-----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, Nm3F3j4tGfshfpImaHlkZPi65SpL3GXqqwJxozRGx9Yx5pcIPqxoVK7/RG/gYL9a Qy9oGjxDN4cQ5zz3OAseXQ== 0000950168-97-000957.txt : 19970417 0000950168-97-000957.hdr.sgml : 19970417 ACCESSION NUMBER: 0000950168-97-000957 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970416 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN INTERNATIONAL PETROLEUM CORP /NV/ CENTRAL INDEX KEY: 0000799119 STANDARD INDUSTRIAL CLASSIFICATION: LESSORS OF REAL PROPERTY, NEC [6519] 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: 97581735 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 AMERICAN INTERNATIONAL PETROLEUM CORPORATION THIS DOCUMENT IS A COPY OF THE FORM 10-K FILED ON APRIL 16, 1997 PURSUANT TO A RULE 201 TEMPORARY HARDSHIP EXEMPTION. 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, 1996 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 1, 1997 was approximately $13,749,000 (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 1, 1997 was 36,726,539 PART I ITEM 1. BUSINESS GENERAL American International Petroleum Corporation ("AIPC" or the "Company"), was organized on April 1, 1929 under the laws of the State of Nevada under the name Pioneer Mines Operating Company. The Company's name was changed to its current name in 1982. The Company plans to implement crude oil refining and asphalt terminalling and processing at its Lake Charles, Louisiana refinery in 1997 and the production of asphalt, vacuum gas oil and other products in late 1997 or 1998. The Company is also in the process of negotiating participation rights in oil and gas projects in South America and Kazakstan and is seeking other oil and gas projects in the United States, Central and South America, Indonesia and in Kazakstan. The Company's wholly-owned subsidiary, American International Refinery, Inc. ("AIRI") is the owner of a refinery in Lake Charles, Louisiana (the "Refinery"). A certain portion of the Refinery, a 30,000 barrel-per-day crude distillation tower (the "Crude Unit") was leased by AIRI to Gold Line Refining Ltd. ("Gold Line"), an independent refiner, from 1990 to March 20, 1997 under a lease agreement (the "Lease Agreement") between AIRI and Gold Line. See "Domestic Operations - Refinery Lease" below. However, the Lease Agreement has recently been terminated, and the Company is having discussions with various companies to utilize the Company's personnel to operate the Crude Unit for processing under similar or more attractive margins than those under the Lease Agreement. See "Domestic Operations - Crude Unit" below. The term the "Company" or "AIPC" includes AIPC and AIRI unless the context otherwise requires. On February 25, 1997, the Company sold all of the issued and outstanding shares of common stock of its wholly-owned oil exploration and production subsidiaries, American International Petroleum Corporation of Colombia and Pan American International Petroleum Corporation, in an arms length transaction (the "MIP Transaction") to Mercantile International Petroleum Inc. ("MIP"). See "International Exploration and Production - Recent Developments - Sale of South American Subsidiaries" below. Prior to the MIP Transaction, the Company's principal oil and gas properties consisted of (i) between 40% and 80% of the working interest in all oil and/or gas wells drilled on approximately 33,000 acres in the Puli Anticline and the Toqui-Toqui Field, located in the Middle Magdalena Region of Colombia, South America and (ii) 65% of the working interest in approximately 27,000 acres of exploratory and development contract rights in the Talara Basin in Peru, South America. The discussions included herein contain forward-looking statements that involve risks and uncertainties, including the Company's continuing losses, working capital deficits, the marketability of the Company's securities obtained from MIP in connection with the MIP Transaction, the ability to enter into profitable contracts to utilize the Refinery, completion of construction projects and financing of refinery operations, the timely development and financing of new oil and gas projects, the impact of competitive products and pricing and other risks detailed from time to time in the Company's SEC reports. 2 DOMESTIC OPERATIONS GENERAL In July 1988, AIRI acquired the Refinery located on 30 acres of land bordering the Calcasieu River near Lake Charles, Louisiana. The Company also owns 22 acres of vacant waterfront property adjacent to the Refinery and another 45 acres of vacant land across the highway from the Refinery. The river connects with the Port of Lake Charles, the Lake Charles Ship Channel and the Intercoastal Waterway. Most of the Refinery's feedstock and refined products are handled through the Refinery's barge dock at the river. The Company recommissioned and tested the Refinery during operations between February and July 1989. During that time it processed up to 24,000 barrels of oil per day. Numerous modifications were designed and implemented to bring the Refinery into compliance with new and existing environmental regulations and to facilitate production of higher value products. Completion of most environmental compliance projects and a military specification jet fuel ("JP-4") upgrade project at the Refinery occurred in 1990. The main unit of the Refinery is the Crude Unit, which is capable of producing light naptha overhead and the following side cuts: heavy naptha, kerosene (for jet fuel), #2 diesel, atmospheric gas oil and reduced crude oil sold as special #5 fuel oil. The Crude Unit is also suitable for adaptation to process sour crude oil. Total petroleum storage capacity is 645,000 barrels and is currently being expanded to approximately 725,000 barrels. Storage tanks on the Refinery's land include 220,000 barrels of crude storage, 345,000 barrels of storage for finished product sales and 80,000 barrels of product rundown storage. The Refinery also has 20,000 barrels of waste water storage capacity. In 1989, the Company purchased a 16,500 barrel per day vacuum distillation unit (the "VDU") which was dismantled and moved to the Refinery. Construction of the VDU on the Refinery site was completed in 1993 and, for various economic reasons, the VDU has been idle since then. However, the Company has plans to utilize the VDU beginning in 1997, primarily to process asphalt and vacuum gas oil. See "Vacuum Distillation Unit Asphalt Project" below. VACUUM DISTILLATION UNIT ASPHALT PROJECT During 1996, the Company performed an analysis to determine the viability of operating the VDU to produce asphalt and vacuum gas oil in addition to, but separate from, any lease and/or other operation of the Crude Unit. Preliminary studies utilizing actual pricing scenarios from 1994 and 1995 indicated 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. Because of delays incurred in securing timely financing, the Company elected to divide the VDU asphalt project into two phases. Phase I provides the minimum number of asphalt storage and shipping tanks, and the necessary processing equipment for the Company to receive, modify and ship asphalt blend stocks on behalf of its customers, on a terminal thru-put basis for a fee. Phase I construction of the asphalt terminal and polymer processing facility was temporarily interrupted but has now resumed. All eight planned asphalt storage tanks have been erected, and the Company is now in the process of installing the interconnecting piping network. The hot oil heater and the polymer processing mill have been delivered and are in place to be plumbed into the system. The Company expects to test the completed system by June 1997. Phase II is intended to add some processing equipment modifications and additional storage tanks to the VDU which will greatly increase the variety of feedstocks the Company could process in the stand-alone mode of operation. In addition, these modifications would also increase the overall throughput capacity of the VDU system by more than 25%. 3 Operating the VDU upon completion of Phase II will allow the Company to provide asphalt, vacuum gas oil and other products. Phase II construction is expected to take an additional six to eight months and cost approximately $2.0 million to complete. With the completion of Phases I and II, the Company will have a basic foundation upon which to build its planned asphalt business. The Company intends to continue to expand its asphalt manufacturing and marketing beyond the initial program for local truck rack paving asphalt producers, into both conventional and modified roofing asphalts and specialty industrial grade asphalt products. A multitude of options exist for the Company to utilize combined or segregated crude/vacuum unit operations to select crude oils and vacuum feedstock that can maximize the market potential for particular asphalt products when demand dictates. The Refinery's strategic location on the Intercoastal Waterway system combined with the close proximity to rail and interstate highway transportation provides access to markets throughout the central United States and Gulf Coast. Future expansion and growth of the Refinery's business will be dependent on the Company's ability to finance feedstock and the construction of additional processing and manufacturing equipment. The Company plans to emphasize the manufacture and sale of specialty polymermodified asphalt products to take advantage of that niche market while aggressively developing a domestic wholesale asphalt market for delivery by barge and railcar throughout the United States. There can be no assurance that the VDU construction will be completed as scheduled, that the Company will obtain sufficient financing or that the planned operations will be profitable. CRUDE UNIT The Company is currently evaluating several fee processing options for operating the Crude Unit recently vacated by Gold Line. The Company intends to staff and operate the Refinery with AIRI employees, and all operations are to be under the direct control of AIRI management. In addition, the planned operation of the VDU, while still fully capable of functioning on a stand-alone basis if the Company so chooses, could be more effectively integrated with other refinery utilities and support systems, thereby resulting in lower overall operating costs. In the fee processing (tolling) configuration, the Company would process various crude oils, condensate or reduced crudes into fungible products for others for a predetermined fee. These fees would be based on the amount and degree of services provided by the Company. Whenever possible, the processing arrangement would be structured to maximize the capacity of the refinery equipment. This format has a significant advantage over the Lease Agreement (See "Refinery Lease" below) structure in that it would allow AIRI to retain control over the Refinery and would provide financial security in the form of a letter of credit or performance bond to guarantee payment when due. The Company intends to charge minimum throughput fees whether the processing client provides sufficient feedstock or not, as long as the refinery is mechanically capable of processing that minimum quantity of feedstock. This requirement provides for a certain amount of guaranteed compensation to the Company for granting access to utilization of the refinery assets. There can be no assurance that a tolling contract will be consummated, that the Company will obtain sufficient financing, and that the planned operations will be profitable. REFINERY LEASE Beginning in 1990, Gold Line leased the Crude Unit from the Company and was responsible for substantially all costs associated with operating the Crude Unit. In 1994, the Lease Agreement expired. However, by mutual consent, Gold Line continued to operate the Refinery on a hold-over basis pursuant to the terms of the Lease Agreement until March 22, 1995, when Gold Line obtained a line of credit with NationsBank to finance its obligations at the Refinery, and the 4 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. In addition, Gold Line had fallen far behind on the lease obligations and, on March 22, 1995, the Company restructured all past due amounts owed to AIRI by Gold Line and accepted a promissory 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 Agreement of approximately $144,000, plus accrued interest at a rate of prime plus 1% and certain additional payments. However, pursuant to the Subordination Agreement, including certain profitability parameters, Gold Line was not permitted to make any payments of principal and interest on the Note to AIRI, nor was AIRI entitled to pursue payments thereof. During 1995, the NationsBank financing was not adequate 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 remained unchanged. In March 1996, Gold Line was successful in obtaining the necessary financing to secure a $45 million fuel supply contract with the DFSC. During the third and fourth quarters of 1996, Gold Line again began to fall behind in its monthly lease fee payments to AIRI, even though it was processing an average in excess of 400,000 barrels of feedstock per month during these periods. In July and September 1996, and again on February 3, 1997, the Company delivered a Default Notice to Gold Line informing Gold Line of various items of default under the Lease Agreement, including on the February 3, 1997 notice non-payment of lease fees totaling approximately $567,000 and 1996 real estate taxes of approximately $208,000. Subsequent Notices of Default were also delivered to Gold Line covering additional items of default, including an additional $287,000 in unpaid lease fees and $29,000 of unpaid insurance premiums (which premiums were paid by AIRI). On February 18, 1997, the Company delivered a Termination Notice and Notice to Vacate, pursuant to the Lease Agreement, whereby the Company gave written notice to Gold Line to vacate the leased premises five days from the date the Notice was delivered. Gold Line did not comply with the Company's Notice to Vacate, so on February 26, 1997 the Company filed suit to evict Gold Line. On March 20, 1997, the court terminated the Lease Agreement and ordered Gold Line to vacate the refinery premises within 24 hours of the Order, with which Gold Line complied. In addition, the Company is suing Gold Line for recovery of unpaid amounts due and other damages. See "Item 3 - Legal Proceedings". REFINERY FINANCING ACTIVITIES Subsequent to the purchase of the Refinery, the Company entered into a series of transactions with MG Trade Finance Corp. ("MGTF") to finance the upgrade and operations of the Refinery. In 1990, AIRI entered into a loan and security agreement (the "Loan Agreement") with MGTF whereby MGTF loaned AIRI $9,855,000 to (i) repay certain of AIRI's prior obligations; (ii) fund certain improvements related to environmental regulations and production of J-4 jet fuel; and (iii) provide working capital. In order to secure AIRI's obligations under the Loan Agreement, AIRI granted MGTF a first priority security interest in the Refinery and in substantially all 5 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 additional 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. Also, in consideration for rescheduling the loan, MGTF received a fee of $100,000 and a warrant to acquire 100,000 shares of the Company's common stock at $16.88 per share. Such warrant was exercisable at any time prior to June 30, 1997. In July 1995 MGTF released all of its then-existing warrants for cancellation and received new warrants to purchase 150,000 shares of the Company's common stock at $2.00 per share. The expiration date of June 30, 1997 remained unchanged. In March 1995, the parties further amended the Loan Agreement whereby the due date was extended to March 31, 1998, and MGTF agreed that only fifty percent of the monthly lease fee proceeds from a lessee would be applied to amortize the MGTF loan, where previously 100% of same were applied. To the extent that 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%. As part of certain negotiations related to the MIP Transaction, the Company agreed to change the due date of the unpaid balance of the Loan Agreement of $2,108,000 to September 30, 1997 from March 31, 1998. In addition, the Company pledged 1,000,000 shares of MIP common stock (partial consideration the Company received in the MIP Transaction) as additional collateral for the Loan Agreement. The Company expects to pay the balance due on the Loan Agreement on or before the revised due date by margining or selling some of its MIP shares, or with other conventional financing. INTERNATIONAL EXPLORATION AND PRODUCTION Generally, oil and gas exploration is extremely speculative, involving a high degree of risk. Even if reserves are found as a result of drilling, profitable production from reserves cannot be assured. RECENT DEVELOPMENTS SALE OF SOUTH AMERICAN SUBSIDIARIES On February 25, 1997, the Company sold all of the issued and outstanding shares of common stock of its wholly-owned subsidiaries, American International Petroleum Corporation of Colombia ("AIPCC") and Pan American International Petroleum Corporation ("PAIPC") (the "Purchased Shares") to MIP in an arms length transaction. 6 The assets of AIPCC and PAIPC consisted of oil and gas properties and equipment in South America with an aggregate net book value of approximately $17.9 million. The total aggregate purchase price payable by MIP for the Purchased Shares was valued (giving account to the contingent portion thereof which was not recorded by the Company pursuant to GAAP) at up to approximately $20.2 million, determined as follows: (a) Cash payments of approximately $3.9 million, of which approximately $2.2 million was paid simultaneously with the closing to retire the Company's 12% Secured Debentures due December 31, 1997, which were secured by the Company's shares of AIPCC. (b) Assumption of AIPCC and PAIPC debt of an aggregate amount of $634,000. (c) 4,384,375 shares of MIP Common Stock (the "MIP Shares") with a trading price of approximately $2.00 on the date the parties agreed in principle to the sale. (d) A two-year $3 million 5% exchangeable subordinated debenture of AIPCC (the "Exchangable Debenture"), exchangable into shares of common stock of MIP on the basis of $3 principal amount of such debenture for one share of MIP on or after February 25, 1998; or Registrant may demand payment on that date of $1.5 million of the principal balance thereof. (e) A $1.4 million "performance earn-out" from future production in Colombia, plus interest at 8% per annum. (f) Up to $2.5 million (reduced proportionately to the extent the Net Operating Loss and Deferred Cost Deductions accrued by AIPCC through December 31, 1996 ("Accrued Tax Benefit Deductions") is less than $50 million but more than $20 million) payable from 25% of AIPCC's future tax savings related to Accrued Tax Benefit Deductions, if any, available to AIPCC on future tax filings in Colombia. As a result of the MIP Transaction, the Company now owns approximately 11.3% of MIP's outstanding share capital on a fully-diluted basis (47,720,867 shares). MIP is traded in U.S. dollars on the Toronto Stock Exchange ("TSE") under the symbol MPT.U. As of April 1, 1997, the MIP Shares were trading on the TSE at $1.70 per share. The Company utilized a substantial portion of the cash proceeds of the sale to repay the outstanding balance on its 12% Secured Debentures, due December 31, 1997, and intends to utilize the remaining cash and non-cash proceeds to pay other debts, expand its refinery and for general corporate use. KAZAKSTAN AGREEMENT On January 27, 1997, the Company entered into an option agreement, which was amended on March 7, 1997 (the "Option") with MED Shipping and Trading S.A. ("MED"), a Liberian corporation with offices in Frankfurt, Germany, whereby MED granted the Company, until March 31, 1997, the right to obtain a 40% working interest in a certain petroleum concession in the Ustert Basin of Kazakstan (the "License"). The License is owned 90% by MED and 10% by another entity. As consideration for the Option, the Company paid MED a $100,000 non-refundable cash deposit and also issued to MED 300,000 shares of the Company's common stock, pursuant to Regulation S. Although the term of the Option has expired, the Company continues its due diligence and negotiations with MED regarding its possible participation in the License. The Company's future foreign operations, if any, could be adversely affected by the occurrence of political instability and civil unrest. Political instability could also change the operating environment for the Company in the countries in which the Company may be involved through the imposition of restrictions on foreign ownership, repatriation of funds, adverse environmental laws and regulations, adverse labor laws and the like. 7 COLOMBIA, SOUTH AMERICA In 1987, AIPCC acquired the rights to 45% of the Puli Association Contract Area in the Middle Magdalena Region from the previous operator. In December 1991, AIPCC purchased an additional 35% interest, bringing its total working interest to 80%. Petroleros Del Norte, a Colombian company, owns the remaining 20% of the working interest. AIPCC is the operator of its Puli Association Contract, which is subject to a 20% royalty payable to the Colombian government national oil company ("Ecopetrol") and to certain Colombian taxes. Under the terms of the Association Contract, twenty-one productive wells had been drilled and completed as of December 31, 1996. These wells produced an average of 884 gross barrels of oil per day during 1996. All of the producing wells are located in the Toqui-Toqui Field of the Puli Association Contract Area. In December 1991, AIPCC signed an Association Contract with Ecopetrol to explore approximately 190,000 acres in the Lagunillas area of the Middle Magdalena Valley. In October 1994, AIPCC farmed-out a 50% working interest in Lagunillas to a non-affiliated company. In September 1995, AIPCC entered into a farmout agreement with a separate non-affiliated oil and gas company (the "Farmee"), whereby AIPCC will transfer all of its remaining interest and obligations at Lagunillas when the Farmee places a performance guarantee and Ecopetrol processes the transfer of interest in the contract. As discussed above, on February 25, 1997, the Company sold all of the issued and outstanding shares of AIPCC's common stock and has no remaining assets or obligations in Colombia. PERU, SOUTH AMERICA In October 1993, PAIPC entered into a joint venture agreement with Rio Bravo S.A., a Peruvian corporation ("Rio Bravo"), to participate in the exploration and development of a 27,000 acre block in the Talara Basin under which PAIPC received 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 was delayed, primarily due to a dispute with Rio Bravo. In spite of these problems, the minimum work program required under the license contract in Peru was completed and certified as complete by the government. However, Rio Bravo 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 Rio Bravo locked out PAIPC's employees in October 1995. As discussed above, the Company sold all its rights with respect to Peru and therefore has no remaining assets or obligations there. INDONESIA In December 1995, the Company entered into a Farmout Agreement with P.T. Pelangi Niaga Mitra Internasional, an Indonesian company, whereby the Company was 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. During the period in which the Company was waiting for government approval of this transaction, Pertamina, the Indonesian government oil company, changed the regulations governing joint venture and farmout agreements in Indonesia. As a result of these changes, in the second quarter of 1996, the Company elected not to pursue this transaction and relinquished its rights thereto. 