COUNTY OF DALLAS ) BEFORE ME, the undersigned authority, on this day personally appeared Earl Thomas, known to me to be the person whose name is subscribed to the foregoing instrument, and acknowledged to me that the same was the act of said Gold Line Refining, Ltd. and that he executed the same for the purposes and considerations therein expressed. GIVEN UNDER MY HAND AND SEAL OF OFFICE this the 22 day of March, 1995. /s/Sherri D. Bender ------------------------------- NOTARY PUBLIC IN AND FOR THE STATE OF TEXAS My Commission Expires: - ------------------------- [STAMP] Notary Public, State of Texas, My Commission Expires 03/14/96 ------------------------------------ Printed Name 8 THIRD AMENDMENT AND SUPPLEMENT TO THE LOAN AND REIMBURSEMENT AGREEMENT THIS THIRD AMENDMENT AND SUPPLEMENT TO THE LOAN AND REIMBURSEMENT AGREEMENT (this "Third Amendment"), dated as of March 22, 1995, is made by and among Gold Line Refining, Ltd., a Texas limited partnership (the "Borrower"), JWP Capital, Inc., a Texas corporation ("JWP"), Marceline Investors, Inc., a Missouri corporation ("Marceline"), Earl L. and Rosiland H. Thomas, husband and wife (both singularly and collectively, "Thomas"), Jerry W. and Mary A. Porter, husband and wife (both singularly and collectively, "Porter"), Don O. and Audrey H. Walsworth, husband and wife (both singularly and collectively, "Walsworth") (JWP, Marceline, Thomas, Porter and Walsworth are collectively referred to herein as the "Guarantors"), and Citizens Bank and Trust Company, a Missouri bank (the "Bank"). RECITALS: A. The Borrower, the Guarantors, Gold Line Services, Inc., a Texas corporation ("Gold Line Services"), and the Bank are parties to the Loan and Reimbursement Agreement, dated as of November 2, 1990 (the "Original Agreement"), as amended and supplemented by (i) the First Amendment and Supplement to Loan and Reimbursement Agreement, dated November 14, 1990 (the "First Amendment"), by and among the Borrower, the Guarantors, Gold Line Services and the Bank, (ii) the Second Amendment and Supplement to the Loan and Reimbursement Agreement, dated as of April 15, 1991 (the "Second Amendment"), by and among the Borrower, the Guarantors, Gold Line Services and the Bank, and (iii) that certain letter, dated November 7, 1991 (the "Letter Supplement"), from the Bank to the Borrower and the Guarantors. B. The Borrower, the Guarantors and the Bank now desire to enter into this Third Amendment to amend and supplement the Original Agreement, as previously amended and supplemented to date (the Original Agreement, as amended by the First Amendment, the Second Amendment, the Letter Supplement and this Third Amendment, is referred to herein as the "Agreement"). C. The Borrower has entered or is about to enter into with NationsBank of Texas, N.A., a national bank ("NationsBank"), a Financing and Security Agreement, dated on or about even date herewith (collectively, including all "Loan Documents" as defined therein, the "NationsBank Credit Agreements"), pursuant to which the Borrower will obtain up to $15 million in new financing from NationsBank. 9 D. The Borrower has entered or is about to enter into with MG Trade Finance Corp. ("MG") certain amended instruments and agreements evidencing existing loans to the Borrower, each dated on or about even date herewith (collectively, the "Amended MG Agreements"), to facilitate the execution and delivery of the NationsBank Credit Agreements. E. The Borrower, the Guarantors and the Bank now desire to amend and supplement (i) the Original Agreement, as previously amended and supplemented to date, (ii) the Security Agreement, as previously amended and supplemented to date, and (iii) the Thomas Security Agreement, as previously amended and supplemented to date, to facilitate the execution and delivery of the NationsBank Credit Agreements, on the terms and subject to the conditions set forth herein. F. The Borrower desires to have the Bank issue, and the Bank is willing to issue, an irrevocable standby letter of credit, in the principal amount of $1,700,000, in favor of NationsBank, for the account of the Borrower, substantially in the form attached hereto as Exhibit A (the "NationsBank Additional Letter of Credit"), on the terms and subject to the conditions set forth herein. G. The Borrower desires to have the Bank enter into, and the Bank is willing to enter into, a Subordination and Standby Agreement with NationsBank, substantially in the form attached