-----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, QF20YcV2XoKofVZFdlJZmHbYGimq/LV7cfHvEsx1HmI19U/H6uMX7z2TN1+EJ+Mq mxDwLT+7599LtLwM9fX2zw== 0001005477-98-001678.txt : 19980518 0001005477-98-001678.hdr.sgml : 19980518 ACCESSION NUMBER: 0001005477-98-001678 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19980515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN INTERNATIONAL PETROLEUM CORP /NV/ CENTRAL INDEX KEY: 0000799119 STANDARD INDUSTRIAL CLASSIFICATION: PETROLEUM REFINING [2911] IRS NUMBER: 133130236 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3 SEC ACT: SEC FILE NUMBER: 333-52859 FILM NUMBER: 98626250 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 S-3 1 FORM S-3 As filed with the Securities and Exchange Commission on May 15, 1998 Registration Nos. 333- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 AMERICAN INTERNATIONAL PETROLEUM CORPORATION (Exact name of Registrant as specified in its charter) Nevada 13-3130236 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 444 Madison Ave, Suite 3203 New York, New York 10022 (212) 688-3333 (Address and telephone number of registrant's principal executive offices) ------------------------------------- DR. GEORGE N. FARIS Chief Executive Officer AMERICAN INTERNATIONAL PETROLEUM CORPORATION 444 Madison Avenue, Suite 3203 New York, New York 10022 Telephone: (212) 688-3333 Telecopier: (212) 688-6657 (Name, address and telephone number of agent for service) ---------------------------- Copies to: CHARLES SNOW, ESQ. SNOW BECKER KRAUSS P.C. 605 Third Avenue New York, New York 10158-0125 Telephone: (212) 687-3860 Fax: (212) 949-7052 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as practicable after this Registration Statement becomes effective. If the only securities being registered on this form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [ ] If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------------ CALCULATION OF REGISTRATION FEE
Proposed Proposed Title of Each Amount Maximum Maximum Amount of Class to be Offering Price Aggregate Registration of Securities Registered Per Security(1) Offering Price (1) Fee to be Registered Common Stock, 7,509,202 (2) $2.69 (3) $20,199,753.38 $ 6,121.14 $.08 par value Common Stock, 1,518,550 (4) $2.69 (3) $ 4,084,899.50 $ 1,237.85 $.08 par value Common Stock, 1,500,000 (5) $2.69 (3) $ 4,035,000.00 $ 1,222.73 $.08 par value ---------- Total Registration Fee...............................................$ 8,581.72 ==========
- ----------------- (1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457 promulgated under the Securities Act of 1933. (2) Represents shares issuable upon conversion of the Registrant's 14% Convertible Notes due April 21, 2000 (the "Convertible Notes") acquired and that may be acquired by the selling securityholders named herein (the "Selling Securityholders") pursuant to a Securities Purchase Agreement dated as of April 21, 1998 (the "Securities Purchase Agreement"), including shares issuable in payment of accrued but unpaid interest on the Convertible Notes upon conversion. The number of shares issuable upon conversion of the Convertible Notes (including accrued but unpaid interest) has been calculated in accordance with the Securities Purchase Agreement based upon an assumed conversion price of $1.63, representing 85% of the average of the lowest 5 consecutive daily weighted average sales price of the Common Stock on the Nasdaq National Market for the 40 day trading period prior to May 11, 1998. Includes an indeterminate number of shares which may become issuable pursuant to the antidilution provisions of the Convertible Notes. (3) Calculated solely for the purpose of determining the registration fee pursuant to Rule 457(g)(3) based upon the closing price of the Common Stock on the Nasdaq National Market on May 8, 1998. (4) Includes 1,400,000 shares issuable upon exercise of warrants issued to the Selling Securityholders in connection with the Securities Purchase Agreement and 118,500 shares isuable upon exercise of warrants issued to a Selling Securityholder as a finder's fee in connection with the Securities Purchase Agreement. Includes an indeterminate number of shares which may become issuable pursuant to the antidilution provisions of the warrants. -ii- (5) Represents shares issuable upon exercise of warrants issued to the Selling Securityholders in connection with a Securities Purchase Agreement dated as of October 9, 1997, as amended. Includes an inderminate number of shares which may become issuable pursuant to the antidilution provisions of the warrants. ------------------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. -iii- SUBJECT TO COMPLETION, DATED MAY 15, 1998 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY STATE. PROSPECTUS AMERICAN INTERNATIONAL