8 OTHER FINANCINGS In March 1994, the Company completed an offering of rights to its shareholders. Each right was exercised for $3.00, and the holder received two shares of common stock and one redeemable warrant to acquire an additional share of common stock at any time prior to March 1, 1996 at an exercise price of $4.00 per share. The expiration date of these warrants has been extended to March 1, 1998, but the exercise price remains at $4.00 per share. Although the Company's operating cash income improved significantly during 1996, its cash flows were insufficient to fund all of its operations, including debt service. In addition, the Company was unsuccessful in obtaining conventional or mezzanine financing to expand its refinery operations or develop its oil discovery in Colombia, either one of which was expected by management to improve the Company's cash flow. Consequently, during 1996 and through April 9, 1997, the Company issued an aggregate of approximately 8.6 million shares of its common stock and various promissory notes and convertible debentures in exchange for cash and services rendered to the Company valued at an aggregate of approximately $6,723,000 through various private placements and agreements, most of which were issued in reliance upon the safe harbor provided by Regulation S as promulgated by the Securities and Exchange Commission (the "SEC"). The Company utilized most of the cash proceeds from these private placements to repay debt and to fund certain operations. COMPETITION The geographic location of the Refinery in Lake Charles, La. gives the Company a distinct freight advantage over other asphalt suppliers. Most of the Company's competition in its planned asphalt manufacturing business will come from those refiners that do not have downstream processing choices such as the Company's. The major competitor in the local truck rack market is a blending plant operation over 75 miles away. The average distance from the Company's refinery to the nearest competing truck rack asphalt producing refinery ranges from 150 to over 200 miles away. The Company's major competitor for barge sales is located over 400 miles farther away from the Company's major markets than the Refinery. This distance equates to more than $1.30 per barrel freight advantage to the Company into the same markets. Due to highly volatile crude oil prices and environmental regulation, many oil refineries have ceased or curtailed production. The Company also believes, although no assurance of this can be given, that the high costs of constructing new refineries, as well as the cost of updating and modifying inactive existing refineries will discourage new competition in the refining business. The oil and gas industry, including oil refining, is highly competitive. The Company is in competition with numerous major oil and gas companies and large independent companies for prospects, skilled labor, drilling contracts, equipment and product sales contracts. Many of these competitors have greater resources than the Company's. Revenues generated by the Company's oil and gas operations and the carrying value of its oil and gas properties are highly dependent on the prices for oil and natural gas. The price which the Company receives for oil or natural gas it may produce is dependent upon numerous factors beyond the control of the Company's management, the exact effect of which cannot be predicted. These factors include, but are not limited to, (i) the quantity and quality of the oil or gas produced, (ii) the overall supply of domestic and foreign oil or gas from currently producing and subsequently discovered fields, (iii) the extent of importation of foreign oil or gas, (iv) the marketing and competitive position of other fuels, including alternative fuels, as well as other sources of energy, (v) the proximity, capacity and cost of oil or gas pipelines and other facilities for the transportation of oil or gas, (vi) the regulation of allowable production by governmental authorities, (vii) the regulations of the Federal Energy 10 Regulatory Commission governing the transportation and marketing of oil and gas, and (viii) international political developments, including nationalization of oil wells and political unrest or upheaval. All of the aforementioned factors, coupled with the Company's ability or inability to engage in effective marketing strategies, may affect the supply or demand for the Company's oil, gas and other products and, thus, the price attainable therefor. FINANCIAL INFORMATION RELATING TO FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES The table below sets forth, for each of the last three fiscal years, the amounts of revenue, operating profit or loss and assets attributable to each of the Company's geographical areas, and the amount of its export sales. Sales to unaffiliated customers:
1996 1995 1994 ----------- ----------- -------- United States $2,596,917 $ 1,403,668 $ 2,094,235 Colombia $1,508,260 1,214,213 1,169,323 Peru * 166,069 122,068 Sales or transfers between geographic areas: United States - - - Colombia - - - Peru - - - Operating profit or (loss): United States 980,874 (518,462) 717,824 Colombia 39,595 (299,188) (8,309,950) Peru (200,000) 100,928 81,044 Identifiable assets: United States 12,895,332 13,565,280 14,481,904 Colombia 14,641,646 14,136,257 13,580,190 Peru 4,860,559 4,247,975 2,717,167
Export sales: - - - *Information not available due to dispute with partner. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". INSURANCE; ENVIRONMENTAL REGULATIONS The Company's operations are subject to all risks normally incident to (i) the refining and manufacturing of petroleum products; and (ii) oil and gas exploratory and drilling activities, including, but not limited to, blowouts, extreme weather conditions, pollution and fires. Any of these occurrences could result in damage to or destruction of oil and gas wells, related equipment and production facilities and may otherwise inflict damage to persons and property. The Company maintains comprehensive and general liability coverage, as is customary in the oil and gas industry and coverage against customary risks, although no assurance can be given that such coverage will be sufficient to cover all risks, be adequate in amount, or that any damages suffered will not be governed by exclusionary clauses, thereby rendering such coverage incomplete or non-existent to protect the Company's interest in specific property. The Company is not fully covered for damages incurred as a consequence of environmental mishaps. The Company believes it is presently in compliance with government regulations and follows safety procedures which meet or exceed industry standards. MARKETING 10 REFINERY The Company's anticipated asphalt terminalling and marketing operations for conventional and polymerized asphalt are currently applicable only to the local truck rack paving market within an approximate 100 mile radius of the Refinery. This market segment represents approximately 20% of the total capacity of the VDU. All other asphalt manufacturing and marketing opportunities in wholesale barge and rail car paving, or retail truck for roofing asphalts, industrial grade asphalts and all conventional and polymerized asphalt products will be developed by the Company for internal benefit and growth. Beginning in 1998, the Company plans to expand its customer base by 15-20% per year until full utilization of the asphalt facility is reached. Since the Company was unable to secure a sufficient amount of funding to complete the timely construction of the asphalt terminal facilities within the deadline dates specified in its agreements with Coastal Refining and Marketing Inc. ("Coastal"), the agreements have lapsed. However, the Company continues to have discussions with Coastal regarding the implementation of terminalling and other operations at the Refinery, but no decision has been made to date. Coastal has expressed an interest in reinstating the agreements upon the completion of the Company's construction, expected in June 1997, however, there is no assurance Coastal will proceed with these arrangements. OIL AND GAS 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, AIPCC entered into an agreement with Carbopetrol S.A. to sell all of its crude oil produced in Colombia. This contract was a 6-month renewable fixed-price sales contract for all crude oil produced by the Company from the Toqui-Toqui field. Payments were made in Colombian Pesos adjusted for expected exchange fluctuation. Prices were based on the price of local fuel oil and, for 1996, averaged a net price to the Company of approximately $8.40 per barrel of oil. In Peru, PAIPC's contract with PetroPeru provided for a flexible royalty rate based on the amount of production and world basket price for this contract area providing a net sales price to PAIPC of approximately 65% of the world basket price for the field, which, based on an average gross price of $16.53 per barrel in 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 24%, 39% and 18% of the Company's 1996, 1995 and 1994 revenues, respectively. Sales to Ecopetrol accounted for approximately 9%, 10% and 47% of the Company's 1996, 1995 and 1994 revenues, respectively. Lease fees from Gold Line accounted for approximately 60%, 42% and 59% of the Company's 1996, 1995 and 1994 revenues, respectively. On March 20, 1997, the Company terminated the Lease Agreement with Gold Line. However, the Company is currently having discussions with other potential customers. The Company believes that it can obtain another contract with better or substantially the same margins as the Lease Agreement or operate the Refinery itself. See "Domestic Operations - Refinery Lease" above. A continuing market for any oil and gas that the Company may produce will depend upon numerous factors, many beyond the control of the Company, and most of which are not predictable. These factors include regulation of oil production, price controls on petroleum and petroleum products, the amount of oil and gas available for sale, the availability of adequate pipeline and other transportation facilities, the marketing of competitive fuels, and other matters affecting the availability of a ready market, such as fluctuating supply and demand. SOURCES AND AVAILABILITY OF RAW MATERIALS 11 The Company plans to purchase all raw materials needed for its operations from suppliers and manufacturers located throughout the United States and internationally. The Company believes that these materials are in good supply and are available from multiple sources. EMPLOYEES As of April 1, 1997, the Company employed 57 persons on a full-time basis, including 9 persons who are engaged in management, accounting and administrative functions for AIPC and 48 who are employed by AIRI on a full-time basis, including 7 persons who are engaged in management and administrative functions. The Company frequently engages the services of consultants that are experts in various phases of the oil and gas industry, such as petroleum engineers, refinery engineers, geologists and geophysicists. The Company believes that relations with its employees are satisfactory. ITEM 2. PROPERTIES OFFICE FACILITIES The Company leases approximately 2,900 square feet of office space at 444 Madison Avenue, New York, N.Y. 10022. This space comprises the Company's principal executive office. The space was leased effective November 1, 1994 for a period of four years at a monthly rental rate of $7,325. In addition, the Company leases approximately 3,400 square feet of office space in Houston, Texas. The lease expires in November 30, 1998 and provides for a monthly rental of $3,607. 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 (See "Item 1 - Business - Domestic Operations"), 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 owned a working interest on December 31, 1996, 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, 1996.
Gross Gross Net Net Developed Undeveloped Developed Undeveloped Acreage Acreage Acreage Acreage Colombia 19,379 13,474 6,201 4,312 Peru - 27,300 - 6,800
The table below indicates the Company's gross and net oil and gas wells as of December 31, 1996. Gross wells represents the total wells in which the Company owned a working interest, and net wells represents the sum of the fractional working interests owned by the Company in such wells. Productive Wells
Total Oil Gas Gross Net Gross Net Gross Net Colombia 21 8.4 21 8.4 - - 12 Peru 4 2.6 4 2.6 - -
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, 1996, 1995, 1994, 1993 and 1992, 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) 1996-Colombia 130,433 $9.98 - - -Peru * * - - 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 - -
Average foreign lifting costs in 1996, 1995, 1994, 1993 and 1992 were approximately $4.69, $2.75, $4.64, $9.02 and $9.11 per equivalent barrel of oil, respectively. The Company's average domestic lifting costs for 1992 was approximately $10.26 per equivalent barrel of oil. *Information not available due to dispute with partner. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". RESERVES Huddleston & Co., Inc., petroleum and geological engineers, performed an evaluation to estimate proved reserves and future net revenues from oil and gas interests owned by AIPCC as of January 1, 1997. As of January 1, 1997, all of the Company's proved reserves were located in Colombia. The report, dated February 6, 1997, is summarized below. Future net revenues were calculated after deducting applicable taxes and after deducting capital costs, transportation costs and operating expenses, but before consideration of Federal income tax. Future net revenues were discounted at a rate of ten percent to determine the "present worth". The present worth was shown to indicate the effect of time on the value of money and should not be construed as being the fair market value for the Company's properties. Estimates of future revenues did not include any salvage value for lease and well equipment or the cost of abandoning any properties. COLOMBIAN RESERVES
Future Revenues Net Oil Future Discounted (Barrels) Net Gas (mmcf) Revenues at 10% ---------- -------------- -------- ------ Proved Developed Producing 917,522 1,121.1 $9,379,548 $ 5,899,502 Proved Developed Non-Producing 31,199 5,200.0 4,070,584 2,274,369 15 Proved Undeveloped 3,061,698 8,358.3 28,474,585 14,183,770 --------- ------- ---------- ---------- TOTAL 4,010,419 14,679.4 $41,924,717 $22,357,641 ========= ======== =========== ===========
Huddleston & Co., Inc. used the net market price, exclusive of transportation cost, of $12.20 per average barrel of oil, $0.40 per MCF for Toqui gas and $1.00 per MCF for Puli gas in their report. The oil prices utilized were the prices received by AIPCC as of December 31, 1996 for oil produced from AIPCC's leaseholds. The gas prices utilized were based on the Ecopetrol spot price at December 31, 1996. The prices were held constant throughout the report except for where contracts provide for increases. Operating costs for AIPCC's and PAIPC's leaseholds included direct leasehold expenses only. Capital expenditures were included as required for new development wells, developed non-producing wells and current wells requiring restoration to operational status on the basis of prices supplied by the Company. The report indicates that the reserves were estimates only and should not be construed as being exact quantities. In evaluating the information at their disposal concerning the report, Huddleston & Co. excluded from consideration all matters as to which legal or accounting interpretation may be controlling. As in all aspects of oil and gas evaluation, there are uncertainties inherent in the interpretation of engineering data and such conclusions necessarily represent only informed professional judgments. The data used in the Huddleston & Co. estimates were obtained from the Company and were assumed to be accurate by Huddleston & Co. Basic geologic, engineering and field performance data are now maintained on file by MIP. DRILLING The following table sets forth the gross and net exploratory and development wells which were completed, capped or abandoned in which the Company participated during the years indicated.
1996 1995 1994 -------------- -------------- --------- Gross Net Gross Net Gross Net Exploratory Wells: South America Oil 1.00 1.00 2.00 2.00 2.00 1.15 Gas - - - - Dry - - 1.00 1.00 - - ---- ---- ----- ----- ---- ---- TOTAL 1.00 1.00 3.00 3.00 2.00 1.15 Development Wells: South America Oil 1.00 .65 2.00 1.30 2.00 1.30 Gas - - - - Dry - - - - - ---- ----- ----- ---- ---- ---- TOTAL 1.00 .65 2.00 1.30 2.00 1.30 ---- ----- ----- ---- ---- ---- TOTAL 2.00 1.65 5.00 4.30 4.00 2.45 ===== ===== ==== ==== ==== ====
ITEM 3. LEGAL PROCEEDINGS Except as described below, there is no material litigation pending to which the Company is a party or to which any of its properties is subject. Further, except as described below, there are no proceedings known to be contemplated by United States or foreign persons or governmental authorities relating to either the Company or its properties. 16 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 that 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 is having ongoing discussions with the IRS regarding the situation. Depending upon the results of these discussions, 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 of $1,100,000 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 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 (the "Exception") which is expected to eliminate most of the plaintiffs claims. The Court ordered a ruling on the Exception referring the Exception to the merits. In the fourth quarter of 1996, a new Judge was assigned AIRI's case. AIRI expects a status conference will be held soon, wherein AIRI will apprise the new Judge of the exception and request a rehearing on the Exception before the new Judge. At this time, the Company is unable to determine what, if any, liability may arise from this action. On February 26, 1997, AIRI filed suit against Gold Line for termination of the Lease Agreement and damages including unpaid processing fees, real-estate taxes, insurance premiums and other items which may be due under the terms of the Lease Agreement. Notice to vacate was also sent to Gold Line, and after the demand to vacate was not met, a pleading to evict Gold Line was filed as an incident to the original suit. After a hearing, the court granted the eviction. A court date is scheduled for May 15, 1997 to present a trial on the merits with respect to the original amount due to AIRI. AIRI seeks approximately $1.8 million, including damages as of the date Gold Line exited the lease premises, for disposition of salt water left on the premises by Gold Line, and also movable property which has been taken or damaged by Gold Line. Gold Line has asserted general affirmative defenses. The Company intends to pursue aggressively all of its legal remedies against Gold Line. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15 None 16 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 1996 First Quarter $0.88 $0.50 $0.19 $0.13 Second Quarter 0.69 0.44 0.16 0.06 Third Quarter 0.59 0.38 0.16 0.06 Fourth Quarter 0.73 0.31 0.12 0.06 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, 1997, the Company had approximately 1,632 shareholders of record of its Common Stock. The Company estimates that an additional 10,000 shareholders hold Common Stock in street name. DIVIDEND POLICY The policy of the Board of Directors is to retain earnings to finance the operations and development of the Company's business. Accordingly, the Company has never paid cash dividends on its Common Stock, and no cash dividends are contemplated to be paid in the foreseeable future. RECENT ISSUANCES NOT PREVIOUSLY REPORTED Between April 1, 1997 and April 9, 1997 the Company sold two-year 8% Redeemable Convertible Debentures (the "8% Debentures") in an offering of up to $1.5 million. The aggregate principal amount of the 8% Debentures was $750,000. The placement agent for the 8% Debentures was Global Funding Group. The Company received net proceeds of $690,000 from the sale of the 8% Debentures. The offering was made pursuant to a safe harbor from registration under Regulation S to Non-U.S. Persons only. The Company may redeem at any time all or a portion of the principal amount of the 8% Debentures at 125% of their face value. The holders of the 8% Debentures may convert some or all of the principal balance of the 8% Debentures 45 days after closing of the offering at a conversion price of 75% of the average closing bid price of the Company's common stock as traded on NASDAQ for the five trading days immediately preceding the conversion date. The Company plans to utilize some of the proceeds from the MIP Transaction to redeem all or a portion of the 8% Debentures. ITEM 6. SELECTED FINANCIAL INFORMATION The following selected financial data for each of the five years in the period ended December 31, 1996 have been derived from the audited consolidated financial statements for those respective years. The selected financial data should be read in conjunction with the consolidated financial statements of the Company and the related notes included elsewhere herein.