hereto as Exhibit B (the "NationsBank Subordination Agreement"), on the terms and subject to the conditions set forth herein. H. The Borrower desires to have the Bank enter into, and the Bank is willing to enter into, a third letter agreement with MG and American International Refinery, Inc. ("AIRI"), substantially in the form attached hereto as Exhibit C (the "Third MG Letter Agreement"), on the terms and subject to the conditions set forth herein. AGREEMENT ACCORDINGLY, in consideration of the premises set forth above, the mutual covenants and agreements set forth herein and for other good and valuable consideration, receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Definitions. All capitalized terms used herein and not otherwise defined herein shall have the meaning given to each such term in the Original Agreement, as previously amended and supplemented to date. 2 10 2. NationsBank Additional Letter of Credit. (a) Upon satisfaction of the conditions set forth in paragraph 13 of this Third Amendment, the Bank will (i) execute and issue the NationsBank Additional Letter of Credit in favor of NationsBank for the account of the Borrower and (ii) deliver the NationsBank Additional Letter of Credit to NationsBank. (b) The Borrower and the Guarantors hereby acknowledge and agree that the NationsBank Additional Letter of Credit is an "Additional Letter of Credit," as contemplated by Section 3.1(b) of the Agreement, and as such is subject to all of the terms and conditions of the Agreement. 3. NationsBank Subordination Agreement. Upon satisfaction of the conditions set forth in paragraph 13 of this Third Amendment, the Bank shall execute and deliver to NationsBank the NationsBank Subordination Agreement. 4. Third MG Letter Agreement. Upon satisfaction of the conditions set forth in paragraph 13 of this Third Amendment, the Bank shall execute and deliver to MG the Third MG Letter Agreement. 5. Amendment of the Agreement. Upon satisfaction of the conditions set forth in paragraph 13 of this Third Amendment, the Borrower, the Guarantor and the Bank hereby amend and supplement the Original Agreement, as previously amended and supplemented to date, to provide that notwithstanding the terms and provisions of any representation, warranty, covenant, Default or Event of Default, condition or other term or provision in the Agreement: (a) the execution and delivery by the Borrower of the NationsBank Credit Agreements and the Amended MG Agreements, and the performance by the Borrower of its obligations under the NationsBank Credit Agreements and the Amended MG Agreements, shall not be, or result in, a breach of any representation, warranty or covenant, or any Default or Event of Default, under the Agreement, and this paragraph 5 shall supersede and take precedence over any representation, warranty, covenant, Default or Event of Default, condition or other term or provision in the Agreement otherwise inconsistent herewith, and (b) the Bank expressly consents to, and irrevocably waives any Default or Event of Default which, but for this paragraph 5, might have resulted from, the execution and delivery of the NationsBank Credit Agreements or the Amended MG Agreements, or the performance by the Borrower of its obligations under the NationsBank Credit Agreements or the Amended MG Agreements, or both. 3 11 6. Additional Amendments to the Agreement. Upon satisfaction of the conditions set forth in paragraph 13 of this Third Amendment, the Borrower, the Guarantors and the Bank further agree to amend and supplement the Original Agreement, as previously amended and supplemented to date, as follows: (a) Section 1.1 is hereby amended by deleting the definition of the term "Letter of Credit" the first time it appears in such section (but retaining the definition of such term the second time it appears in such section). (b) Section 6.10 is hereby deleted in its entirety. (c) Section 7.4 is hereby amended by deleting said Section 7.4 in its entirety and replacing it with the following: Section 7.4. Distributions to Partners. (a) The Borrower shall not make any distributions with respect to, or redeem or otherwise acquire, any general or limited partnership interest (i) except as expressly set forth in Section 7.4(b), without the prior written consent of the Bank or (ii) which would be in violation of the Borrower's covenant (the "NationsBank Capital and Surplus Retention Covenant") with NationsBank set forth in Section 6.23 of the