PETROLEUM CORPORATION SHARES OF COMMON STOCK This Prospectus relates to the offer and sale by the selling securityholders named herein (the "Selling Securityholders") of shares (the "Shares") of the common stock, $.08 par value (the "Common Stock"), of American International Petroleum Corporation, a Nevada corporation (the "Company"), registered in the registration statement of which this Prospectus forms a part (the "Registration Statement"). The shares of Common Stock offered hereby may be acquired by the Selling Securityholders (i) upon conversion of the Company's 14% Convertible Notes due April 21, 2000 (the "Convertible Notes"), including shares issued in payment of accrued interest on the Convertible Notes, (ii) upon exercise of warrants to purchase on aggregate of 3,018,500 shares of Common Stock issued in connection with the issuance and sale of the Convertible Notes and the Company's 14% Convertible Notes due October 15, 1998 (which were issued in October 1997 and are hereinafter referred to as the "1997 Notes"). The conversion price for determining the number of shares of Common Stock issuable upon conversion of the Convertible Notes is 85% of the average of the lowest five consecutive daily weighted average sales price of the Common Stock on the Nasdaq National Market for the 40 trading days immediately preceding the date of conversion. The distribution of the Shares by the Selling Securityholders, or by pledgees, donees, distributees, transferees or other successors in interest, may be affected from time to time by underwriters who may be selected by the Selling Securityholders and/or broker-dealers, in one or more transactions (which may involve crosses and block transactions) on the Nasdaq National Market or other over-the-counter markets, or in special offerings, exchange distributions or secondary distributions pursuant to and in accordance with the rules of the Nasdaq National Market or of such other over-the-counter markets, in negotiated transactions or otherwise, at market prices prevailing at the time of sale, at prices related to such prevailing market prices or at negotiated prices. In connection with the distribution of the Shares or otherwise, the Selling Securityholders may enter into hedging or option transactions with broker-dealers and may sell Shares short and deliver the Shares to close out such short positions. See "Selling Securityholders" and "Plan of Distribution". The Common Stock is quoted on the Nasdaq National Market under the symbol "AIPN". On May 8, 1998, the closing price of the Common Stock on the Nasdaq National Market was $2.69 per share. The Company will not receive any proceeds from the sale of the Shares by the Selling Securityholders, but will receive the exercise price of the Warrants. See "Risk Factors" beginning on page 7 for a discussion of certain risks of an investment in the Common Stock. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. --------------------- The Shares have been registered pursuant to registration rights granted to the Selling Securityholders. The Company has agreed to pay all expenses of registration in connection with the offering, other than brokerage commissions and underwriting discounts incurred by the Selling Securityholders, which will be borne by the Selling Securityholders. In addition, the Company has agreed to indemnify the Selling Securityholders, underwriters who may be selected by the Selling Securityholders and certain other persons against certain liabilities, including liabilities under the Securities Act of 1933 as amended (the "Securities Act"). The sale of the Shares by the Selling Securityholders is subject to the prospectus delivery and other requirements of the Securities Act. The date of this Prospectus is ___________, 1998 AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934 (the "Exchange Act") and, in accordance therewith, files reports, proxy and information statements and other information with the Securities and Exchange Commission (the "Commission). Reports, proxy statements and other information filed by the Company can be inspected and copied at the Public Reference Room of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Regional Offices of the Commission at Seven World Trade Center, Suite 1300, New York, New York 10048 and at 500 West Madison Street, Suite 1400, Chicago, Illinois 60611, and copies of such material also may be obtained from the Public Reference Room of the Commission at prescribed rates. Information concerning the operation of the Public Reference Room of the Commission may be obtained by calling 1-800-SEC-0330. The Commission also maintains an internet site on the Worldwide Web at www.sec.gov. that contains reports, proxy and information statements and other information regarding the Company and other registrants that file electronically with the Commission. DOCUMENTS INCORPORATED BY REFERENCE The following documents filed with the Commission are incorporated in this Prospectus by reference: 1. The Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 ("Form 10-K"). 