For the Years Ended December 31, 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Condensed consolidated statement of operations: Revenues $ 4,110,514 $ 2,811,308 $ 3,508,514 $ 3,990,156 $ 3,381,453 Net loss(1) (4,652,207) (4,338,322) (10,966,914) (14,139,737) (4,987,144) 17 Net loss per share(2) (0.16) (0.20) (0.65) (2.23) (0.90) At December 31, 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Condensed consolidated balance sheet: Working capital deficit $ (9,823,229) $ (3,402,543) $ (28,462) $ (7,507,056) $ (6,476,996) Total assets 34,492,431 32,640,362 32,229,713 34,996,925 45,391,666 Total liabilities 13,164,713 11,349,670 10,255,687 18,878,148 15,685,931 Long-term debt 798,199 5,432,671 6,601,421 7,812,500 5,250,000 Stockholders' equity 21,327,718 21,290,692 21,974,626 16,118,777 29,705,731 Cash Dividends declared 0 0 0 0 0
- -------------------------------- 1) Net loss in 1996, 1994 and 1993 included a provision for the write down of the carrying costs of oil and gas properties of $200,000, $6,904,000 and $9,975,000, respectively. 2) Adjusted, as applicable, to give effect to the one-for-10 reverse stock split effectuated by the Company on October 28, 1993. 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. However, as a result of the MIP Transaction, discussed below, the Company's working capital position significantly improved, as exhibited by the pro-forma balance sheet comparison presented herein. At December 31, 1996 the Company had an unrestricted cash balance of $11,000 compared to $162,000 at December 31, 1995. During the year ended December 31, 1996, approximately $551,000 was provided by operations. Net loss for the period totalled $4,652,000 (including $4,815,000 in non-cash elements as follows: provision for depreciation, depletion and amortization of $1,265,000, bad debts of $790,000, a contingent excise tax liability (or for legal expenses related thereto, or both) of $850,000 and inputed interest expenses of $1,216,000 related to the discount of certain convertible debentures. See "Results of Operations Interest Expense" below.) There was also a non-cash charge in 1996 of $200,000 related to a write down of the carrying costs of oil and gas properties in Peru. Approximately $1,115,000 was used during the period to increase current assets other than cash, and approximately $2,352,000 was provided by an increase in accounts payable and accrued liabilities. Cash for operations during 1996 was provided, in part, by the issuance of Common Stock and convertible debentures in an aggregate amount of approximately $3,810,000. During the years ended December 31, 1995 and December 31, 1994, the Company generated net losses of $4,338,000 and $10,967,000 respectively. There was a non-cash charge in 1994 of $6,904,000 for a reduction in the carrying cost of oil and gas properties due primarily to prior-period reductions in the estimated volume of proven oil and gas reserves. Cash flow used in operations in 1995 and 1994 totalled $274,000 and $5,110,000 respectively. Cash flow from operations was adjusted for depreciation, depletion and amortization of $1,396,000 and $1,501,000 in 1995 and 1994, respectively, and non-cash provisions for bad debts in 1995 and 1994 of $711,000 and $19,000 respectively. In addition, the net loss for 1994 included a contingent excise tax liability (or legal expenses therefor) of $250,000 and a non-cash charge of $56,000 related to employment signing bonuses and forgiveness of accounts receivable from an employee stock purchase. There was also a non-cash provision of $211,000 in 1994 for an adjustment to the exercise price of certain outstanding warrants. Additionally, $189,000 and $277,000 in 1995 and 1994, respectively, were invested in current assets other than cash. Accounts payable increased by $1,985,000 in 1995 and decreased by $3,234,000 in 1994. Additional uses of funds during the periods included investments in oil and gas properties during 1995 and 1994 of $3,194,000 and 18 $5,557,000, respectively, net of certain recoverable costs. Total cash used in operations and investment activity during the years ended December 31, 1995 and 1994 was $3,481,000 and $10,341,000, respectively. Cash was provided primarily from outside sources, including $3,112,000 and $14,978,000 from the issuance of common stock during 1995 and 1994, respectively, and $60,000 in proceeds from the issuance of long term debt in 1994. On February 25, 1997, the Company sold all of the issued and outstanding shares of common stock of its wholly-owned subsidiaries, American International Petroleum Corporation of Colombia ("AIPCC") and Pan American International Petroleum Corporation ("PAIPC") (the "Purchased Shares") in an arms length transaction (the "MIP Transaction") to Mercantile International Petroleum Inc. ("MIP"). The assets of AIPCC and PAIPC consisted of oil and gas properties and equipment in South America with an aggregate net book value of approximately $17.9 million. The total aggregate purchase price payable by MIP for the Purchased Shares was valued, giving account to continent portion thereof, which was not recorded by the Company pursuant to GAAP, at up to approximately $20.2 million, determined as follows: (a) Cash payments of approximately $3.9 million, of which approximately $2.2 million was paid simultaneously with the closing to retire the Company's 12% Secured Debentures due December 31, 1997, which were secured by the Company's shares of AIPCC. (b) Assumption of AIPCC and PAIPC debt of an aggregate amount of $634,000. (c) 4,384,375 shares of MIP Common Stock (the "MIP Shares") with a trading price of approximately $2.00 on the date the parties agreed in principle to the sale. (d) A two-year $3 million 5% exchangeable subordinated debenture of AIPCC, exchangeable into shares of common stock of MIP on the basis of $3 principal amount of such debenture for one share of MIP on or after February 25, 1998; or Registrant may demand payment on that date of $1.5 million of the principal balance thereof. (e) A $1.4 million "performance earn-out" from future production in Colombia, plus interest at 8% per annum. (f) Up to $2.5 million (reduced proportionately to the extent the Net Operating Loss and Deferred Cost Deductions accrued by AIPCC through December 31, 1996 ("Accrued Tax Benefit Deductions") is less than $50 million but more than $20 million) payable from 25% of AIPCC's future tax savings related to Accrued Tax Benefit Deductions available to AIPCC on future tax filings in Colombia. The following Pro-forma Balance Sheet presentation is included to illustrate the effect on the Company's financial position of the MIP Transaction. These Balance Sheets show the Company's actual financial position at December 31, 1996 as compared to how such Balance Sheet would appear had the MIP Transaction occurred on that date. The Pro-forma Balance Sheet excludes all other transactions or operations subsequent to the end of 1996: CONSOLIDATED BALANCE SHEETS
December 31, Proforma Unaudited 1996 1996 ---- ---- Assets Current assets: Cash and cash equivalents $11,058 $1,488,509 Cash - restricted 161,022 29,125 Marketable Securities - 8,768,750 Accounts receivable, net 1,073,140 1,773,741 Inventory 459,961 - Prepaid expenses 838,104 437,367 ----------- ------------ Total current assets 2,543,285 12,497,492 ----------- ------------ Property, plant and equipment: 19 Unevaluated property 5,648,630 89,389 Oil and gas properties 32,506,656 371,665 Refinery property and equipment 17,235,183 17,235,183 Other 499,971 192,968 ----------- ----------- 55,890,440 17,889,205 Less-accumulated depreciation, depletion and amortization and impairments (23,959,191) (3,669,618) ------------ ------------ Total property, plant and equipment 31,931,249 14,219,587 ------------ ------------ Other long-term assets, net 17,897 2,342,897 ------------ ------------ Total assets $34,492,431 $29,059,976 ============ ============ Liabilities and Stockholders' Equity Current liabilities: Notes payable $ 237,162 $ - Current portion of long-term debt 5,968,393 3,799,643 Accounts payable 3,636,765 1,564,013 Accrued liabilities 2,524,194 2,192,152 ------------ ------------ Total current liabilities 12,366,514 7,555,808 Long-term debt 798,199 798,199 ------------ ------------ Total liabilities 13,164,713 8,354,007 ------------ ------------ Stockholders' equity: Preferred stock, par value $0.01, 7,000,000 shares authorized, none issued; Common stock, par value $.08, 100,000,000 shares authorized 34,458,921 shares issued and outstanding at December 31, 1996 2,756,714 2,756,714 Additional paid-in capital 78,677,265 78,677,265 Stock purchase warrants 1,297,754 1,297,754 Accumulated deficit (61,404,015) (62,025,764) ------------- ------------- Total stockholders' equity 21,327,718 20,705,969 ------------- ------------- Commitments and contingent liabilities (Note 10) - - ------------- ------ Total liabilities and stockholders' equity $34,492,431 $29,059,976 ============= ============
As a result of the MIP Transaction, the Company now owns approximately 11.3% of MIP's outstanding share capital on a fully-diluted basis (47,720,867 shares). MIP is traded in U.S. dollars on the Toronto Stock Exchange (the "TSE") under the symbol MPT.U. Since the MIP Shares were restricted from sale by the Company for 40 days from the date of closing of the MIP Transaction, they were not immediately marginable. In addition, Gold Line did not make any lease payments to the Company in 1997. Consequently, in order to redeem certain outstanding convertible debentures prior to their conversion by the holders thereof into the Company's common stock, and to continue the expansion of its refinery, in April 1997, the Company sold $750,000 of 8%, two-year Redeemable Convertible Debentures pursuant to Regulation S (the "8% Debentures") to provide the required cash flows the Company needs until it is able to margin or sell the MIP Shares. It is the Company's intent to margin or sell the MIP Shares as required and to utilize the proceeds therefrom to redeem all or a portion of the 8% Debentures, and certain other outstanding convertible debentures of the Company as well, prior to their conversion into shares of the Company's common stock. However, to the extent it can, the Company intends to retain the MIP Shares until the Company's capital requirements dictate that they be sold. The Company believes that it has sufficient capital, or access thereto, to complete the expansion of its refinery in Lake Charles, Louisiana (the "Refinery") to enable the implementation of its asphalt operations and to make any preliminary oil and gas related expenditures. The asphalt and tolling operations are expected to provide the Company with the future capital necessary to fund its oil and gas operations, or place the Company in a position where it is able to access conventional financing for such projects. The Company expects to receive proceeds upon the final adjudication of its claim against Gold Line although the exact amount, if any, is indeterminable at this time. During the next twelve months, the Company plans to expend up to approximately $3 million for the Refinery expansion, which it expects to be funded in part by the 8% 20 Debentures, internally-generated cash flow from refinery operations, and/or by the margin or sale of the MIP Shares and interest payments received from the Exchangeable Debenture. The Company is also having discussions with other financing entities who have expressed interest in financing further expansion of the Refinery and future operations thereto. The Company's 12% Secured Debentures (the "Debentures"), which had a principal and interest balance at December 31, 1996 of an aggregate of $3,720,000 were paid in full during the first quarter of 1997, mostly from proceeds received from the MIP Transaction. 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 were reduced from 100% to 50% of the monthly lease fee proceeds the Company received from leasing the Refinery. See "Refinery Operations" below. 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. The Loan Agreement contains certain restrictive covenants and requirements, however, the Company and MGTF have from time to time amended the Loan Agreement or waived certain events of technical default. As part of the MIP Transaction, the Company agreed to change the maturity date for payment of the unpaid balance (currently $2,108,000) to September 30, 1997 from March 31, 1998. In addition, the Company pledged 1,000,000 shares of its MIP common stock to further secure the Loan Agreement. The Company expects to pay the balance due on the Loan Agreement by the revised due date by margining or selling some of its MIP shares, or with other conventional financing. During 1995, Gold Line incurred various financial and purchasing problems which resulted in diminished throughput volumes and lower lease fees to the Company than in 1994 and also prevented Gold Line from making its note scheduled payments to the Company of approximately $144,000 plus interest per quarter in September and December 1995, and throughout 1996. These problems resulted in lower cash flow to the Company requiring it to utilize other methods to acquire funds necessary to satisfy its monetary and contractual obligations, including the issuance of equity, as described above. Pursuant to the Subordination Agreement, the Company has agreed to defer the receipt of certain amounts owing to it from Gold Line as at March 22, 1995, together with interest accruing thereon, until such time as Gold Line is in compliance with certain covenants under its financing with NationsBank. It is impossible to predict when, if ever, Gold Line will be in compliance with such covenants and when, if ever, the Company will be able to collect such obligations. Nonpayment thereof would not result in and additional charge against earnings. There is no assurance of success of any financing efforts the Company may pursue or the timing or success of it refinery/VDU projects and/or its potential projects. In the event the Company is not able to fund its projects on its own in a timely manner, Management believes it will be able to obtain partners for certain projects, however, such projects could be delayed or curtailed. IMPACT OF CHANGING PRICES The Company's revenues, its ability to repay indebtedness and the carrying value of its oil and gas properties owned from time to time 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. For example, this occurred in 1994, when, based on estimates of proven reserve quantities by the Company's independent reservoir engineers, the Company reduced the carrying value of its oil and gas assets by $6,904,000 during the fourth quarter of 1994. RESULTS OF OPERATIONS The following table highlights the results of operations for the years ended December 31, 1996, 1995 and 1994. 21
For the Years Ended December 31, 1996 1995 1994 Exploration and Production Activity: Colombia Properties: Revenue - Oil Sales (000's) $1,365 $1,104 $1,083 Lease Operating Expenses (000's) $612 $364 $564 Production Volume - Bbls 130,433 137,821 121,643 Average Price per Bbl $10.46 $8.01 $8.91 Production Cost per Bbl $4.69 $2.65 $4.64 DD&A per Bbl (1) $3.77 $3.86 $5.51 Peru Properties (2)(3): 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 - - - Refinery Operations: Refinery Lease Fees (000's) $2,468 $1,185 $2,065 Average Daily Throughput (Bbls) 13,138 8,116 14,518 Average Throughput Fee $.50 $0.40 $0.39
- ----------------------------- (1) DD&A excludes provisions for reduction of oil and gas properties of $200,000 and $6,904,000 in 1996 and 1994, respectively. (2) Information for 1996 was not available due to a dispute with a joint venture partner. (3) No DD&A was calculated since all properties and related capital expenditures in Peru were considered as unevaluated and therefore were excluded from the DD&A calculation in each of 1996, 1995 and 1994. REFINERY OPERATIONS For the Year Ended December 31, 1996 compared to the Year Ended December 31, 1995 The Company leased its refinery to Gold Line Refinery Ltd. from 1990 until March 20, 1997. As lessee, Gold Line was responsible for all operating costs of the refinery. The Company charged Gold Line a fee for each barrel of feedstock processed at the refinery. The fee during 1995 was $.40 per barrel of throughput, which increased to $.50 per barrel on January 1, 1996. This rate continued until the Lease was terminated on March 20, 1997. Refinery lease fee revenue increased by approximately 108% in 1996 to $2,468,000 compared to $1,185,000 in 1995. The increase was due to the increase in the throughput processing fee from $0.40 to $0.50 per barrel processed and in the increase in its throughput barrels by 62% during 1996, primarily due to Gold Line having its feedstock financing in place throughout 1996 compared to being shutdown for the first quarter of 1995 due to a lack of financing. In March of 1996, Gold Line secured an additional one-year, $45 million fuel supply contract with the DFSC which, when combined with its then current DFSC contract increased processing requirements to between 15,000 and 16,000 barrels of feedstock per day. However, because of non-payment of lease fees and other items of default under the terms of the Lease Agreement, Gold Line was evicted from the Refinery premises on March 20, 1997. The Company plans to implement terminalling operations whereby the Company will charge a processing fee for providing its refinery facilities as a terminal to store and process its customer's asphalt for distribution to local markets. The Company is also currently evaluating several fee processing options for operating the Crude Unit, which could provide the Company with similar or better operating income than that formerly provided by the Lease Agreement. 22 For the Year Ended December 31, 1995 compared to the Year Ended December 31, 1994 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, as discussed above. As a result, Gold Line experienced a 44% decline in its annual throughput in 1995 compared to 1994. OIL AND GAS PRODUCTION ACTIVITY For the Year ended December 31, 1996 compared to the Year ended December 31, 1995. Oil production in 1996 decreased to 130,433 barrels of oil from 155,615 in 1995, a 16% decrease. Approximately 11% of the 16% decrease was attributed to the lack of any production from the Peru properties during 1996. Average oil prices, net of transportation, increased, however, by 25% or $1.97 per barrel to $9.98 in 1996, as compared to $8.01 in 1995 due to renegotiated oil sales contracts and higher oil prices in 1996. The increase in oil prices during 1996 more than offset the decline in oil production for period, resulting in a 7% increase in oil revenues in 1996 compared to 1995. Production costs had a net increase of $181,000 or 42% in 1996 compared to 1995. Transportation costs of $63,000 accounted for 17% of the increase in 1996. During 1996, an increase in G&A overhead allocation of $107,000 to production costs accounted for 29% of the increase. This increase in overhead allocation is directly related to a corresponding decrease in total G&A expenses. For the Year ended December 31, 1995 compared to the Year ended December 31, 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 AIPCC sold all of its crude oil directly to an end-user at the wellhead, eliminating transportation costs. OTHER INCOME Other income decreased by approximately $78,000 (22%) during 1996 to $278,000 compared to $356,000 in 1995. This was due primarily to a decrease in interest income of 44% to $127,000, compared to $228,000 in 1995, due to a decrease in funds on deposit during 1996. 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 fluctuations in the currency exchange rates between the United State and Colombia. GENERAL AND ADMINISTRATIVE For the year ended December 31, 1996 compared to the year ended December 31, 1995 Total General & Administrative Expenses ("G&A") decreased during 1996 by $496,000 or 14% compared to 1995. There was an additional $400,000 increase in 1996 in the provision for excise tax compared to the $250,000 provision charged in 1995. Decreases in other G&A expenses during 1996 compared to 1995 were: 23 decrease in payroll expense of $95,000, decrease in professional and consulting fees of $93,000, decrease in insurance costs of $56,000, and an increase in the capitalized and reimbursed G&A expenses of $137,000. During the construction of the Company's refinery project, which commenced during 1996, approximately $275,000 of G&A expenses were capitalized to the project. Further declines in G&A are expected after February 25, 1997, due to the elimination of expenses related to the operation of AIPCC and PAIPC. For the year ended December 31, 1995 compared to the year ended December 31, 1994 Total 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. INTEREST Interest expense increased by $1,781,000 in 1996 compared to 1995, due primarily to $1.2 million in imputed interest recorded for discounted convertible debentures, discussed below, and to $450,000 in interest expense related to a pending Excise Tax dispute with the IRS. The SEC staff recently adopted a new position on accounting for convertible debt instruments which are convertible at a discount to the market price. As a result, interest expense in 1996 reflects $1,216,000 related to the presumed incremental yield the investor may derive from the discounted conversion rate of such instruments issued by the Company in 1996. Management believes that the related amount of interest recorded by the Company is not necessarily the true cost to the Company of the instruments it issued and that it may be reasonable to conclude that the fair value of the common stock into which these securities may be converted was less than such stock's quoted market price at the date the convertible securities were issued (considering factors such as the period for which sale of the stock is restricted (which in certain cases was as long as six months), large block factors, lack of a sufficiently-active market into which the stock can be quickly sold, time value, etc.). However, the SEC believes that an "intrinsic value" of the conversion feature at the date of issuance should be accounted for and that such incremental yield should be measured based on the stock's quoted market price at the date of issuance, regardless if such yield is assured. The SEC staff has indicated that "Registrants using another value will bear the difficult burden of providing persuasive evidence that another value is more appropriate." Consequently, the Company accounts for such instruments as directed by the SEC. The Company also capitalizes certain other costs associated with the offering and sale of debentures. Such costs are amortized as interest expense over the life of the related debt instrument. Debenture costs amortized in 1996 increased by $183,000 to $289,000 as compared to 1995. In 1997, interest expense is expected to decrease due to the expected issuance of fewer discounted convertible debt instruments, the pay down of debt in January and February 1997, and anticipated reductions in same later in 1997. 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. 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 24 On August 13, 1996, Price Waterhouse LLP resigned as the independent accountants of the Company. In connection with its audits for the two most recent fiscal years and through August 13, 1996, there were no disagreements with Price Waterhouse LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure. Information required under Item 304 of Regulation S-K was previously disclosed on a Current Report on Form 8-K dated August 19, 1996 filed by the Company with the SEC. 25 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 56 Chairman of the Board of Directors and Chief Executive Officer Denis J. Fitzpatrick 52 Vice President, Secretary and Chief Financial Officer William L. Tracy 49 Treasurer and Controller Daniel Y. Kim 72 Director Donald G. Rynne 74 Director William R. Smart 76 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 and has held various accounting and financial management positions in the oil and gas industry since that date. In the past he has served as a Director or Officer of the Council of Petroleum Accountants Society; served on the Tax Committee of the American Petroleum Institute and as a member of the American Management Association. Mr. 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 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. Since November 1, 1983, Mr. Smart has been Senior Vice President of Cambridge Strategic Management Group, a management consulting firm. 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. 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. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and directors, and persons who own more than 10 percent of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Such reporting persons are required by regulation to furnish the Company with copies of all Section 16(a) reports that they file. Based solely on its review of the copies of such reports received by it, or written representations from certain reporting persons that no Form 5 was required for those persons, the Company believes that, during the period from January 1, 1996 through December 31, 1996, all filing requirements applicable to its officers, directors and greater than ten percent beneficial owners were complied with, except that each of Messrs. Fitzpatrick, Rynne, Smart and Tracy, and Drs. Kim and Faris filed one late report on Form 4, in each case relating to two transactions. 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 1996, 1995 and 1994.
Annual Compensation Long Term Compensation Name and Principal Other Annual All Other Position Year Salary Bonus Compensation Options(#) Compensation - ------------------ ---- ------ ----- ------------ ------------ ------------ George N. Faris 1996 $292,000 $15,000 $ 9,600(1) 1,000,000 $422,000(2) Chairman of the 1995 $240,000 - $45,000(1) 202,500(3) - Board and Chief 1994 $248,000 - $16,250(4) - - Executive Officer Denis J. Fitzpatrick 1996 $105,000 $ 5,000 $15,000(5) 100,000 - Secretary, Vice 1995 $105,000 - $18,494(5)(6) 20,000(3) - President and Chief 1994 $ 38,000(7) - $ 6,250(5) 20,000(8) - Financial Officer Kenneth N. Durham 1996 - (9) - - - - President and Chief 1995 $145,000(9) - - - - Operating Officer 1994 $169,000 - - - -
27 (1) $35,503 of the amount in 1995 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 in each of 1996 and 1995. (2) 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. (3) Options issued in substitution for outstanding options. The exercise price was reduced to $.50 per share. (4) Includes split dollar life insurance premiums of $16,250 paid by the Company on behalf of Dr. Faris in 1994. (5) Mr. Fitzpatrick is reimbursed up to $15,000 per year in expenses incurred while working in the New York office. (6) Mr. Fitzpatrick was awarded 5,000 restricted shares of Common Stock as a signing bonus, which shares were issued in 1995. (7) Mr. Fitzpatrick joined the Company on August 15, 1994 at an annual salary level of $105,000. (8) Options awarded upon hiring. These were later repriced. See footnote 3 above. (9) Mr. Durham resigned from employment with the Company effective on November 3, 1995. STOCK OPTION PLANS The Company has established a 1995 Stock Option Plan (the "Plan"). The Plan was approved by the Board of Directors on November 8, 1995 and by the Company's shareholders on July 11, 1996. The Plan is administered by the Board of Directors of the Company or a Committee designated by them. Under the Plan employees, including officers and managerial or supervising personnel, are eligible to receive Incentive Stock Options ("ISOs") or ISOs 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. Option may be granted under the Plan to purchase an aggregate of 3,500,000 shares of Common Stock. If an option granted under the Plan terminates or expires without having been exercised in full, the unexercised shares subject to that option will be available for a further grant of options under the Plan. Options may not be transferred other than by will or the laws of descent and distribution and, during the lifetime of the optionee, may be exercised only by the optionee. Options may not be granted under the Plan after November 7, 2005. The exercise price of the options granted under the Plan cannot be less than the fair market value of the shares of Common Stock on the date the option is granted. ISO's granted to Shareholders owning 10% or more of the outstanding voting power of the Company must be exercised at a price equal to 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 $100,000. Any additional Common Stock as to which options become exercisable for the first time during any such year are 28 treated as NQSO's. The total number of options granted under the Plan, as of April 10, 1997 was 1,902,500, which included 302,500 repriced options granted in substitution for options previously held. OPTION GRANTS IN LAST FISCAL YEAR The table below includes the number of stock options granted to certain executive officers during the year ended December 31, 1996, exercise information and potential realizable value.