NationsBank Credit Agreements. (b) Without the prior written consent of the Bank, during any fiscal year the Borrower may make periodic cash distributions to the partners in an amount not greater in the aggregate than 40% of the Borrower's year to date net income to be used by the partners solely for the payment of federal and state income taxes. (d) Section 8.1 is amended by adding the word "or" at the end of subsection 8.1(m), and inserting after such subsection (m) and prior to the flush language immediately following such subsection (m) the following new subsection: (n) An Event of Default (as defined in the NationsBank Credit Agreements) shall be declared by NationsBank under the NationsBank Credit Agreements. 7. Amendment of the Security Agreement. Upon satisfaction of the conditions set forth in paragraph 13 of this Third Amendment, the Bank and the Borrower hereby amend and supplement the Security Agreement, as previously amended and supplemented to date, to provide that, notwithstanding the terms and provisions of any representation, warranty, covenant, default 4 12 or event of default, condition or other term or provision in the Security Agreement: (a) the execution and delivery by the Borrower of the NationsBank Credit Agreements and the Amended MG Agreements, and the performance by the Borrower of its obligations under the NationsBank Credit Agreements and the Amended MG Agreements, shall not be, or result in, a breach of any representation, warranty, covenant, or any default or event of default, under the Security Agreement, and this paragraph 7 shall supersede and take precedence over any representation, warranty, covenant, default or event of default, condition or other term or provision in the Security Agreement otherwise inconsistent herewith; and (b) the Bank expressly consents to, and irrevocably waives any default or event of default under the Security Agreement which, but for this paragraph 7, might have resulted from, the execution and delivery of the NationsBank Credit Agreements or the Amended MG Agreements, or the performance by the Borrower of its obligations under the NationsBank Credit Agreements or the Amended MG Agreements, or both. 8. Amendment of the Thomas Security Agreement. Upon satisfaction of the conditions set forth in paragraph 13 of this Third Amendment, the Bank and Thomas hereby amend and supplement the Thomas Security Agreement, as previously amended and supplemented to date, to provide that, notwithstanding the terms and provisions of any representation, warranty, covenant, default or event of default, condition or other term or provision in the Thomas Security Agreement: (a) the execution and delivery by Thomas of the NationsBank Credit Agreements and the Amended MG Agreements, and the performance by Thomas of his obligations under the NationsBank Credit Agreements and the Amended MG Agreements, shall not be, or result in, a breach of any representation, warranty, covenant, or any default or event of default, under the Security Agreement, and this paragraph 8 shall supersede and take precedence over any representation, warranty, covenant, default or event of default, condition or other term or provision in the Thomas Security Agreement otherwise inconsistent herewith, and (b) the Bank expressly consents to, and irrevocably waives any default or event of default under the Thomas Security Agreement which, but for this paragraph 8, might have resulted from, the execution and delivery of such NationsBank Credit Agreements or the Amended MG Agreements, or the performance by Thomas of his obligations under such NationsBank Credit Agreements or the Amended MG Agreements, or both. 5 13 9. Waiver of Defaults. Upon satisfaction of the conditions set forth in paragraph 13 of this Third Amendment, the Bank hereby waives any and all Defaults and Events of Default which may exist on the date hereof; provided, however, that the Bank does not waive any Default or Event of Default which would also be (or with the giving of notice or the passage of time, or both, would become) an Event of Default (as defined in the NationsBank Credit Agreements) under the NationsBank Credit Agreements. 10. Certain Representations and warranties. The Borrower hereby makes to the Bank each and every representation and warranty made by the Borrower to NationsBank in the NationsBank Credit Agreements (the "NationsBank Representations and warranties"), and acknowledges and confirms that the NationsBank Representations and Warranties are representations and warranties made in the Agreement and are subject to Section 8.1(g) of the Agreement. 11. Affirmations by the Borrower and the Guarantors. (a) The Borrower hereby expressly represents, warrants, covenants and agrees that the Agreement and each of the Security Documents, in each case as previously amended and supplemented to date, is and remains a legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms; subject, however, to the provisions of this Third Amendment and the agreements contemplated hereby. (b) Each of the Guarantors hereby expressly represents, warrants, covenants and agrees that the Agreement and each Guaranty Document to which such Guarantor is a party, in each case as previously amended and as supplemented to date, is and remains a legal, valid and binding obligation of the Guarantor, enforceable against the Guarantor in accordance with its terms; subject, however, to the provisions of this Third Amendment and the agreements contemplated hereby. 12. Consents of the Borrower and the Guarantors. The Borrower and each of the Guarantors hereby expressly consents and agrees to: (a) the execution and delivery by the Borrower of the NationsBank Credit Agreements; (b) the execution and delivery by the Borrower of the Amended MG Agreements; and (c) the execution and delivery by the Bank of: (1) the NationsBank Additional Letter of Credit; 6 14 (2) the NationsBank Subordination Agreement; and (3) the Third MG Letter Agreement. 13. Conditions Precedent. The Bank shall have no obligations under this Third Amendment unless and until the following conditions have been met: (a) the Bank shall have received copies of this Third Amendment executed by the Borrower and each of the Guarantors; (b) the Bank shall have received a copy of the NationsBank Subordination Agreement duly executed by NationsBank; (c) the Bank shall have received a copy of the Third MG Letter Agreement duly executed by MG and AIRI; (d) the NationsBank Credit Agreements shall have been duly executed and delivered by all parties thereto; (e) the Borrower shall have paid or caused to be paid to the Bank the Bank's customary letter of credit fees, as provided in Section 3.2 of this Agreement, and all attorneys' fees and other expenses reasonably incurred by the Bank in connection with the negotiation, drafting, execution and delivery of this Third Amendment and the transaction documents completed hereby; (f) the Borrower shall have physically delivered and surrendered, or caused MG to have physically delivered and surrendered, to the Bank, the original Letter of Credit (Number 005056), originally dated November 18, 1990, issued by Commerce Bank of Kansas City, N.A. ("Commerce Bank"), for the joint account of the Borrower and the Bank and for the benefit of MG, in the original face amount of $2,500,000 (the "Commerce Letter of Credit"), with a remaining undrawn balance of $1,700,000, together with such releases and other documentation as Commerce Bank may reasonably request in order to effect the cancellation of the Commerce Letter of Credit; and (g) the Borrower shall have executed and delivered to this Bank such additional documents and instruments as the Bank may reasonably request to evidence and consummate the transactions contemplated by this Third Amendment. 14. Governing Law. This Third Amendment and all rights hereunder shall be governed by and construed in accordance with the laws of the State of Missouri. 15. Counterparts. This Third Amendment may be executed in any number of counterparts, all of which taken 7 15 together shall constitute one agreement, and any party hereto may execute this Third Amendment by signing any such counterpart. 16. Execution and Delivery Via Facsimile. The parties hereto agree that the Borrower and each Guarantor may execute and deliver this Third Amendment by executing an original or a facsimile copy of this Third Amendment and transmitting such executed copy via facsimile to the Bank at 816-646-5594, Attn: Edward D. Douglas. Each party that transmits an executed copy of this Third Amendment to the Bank via facsimile agrees (i) to be bound by the terms of this Third Amendment upon the Bank's receipt of such facsimile and (ii) to promptly deliver a hard copy of the executed copy of this Third Amendment to the Bank via courier for next day delivery. 