Individual Grants Potential Realizable Number of Percent of Value at Assumed Securities Total Options Annual Rates of Stock Underlying Granted to Price Appreciation Options Employees Exercise Expiration for Option Term Name Granted) in Fiscal Year Price($/sh) Date 5%($) 10%($) - ---- ---------- -------------- ----------- ---- ----- ------ George N. Faris 1,000,000 76.9% $.50 10/21/99 $ - $20,000 Denis J. Fitzpatrick 100,000 7.7% $.50 10/21/99 $ - $ 2,000
AGGREGATE OPTION EXERCISES IN 1996 AND OPTION VALUES AT DECEMBER 31, 1996 29 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, 1996. 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 on Value Number of Unexercised Value of Unexercised Name Exercise Realized Options at Year End In-the-money Options(1) Exercisable Unexercisable Exercisable Unexercisable George N. Faris - - 452,000 750,000 - - Denis J. Fitzpatrick - - 45,000 75,000 - -
(1) The closing price of the Common Stock on the last day of the year ended December 31, 1996 was $.39. Therefore, all options listed were "Out-of-the- Money" as of that date. EMPLOYMENT CONTRACT Effective May 1, 1989, the Company entered into a an employment agreement with George N. Faris at an annual salary of $200,000, which agreement is renewed annually. In 1992, the Board increased Dr. Faris' salary to $300,000 per year. In April 1994, Dr. Faris voluntarily reduced his salary to $240,000 per year. In February 1996, Dr. Faris' salary was reinstated to $300,000 per year effective February 1, 1996. Pursuant to the employment agreement, in the event of a change in control of the Company which Dr. Faris and a majority of the Company's Board of Directors approve, Dr. Faris was 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 opposed a change in control, but the majority of the Board of Directors voted in favor of such change, then Dr. Faris could have terminated his employment and received 2.5 times his fixed compensation. In the event that Dr. Faris' employment was terminated prior to the expiration of his contract for reasons other than cause or death, or if such employment agreement was not renewed at termination, the Company was to pay 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 in annual installments of $250,000. 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 subsequently ratified by the Company's shareholders. Pursuant to the Amendment, the rights of Dr. Faris described in the previous paragraph terminated, and Dr. Faris received, in exchange, 900,000 shares of restricted stock of the Company. 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 three 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". 30 COMPENSATION OF DIRECTORS During 1996, the Company reimbursed directors for their actual Companyrelated 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 attended in person if such director served on a Standing Committee of the Board of Directors; and $500 for each Board meeting attended in person. 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, any of whose officers served either on the Board of Directors of the Company or on the Compensation Committee of the Company. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information, as of April 1, 1997, 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.
Name and Address Amount and Nature of Percent of Beneficial Holder(1) Beneficial Ownership of Class George N. Faris 2,595,176(2) 6.7% Daniel Y. Kim 88,500(3) * Donald G. Rynne 382,780(4) 1.0% William R. Smart 192,944(5) * Denis J. Fitzpatrick 100,000(6) * Kenneth N. Durham 5,000 * All officers and directors as a group (consisting of 6 persons) 3,397,900(7) 8.7%
* Less than 1% (1) All Officers and Directors have an address care of the Company, 444 Madison Avenue, Suite 3203, New York, NY 10022. (2) Excludes 37,400 shares of Common Stock beneficially owned by Mrs. Claudette Faris, Dr. Faris' wife, as to which shares Dr. Faris disclaims beneficial ownership, and 250,000 unexercisable options. Includes 1,238,169 shares of Common Stock issuable upon exercise of stock options and warrants held by Dr. Faris. (3) Includes 80,500 shares of Common Stock issuable upon exercise of a like number of options owned by Dr. Kim. Excludes 25,000 unexercisable options. (4) Includes 174,260 shares of Common Stock issuable upon exercise of a like number of options and warrants owned by Mr. Rynne. Excludes 25,000 unexercisable options. 31 (5) Includes 136,986 shares of Common Stock issuable upon exercise of a like number of options and warrants owned by Mr. Smart. Excludes 25,000 unexercisable options. (6) Includes 95,000 shares of Common Stock issuable upon exercise of options owned by Mr. Fitzpatrick. Excludes 25,000 unexercisable options. (7) Includes all of the shares of Common Stock issuable upon exercise of options and warrants described in Notes (2) through (6) above, plus 38,500 shares of Common Stock issuable upon exercise of options owned by another officer of the Company. Excludes 12,500 unexercisable options owned by such officer. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See "Item 11 - Executive Compensation - Employment Contract". 32 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 December 31, 1996 and 1995 F-5 Consolidated Statement of Operations Years Ended December 31, 1996, 1995 and 1994 F-6 Consolidated Statement of Cash Flows Years Ended December 31, 1996, 1995 and 1994 F-7 Consolidated Statement of Changes in Stockholders' Equity - Years Ended December 31, 1996, 1995 and 1994 F-8 Notes to Consolidated Financial Statements F-11 Supplementary Oil and Gas Information F-34 (2) FINANCIAL STATEMENT SCHEDULES. None. (3) EXHIBITS. 2.1 Share Purchase Agreement dated February 25, 1997, among the Registrant, AIPCC, PAIPC and MIP.(12) 3.1 Restated Articles of Incorporation of the Registrant. (8) 3.2 By-Laws of the Registrant, as amended. 4.1 Form of Class A Warrant. (4) 4.2 1995 Stock Option Plan and Form of Option Agreements of the Registrant.(7) 4.3 Form of 12.5% Series X Senior Convetible Subordinated Redeemable Debenture due January 2, 1998.(10) 4.4 Form of Subscription Agreement used in connection with the offering of the Series X Debentures, referred to herein as Exhibit 4.3.(10) 4.5 Form of Regulation S Subscription Agreement for Common Stock used in an offering of 1,000,000 shares dated May 28, 1997.(11) 4.6 Form of 7% Convertible Debenture due February 1, 1999.(11) 4.7 Form of Subscription Agreement used in connection with the offering of the 7% Debentures, referred to herein as Exhibit 4.6.(11) 4.8 Form of 8% Redeemable Convertible Debenture due April 1999 and Form of Subscription Agreement relating thereto. 10.1 Employment Agreement, dated May 1, 1989 by and between George N. Faris and the Registrant.(1) 10.2 Loan and Security Agreement ("Loan Agreement") dated December 4, 1990 by and between MG Trade Finance Corp. ("MGTF") and AIRI. (2) 10.3 Corporate Continuing Guarantee of the Registrant to MGTF, dated December 4, 1990. (2) 33 10.4 Pledge Agreement, dated as of the 4th day of December 1990, by and among the Registrant, AIRI and MGTF. (2) 10.5 Shareholder Distribution Agreement dated as of the 4th day of December 1990, by and among the Registrant, AIRI and MGTF. (2) 10.6 Form of Sale of Indebtedness and Assignment of Collateral Mortgage Notes and Security Documents. (2) 10.7 Form of Collateral Mortgage Note drawn by AIRI. (2) 10.8 Form of Amended and Restated Collateral Pledge Agreement drawn by AIRI (Inventory). (2) 10.9 Form of Amended and Restated Collateral Pledge Agreement drawn by AIRI (Fixed Assets). (2) 10.10 Environment Indemnity Agreement dated December 4, 1990 by and between AIRI, the Registrant and MG. (2) 10.11 Amendment to Loan and Security Agreement, dated as of September 26, 1991. (3) 10.12 Promissory Note, dated March 15, 1995 from Gold Line Refining, Ltd. to American International Petroleum Corporation.(5) 10.13 Amended and Restated Lease Agreement between Gold Line and AIRI dated March 22, 1995.(5) 10.14 Letter Agreement dated March 22, 1995 amending Loan and Security Agreement(5) 10.15 Subordination and Standby Agreement dated March 22, 1995 between NationsBank, Gold Line Refining, Ltd., Citizens Bank and AIRI.(7) 10.16 Intercreditor Letter Agreements dated March 22, 1995 between MGTF, Citizens Bank and AIRI.(7) 10.17 Amendment #1 to Employment Agreement, dated October 13, 1995, between George N. Faris and the Registrant(6). 10.18 Letter dated February 9, 1996 amending Promissory Note between AIRI and Gold Line Refining Ltd.(7) 10.19 Registration Rights Agreement dated July 11, 1996 between Dr. George N. Faris and the Registrant.(8) 10.20 $3 million 5% exchangeable debenture, granted by AIPCC to the Registrant, due February 25, 1999.(12) 10.21 Pledge Agreement dated February 25, 1997 among the Registrant, MIP and MGTF.(12) 16.1 Letter dated August 19, 1996 regarding a change in certifying accountant.(9) 21.1 Subsidiaries of the Registrant. 27.1 Financial Data Schedule. - ------------ (1) Incorporated herein by reference to the Registration Statement on Form S-1 declared effective on February 13, 1990. 34 (2) Incorporated herein by reference to the Registrant's Current Report on Form 8-K, dated December 4, 1990. (3) Incorporated herein by reference to the Registration Statement on ForM S-1, declared effective November 9, 1992. (4) Incorporated herein by reference to the Registration Statement on Form S-2, declared effective January 13, 1994. (5) Incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. (6) Incorporated herein by reference to Amendment #19 to Schedule 13D of George N. Faris for October 13, 1995. (7) Incorporated herein by reference to the Registants' Annual Report on Form 10-K for the fiscal year ended December 31, 1995. (8) Incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996. (9) Incorporated herein by reference to the Registrant's Form 8-K dated August 19, 1996. (10) Incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996. (11) Incorporated herein by reference to the Registrant's Form 8-K dated February 12, 1997. (12) Incorporated herein by reference to the Registrant's Form 8-K dated March 12, 1997. (B) REPORTS ON FORM 8-K A Current Report on Form 8-K, dated December 24, 1996, was filed by the Company with respect to the sale of convertible debentures pursuant to Regulation S. 35 INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Stockholders American International Petroleum Corporation We have audited the accompanying consolidated balance sheet of American International Petroleum Corporation and Subsidiaries as of December 31, 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We did not audit the financial statements for the year ended December 31, 1996 of American International Petroleum Corporation of Colombia (AIPC-Colombia), a wholly-owned subsidiary, which statements reflect total assets of $14,641,646 at December 31, 1996 and total revenues of $1,364,581 for the year ended December 31, 1996. 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 amounts included in AIPC-Colombia, is based solely on the report of the other auditors. We conducted our audit in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based upon our audit and the report of other auditors, the consolidated financial statements referred to above present fairly in all material respects, the consolidated financial position of American International Petroleum Corporation and Subsidiaries as of December 31, 1996, and the results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles. HEIN + ASSOCIATES LLP Certified Public Accountants Houston, Texas April 9, 1997 F-1 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 accompanying consolidated balance sheet and the related consolidated statements of operations, of cash flows and of changes in stockholders' equity present fairly, in all material respects, the financial position of American International Petroleum Corporation and its subsidiaries at December 31, 1995, and the results of their operations and their cash flows for each of the two 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-2 TRANSLATION OF AUDITOR'S REPORT Bogota, March 11, 1997 To the Members of the Board of Directors of American International Petroleum Corporation of Colombia I have audited the general balance sheets of the Colombian Branch of American International Petroleum Corporation of Colombia through December 31, 1996 and 1995, as well as the corresponding financial results, changes in the net worth of the Branch, changes in the financial status and cash flow for the years ended on said dates. The presentation of those financial statements and their corresponding notes are the responsibility of the Branch's administration and they reflect its operation. My functions include their audit and rendering an opinion about them. I obtained the necessary information to comply with my functions as Auditor and conducted my work in accordance with generally accepted auditing rules in Colombia, which require that the auditing 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, the conduct of an examination based on selective samples 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 management and the presentation of the financial reports as a whole. I consider that my audit provides a reasonable basis for the opinion I express below regarding the financial reports. The Branch follows accounting procedures generally accepted for oil companies, established by the Superintendency of Companies and Colombian law, in its accounting and in the presentation of the financial statements. In my opinion, the financial statements previously mentioned, which were faithfully taken from the books, reasonably reflect the financial condition of American International Petroleum Corporation of Colombia through December 31, 1996 and December 31, 1995, the results of its operations, changes in its financial condition, changes in its net worth and its cash flows for the year ended on those dates, all 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, 1996 and December 31, 1995 were kept in compliance with the legal norms and accounting practices; the operations registered in the books and the administrator's actions complied with the statutes and the decisions of the Board of Directors of its Main Office; the correspondence and vouchers of the accounts were duly carried out and kept, and adequate measures of internal control and maintenance and guard of the Branch's and third parties' goods in its possession were observed. BERNARDO VILLEGAS PEREZ AUDITOR Professional Card No. 4962-A F-3 BERNARDO VILLEGAS PEREZ CONTADOR PUBLICO Santafe de Bogota, D.C. Marzo 11 de 1997 A los senores Miembros de la Junta Directiva de AMERICAN INTERNATIONAL PETROLEUM CORPORATION COLOMBIA He auditado los balances generales de la Sucursal en Colombia de American International Petroleum Corporation of Colombia al 31 de Diciembre de 1996 y 1995 y los correspondientes Estados de Resultados, de cambios en el patrimonio, de cambios en la situacion financiera y de flujo de efectivo de los anos terminados en dichas fechas. 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 sobre ellos. Obtuve 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 razonblemente 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 las presentacion de los estados financieros en conjunto. Considero que mi auditoria provee una base rezonable 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 las Superintendencia de Sociedades y las leyes Colombianas. En mi opinion los estados financieros antes mencionados, que fueron tomados fielmente de los libros, presentan razonblemente las situacion financiera de American International Petroleum Corporation of Colombia al 31 de Diciembre de 1996 y 31 de Diciembre de 1995, los resultados de sus operaciones, los cambios en el patrimonio, en su y 31 de Diciembre de 1995 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. Ademas, conceptuo que durante el ano terminado en 31 de Diciembre de 1996 y 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 se conservan debidamente, se observaron medidas adecuadas de control interno y conservacion y custodia de los bienes de American International Petroleum Corporation of Colombia y de terceros, en su poder. BERNARDO VILLEGAS PEREZ Revisor Fiscal Tarjeta Profesional 4962-A F-4 AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, ------------------------------------------------------ Pro Forma 1996 1995 1996 (Unaudited) Assets Current assets: Cash and cash equivalents $ 11,058 $ 162,218 $ 1,488,509 Cash - restricted 161,022 226,223 29,125 Marketable Securities -- -- 8,768,750 Accounts receivable, net 1,073,140 1,073,553 1,773,741 Inventory 459,961 504,953 -- Prepaid expenses 838,104 547,509 437,367 ------------ ------------ ------------ Total current assets 2,543,285 2,514,456 12,497,492 ------------ ------------ ------------ Property, plant and equipment: Unevaluated property 5,648,630 4,998,824 89,389 Oil and gas properties 32,506,656 31,566,297 371,665 Refinery property and equipment 17,235,183 15,521,995 17,235,183 Other 499,971 506,445 192,968 ------------ ------------ ------------ 55,890,440 52,593,561 17,889,205 Less - accumulated depreciation, depletion and amortization and impairments (23,959,191) (22,502,472) (3,669,618) ------------ ------------ ------------ Total property, plant and equipment 31,931,249 30,091,089 14,219,587 ------------ ------------ ------------ Other long-term assets, net 17,897 34,817 2,342,897 ------------ ------------ ------------ Total assets $ 34,492,431 $ 32,640,362 $ 29,059,976 ============ ============ ============ Liabilities and Stockholders' Equity Current liabilities: Notes payable $ 237,162 $ 66,759 $ -- Current portion of long-term debt 5,968,393 1,870,000 3,799,643 Accounts payable 3,636,765 2,363,562 1,564,013 Accrued liabilities 2,524,194 1,616,678 2,192,152 ------------ ------------ ------------ Total current liabilities 12,366,514 5,916,999 7,555,808 Long-term debt 798,199 5,432,671 798,199 ------------ ------------ ------------ Total liabilities 13,164,713 11,349,670 8,354,007 ------------ ------------ ------------ Stockholders' equity: Preferred stock, par value $0.01, 7,000,000 shares authorized, none issued Common stock, par value $.08, 100,000,000 shares authorized, 34,458,921 shares issued and outstanding at December 31, 1996 and 24,705,926 shares at December 31, 1995 2,756,714 1,976,474 2,756,714 Additional paid-in capital 78,677,265 74,768,272 78,677,265 Stock purchase warrants 1,297,754 1,297,754 1,297,754 Accumulated deficit (61,404,015) (56,751,808) (62,025,764) ------------ ------------ ------------ Total stockholders' equity 21,327,718 21,290,692 20,705,969 ------------ ------------ ------------ Commitments and contingent liabilities (Note 10) -- -- -- ------------ ------------ ------------ Total liabilities and stockholders' equity $ 34,492,431 $ 32,640,362 $ 29,059,976 ============ ============ ============
The accompanying notes are an integral part of these statements. F-5 AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, --------------------------------------------- 1996 1995 Revenues: Oil and gas production and pipeline fees $1,364,581 $1,270,164 Refinery lease fees 2,467,606 1,184,864 Other 278,327 356,280 --------------- ---------------- Total revenues 4,110,514 2,811,308 --------------- ---------------- Expenses: Operating 613,336 432,440 General and administrative 3,076,357 3,572,337 Depreciation, depletion and amortization 1,265,230 1,396,423 Interest 2,818,218 1,037,308 Write-down of oil and gas properties 200,000 - Provision for bad debts 789,580 711,122 --------------- ---------------- Total expenses 8,762,721 7,149,630 --------------- ---------------- Net loss ($4,652,207) ($4,338,322) =============== ================ Net loss per share of common stock ($0.16) ($0.20) =============== ================ Weighted-average number of shares of common stock outstanding 29,598,832 21,746,719 =============== ================
The accompanying notes are an integral part of these statements. F-6 AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, ---------------------------------------------------- 1996 1995 1994 ---------------- -------------- --------------- Cash flows from operating activities: Net loss $ (4,652,207) ($4,338,322) ($10,966,914) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation, depletion and amortization 2,551,504 1,502,435 1,698,532 Write-down of oil and gas properties 200,000 - 6,904,016 Provision for bad debts 789,580 711,122 18,866 Warrant price adjustment - - 210,588 Compensation expense 424,063 55,814 - Changes in assets and liabilities: Accounts and notes receivable (789,167) (537,569) 286,491 Inventory 44,992 446,519 (55,864) Prepaid and other (370,274) (98,359) 27,586 Accounts payable and accrued liabilities 2,352,361 1,984,574 (3,233,610) ---------------- -------------- --------------- Net cash provided by (used in) operating activities 550,852 (273,786) (5,110,309) ---------------- -------------- --------------- Cash flows from investing activities: Additions to oil and gas properties (1,590,165) (3,194,454) (5,556,593) Additions to refinery property and equipment (1,713,188) 14,284 - Proceeds from sales of marketable securities - - 301,201 Other (10,176) (26,753) 25,037 ---------------- -------------- --------------- Net cash used in investing activities (3,313,529) (3,206,923) (5,230,355) ---------------- -------------- --------------- Cash flows from financing activities: Cash - restricted, loan collateral 65,201 (11,593) (214,630) Net increase (decrease) in notes payable 170,403 66,759 (535,078) Increase (decrease) in notes payable officers and directors - - (50,000) Proceeds from long-term debt - - 60,000 Repayments of long-term debt (1,434,278) (467,500) (3,374,520) Proceeds from issuance of common stock and warrants, net 745,302 3,111,858 14,977,922 Proceeds from exercise of stock warrants and options - 32 140 Proceeds from notes receivable for issuance of common stock - - 367,064 Proceeds from issuance of debentures, net 3,064,889 - - ---------------- -------------- --------------- Net cash provided by financing activities 2,611,517 2,699,556 11,230,898 ---------------- -------------- --------------- Net increase (decrease) in cash and cash equivalents (151,160) (781,153) 890,234 Cash and cash equivalents at beginning of year 162,218 943,371 53,137 ---------------- -------------- --------------- Cash and cash equivalents at end of year $11,058 $162,218 $943,371 ================ ============== ===============