8 16 IN WITNESS WHEREOF, the parties hereto have executed and delivered this Third Amendment as of the date first above written. GOLD LINE REFINING, LTD. By: /s/ Earl L. Thomas ------------------------------------ Name: Earl L. Thomas Title: General Partner JWP CAPITAL, INC. By: /s/ Jerry W. Porter ------------------------------------ Name: Jerry W. Porter Title: President MARCELINE INVESTORS, INC. By: ------------------------------------ Name: Don O. Walsworth Title: President /s/ Frank L. Thomas ------------------------------------------ Earl L. Thomas /s/ Rosiland H. Thomas ------------------------------------------ Rosiland H. Thomas /s/ Jerry W. Porter ------------------------------------------ Jerry W. Porter /s/ Mary A. Porter ------------------------------------------ Mary A. Porter /s/ Don O. Walsworth ------------------------------------------ Don O. Walsworth /s/ Audrey H. Walsworth ------------------------------------------ Audrey H. Walsworth CITIZENS BANK AND TRUST COMPANY By: /s/ Edward D. Douglas ------------------------------------ Name: Edward D. Douglas Title: President EX-10.20 6 INTERCREDITOR LETTER AGREEMENTS 1 EXHIBIT 10.20 LETTER AGREEMENT THIS AGREEMENT is made this 22nd day of March, 1995 by and among MG TRADE FINANCE CORP., a Delaware corporation ("MGTF"), CITIZENS BANK AND TRUST COMPANY, a Missouri bank ("CBTC") and AMERICAN INTERNATIONAL REFINERY, INC., a Louisiana corporation ("AIRI"). WITNESSETH: WHEREAS, MGTF is entering into a Subordination and Standby Agreement (the "MGTF Agreement") dated the date hereof, with Gold Line Refining, Ltd., a Texas limited partnership ("Gold Line") and NationsBank of Texas, N.A., a national bank ("NationsBank"), whereby the MGTF Obligations (as defined in the MGTF Agreement) shall be fully subordinated in right of payment and claim in favor of the NationsBank Obligations (as defined in the MGTF Agreement) and WHEREAS, CBTC is entering into a Subordination and Standby Agreement (the "CBTC Agreement") dated the date hereof, with Gold Line and NationsBank, whereby the CBTC Obligations (as defined in the CBTC Agreement) shall be fully subordinated in right of payment and claim in favor of the NationsBank Obligations (as defined in the CBTC Agreement); and WHEREAS, AIRI is entering into a Subordination and Standby Agreement (the "AIRI Agreement") dated the date hereof, with Gold Line and NationsBank, whereby the AIRI Obligations (as defined in the AIRI Agreement) shall be fully subordinated in right of payment and claim in favor of the NationsBank Obligations (as defined in the AIRI Agreement); and WHEREAS, CBTC is issuing an irrevocable standby letter of credit, dated on or about the date hereof, in favor of NationsBank as beneficiary (the "Letter of Credit") in the amount of $1,700,000 pursuant to the CBTC Agreement; and WHEREAS, MGTF, CBTC and AIRI each desire to make the agreements set forth herein; NOW, THEREFORE, in consideration of the mutual agreements herein contained and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereby agree as follows: 1. CBTC agrees that it will not take any action to amend or in any way alter, nor will it allow Gold Line or NationsBank to amend or in any way alter, the terms of the CBTC Agreement without the prior written consent of MGTF and AIRI. 2 2. AIRI agrees that it will not take any action to amend or in any way alter, nor will it allow Gold Line or NationsBank to amend or in any way alter, the terms of the AIRI Agreement without the prior written consent of MGTF and CBTC. 3. MGTF agrees that it will not take any action to amend or in any way alter, nor will it allow Gold Line or NationsBank to amend or in any way alter, the terms of the MGTF Agreement without the prior written consent of AIRI and CBTC. 4. CBTC agrees that it will not take any action to amend or in any way alter, nor will it allow NationsBank to amend or in any way alter, the terms of the Letter of Credit, except to provide extensions thereto, without the prior written consent of MGTF. 5. CBTC agrees that in the event that the Letter of Credit is about to expire without NationsBank having transferred the Letter of Credit to MGTF, then, to the extent that any of the MGTF Obligations existing on the date hereof are still outstanding, (i) CBTC will use its beat efforts to extend the term of the Letter of credit or (ii) immediately upon the expiration of the Letter of Credit will issue to MGTF a letter of credit for any undrawn portion under the Letter of Credit. 6. Each of CBTC and MGTF acknowledges and affirms the subordination provisions set forth in the terms of the letter agreement, dated on or about November 15, 1990, from CBTC to MGTF, as amended by the letter agreement, dated on or about April 15, 1991, from CBTC to MGTF. 7. The term of this Agreement shall terminate upon the termination of the MGTF Agreement, the CBTC Agreement and the AIRI Agreement. 8. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. 9. This Agreement is binding upon and inures to the benefit of the parties hereto and their respective assignees, transferees, and successors. 10. This Agreement may be executed in counterparts, each of which shall be an original, but all of which, taken together, shall constitute the one and the same instrument. -2- 3 IN WITNESS WHEREOF, each of MGTF, CBTC and AIRI have executed this Agreement by their duly authorized officers as of the date first above written. MG TRADE FINANCE CORP. By: /s/ William D. Rutherford ------------------------------------------ Name: William D. Rutherford Title: Director of Special Projects By: /s/ Tommy L. Byrd ------------------------------------------ Name: Tommy L. Byrd Title: Vice President CITIZENS BANK AND TRUST COMPANY By: /s/ Edward D. Douglas ------------------------------------------ Name: Edward D. Douglas Title: President AMERICAN INTERNATIONAL REFINERY, INC. By: /s/ George N. Faris ------------------------------------------ Name: George N. Faris Title: CEO -3- 4 LETTER AGREEMENT THIS AGREEMENT is made this 22nd day of March, 1995 by and among MG TRADE FINANCE CORP., a Delaware corporation ("Lender"), and AMERICAN INTERNATIONAL REFINERY, Inc., a Louisiana corporation ("Borrower"). WITNESSETH: WHEREAS, Lender and Borrower have entered into a Loan and Security Agreement dated as of December 4, 1990 (such agreement, as amended, the "Loan Agreement") ; and WHEREAS, Borrower is entering into a Subordination and Standby Agreement (the "AIRI Agreement"), dated the date hereof, with Gold Line Refining, Ltd., a Texas limited partnership ("Gold Line") and NationsBank of Texas, N.A., a national bank; and WHEREAS, Lender is entering into a Subordination and Standby Agreement (the "MGTF Agreement"), dated the date hereof, with Gold Line and NationsBank; and WHEREAS, capitalised terms used herein but not defined shall have the meanings assigned to such terms in the Loan Agreement; and WHEREAS, Lender and Borrower each desire to make the agreements set forth herein; NOW, THEREFORE, in consideration of the mutual agreements herein contained and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereby agree as follows: 1. Notwithstanding anything to the contrary contained in the Loan Agreement, Lender and Borrower hereby agree that the Termination Date of the Loan shall be March 31, 1998; 2. Notwithstanding anything to the contrary contained in the Loan Agreement, Lender and Borrower hereby agree that Borrower will pay to Lender fifty percent (50%) of all lease rental payments received by Borrower pursuant to the Gold Line Lease. Any lease rental payments received by Borrower pursuant to this paragraph 2 shall be applied first to accrued interest on the Loan and then to outstanding principal; provided, however, that Borrower will pay to Lender on the last day of each month accrued but unpaid interest due for such month. 5 3. Notwithstanding anything to the contrary contained in the Loan Agreement, Lender and Borrower hereby agree that Borrower will pay to Lender fifty percent (50%) of all payments received by Borrower pursuant to the AIRI Agreement. Any payments received by Borrower pursuant to this paragraph 3 shall be applied towards repayment of the outstanding principal of the Loan. 4. Lender and Borrower hereby agree that to the extent that payments made by Gold Line pursuant to the AIRI Agreement and the MGTF Agreement are insufficient to cover the amounts due to AIRI and MGTF on the AIRI Note (as defined in the AIRI Agreement) and the MGTF Note (as defined in the MGTF Agreement), respectively, any such payments made shall be shared pro rata by AIRI and MGTF in proportion to the amounts due under the AIRI Note and the MGTF Note, respectively. 5. Notwithstanding anything to the contrary contained in the Loan Agreement, Lender and Borrower hereby agree that Borrower will pay to Lender interest on the Loan at a fluctuating rate which is equal to one percent (1%) per annum above Prime Rate. 6. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. 