The accompanying notes are an integral part of these statements. F-7 AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Additional Stock Common stock paid-in purchase Accumulated Shares Amount capital warrants deficit Total ------------- ------------- ------------- ------------ ------------ -------------- Balance, January 1, 1996 24,705,926 $ 1,976,474 $ 74,768,272 $ 1,297,754 $(56,751,808) $ 21,290,692 Conversions of Debentures 6,535,122 522,810 1,477,190 -- -- 2,000,000 Issuance of stock in lieu of current liabilities 479,540 38,363 130,539 -- -- 168,902 Issuance of stock for compensation 905,000 72,400 351,663 -- -- 424,063 Issuance of common stock 1,833,333 146,667 598,635 -- -- 745,302 Imputed interest on debentures convertible at a discount to market -- -- 1,350,966 -- -- 1,350,966 Net loss for the year -- -- -- -- (4,652,207) (4,652,207) ------------ ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1996 34,458,921 $ 2,756,714 $ 78,677,265 $ 1,297,754 $(61,404,015) $ 21,327,718
The accompanying notes are an integral part of this statement. F-8 AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Notes Additional Stock receivable Common stock paid-in purchase for issuance Accumulated Shares Amount capital warrants of stock 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 ========== ========== =========== ========== ======== ============ ===========
The accompanying notes are an integral part of this statement. F-9 AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Notes Additional Stock receivable Common stock paid-in purchase for issuance Accumulated Shares Amount capital warrants of stock deficit Total ---------- ---------- ----------- ---------- --------- ------------ ------------- Balance, January 1, 1994 7,064,233 565,139 $57,000,210 $ -- $ -- $(41,446,572) $16,118,777 Issuance of stock and warrants 11,382,548 910,603 13,169,565 1,297,754 -- -- 15,377,922 Conversion of debentures 633,334 50,667 899,333 -- -- -- 950,000 Issuance of stock for payment of notes payable 8,525 682 12,105 -- -- -- 12,787 Issuance of stock in lieu of current liabilities 10,373 830 14,729 -- -- -- 15,559 Issuance of stock for note receivable -- -- -- -- (400,000) -- (400,000) Payment received on note receivable -- -- -- -- 367,064 -- 367,064 Exercise of warrants 35 3 137 -- -- -- 140 Adjustments to exercise price of warrants -- -- 210,588 -- -- -- 210,588 Expired stock dividends - Aztec -- -- 288,703 -- -- -- 288,703 Net loss for the year -- -- -- -- -- (10,966,914) (10,966,914) ---------- ---------- ----------- ---------- -------- ------------ ----------- Balance, December 31, 1994 19,099,048 $1,527,924 $71,595,370 $1,297,754 $ (32,936) $(52,413,486) $21,974,626 ========== ========== =========== ========== ======== ============ ===========
The accompanying notes are an integral part of this statement. F-10 AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES: American International Petroleum Corporation (the "Company") was incorporated in the State of Nevada and, through its wholly-owned subsidiary, is the owner of a refinery in Lake Charles, Louisiana. The Company is also seeking domestic and international oil and gas properties. Sale of Subsidiaries On February 25, 1997, the Company sold all of the issued and outstanding common stock of two of its wholly-owned subsidiaries, American International Petroleum Corporation of Colombia ("AIPCC") and Pan American International Petroleum Corporation ("PAIPC"). Consequently, all references to these subsidiaries herein are presented in the past tense. 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"), AIPCC and PAIPC. Intercompany balances and transactions are eliminated in consolidation. Cash and cash equivalents All liquid short-term instruments purchased with original maturity dates of three months or less are considered cash equivalents. Restricted cash represents cash utilized as collateral for the Company's borrowings in Colombia and drilling commitments in Peru. In the first quarter of 1996, the Company fulfilled its drilling requirements in Peru and the cash collateral 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 F-11 undiscounted future development costs of proved reserves are depleted using the unit-of-production method based on total proved reserves applicable to each country. Under the full cost method of accounting, unevaluated property costs are not amortized. A gain or loss is recognized on sales of oil and gas properties only when the sale involves significant reserves. Costs related to acquisition, holding and initial exploration of concessions in countries with no proved reserves are initially capitalized and periodically evaluated for impairment. Certain geological and general and administrative costs are capitalized into the cost pools of the country cost centers. Such costs include certain salaries and benefits, office facilities, equipment and insurance. Capitalized general and administrative costs are directly related to the Company's exploration and development activities in Colombia and Peru and totaled $331,355, $472,606, and $383,004 for the years ended December 31, 1996, 1995 and 1994, 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 to expense in 1994 for the reduction of carrying costs of oil and gas assets. The Company's oil and gas properties, substantially all of which were held in AIPCC and PAIPC, were reduced to the amount realized from the sale of AIPCC and PAIPC on February 25, 1997 resulting in an impairment loss of $200,000 during 1996. 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 required that the carrying amount of impaired assets be reduced to fair value. The Company adopted SFAS No. 121 in the fourth quarter of 1995 and determined that it has no effect on the financial statements for the years ended December 31, 1996 and 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. F-12 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 collected sales of oil and gas in Colombia and Peru in local currency and utilized those receipts for local operations. Periodically, funds were transferred from U.S. accounts to Colombia or Peru and converted into pesos or soles, respectively, when local currency was insufficient to meet obligations payable in local currency. Foreign exchange gains were $63,763, $12,544, and $34,300 in 1996, 1995, and 1994, 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 Statement on Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" defines a fair value based method of accounting for an employee stock option or similar equity instrument or plan. However, SFAS No. 123 allows an entity to continue to measure compensation costs for these plans using the current method of accounting. Beginning in 1996, AIPC elected to account for employee stock compensation plans as defined in SFAS No. 123. 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. Pro forma Balance Sheet On February 25, 1997, the Company sold off the issued and outstanding shares of common stock of its wholly-owned subsidiaries, American International Petroleum Corporation of Colombia ("AIPCC") and Pan American International Petroleum Corporation ("PAIPC") (the "Purchased Shares") to Mercantile International Petroleum, Inc. ("MIP") in an arms length transaction. The assets of AIPCC and PAIPC consisted of oil and gas properties and equipment in South F-13 America with an aggregate net book value of approximately $17.9 million. The total aggregate purchase price payable by MIP for the Purchased Shares was valued at up to approximately $20.2 million, determined as follows: (a) Cash payments of approximately $3.9 million, of which approximately $2.2 million was paid simultaneously with the closing to retire the Company's 12% Secured Debentures due December 31, 1997, which were secured by the Company's shares of AIPCC. (b) Assumption of AIPCC and PAIPC debt of an aggregate amount of $634,000. (c) 4,384,375 shares of MIP Common Stock (the "MIP Shares") with a trading price of approximately $2.00 on the date the parties agreed in principle to the sale. (d) A two-year $3 million 5% exchangeable subordinated debenture of AIPCC (the "Exchangable Debenture"), exchangable into shares of common stock of MIP on the basis of $3 principal amount of such debenture for one share of MIP on or after February 25, 1998; or Registrant may demand payment on that date of $1.5 million of the principal balance thereof. (e) a $1.4 million "performance earn-out" from future production in Colombia, plus interest at 8% per annum. (f) Up to $2.5 million (reduced proportionately to the extent the Net Operating Loss and Deferred Cost Deductions accrued by AIPCC through December 31, 1996 ("Accrued Tax benefit Deductions") is less than $50 million but more than $20 million) payable from 25% of AIPCC's future tax savings related to Accrued Tax Benefit Deductions, if any, available to AIPCC on future tax filings in Colombia. As a result of the MIP transaction, the Company now owns approximately 11.3% of MIP's outstanding share capital on a fully-diluted basis (47,720,867 shares). MIP is traded in U.S. dollars on the Toronto Stock Exchange under the symbol MPT.U. The Company utilized some of the proceeds of the sale to repay the outstanding balance on its 12% Secured Debentures, due December 31, 1997, and intends to utilize the remaining proceeds to pay other debts, expand its refinery and for general corporate use. The unaudited Pro-forma Balance Sheet presented herein reflects the historical accounts of the Company giving effect to the MIP transaction as if it had occurred at December 31, 1996. New Accounting Standard The FASB issued Statement of Financial Accounting Standards No. 128, entitled Earnings Per Share, during February 1997. The new statement, which is effective for financial statements issued after December 31, 1997, including interim periods, establishes standards for computing and presenting earnings per share. The new statement requires retroactive restatement of all prior-period earnings per share data presented. The Company does not believe the new statement will have a material impact upon previously presented earnings per share information. F-14 NOTE 2 - MANAGEMENT'S PLANS: The Company has incurred losses of $4,652,207, $4,338,322, and $10,966,914 for the years ended December 31, 1996, 1995 and 1994, respectively. The Company also had negative working capital of $9,823,229 at December 31, 1996, which included approximately $3,720,000 of principal and interest due on its 12% Secured Debentures. During the third and fourth quarters of 1996, the lessee of the Company's refinery, Gold Line Refining Inc. ("Gold Line") began withholding payment of its lease fees and other amounts due to the Company under its lease. In addition, Gold Line did not make its scheduled note payments to the Company. This situation, coupled with the Company's 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 certain convertible debentures, bonds and shares of its common stock for cash and services rendered to the Company of approximately $3.8 million during 1996. During the first quarter of 1997, the Company received cash and settled certain liabilities totaling approximately $2.2 million from the sales and issuance of its common stock and convertible debentures. Funds from these transactions enabled the Company to make payments of principal and interest on its 12% Secured Debentures totaling approximately $1,379,125, to settle certain other obligations outstanding at December 31, 1996 and to make certain capital improvements to its Refinery. On February 25, 1997, the Company sold all of the issued and outstanding shares of common stock of its wholly-owned subsidiaries (Notes 1 and 15). The Company plans to utilize some of the proceeds received from this transaction to repay its outstanding debts and fund its operations until cash flows from its refinery operation are sufficient in nature to support the Company's operating capital requirements. Certain of the proceeds mentioned above are in the form of shares of common stock (the "MIP Shares") of the purchaser Mercantile International Petroleum, Inc. ("MIP"). The Company, initially, plans to margin the MIP shares as required in order to fund its operations. At some future date, it is likely the Company will sell a substantial portion of the MIP shares as its capital requirements dictate. However, the Company prefers to hold the MIP shares rather than sell them at this time, with the intention of selling them at a higher price than their current market value. As a result of a Company-filed action citing non-payment of lease fees and other amounts due to the Company, on March 20, 1997, Gold Line received a court order terminating its lease with the Company and was evicted from the refinery premises (Note 8). The Company is currently evaluating several options whereby AIRI would operate the crude processing unit ("CPU"), previously leased to Gold Line, and process feedstocks and produce products for other companies for a fee. It is expected that such an arrangement would provide operating income which would be similar to or greater than that derived from the Gold Line lease. In addition, the new terms would include both the implementation of a minimum throughput fee and a performance bond from these entities to ensure timely payment of fees. The Company hopes to implement this operation sometime during the second quarter of 1997. Upon completion of the necessary construction and expansion of the Company's vacuum distillation unit ("VDU"), in 1997 or early in 1998, the Company plans to implement the manufacturing of its own asphalt. F-15 Management believes the proceeds generated from equity financings and the margin and/or sale of the MIP shares, should provide the Company with the funds necessary to meet its working capital obligations and operating commitments during the ensuing fiscal year or until the refinery operations are sufficient in nature to provide same. The Company is also currently having discussions with various banking institutions in the United States and abroad regarding financing for the contemplated refinery operations. 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 the margin or sale of the MIP shares, or from debt financing, the exercise of outstanding options and warrants 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, or any anticipated oil or gas projects it may be considering. NOTE 3 - ACCOUNTS AND SHORT-TERM NOTES RECEIVABLE: Accounts and notes receivable are shown below:
December 31, ---------------------------------------------- 1996 1995 ---- ---- Accounts receivable - trade $ 1,942,946 $ 939,958.00 Note receivable - Gold Line 900,732 1,058,971 Other 150,980 139,082 ------------------- --------------------- 2,994,658 2,138,011 Less - allowance for doubtful accounts (1,921,518) (1,064,458) ------------------- --------------------- $ 1,073,140 $ 1,073,553 =================== =====================
NOTE 4 - OTHER LONG-TERM ASSETS: Other long-term assets consist of the following:
December 31, -------------------------------- 1996 1995 ---- ---- Note receivable - Gold Line $ - $ 974,583 Unamortized bond issue cost 17,897 34,817 ------------ ---------------- 17,897 1,009,400 Less - allowance for doubtful accounts - (974,583) ------------ ---------------- $ 17,897 $ 34,817 ============ ================
NOTE 5 - ACCOUNTS PAYABLE: Accounts payable at December 31, 1995 included $500,000 payable to an individual subcontractor for oil and gas operational services which was paid subsequent to December 31, 1995. F-16 NOTE 6 - ACCRUED LIABILITIES: Accrued liabilities consist of the following:
December 31, --------------------------------------- 1996 1995 Accrued payroll $ 266,429 $ 366,499 Accrued interest 282,076 347,247 Corporate taxes 330,024 275,206 Excise taxes 1,100,000 250,000 Property taxes 219,345 228,756 Other 326,320 148,970 ------------------ ----------------- $ 2,524,194 $ 1,616,678 ================== =================
NOTE 7 - LONG-TERM DEBT:
December 31, ----------------------------------------- 1996 1995 ---- ---- Note payable to MG Trade Finance Corporation $ 2,108,393 $ 2,845,171 8% - $100,000 Convertible debentures - due February 14, 1997, effective interest rate - 8% 100,000 - 9% - $150,000 Convertible Debentures - due December 9, 2000 effective interest rate - 17.3% 124,445 - 10% - $391,629 Convertible Debentures - due April 1, 1998 effective interest rate - 34.7% 293,040 - 12% Secured Debentures - due December 31, 1997, effective interest rate - 12% 25% of original principal due on December 31, 1996 3,510,000 4,207,500 12.5% - $426,000 Convertible Debentures - due January 2, 1998 effective interest rate - 49.2 to 51.7% 380,714 - Senior Convertible Subordinated Debentures-due February 1, 1997, interest ranges from 8.5-10.5% per annum, payable quarterly, convertible into common shares at at $50.00 per share. 250,000 250,000 ----------------- ----------------- 6,766,592 7,302,671 Less - Current portion 5,968,393 1,870,000 ----------------- ----------------- $ 798,199 $ 5,432,671 ================= =================
F-17 The effective interest rate as stated for each of the debt instruments above does not necessarily reflect the actual cash cost to the Company for that specific debt instrument. The effective interest rate reflects presumed incremental yield the holder of the debt instrument may derive from the discounted conversion rate of such instrument issued by the Company in 1996. The calculation and the presentation of such is a result of a new position adopted by the Securities and Exchange Commission, ("SEC"), for convertible debt instruments which are convertible at a discount to the market price. The staff of the SEC has taken the position that registrants who have accounted for such instruments in a different manner should restate previously issued financial statements, to the extent such restatements are material. During 1996, the Company sold convertible debentures totallying $2,965,000, of which $2,000,000 were converted into the Company's common stock at discounts to market ranging from 25% to 35%. The remaining convertible debentures sold during 1996, are convertible into the Company's common stock at discounts to market ranging from 25% to 35%. The following are the Company's unaudited quarterly results of operations for the year ended December 31, 1996, as restated to reflect accounting for various convertible debentures issued during 1996, which are convertible at a discount to market, in the manner prescribed by the SEC.
First Second Third Fourth Quarter Quarter Quarter Quarter Net (loss), as previously reported $(312,177) $ (470,210) $(742,780) $ (1,911,190) Additional financing cost 221,296 753,062 80,407 161,085 ---------------- ------------------- ---------------- ------------------ Net (loss), as restated $(533,473) $ (1,223,272) $(823,187) $ (2,072,275)
Long-term debt of $5,968,393, $673,754 and $124,445 matures during 1997, 1998 and 2000, 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 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, F-18 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 maturity was changed to 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 8). 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, would permit MGTF to accelerate the loan and demand immediate payment. At various times during 1996, 1995, 1994, 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. As part of certain negotiations related to the MIP Transaction, the Company agreed to change the due date of the unpaid balance of the Loan Agreement of $2,108,000 to September 30, 1997 from March 31, 1998. In addition, the Company agreed to pledge 1,000,000 shares of MIP common stock (partial consideration the Company received in the MIP Transaction) as additional collateral for the Loan Agreement. F-19 NOTE 8 - REFINERY LEASE: In October 1990, the Company leased its refinery to Gold Line. All amounts owed to AIRI by Gold Line on October 1, 1992 were restructured to a note totaling $1,244,192, due on September 30, 1995 bearing interest at prime plus 2%. The note was to be retired in monthly installments equal to 10% of Gold Line's monthly operating cash flow, if such operating cash flow was positive. No amounts were collected pursuant to the provision and the note was fully reserved for during 1992. No interest was accrued with respect to this note. On March 22, 1995, the term of the lease was extended through March 31, 1998. In consideration for extending the lease, Gold Line executed a $1,801,464 promissory note (which amount includes the $1,244,192 note referred to above and certain trade receivables owed the Company by Gold Line of $506,332 at December 31, 1994) payable in installments of principal and interest through June 15, 1997. The promissory note bears interest at prime plus 1%. The Company established a reserve for doubtful accounts of $1,921,518 and $2,039,041 at December 31, 1996 and 1995, respectively. In February, 1996, in order to enhance the business strength of the lessee of its Refinery and to assist it in securing a new government contract, the Company agreed to reduce the fully reserved principal balance of its note receivable from the lessee to $900,732 from $1,801,464. During the third and fourth quarters of 1996, Gold Line began to fall behind in their monthly lease fee payments to AIRI, even though it was processing an average in excess of 400,000 barrels of feedstock per month during these periods. On February 3, 1997, the Company delivered a Default Notice to Gold Line informing Gold Line of various items of default under the Lease Agreement, including non-payment of lease fees totaling approximately $567,000 and 1996 real estate taxes of approximately $208,000. Subsequent Notices of Default were also delivered to Gold Line covering additional items of default, including an additional $287,000 in unpaid lease fees and $29,000 of unpaid insurance premiums (which premiums have been paid by AIRI). On February 18, 1997, the Company delivered a Termination Notice and Notice to Vacate, pursuant to the Lease Agreement, whereby the Company gave written notice to Gold Line to vacate the leased premises five days from the date the Notice was delivered. Gold Line did not comply with the Company's Notice to Vacate, so on February 26, 1997 the Company filed suit against Gold Line. On March 20, 1997, the court terminated the Lease Agreement and ordered Gold Line to vacate the refinery premises within 24 hours of the Order, with which Gold Line complied. The carrying value of the Company's refinery property and equipment amounted to $12,425,476 (cost - $15,561,286; accumulated depreciation - $3,125,810) at December 31, 1996. F-20 NOTE 9 - STOCK OPTIONS AND WARRANTS: Outstanding warrants and options At December 31, 1996, 1995 and 1994, 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.
Numbers of Shares Under Options and Warrants at December 31, - ----------------------------------------------------------------------------- Exercise Expiration 1996 1995 1994 Price Date ---- ---- ---- ------- --------- - 1,500 1,500 $ 36.250 April 1, 1996 (2) - 66,715 66,715 $ 32.500 February 26, 1996 (2) - 7,988 7,988 $ 15.000 March 10, 1996 (2) - 3,000 3,000 $ 30.000 August 28, 1996 (2) 5,957,347 5,957,347 5,957,355 $ 4.000 March 1, 1997 20,000 20,000 20,000 $ 30.625 July 14, 1997 - 282,500 - $ 1.000 December 31, 1997 (1) (2) 150,000 150,000 - $ 2.000 March 31, 1998 - 20,000 - $ 1.000 August 3, 1998 (1) (2) - - 56,250 $ 20.000 December 31, 1995 (2) - - 296,667 $ 15.630 June 30, 1997 (2) - - 100,000 $ 16.880 June 30, 1997 (2) - - 337,500 $ 4.000 December 31, 1997 (1) (2) 282,500 - - $ 0.500 December 31, 1997 (1) 20,000 - - $ 0.500 August 3, 1998 (1) - - 20,000 $ 1.500 August 3, 1998 (2) 1,550,000 - - $ 0.500 October 21, 1999 10,500 - - $ 0.475 July 16, 2001 8,333 - - $ 0.416 August 19, 2001 16,667 - - $ 0.413 August 20, 2001 18,519 - - $ 0.406 October 31, 2001 50,000 - - $ 0.500 November 1, 2000 - --------------------------- ---------------------- ------------------- 8,083,866 6,509,050 6,866,975 =========================== ====================== ===================
(1) 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. (2) These options and warrants were cancelled or expired, as applicable, in 1995 or 1996 as indicated in the table. F-21 Options and warrants to purchase 8 and 35 shares were exercised in 1995 and 1994, respectively, at prices of $4.00. No options or warrants to purchase were exercised during 1996. Stock option plans 1995 PLAN Under the Company's 1995 Stock Option Plan (the "1995 Plan"), the Company's employees, Directors, independent contractors, and consultants are eligible to receive options to purchase shares of the Company's common stock. The Plan allows the Company to grant incentive stock options ("ISOs"), nonqualified stock options ("NQSOs"), and ISOs and NQSOs in tandem with stock appreciation rights ("SARs"; collectively "Options"). A maximum of 3,500,000 shares may be issued and no options may be granted after ten years from the date the 1995 Plan is adopted, or the date the Plan is approved by the stockholders of the Company, whichever is earlier. The exercise price of the Options cannot be less than the fair market value of the shares of common stock on the date the Option is granted. Options granted to individuals owning 10% or more of the outstanding voting power of the Company must be exercisable at a price equal to 110% of the fair market value on the date of the grant. Activity in the 1995 Stock Option Plan for the years ended december 31, 1995 and 1996 was as follows:
Weighted Average Number of Exercise Price Shares Per Share Outstanding, December 31, 1994 360,500 $ 4.08 Canceled (302,500) $ 3.83 Granted 302,500 $ 1.00 Expired (55,000) $ 4.00 Outstanding, December 31, 1995 305,500 $ 1.28 Canceled (302,500) $ 1.00 Granted 1,902,500 $ 0.50 Expired (3,000) $ 30.00 Outstanding, December 31, 1996 1,902,500 $ 0.50
As of December 31, 1996, options to acquire $1,465,000 shares of the Company's common stock were fully vested and exercisable at a weighted average exercise price of $0.50 per share. The remaining options, which also have a weighted average exercise price of $0.50 per share, will vest in 1997. If not previously exercised, options outstanding at December 31, 1996, will expire as follows: 282,500 options expire on December 31, 1997; 20,000 options expire on August 3, 1998; 1,550,000 options expire on October 22, 1999; and 50,000 options expire on November 1, 2000. F-22 The weighted average grant date fair value of the options issued during 1996 and the weighted average exercise price of those options amounted to $.034 and $0.50, respectively. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: risk-free rates of 5.5% to 6.3%; volatility of 176%, no assumed dividend yield; and expected lives of one to ur years. The 1995 Plan was submitted to and approved by the Company's stockholders at its annual meeting in 1996. In October 1995, the Financial Accounting Standards Board issued a new statement titled "Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123 encourages, but does not require, companies to recognize compensation expense for grants of stock, stock options, and other equity instruments to employees based on fair value. Fair value is generally determined under an option pricing model using the criteria set forth in SFAS 123. The Company applies APB Opinion 25, ACCOUNTING OF STOCK ISSUED TO EMPLOYEES, and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans. Had compensation expense for the Company's stock based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS 123, the Company's net loss and loss per common share would have been increased to the pro forma amounts indicated below:
1995 1996 ---- ---- Net loss As reported $ (4,338,322) $ (4,652,207) Pro forma (4,631,608) (4,851,124) Net loss per common share As reported (0.20) (0.16) Pro forma (0.21) (0.16)
Options which were issued during previous fiscal years at an exercise price of $4.00 per share were revalued at $1.00 per share during 1995. During 1996 the exercise price of these options was reduced to $.50 per share. In accordance with SFAS 123 the revaluation of the shares constitutes a new issuance of options. Compensation expense of $174,020 was reflected in the pro forma amounts for 1995 for those options revalued in 1995. No expense was reflected in the 1996 pro forma amounts because the value of the options had declined. NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES: Drilling commitments As of December 31, 1996, the Company had completed all its contractual work commitments in Colombia and Peru. As a result of the sale of its wholly-owned Colombia and Peru subsidiaries , the Company has no further obligations in either country. F-23 IRS Excise Tax Claim In May 1992, AIRI was notified by the Internal Revenue Service ("IRS") that the IRS was considering an assessment of excise taxes, penalties and interest of approximately $3,500,000 related to the sale of fuel products during 1989. The IRS claims that AIRI failed to comply with an administrative procedure that required sellers, and buyers in tax-free transactions, to obtain certification from the IRS. The Company believes that AIRI complied with the substance of the existing requirements and such sales were either tax-free or such excise taxes were paid by the end-users of such products. AIRI has offered to negotiate a settlement of this matter with IRS Appeals since early 1993. Such negotiations included face-to-face meetings, numerous phone calls and written transmittals and several offers of settlement by both the Company and the IRS. During these negotiations, the IRS Appeals officers offered to waive all of the penalties and 75% of the amount of the proposed tax liability. However, AIRI rejected this offer and requested the IRS' National Office provide technical advice to its Appeals officers. After numerous conferences and discussions with the National Office in 1995, the National Office issued an adverse Technical Advice Memorandum ("TAM") to the effect that AIRI should be liable for the tax on the sale of diesel fuel for the first three quarters of 1989. However, subsequent to the issuance of the TAM, the IRS Appeals officer indicated to AIRI that the IRS still wants to negotiate a settlement. AIRI continues to meet with the IRS to resolve this situation. A settlement is expected in the second quarter of 1997, although the exact nature of such a settlement cannot be predicted at this time. 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 aggregate allowance during 1996 and 1995 of $850,000 and $250,000, respectively, for estimated costs, either in the form of legal expenses or payments to the IRS, or some combination of both. 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., and 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 (the "Exception") which is expected to eliminate most of the plaintiffs' claims. The Court ordered a ruling on the Exception, referring the Exception to the merits. In the fourth quarter of 1996, a new Judge was assigned AIRI's case. AIRI expects a F-24 status conference will be held soon, wherein AIRI will apprise the new Judge of the Exception and request a rehearing on the Exception before the new Judge. 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 that 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 Bavo will be decided in PAIPC's favor. PAIPC has also filed counter-claims and is in the process of filing liens against Ro Bravo to defend its interests in the Block and License contract and continues to partificipate 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. As of February 25, 1997 the Company sold all its rights with respect to Peru and therefore has no remaining assets or obligations there. Employment agreements The Company has entered into an employment agreement with its chief executive officer. Total salaries payable under this contract for 1997 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. Shareholder approval was obtained in July 1996 and the Company recorded the issuance of the shares and the related expense at that time. Gold Line Defaults During the third and fourth quarters of 1996, Gold Line defaulted on their obligations to pay lease fees, insurance premiums, property taxes and other items to AIRI under the terms of the Lease Agreement totaling an aggregate of $567,000. In addition, Gold Line paid no lease fees to AIRI during the first quarter of 1997. On February 18, 1997, AIRI filed suit against Gold Line for termination of the Lease Agreement and damages including unpaid processing fees, real-estate taxes, insurance premium and other items which may be due under the terms of the Lease Agreement. Notice to vacate was also sent to Gold Line, and after the demand to vacate was not met, a pleading to evict Gold Line was filed as an incident to the original suit. After a hearing on March 20, 1997, the court granted the eviction. A future court date is scheduled for May 15, 1997 to present a trial on the merits with respect to the original amount due to AIRI. AIRI seeks F-25 approximately $1.8 million, including damages as of the date Gold Line exited the lease premises, for disposition of salt water left on the premises by Gold Line, and also movable property which has been taken or damaged by Gold Line. Gold Line has asserted general affirmative defenses. The Company intends to pursue aggressively all of its legal remedies against Gold Line. The likelihood of AIRI collecting these delinquent amounts is unknown at this time. However, the Company has provided an allowance during 1996 of $681,000 which fully reserves all amounts due AIRI as of December 31, 1996. 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, 1996: 1997 $ 131,190 1998 112,932 ------------------- Total Minimum lease payments $ 244,122 =================== 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: 1996 1995 1994 ---- ---- ---- Minimum rentals $307,912 $297,502 $243,324 Less - sublease rentals 130,437 114,213 - ------------- ------------ ----------- Total $177,475 $183,289 $243,324 ============= ============ =========== 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 11 - 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 F-26 differences between financial reporting and tax bases of assets and liabilities. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. The Company reported a loss from operations during 1994, 1995 and 1996 and has a net operating loss carryforward from prior years' operations. Accordingly, no income tax provision has been provided in the accompanying statement of operations. The Company has available unused tax net operating loss carryforwards of approximately $54,000,000 which expire in years 1997 through 2009. Due to a change in control, as defined in Section 382 of the Internal Revenue Code, which occurred in 1994, the Company's utilizable tax operating loss carryforwards to offset future income have been restricted. These restrictions will limit the Company's future use of its loss carryforwards. The amount of the Company's net operating loss available at the end of 1996 is approximately $18,500,000. The components of deferred tax assets and liabilities are as follows:
December 31, --------------------------------------- 1996 1995 ---- ---- Deferred tax assets: Net operating loss carryforwards $ 6,942,000 $ 9,674,000 Allowance for doubtful accounts 721,000 877,000 Accrued liabilities - 88,000 Depreciation, depletion, amortization and impairment (984,000) (461,000) ------------------ ------------------ Net deferred tax asset 6,679,000 10,178,000 Valuation allowance (6,679,000) (10,178,000) ------------------ ------------------ $ - $ - ================== ==================
The valuation allowance relates to the uncertainty as to the future utilization of net operating loss carryforwards. NOTE 12 - CONCENTRATIONS OF CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS: Financial instruments which potentially expose the Company to concentrations of credit risk consist primarily of trade accounts receivable. Accounts receivable were $1,073,140 at December 31, 1996. Refinery processing fees were earned through lease of the Company's refinery to Gold Line. Trade accounts receivable and notes receivable from Gold Line aggregated $2,126,418 at December 31, 1996, net of reserves for uncollectible amounts of $1,921,518. The Company's ability to collect outstanding amounts from Gold Line and restrictions thereon were subject to agreements between MGTF, Gold Line, NationsBank (a Gold Line creditor), and the Company (Notes 2, 7 and 8). The Company has filed suit as discussed previously in Note 10 to collect certain reserved amounts from Goldline. F-27 The estimated fair value of the Company's financial instruments is as follows:
1996 1995 -------------------------------------- ------------------------------------- Carrying Fair Carrying Fair value value value value Long-term debt $ 6,766,592 $ 6,766,592 $ 7,302,671 $ 7,352,671
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. As of December 31, 1996, 88% of the Company's long-term debt matures during 1997. As a result, the Company believes the carrying value of its long-term debt, approximates fair value. The reported amounts of financial instruments such as cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value because of their short-term maturities. NOTE 13 - 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 activities are concentrated in foreign countries. Operating in foreign countries subjects the Company to inherent risks such as a loss of revenues, property and equipment from such hazards as exploration, nationalization, war and other political risks, risks of increases of taxes and governmental royalties, renegotiation of contracts with government entities and changes in laws and policies governing operations of foreign-based companies. The Company's oil and gas business is subject to operating risks associated with the exploration, production and refining of oil and gas, including blowouts, pollution and acts of nature that could result in damage to oil and gas wells, production facilities or formations. In addition, oil and gas prices have fluctuated substantially in recent years as a result of events which were outside of the Company's control. F-28 Financial information, summarized by geographic area, is as follows:
Geographic Segment ---------------------------------------------------------------------- Consolidated 1996 United States Colombia Peru total - ---- ------------- -------- ---- ----- Sales and other operating revenue $ 2,596,917 $ 1,508,260 $ - $ 4,105,177 Interest income and other corporate revenues 5,337 -------------------- Total revenue $ 4,110,514 Costs and operating expense 1,616,043 1,468,665 200,000 3,284,708 -------------------- --------------------- ------------------ -------------------- Operating profit (loss) $ 980,874 $ 39,595 $ (200,000) $ 825,806 ==================== ===================== ================== General corporate expenses 2,659,795 Interest expense 2,818,218 -------------------- Net loss (4,652,207) ==================== Identifiable assets at December 31, 1996 $ 12,895,332 $ 14,641,646 $ 4,860,559 $ 32,397,537 ==================== ===================== ================== Corporate assets 2,094,894 -------------------- Total assets at December 31, 1996 $ 34,492,431 ==================== Depreciation, depletion and amortization rate per equivalent barrel of oil $ - $ 3.77 $ - $ 3.77 ==================== ===================== ================== ==================== Capital Expenditures, net of cost recoveries $ 1,713,188 $ 719,954 $ 825,923 $ 3,259,065 ==================== ===================== ================== ====================
F-29
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 expense 1,922,130 1,513,401 65,141 3,500,672 -------------------- --------------------- ------------------ -------------------- Operating profit (loss) $ (518,462) $ (299,188) $ 100,928 $ (689,364) ==================== ===================== ================== General corporate 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-30
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 expense 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 expenses 2,278,942 Interest expense 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, 1995 $ 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-31 NOTE 14 - 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:
1996 1995 1994 ---- ---- ---- Conversion of debentures $ 2,000,000 $ - $ 950,000 Conversion of notes payable - - 12,787 Stock issued in lieu of current liabilities 168,902 489,250 15,559 Issuance of stock for notes receivable, net of amounts collected - - 32,936 Issuance of stock - unearned compensation 424,063 20,312 -
Cash paid for interest, net of amounts capitalized, was $808,477, $964,609, and $647,439 during 1996, 1995, and 1994, respectively. Cash paid for corporate franchise taxes was $114,128, $52,050, and $36,001 during 1996, 1995 and 1994, respectively.. NOTE 15 - SUBSEQUENT EVENTS: Regulation S Offerings In 1997, the Company received aggregate net proceeds of $2,742,000 from the sales and issuance of shares of its common stock and from the sales of redeemable convertible subordinated debentures, issued in accordance with Regulation S. The proceeds were utilized for the payment of certain debts (including an aggregate of approximately $1,380,000 in principal and interest on the Company's 12% secured debentures which was due on December 31, 1996), the expansion of its Refinery, and for working capital purposes. Sale of Subsidiaries On February 25, 1997, the Company sold all of the issued and outstanding common stock of its wholly-owned subsidiaries in Colombia and Peru for cash, stock and the assumption of certain Company debt, including payment of the remaining principal and interest due on its 12% Secured Debentures of an aggregate of approximately $2,362,000. (Note 1). Note Payable As part of its February 25, 1997 agreement to sell its subsidiaries in Colombia and Peru, the Company agreed to move up the due date of its $2,108,000 note payable to MG Trade Finance Corp. from March 31, 1998 to September 30, 1997. F-32 Gold Line Lease On March 20, 1997, the Company terminated its lease and evicted the lessee Gold Line Refining Ltd. (Note 10). Kazakstan Option On January 27, 1997, the Company entered into an option agreement, which was amended on March 7, 1997 (the "Option") for the right to obtain a 40% working interest in a certain petroleum concession in Kazakstan. In consideration for the Option, the Company paid $100,000 in cash and issued 300,000 shares of its common stock. F-33 AMERICAN INTERNATIONAL PETROLEUM AND SUBSIDIARIES SUPPLEMENTARY OIL AND GAS INFORMATION FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, 1994 (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 AMERICAN INTERNATIONAL PETROLEUM AND SUBSIDIARIES SUPPLEMENTARY OIL AND GAS INFORMATION (UNAUDITED) Capitalized costs relating to oil and gas activities and costs incurred in oil and gas property acquisition, exploration and development activities for each year are shown below: Capitalized costs
Colombia Peru --------------------------------------------- ---------------------------------------- 1996 1995 1994 1996 1995 1994 ---- ---- ---- ---- ---- ---- Unevaluated property not subject to amortization $ 1,101,277 $ 1,101,277 $ 2,163,201 $ 4,457,964 $ 3,832,041 $ 2,303,946 Proved and unproved properties 31,934,991 31,215,040 28,903,520 200,000 - - Accumulated deprecia- tion, depletion and amortization 19,870,122 19,364,606 18,832,617 200,000 - - --------------------------------------------- ---------------------------------------- Net Capitalized costs $ 13,166,146 $ 12,951,711 $ 12,234,104 $ 4,457,964 $ 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 - - - Development costs 719,954 527,595 683,532 - - - RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES Oil and gas sales $ 1,364,581 $ 1,104,095 $ 1,083,406 $ - $166,069 $ 122,018 --------------------------------------------- ---------------------------------------- Lease operating costs 611,857 363,600 564,061 - 65,141 41,022 Depreciation, depletion and amortization 491,732 531,989 670,857 - - - Provision for reduction of oil and gas properties - - 6,904,016 200,000 - - --------------------------------------------- ---------------------------------------- 1,103,589 895,589 8,138,934 200,000 65,141 41,022 --------------------------------------------- ---------------------------------------- Income (loss) before tax provision 260,992 208,506 (7,055,528) - 100,928 80,996 Provision (benefit) for income tax - - - - - - --------------------------------------------- ---------------------------------------- Results of operations $ 260,992$ 208,506 $ (7,055,528) $ (200,000) $ 100,928 $ 80,996 ============================================= ========================================
Other Total ---------------------------------- ------------------------------------------- 1996 1995 1994 1996 1995 1994 ---- ---- ---- ---- ---- ---- Unevaluated property not subject to amortization $ 89,389 $ 65,506 - $ 5,648,630 $ 4,998,824 $ 4,467,147 Proved and unproved properties 371,665 351,257 - 32,506,656 31,566,297 28,903,520 Accumulated deprecia- tion, depletion and amortization 371,665 351,257 - 20,441,787 19,715,863 18,832,617 ---------------------------------- ------------------------------------------- Net Capitalized costs $ 89,389 $ 65,506 $ - $ 17,713,499 $ 16,849,258 $ 14,538,050 ================================== =========================================== 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 Development costs - - - 719,954 527,595 683,532 RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES Oil and gas sales $ - $ - $ - $ 1,364,581 $ 1,270,164 $ 1,205,424 ---------------------------------- ------------------------------------------- Lease operating costs - - - 611,857 428,741 605,083 Depreciation, depletion and amortization - 351,257 - 491,732 883,246 670,857 Provision for reduction of oil and gas properties - - - 200,000 - 6,904,016 ---------------------------------- ------------------------------------------- - 351,257 - 1,303,589 1,311,987 8,179,956 ---------------------------------- ------------------------------------------- Income (loss) before tax provision - (351,257) - 60,992 (41,823) (6,974,532) Provision (benefit) for income tax - - - - - - ---------------------------------- ------------------------------------------- Results of operations $ - $ (351,257) $ - $ 60,992 $ (41,823)$ (6,974,532) ================================== ===========================================
F-35 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, ------------------------------------------------------------ 1996 1995 1994 ---- ---- ---- Colombia: Acquisition costs $ 1,101,277 $ 1,101,277 $ 1,101,277 Exploration costs - - 1,061,924 ----------------- ----------------- ------------------ 1,101,277 1,101,277 2,163,201 Peru: Exploration costs 4,457,964 3,832,041 2,303,946 ----------------- ----------------- ------------------ Other Acquisition costs 89,389 65,506 - ----------------- ----------------- ------------------ $5,648,630 $4,998,824 $4,467,147 ================= ================= ==================
Acquisition costs of unproved properties not subject to amortization at December 31, 1996, 1995 and 1994, respectively, consists mainly of lease acquisition costs related to unproved areas. As of February 25, 1997 the Company has sold all of its wholly owned subsidiaries operating in Columbia and Peru. F-36 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, 1996, 1995 and 1994. 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, 1994 - - 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 Production - - (137,821) - (137,821) - ----------- ---------- ------------------ ------------- -------------------------- December 31, 1995 - - 4,106,480 11,381,400 4,106,480 11,381,400 Revisions of previous estimates - - 34,372 3,298,000 34,372 3,298,000 Extensions, discoveries and other additions - - - - - - Production - - (130,433) - (130,433) - ----------- ---------- ------------------ ------------- -------------------------- December 31, 1996 - - 4,010,419 14,679,400 4,010,419 14,679,400 =========== ========== ================== ============= ==========================
F-37
United States Colombia Total ----------------------- ----------------------- ------------------------ Oil Gas Oil Gas Oil Gas BBLS MCF BBLS MCF BBLS MCF Net proved developed reserves January 1, 1994 - - 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 December 31, 1996 - - 948,721 6,321,100 948,721 6,321,000
Revisions to reserves in 1996 reflect an increase in gas reserves due to the Company's gas field development program and anticipated recompletion of Puli No. 3. Revisions to crude oil reserves in 1995 reflect the increased working interest participation of the Company in the proved undeveloped reserves due to nonparticipation of the other joint venture partners. Revisions to crude oil 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. These revisions were partially offset by an increase in the Toqui reserves due to the lower decline rate demonstrated during 1994. F-38 STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOW: The standardized measure of discounted future net cash flows relating to the Company's proved oil and gas reserves is calculated and presented in accordance with Statement of Financial Accounting Standards No. 69. Accordingly, future cash inflows were determined by applying year-end oil and gas prices to the Company's estimated share of the future production from proved oil and gas reserves. Future production and development costs were computed by applying year-end costs to future years. Future income taxes were derived by applying year-end statutory tax rates to the estimated net future cash flows. A prescribed 10% discount factor was applied to the future net cash flows. In the Company's opinion, this standardized measure is not a representative measure of fair market value, and the standardized measure presented for the Company's proved oil and gas reserves is not representative of the reserve value. The standardized measure is intended only to assist financial statement users in making comparisons between companies.