7. This Agreement is binding upon and inures to the benefit of the parties hereto and their respective assignees, transferees, and successors. 8. This Agreement may be executed in counterparts, each of which shall be an original, but all of which, taken together, shall constitute the one and the same instrument. -2- 6 IN WITNESS WHEREOF, Lender and Borrower have executed this Agreement by their duly authorized officers as of the date first above written. MG TRADE FINANCE CORP. By: /s/ William D. Rutherford ------------------------------------------ Name: William D. Rutherford Title: Director of Special Projects By: /s/ Tommy L. Byrd ------------------------------------------ Name: Tommy L. Byrd Title: Vice President AMERICAN INTERNATIONAL REFINERY, INC. By: /s/ George N. Faris ------------------------------------------ Name: George N. Faris Title: CEO -3- EX-10.22 7 LETTER AMENDING PROMISSORY NOTE 1 EXHIBIT 10.22 February 9, 1996 Mr. Earl Thomas, Managing General Partner Gold Line Refining, Ltd. 7324 Southwest Freeway, Suite 600 Houston, Texas 77074 Re: Proposed Modification of Promissory Note dated as of March 15, 1996 Dear Earl: Reference is made to your letter dated February 6, 1996 and to our recent discussions relating to the proposed modification to the promissory note (the "Promissory Note") dated as of March 15, 1995 drawn by Gold Line Refining, Ltd. ("Gold Line") to the order of American International Refinery, Inc. ("AIRI") in the principal amount of One Million Eight Hundred One Thousand Four Hundred Sixty-Four and 13/100 ($1,801,464.13). AIRI is willing to modify the Promissory Note and the Promissory Note shall be deemed modified to read as set forth in Exhibit "A" hereto ("Modified Note") upon the satisfaction by the respective times set forth therein of the conditions set forth below: 1. Payment by February 29, 1996 pursuant to the terms of the Amended and Restated Lease Agreement effective the 15th day of March 1995 by and between AIRI and Gold Line (the "Lease") of $214,004, representing 1995 property taxes. 2. Payment of the rental due pursuant to Sections 3.2 and 3.6 of the Lease for the month of January of $125,582 as soon as possible, but in no event later than the end of business on February 20, 1996. 3. Receipt by Gold Line of April 1996 contract from the DFSC ("DFSC Contract") by no later than March 31, 1996. 4. Gold Line's execution and delivery of the Modified Note simultaneously with its acknowledgement to this letter. 2 Mr. Earl Thomas February 9, 1996 Page 2 In partial consideration of the foregoing, Gold Line covenants to process at AIRI's Lake Charles Louisiana refinery all feedstock necessary to satisfy any DFSC contract obtained by it during the term of the Lease, in accordance with the provisions thereof (the "Processing Covenant"). Snow Becker Krauss, P.C. (the "Escrow Agent") shall hold the Promissory Note and the Modified Note in escrow. Upon satisfaction of the conditions set forth in (1) through (4) above, the Escrow Agent shall release the Promissory Note to Gold Line marked cancelled and the Modified Note to AIRI. If AIRI notifies the Escrow Agent that the conditions set forth above are not satisfied, Escrow Agent shall release the Promissory Note to AIRI and return the Modified Note to Gold Line marked NULL AND VOID. The release of the Promissory Note does not modify, waive or release Gold Line's obligation under its Processing Convenant. The execution of this letter agreement does not modify the Lease or any other agreement to which both Gold Line and AIRI, and if applicable, additional persons, are parties. If the above accurately sets forth our understanding, pleas acknowledge in the space provided below, at which time this letter agreement shall be binding upon the parties. Very truly yours, AMERICAN INTERNATIONAL REFINERY, INC. By: /s/ George N. Faris ------------------------------- Dr. George N. Faris President Agreed and Accepted: Gold Line Refining, Ltd. By: /s/ Earl Thomas ------------------------------------ Earl Thomas Managing General Partner With respect to Acting as Escrow Agent: Snow Becker Krauss, P.C. By: -------------------------------------- EX-27.1 8 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 388,441 0 3,112,594 2,039,041 504,953 2,514,456 52,593,561 22,502,472 32,640,362 5,916,999 5,432,671 0 0 1,976,474 19,314,218 32,640,362 1,270,164 2,811,308 432,440 432,440 4,968,760 711,122 1,037,308 (4,338,322) 0 0 0 0 0 (4,338,322) (0.02) 0
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