Colombia ----------------------------------------------------------------- 1996 1995 1994 ---- ---- ---- Future cash inflows $ 61,173,696 $ 46,433,879 $ 33,896,403 Future development costs (12,170,000) (10,780,000) (5,977,600) Future production costs (8,012,891) (9,409,442) (7,154,014) Future income tax expenses - - - ------------------- ------------------- ------------------- Future net cash flows 40,990,805 26,244,437 20,764,789 Annual discount 10% rate (19,088,789) (13,885,290) (10,693,885) ------------------- ------------------- ------------------- Standardized measure discounted future net cash flows $ 21,902,016 $ 12,359,147 $ 10,070,904 =================== =================== ===================
Future cash flows in 1996 increased as a result of the increased selling price of oil in the world market in 1996 and also as a result of the upward revision in estimated future recoverable equivalent barrels of oil by approximately 585,000 BOE. Estimated future income taxes were eliminated in 1994, 1995 and 1996 because estimated future tax deductions related to oil and gas properties exceeded estimated future net revenues based on oil and gas prices and related costs at December 31, 1994, 1995 and 1996. F-39 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 $9,542,869 and of $2,288,243 in 1996 and 1995 respectively and a decrease of $3,532,119 in 1994. The principal sources of change were as follows:
For the years ended December 31, ---------------------------------------------------------------------- 1996 1995 1994 ---- ---- ---- Beginning of year $ 12,359,147 $ 10,070,904 $ 13,603,023 Sales and transfer of oil and gas produced, net of production costs (752,724) (740,495) (519,345) Net changes in prices and production costs 6,764,808 135,987 1,660,800 Extensions, discoveries, additions and improved recovery, less related costs - 660,594 - Previously estimated development costs incurred during the year 719,954 527,595 683,532 Changes in estimated future development costs (973,650) (2,032,144) 1,302,552 Revisions of previous reserve quantity estimates 1,460,849 3,783,148 (5,751,795) Changes in timing and other 1,087,717 (1,053,532) (2,268,165) Accretion of discount 1,235,915 1,007,090 1,360,302 --------------------- ---------------------- ---------------------- ===================== ====================== ====================== End of year $ 21,902,016 $ 12,359,147 $ 10,070,904 ===================== ====================== ======================
F-40 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 14, 1997 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 14, 1997 --------------------------- George N. Faris, Chairman of the Board of Directors and Chief Executive Officer By: /s/ Denis J. Fitzpatrick Date: April 14, 1997 --------------------------- Denis J. Fitzpatrick Vice President, Secretary, Principal Financial and Accounting Officer By: /s/ Donald G. Rynne Date: April 14, 1997 --------------------------- Donald G. Rynne, Director By: /s/ Daniel Y. Kim Date: April 14, 1997 --------------------------- Daniel Y. Kim, Director By: /s/ William R. Smart Date: April 14, 1997 --------------------------- William R. Smart, Director EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION 3.2 Bylaws of the Registrant, as amended 4.8 Form of 8% Redeemable Convertible Debenture due April 1999 and Form of Subscription Agreement relating thereto. 21.1 Subsidiaries of the Registrant 27.1 Financial Data Schedule EX-3 2 EXHIBIT 3.2 EXHIBIT 3.2 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 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. -1- 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. 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 -2- 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 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; -3- (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. (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 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 -4- 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 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: -5- (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. 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. -6- 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. 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. 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 -7- 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 (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 -8- 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. -9- EX-4 3 EXHIBIT 4.8 EXHIBIT 4.8 FORM OF DEBENTURE THE SECURITIES REPRESENTED HEREBY OR THOSE INTO WHICH SUCH SECURITIES ARE CONVERTIBLE HAVE NOT BEEN REGISTERED UNDER (1) THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), OR (2) ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE OFFERED OR SOLD IN THE UNITED STATES (AS DEFINED IN REGULATION S PROMULGATED UNDER THE 1933 ACT ("REGULATION S")) OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, ANY U.S. PERSON (AS THAT TERM IS DEFINED IN REGULATION S) EXCEPT PURSUANT TO REGISTRATION UNDER THE 1933 ACT OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE 1933 ACT AND APPLICABLE STATE SECURITIES LAWS. DATE: DEBENTURE # U.S.$ AMERICAN INTERNATIONAL PETROLEUM CORPORATION SERIES G EIGHT PERCENT (8%) REDEEMABLE CONVERTIBLE DEBENTURES DUE MARCH _____,1999 THIS DEBENTURE is one of a duly authorized issue of debentures of American International Petroleum Corporation, a corporation duly organized and validly existing under the laws of the State of Nevada, United States of America (the "Company") designated as its Series G Eight Percent (8%) Redeemable Convertible Debentures Due March , 1999, in an aggregate principal face value for all Debentures in this Series G not to exceed One Million Five Hundred Thousand United States Dollars (US$1,500,000.00). FOR VALUE RECEIVED, the Company promises to pay to _________ ______________________________________, the registered holder hereof and its successors and assigns (the "Holder"), the principal sum of United States Dollars ($ ) on - -------------------- ------------------------------ March , 1999 (the "Maturity Date"), and to pay interest on the principal sum outstanding, at the rate of eight percent (8%) per annum due and payable in quarterly installments in arrears, with the first such payment to be made on July 1, 1997. Accrual of interest, payable in cash, 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 that Offshore Securities Subscription Agreement dated as of March , 1997, between the Company and the Holder hereof (or its predecessor in interest) (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 to time. The Company will pay the outstanding principal of and any 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 record Holder of this Debenture as of the tenth (10th) day prior to the Maturity Date and addressed to such Holder at the last address appearing on the Debenture Register. The forwarding of such funds 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 or withheld. This Debenture is subject to the following additional provisions: 1. The Debentures are issuable in denominations of Fifty Thousand United States Dollars (US$50,000.00) and integral multiples thereof. The Debentures are exchangeable commencing forty-five (45) days from the date hereof for an equal aggregate principal amount of Debentures of different authorized denominations, as requested by the Holder surrendering the same, but not of denominations of less than Fifty Thousand United States Dollars (US$50,000.00) without the Company's written consent. No service charge will be made for such registration or transfer or exchange. 2. The Company shall be entitled to withhold from all payments of principal pursuant to 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. 3. This Debenture has been issued subject to investment representations of the original purchaser hereof and may be transferred or exchanged in the United States or to a U.S. Person only in compliance with the 1933 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 his 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 below, in addition to the requirements set forth in Section 4, 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 (such confirmation hereinafter referred to as the "Confirmation"), and (ii) an opinion of U.S. counsel reasonably acceptable to the Company to the effect that the Debenture and shares of common stock in the Company issuable upon conversion thereof have been registered under the 1933 Act or are exempt from such registration. In the event the Confirmation and an opinion of counsel is not provided, the Holder hereof will not be entitled to exercise the right to convert the Debenture pursuant to Section 4(a) below. 4. (a) The Holder of this Debenture is entitled, at its option, at any time commencing forty-five (45) days after issue hereof, to convert the original principal face amount of this Debenture into shares of common stock in the Company, $0.08 par value per share (the "Common Stock"), at a conversion price (the "Conversion Price") for each share of Common Stock equal to seventy-five percent (75%) of the Market Price (as defined below) of the Common Stock. For the purposes of this Paragraph 4, the Market Price shall be the average closing bid price of the Common Stock for the five (5) business days immediately preceding the conversion date, as reported by the National Association of Securities Dealers Automated Quotation System ("NASDAQ"). Such conversion shall be achieved by surrendering the Debenture to be converted with the form of conversion notice attached hereto as Exhibit I (a "Notice of Conversion"), executed by the Holder of this Debenture evidencing such Holder's intention to convert this Debenture or a specified portion (as herein provided) hereof, and accompanied by proper assignment hereof in blank. 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. Accrued interest shall be payable in cash. The date on which notice of conversion is given shall be deemed to be either the date on which the Holder has delivered this Debenture, with the Notice of Conversion duly executed, to the Company, or, if earlier, the date set forth in such Notice of Conversion if the Debenture is received by the Company within five (5) business days thereafter. (b) Notwithstanding the provisions of Paragraph 4(a) above, the Company may redeem any or all of the Debentures after the issue hereof and at any time before receipt or within five (5) business days after receipt of a Notice of Conversion by paying to the Holder in cash the sum of one hundred twenty-five percent (125%) of the then outstanding principal balance of the Debenture (or portion thereof with respect to which the Notice of Conversion has been received, if applicable) to be converted 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 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 transfer or check plus any amount required by law to be deducted or withheld. Such payment in redemption of the Debenture shall be made by the Company within five (5) business days of receipt by the Company of a Notice of Conversion from the Holder. Should the Company decide to redeem the Debenture as described in this Paragraph, the Company shall provide to the Holder a written statement by facsimile of its intention to redeem (a "Notice of Redemption") within one (1) business day after receipt of a Notice of Conversion as stated above, which Notice of Redemption shall be binding upon the Company. Should the Company not fulfill its obligation to pay the redemption price in a timely manner as herein stated, the Holder shall have the right at its option to adjust the Market Price(as defined in Paragraph 4(a) above) to reflect the average closing bid price for the five (5) business days immediately preceding the date the Holder again in writing demands conversion of the Debenture after the failed redemption by the Company. In addition, the Company shall proceed with conversion of the Debenture as stated herein and as if no Notice of Redemption had been sent by the Company. 5. No provision of this Debenture shall alter or impair the obligation of the Company, which obligation is absolute and unconditional, to repay the principal amount of this Debenture at the time, place, rate, and in the coin currency, hereinabove stated. This Debenture and all other Debentures now or hereafter issued on similar terms are direct obligations of the Company. This Debenture ranks equally with all other Debentures now or hereafter issued under the terms set forth herein. The Conversion Price and number of shares of Common Stock issuable upon conversion shall be subject to adjustment from time to time as provided in Section 6 below. 6. (a) In the event the Company should at any time or from time to time, after the date of this Debenture, fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock (equal to at least ten percent (10%) or more of the Company's then issued and outstanding shares of Common Stock) or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly additional shares of Common Stock (hereinafter referred to as "Common Stock Equivalents") without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend, distribution, split or subdivision if no record date is fixed), the Conversion Price shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of this Debenture shall be increased in proportion to such increase in the aggregate number of shares of Common Stock outstanding and those issuable with respect to such Common Stock Equivalents. (b) If the number of shares of Common Stock outstanding at any time after the date of this Debenture is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Conversion Price shall be appropriately increased so that the number of shares of Common Stock issuable upon conversion of this Debenture shall be decreased in proportion to such decrease in outstanding shares. 7. The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of this Debenture, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all of the outstanding principal amount, and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of this Debenture, in addition to such other remedies as shall be available to Holder, the Company will take such corporate action as may, in the opinion of its counsel, be necessary to increase the number of authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including without limitation, using its best efforts to obtain the requisite stockholder approval necessary to increase the number of authorized shares of the Company's Common Stock. 8. Except as set out in Section 10 below, 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 hereunder, regardless of and without any notice, diligence, act or omission as or with respect to the collection of any amount called for hereunder. 9. The Company agrees to pay all costs and expenses, including without limitation reasonable attorney's fees, which may be incurred by the Holder in collecting any amount due under this Debenture. 10. If one or more of the following described "Events of Default" shall occur: (a) The Company shall default in the payment of principal or interest on this Debenture for a period of seven (7) days following its due date; 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 statement heretofore or hereafter furnished by or on behalf of the Company in connection with the execution and delivery of this Debenture or the Subscription Agreement shall be false or misleading in any material respect at the time made and the Holder shall have provided seven (7) days prior written notice to the Company of the alleged misrepresentation or breach of warranty; 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 or the Subscription Agreement and such failure shall continue uncured for a period of seven (7) days after notice from the Holder of such failure; or (d) The Company shall either: (i) become insolvent; (ii) admit in writing its inability to pay its debts generally or as the become due; (iii) make an assignment for the benefit of creditors or commence proceedings for its dissolution; or (iv) 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 the Company's consent and such appointment is not 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 Three Hundred Thousand United States Dollars (US$300,000.00) in the aggregate shall be entered or filed against the Company or any of its properties or 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 institution or 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 (i) The Company shall have its Common Stock delisted from the NASDAQ stock exchange (and not immediately relisted on another national securities exchange) or suspended from trading thereon, and shall not have its Common Stock relisted or have such suspension lifted, as the case may be, within ten (10) business days; or (j) The Company shall have received a notice of default on the payment of any debt(s) aggregating in excess of Three Hundred Thousand United States Dollars (US$300,000.00) beyond any applicable grace period; 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 in one instance shall not be deemed to be a waiver in another instance or for any other prior or subsequent Event of Default) at the option of the Holder and in the Holder's sole discretion, the Holder may immediately accelerate the maturity hereof, whereupon all principal and interest hereunder shall be immediately due and payable, without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived by the Company, anything herein or in any note or other instrument contained to the contrary notwithstanding, and the Holder may immediately, and upon the 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 or equity. 11. As set forth herein, the Company shall use all reasonable efforts to issue and deliver, within three (3) business days after the Holder has fulfilled all conditions and submitted all necessary documents duly executed and in proper form required for conversion (the "Deadline"), to the Holder or any party receiving a Debenture by transfer from the Holder (together, a "Holder"), at the address of the Holder on the Debenture Register, a certificate or certificates for the number of shares of Common Stock to which the Holder shall be entitled (the "Certificates"). The Company understands and agrees that a delay in the issuance of the Certificates beyond the Deadline could result in economic loss and other damages to the Holder. As compensation to the Holder for such loss, the Company agrees to pay liquidated damages (and not as a penalty) to the Holder for issuance and delivery of the Certificates after the Deadline, in accordance with the following schedule (where "No. Business Days Late" is defined as the number of business days beyond seven (7) business days from the date of receipt by the Company of a notice of conversion and by the transfer agent of all necessary documentation duly executed and in proper form required for conversion, including the original Debenture to be converted, all in accordance with the Debenture, Subscription Agreement and the requirements of the transfer agent)
No. Business Days Late Liquidated Damages (in US$) 1 $500 2 $1,000 3 $1,500 4 $2,000 5 $2,500 6 $3,000 7 $3,500 8 $4,000 9 $4,500 10 $5,000 11+ $5,000 + $5,000 for each Business Day Late beyond 11 days
The Company shall pay the Holder any liquidated damages incurred as called for under this Section 11 by certified or cashier's check upon the earlier of (i) issuance of the Certificates to the Holder or (ii) each monthly anniversary of the receipt by the Company of such Holder's Notice of Conversion. Nothing herein shall limit the Holder's right to pursue actual damages for the Company's failure to issue and deliver the Certificates to the Holder in accordance with the terms of the Debenture or for breach by the Company of the Subscription Agreement. 12. 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 thereon, or otherwise in respect hereof, against any incorporator, shareholder, officer, director, or agent 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. 13. The Holder of this Debenture, by acceptance hereof, agrees that this Debenture is being acquired for investment purposes and that such Holder will not offer, sell or otherwise dispose of this Debenture or the shares of Common Stock issuable upon exercise hereof except under circumstances which will not result in a violation of the 1933 Act, or any applicable state "blue sky" or other law relating to the sale of securities. Notwithstanding the foregoing, the Holder of this Debenture has no intention of offering, selling or otherwise disposing of this Debenture or the shares of Common Stock issuable upon exercise hereof in violation of the requirements of Regulation S. 14. 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. 15. This Debenture and the Exhibit(s) attached hereto and the Subscription Agreement and the Exhibit(s) attached thereto constitute the full and entire understanding between the Company and the Holder with respect to the subject matter hereof and thereof. 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. 16. This Debenture shall be governed by and construed in accordance with the laws of the state of New York. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed by an officer thereunto duly authorized, all as of the date first hereinabove written. AMERICAN INTERNATIONAL PETROLEUM CORPORATION By: _______________________________________ Denis J. Fitzpatrick, Vice President 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 Eight Percent (8%) Convertible Debenture Due March , 1999, No. , into shares of Common Stock of American International Petroleum Corporation, (the "Company") according to the terms and 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 Exchange 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 (as defined in the said Debenture) are true. Date of Conversion:* Applicable Conversion Price: _________________________________ Holder (Print True Legal Name): ______________________________ - -------------------------------------------------------------- (Signature of Duly Authorized Representative of Holder) Address of Holder: _________________________________ ================================= --------------------------------- * This original Notice of Conversion, along with the original Debenture, must be received by the Escrow Agent and the Company by the fifth business day following the Date of Conversion FORM OF OFFSHORE SECURITIES SUBSCRIPTION AGREEMENT THIS OFFSHORE SECURITIES SUBSCRIPTION AGREEMENT dated as of March , 1997 (the "Agreement"), is executed in reliance upon the exemption from registration provided by Regulation S ("Regulation S") as promulgated by the Securities and Exchange Commission ("SEC") under the Securities Act of 1933, as amended (the "1933 Act"). Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to them in Regulation S. This Agreement has been executed by the undersigned purchaser ("Purchaser") in connection with the private placement of Series G Eight Percent (8%) Redeemable Convertible Debentures of American International Petroleum Corporation, a Nevada Corporation, with its principal executive offices located at 444 Madison Avenue, Suite 3203, New York, New York USA 10022 (hereinafter "Seller"). Purchaser hereby represents and warrants to, and agrees with Seller that: THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION UNDER THE 1933 ACT, AS AMENDED, OR THE SECURITIES COMMISSION OF ANY STATE UNDER ANY STATE SECURITIES LAW. THEY ARE BEING OFFERED PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER REGULATION S ("REGULATION S") PROMULGATED UNDER THE 1933 ACT. THESE SECURITIES MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS (AS THAT TERM IS DEFINED IN REGULATION S) UNLESS SUCH SECURITIES ARE REGISTERED UNDER THE 1933 ACT AND APPLICABLE STATE SECURITIES LAWS, OR SUCH OFFER, SALE OR TRANSFER IS MADE PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SAID LAWS and, THIS SUBSCRIPTION AGREEMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE SECURITIES OFFERED HEREBY BY OR TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR IN VIOLATION OF REGULATION S. INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE COMPANY AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND THE RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED OR DETERMINED THE ACCURACY OR ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. 1. Agreement to Subscribe; Purchase Price. (a) Subscription. Purchaser hereby subscribes for and agrees to purchase from Seller Series G Eight Percent (8%) Redeemable Convertible Debentures substantially in the form of the Debenture attached hereto as Exhibit A, in an aggregate principal face value for all Debentures in such Series G not to exceed One Million Five Hundred Thousand United States Dollars (US$1,500,000.00) (singly, a "Debenture" and collectively, the "Debentures"), at an aggregate purchase price as set forth in Paragraph 1(b) hereinafter. (b) Purchase Price; Manner of Payment. The aggregate purchase price for the Debenture(s) purchased pursuant to this Agreement shall be ________________________ United States Dollars ($ ) (the "Purchase Price"), which shall be payable at the closing pursuant to Paragraph 1(c) hereinafter by delivering immediately available funds in United States Dollars, by wire transfer, to the designated depository for closing by delivery of securities versus payment. (c) Closing. Subject to the satisfaction of the conditions set forth in Paragraphs 8 and 9 hereinafter, the closing of the transaction(s) contemplated by this Agreement shall occur on or before March 31, 1997, or such other date as is mutually agreed to in writing by Purchaser and Seller (the "Closing Date"). 2. Purchaser Representations, Warranties and Covenants; Access to Information. (a) Offshore Transaction. In connection with the purchase and sale of the Debentures, Purchaser represents and warrants to, and covenants and agrees with Seller as follows: (i) Purchaser is a natural person or if not a natural person then Purchaser is not organized under the laws of any jurisdiction within the United States, was not formed by a U.S. Person (as defined in Regulation S) for the purpose of investing in Regulation S securities; and Purchaser is not otherwise a U.S. Person. Purchaser is not, and on the Closing Date will not be, an affiliate of Seller; (ii) At the time the buy order was originated, Purchaser was outside the United States and is outside of the United States as of the date of 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 (the "Common Stock") (such Debentures and Common Stock to be referred to collectively as the "Securities"), was made by Purchaser in the United States; (iv) Purchaser is purchasing the Securities for its own account and Purchaser 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 Purchaser 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 Rules 903 and 904, if applicable, of Regulation S, or pursuant to registration of securities under the 1933 Act or pursuant to an available exemption from registration. In any event, none of the Securities have been nor will they be offered or sold by Purchaser 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: (a) the date of closing of the offering of the Securities; or (b) the date of the first offer of the Securities to persons other than distributors (the "Restricted Period"), as certified by Purchaser to Seller; and thereafter only pursuant to a Registration Statement or an applicable exemption from registration of the Securities; (vi) The transaction(s) contemplated by this Agreement (a) have not been and will not be pre-arranged by Purchaser with a buyer located in the United States or a purchaser which is a U.S. Person, and (b) are not and will not be a part of a plan or scheme by Purchaser, to evade the registration provisions of the 1933 Act; (vii) Purchaser 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 Purchaser set forth herein in order to determine the applicability of such exclusions and the suitability of Purchaser and any buyer from Purchaser to acquire the Securities; (viii) Purchaser 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 Purchaser pursuant to Section (c)(2)(iv) of Rule 901 of Regulation S; (ix) Purchaser has not conducted and shall not conduct any "directed selling efforts" as that phrase is defined in Rule 902(b) of Regulation S; nor has Purchaser conducted any general solicitation relating to the offer and sale of any of the Securities in the United States or elsewhere; (x) This Agreement has been duly authorized, validly executed and delivered on behalf of Purchaser and is a valid and binding agreement in accordance with its terms, subject to general principles of equity and to bankruptcy and other laws affecting the enforcement of creditors' rights generally; Purchaser (and Purchaser's legal counsel) has examined this Agreement and is satisfied that this Agreement is in accordance with the requirements of Regulation S and is effective to accomplish the purposes set forth herein; (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 Purchaser of any of the terms or provisions of, or constitute a default under, the articles of incorporation or by-laws (or any similar constitutive documents) of Purchaser or any indenture, mortgage, deed of trust, or other material agreement or instrument to which Purchaser 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 Purchaser or any of its properties or assets; (xii) All invitations, offers and sales of or in respect of, any of the Securities, by Purchaser and any distribution by Purchaser 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 agency or stock exchange in any country or any political subdivision of any country except to the extent required for the filing of Form 10(b)17 with NASDAQ; (xiii) Purchaser 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 Purchaser nor any of its affiliates has entered, has any intention of entering, nor will during the Restricted Period enter into any short position, put option, or other similar instrument or position or any other hedging activity with respect to any of the Securities or other securities of the same class as the Securities. (b) No Governmental Regulation or Approval. Purchaser understands that no Federal or State or foreign governmental agency has passed on or made any recommendation with respect to, or endorsement of, the Securities. (c) Current Public Information. Purchaser acknowledges that it and its advisors, if any, have been 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 Purchaser. Purchaser further acknowledges that it and its advisors, if any, have received complete and satisfactory answers to such inquiries. (d) Purchaser's Sophistication. Purchaser acknowledges that the purchase of the Securities involves a high degree of risk, including the risk of the total loss of Purchaser's investment. Purchaser has such knowledge and experience in financial matters that it is capable of evaluating the merits and all of the risks involved with the purchase of the Securities. (e) Tax Status. Purchaser is not a "Ten Percent Shareholder" (as defined in Section 871(h)(3)(B) of the United States Internal Revenue Code) of Seller. 3. Representations, Warranties and Covenants of Seller. (a) Reporting Company Status. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Nevada, and is duly qualified as a foreign corporation in all jurisdictions in which the failure to so qualify would have a material adverse effect on Seller and its subsidiaries taken as a whole. Seller is a "Reporting Issuer" as defined in Rule 902 of Regulation S. Seller has registered its common stock, $0.08 par value per share, pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "1934 Act"), and the Common Stock is listed and trades on NASDAQ and Seller has not received any written or oral notice as to its continued eligibility for listing. Seller has filed all material required to be filed pursuant to all reporting obligations under either Section 13(a) or 15(d) of the 1934 Act for a period of at least twelve (12) months immediately preceding the offer or sale of the Securities (or for such shorter time period that Seller has been required to file such material, if Seller has been required to file same for less than twelve (12) months). (b) Current Public Information. Seller has furnished Purchaser with copies of its most recent reports, as the same may have been amended, filed under the 1934 Act as referred to above, and other publicly available documents and information requested by Purchaser, receipt of which is hereby acknowledged by Purchaser. (c) Offshore Transaction. Seller has not offered any of the Securities to any person in the United States, any identifiable group of U.S. citizens abroad, or to any U.S. Person, as that term is defined in Regulation S. In addition, (i) Seller and its agents reasonably believe that, at the time the buy order was originated, Purchaser was outside the United States and was not a U.S. Person, such belief based upon the representations of Purchaser; (ii) Seller and its agents reasonably believe that the transaction has not been pre-arranged by Purchaser with a buyer in the United States, based upon the representations of Purchaser; (iii) No offer to buy or sell the Securities was or will be made by Seller to any person in the United States or to any U.S. Person; (iv) The sale of the Securities by Seller pursuant to this Agreement will be made in accordance with all of the provisions and requirements of Regulation S provided that the representations, warranties and covenants of Purchaser contained in this Agreement are true and correct; and (v) The transactions contemplated by this Agreement: (A) have not been and will not be pre-arranged by Seller with a buyer located in the United States or a buyer 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 requirements of the 1933 Act. (d) No Directed Selling Efforts. With respect to the transactions contemplated by this Agreement, 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 with the terms of the Debentures for the consideration expressed herein and in the Debentures, will be duly and validly issued, fully paid and non-assessable. Issuance of the Common Stock upon conversion of the Debenture(s) in accordance with the terms of the Debenture(s), shall be duly and validly issued, fully paid, and non-assessable and will not subject the holder(s) thereof, if such person(s) are non-U.S. Persons, to personal liability by reason of being such holder(s). There are no preemptive 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 and other laws affecting the enforcement of creditors' rights generally. Seller (and Seller's legal counsel, to the extent desired by Seller) has examined this Agreement and is satisfied that this Agreement is in accordance with the requirements of Regulation S and is effective to accomplish the purposes set forth herein. (g) Non-contravention. The execution and delivery of this Agreement, and the consummation of the issuance of the Securities and the transaction(s) contemplated by this Agreement do not and will not conflict with or result in a breach by Seller of any of the terms or provisions of, or constitute a default under, the articles of incorporation or by-laws (or any similar constitutive documents) 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 governmental body which is legally required for the issuance and sale of the Securities to persons who are non-U.S. Persons, as contemplated by this Agreement, other than as may be required by the NASDAQ Stock Market, Inc. (i) Litigation. Except as set forth in Exhibit 3(i), attached hereto and incorporated herein by this reference, there is no action, suit or proceeding by or before any court or governmental agency or body, domestic or foreign, now pending against Seller or any of its assets, or, to the knowledge of Seller, which might result in any material adverse change in the condition (financial or otherwise) or in the earnings, business affairs or business prospects of Seller, or which might materially and adversely affect the assets of Seller. (j) No Default. Seller has not received any notice of default with respect to its performance or observance of any material obligation, agreement, covenant or condition contained in any indenture, mortgage, deed of trust or other material instrument or agreement to which it is a party or by which it or its properties or assets may be bound; and neither the execution nor the delivery by Seller, nor the performance by Seller of its obligations under this Agreement or the Debentures will conflict with or result in the breach or violation of any of the terms or provisions of, or constitute a default or result in the creation or imposition of any lien or charge on any properties or assets of Seller, any material indenture, mortgage, deed of trust or other material agreement or instrument to which Seller is a party or by which it is bound or by any statute or the articles of incorporation or by-laws of Seller, or any decree, judgment, order, rule or regulation of any court or governmental agency or body having jurisdiction over Seller or its properties or assets. (k) SEC Filings. None of Seller's filings with the SEC since and including without limitation the filing of its latest Annual Report for Seller's most recent fiscal year contains any untrue statement of a material fact or omits to state any material fact required to be contained therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Seller has since at least January 1, 1996, timely filed all requisite forms, reports and exhibits thereto with the SEC as the same have become due. (l) Full Disclosure. There is no fact known to Seller (other than general economic conditions known to the public generally) which has not been disclosed in writing to Purchaser that: (i) could reasonably be expected to have a material adverse effect on the condition (financial or otherwise) of or in the earnings, business affairs, business prospects, properties or assets of Seller; or (ii) could reasonably be expected to materially and adversely affect the ability of Seller to perform its obligations under this Agreement. (m) Continued Listing. Seller shall use its best efforts to continue to have its stock listed on the NASDAQ stock exchange. (n) No Stop Transfer Instructions; Irrevocable Treasury Order; Instructions to Transfer Agent. Except as otherwise expressly provided in Paragraph 5 below, Seller will not issue stop transfer instructions to its transfer agent with respect to, and will not place any restrictive legend of any kind on, the share certificates represented by the shares of Common Stock issuable upon the conversion of the Debenture(s). Seller hereby agrees to execute an irrevocable treasury order with respect to the Common Stock, the form of which is attached hereto as Exhibit B, and to deliver same to the closing agent for the transaction(s) contemplated hereby. Seller agrees to instruct its transfer agent to reserve on its books a sufficient number of shares of common stock of Seller to effectuate the transaction(s) contemplated hereby. (o) No Other Offerings Pursuant to Regulation S. Seller covenants that, upon completion of the full private placement as contemplated in this Agreement, Seller will not undertake another private placement pursuant to Regulation S for a minimum of sixty (60) days from the date of this Agreement, but in any event not before June 1, 1997. 4. Exemption; Reliance on Representations. Purchaser understands that the offer and sale of the Securities are not being registered under the 1933 Act. Seller and Purchaser are relying on the rules governing offers and sales made outside the United States pursuant to Regulation S. 5. Transfer Agent Instructions. (a) Debentures. Upon the conversion of a Debenture, the holder thereof shall submit such Debenture to Seller with a Notice of Conversion (as defined in Exhibit A attached hereto) and Seller shall immediately instruct Seller's transfer agent to issue one or more certificates representing that number of shares of Common Stock into which the Debenture is convertible in accordance with the provisions regarding conversion set forth in Exhibit A attached hereto. Seller shall act as Debenture registrar and shall maintain an appropriate ledger containing the necessary information with respect to each Debenture. (b) Common Stock to be Issued without Restrictive Legend. Upon the conversion of any Debenture by a person who certifies in its Notice of Conversion (as defined in Exhibit A attached hereto) that it is a non-U.S. Person, Seller shall instruct Seller's transfer agent to issue stock certificates WITHOUT ANY RESTRICTIVE LEGEND OF ANY KIND in the name of Purchaser or its nominee (which nominee shall not be a U.S. Person) or such other non-U.S. Persons as may be designated by Purchaser 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, other than as specified in Paragraph 3(n) above, no instructions other than these instructions and instructions to impose a "stop transfer" order with respect to the said stock certificates until the end of the Restricted Period have been given or will be given to Seller's transfer agent and that the Common Stock shall otherwise be freely transferable on the books and records of Seller. Nothing in this Paragraph 5, however, shall affect in any way Purchaser's or such nominee's obligations and agreements to comply with all applicable laws upon resale of the Securities. 6. Registration. If upon conversion of the Debentures effected by Purchaser pursuant to the terms of this Agreement Seller fails to issue certificates for shares of Common Stock issuable upon such conversion (the "Underlying Shares") to Purchaser bearing no restrictive legend for any reason other than Seller's reasonable, good faith belief that the representations and warranties made by Purchaser in this Agreement or the Notice of Conversion (which is defined in and a part of Exhibit A) were untrue when made, or if the restricted period under Regulation S is extended, then Seller shall be required, at the request of Purchaser and at Seller's expense, to effect the registration of the Underlying Shares under the 1933 Act and all relevant "blue sky" laws as promptly as is practicable. Seller and Purchaser 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. Seller shall file a registration statement within fifteen (15) days of Purchaser's demand therefor and shall use its best efforts to cause such registration statement to become effective as soon as practicable thereafter and in any event within sixty (60) days from the initial filing thereof. Such best efforts shall include, without limitation, promptly responding to all comments received from the SEC and providing Purchaser's counsel with a contemporaneous copy of all written correspondence with the SEC. Once declared effective by the SEC, Seller shall cause such registration statement to remain effective until the earlier of: (i) the sale by Purchaser of all Underlying Shares registered; or (ii) one hundred twenty (120) days after the effective date of such registration statement. In the event Seller undertakes to file a registration statement on Form S-3 in connection with the Common Stock, upon the effectiveness of such registration, Purchaser shall have the option to sell the Underlying Shares pursuant thereto. The foregoing shall not in any way limit Purchaser's rights in connection with the Common Stock or the Underlying Shares pursuant to Regulation S or otherwise. 7. Delivery Instructions. The Debentures being purchased pursuant to this Agreement shall be delivered to Purchaser at such time and place as shall be mutually agreed by Seller and Purchaser, subject to the requirements that the Debentures and the Underlying Shares may not be delivered to or for the benefit of a U.S. Person. 8. Conditions to Seller's Obligation to Sell. Seller's obligation to sell the Debentures is conditioned upon the following: (a) The receipt and acceptance by Purchaser of this Agreement as evidenced by Purchaser's execution of this Agreement; and (b) Delivery by Purchaser into the closing depository of the Purchase Price in immediately available funds as payment in full for the Debentures. 9. Conditions to Purchaser's Obligation to Purchase. Purchaser's obligation to purchase the Debentures is conditioned upon the following: (a) The receipt and acceptance by Seller of this Agreement as evidenced by Seller's execution of this Agreement; and (b) Delivery by Seller of the Debentures as described herein. 10. 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 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 Purchaser, nor any direct or indirect purchaser of the Securities from Purchaser, may directly or indirectly offer or sell the Securities in the United States or to U.S. Persons (other than to distributors) unless the Securities are registered under the 1933 Act and any applicable state securities laws, or unless an exemption from the registration requirements of the 1933 Act or any such state securities laws is available. Such statements shall appear (i) on the cover of any prospectus or offering circular used in connection with the offer or sale of the Securities; (ii) in the underwriting section of any prospectus or offering circular used in connection with the offer or sale of the Securities; and (iii) in any advertisement made or issued by Seller, Purchaser, or any distributor, any of their respective affiliates, or any other person acting on behalf of any of the foregoing. 11. Miscellaneous. (a) Except as otherwise specifically provided herein, this Agreement constitutes the entire agreement between the parties hereto, and neither party shall be liable for or bound to the other in any manner by any warranties, representations or covenants except as specifically set forth herein. Any previous agreement between the parties related to the transactions contemplated by this Agreement 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 implied, 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) Purchaser is an independent contractor, and is not the agent of Seller. Purchaser is not authorized to bind Seller, or to make any representation or warranty on behalf of Seller. (c) Seller makes no representation or warranty with respect to Seller, its finances, assets, business prospects or otherwise, other than as contained herein. Purchaser will advise each buyer, if any, and potential buyer of the Securities, of the foregoing sentence, and that such buyer or potential buyer is relying on its own investigation with respect to all such matters, and that such buyer or potential buyer will be given access to any and all documentation and Seller personnel as it may reasonably request for such investigation. (d) All representations and warranties contained in this Agreement by Seller and Purchaser shall survive the closing of the transactions contemplated by this Agreement. (e) This Agreement shall be construed according to the internal laws of the state of New York. This Agreement may be executed in multiple counterparts, and the facsimile transmission of an executed counterpart to this Agreement by a party to the other party or to the closing agent shall be effective as an original. (f) Each party agrees to indemnify the other and hold the other harmless from and against any and all losses, damages, liabilities, costs and expenses (including without limitation reasonable attorney's fees) which the other party may sustain or incur in connection with the breach by the indemnifying party of any representation, warranty or covenant made by it in this Agreement, or of any other term or condition of this Agreement. (g) Except as reasonably required in order to effectuate the requirements and purposes hereof, and except as required by law, the parties shall keep permanently confidential the contents of this Agreement and all other agreements between themselves. With the exception of legal counsel and key operations personnel of the parties, and except as required by law, under no circumstances may either party permit this Agreement, or any copies thereof, to be viewed and/or retained by any third party. IN WITNESS WHEREOF, Seller and Purchaser have executed this Agreement as of the date first hereinabove written. [SIGNATURE PAGE FOLLOWS] [SIGNATURE PAGE - OFFSHORE SECURITIES SUBSCRIPTION AGREEMENT DATED MARCH ,1997] OFFICIAL SIGNATORY OF SELLER AMERICAN INTERNATIONAL PETROLEUM CORPORATION By:_________________________________________ Denis J. Fitzpatrick, Vice President OFFICIAL SIGNATORY OF PURCHASER Purchaser: By: Title: (Print Name and Title) Address of Purchaser: ---------------------------------------------- EX-21 4 EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT PERCENTAGE OWNED NAME OF SUBSIDIARY STATE OF INCORPORATION BY REGISTRANT American International Louisiana 100% Refinery, Inc. EX-27 5 EXHIBIT 27.1 (FDS)
5 Year Dec-31-1996 Jan-01-1996 Dec-31-1996 172,080 0 2,994,658 1,921,518 459,961 2,543,285 55,890,440 23,959,191 34,492,431 12,366,514 788,199 2,756,714 0 0 0 21,327,718 1,364,581 4,110,514 613,336 613,336 4,341,587 789,580 2,818,218 (4,652,207) 0 0 0 0 0 (4,652,207) (0.16) 0
-----END PRIVACY-ENHANCED MESSAGE-----