2. The Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998. 3. The Company's Proxy Statement dated April 15, 1998 for its Annual Meeting of Shareholders scheduled to be held on June 29, 1998. 4. The description of the Common Stock contained in the Company's Registration Statement on Form 8-A (File No. 0-14905) filed pursuant to Section 12(g) of the Exchange Act, including any amendment or report filed for the purpose of updating such information. All documents subsequently filed by the Company pursuant to Sections 13(a), 13(c), 14, and 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to the termination of the offering made hereby shall be deemed to be incorporated by reference herein and to be a part hereof from the date of filing of such documents. Any statement contained in a previously filed document incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein modifies or supersedes such statement; and any statement contained herein shall be deemed to be modified or superseded to the extent that a statement in any document subsequently filed, which is incorporated by reference herein, modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. 2 The Company will provide without charge to each person, including any beneficial owner, to whom a copy of this Prospectus is delivered, upon written or oral request of such person, a copy of any or all of the documents that have been incorporated by reference in this Prospectus (other than exhibits to such documents, unless such exhibits are specifically incorporated by reference into the documents that this Prospectus incorporates). Requests for copies of such documents should be directed to the Company at 444 Madison Avenue, Suite 3203, New York, New York 10022; Attention: Corporate Secretary. ------------------------ No person is authorized to give any information or to make any representations other than those contained in this Prospectus in connection with any offer to sell or sale of the securities to which this Prospectus relates and, if given or made, such information or representations must not be relied upon as having been authorized. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, imply that there has been no change in the facts herein set forth since the date hereof. This Prospectus does not constitue an offer to sell or to a solicitation of any offer to buy from any person in any state in which any such offer or solicitation would be unlawful. 3 THE COMPANY The following information concerning the Company, is qualified in its entirety by the more detailed information, financial statements and the notes thereto appearing elsewhere in, or incorporated by reference into, this Prospectus. The information included in, or incorporated by reference into, this Prospectus contains forward-looking statements that involve risks and uncertainties, including the Company's continuing losses, working capital deficits, the ability to enter into profitable contracts to utilize the Company's Lake Charles, Louisiana 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. Unless otherwise indicated or the context otherwise requires, all references to the Company in this Prospectus include AMERICAN INTERNATIONAL PETROLEUM CORPORATION and its wholly owned subsidiaries. The Company, through its wholly-owned subsidiary, American International Refinery, Inc. (AIRI"), is the owner of a refinery in Lake Charles, Louisiana (the "Refinery"). The Company implemented the production and processing of asphalt, vacuum gas oil and other products at the Refinery in the first quarter of 1998 utilizing low-cost, low-gravity, high-sulphur crudes from Mexico and Venezuela. In addition, the Company, through its wholly-owned subsidiary, American International Petroleum Kazakstan ("AIPK"), is the owner of a 70% working interest in a 20,000 square kilometer exploration block in western Kazakstan and is engaged in oil and gas exploration and development in western Kazakstan. The Company also is seeking other oil and gas projects in the United States, Russia and Central Asia. The Company was organized on April 1, 1929 under the laws of the State of Nevada under the name Pioneer Mines Operating Company. The name of the Company was changed to American International Petroleum Corporation in 1982. The executive offices of the Company are located at 444 Madison Avenue, Suite 3203, New York, New York 10022, and its telephone number is (212) 688-3333. 4 Recent Developments Zao Nafta On March 16, 1998, the Company signed an agreement for the Exploration of the Mamourinskoye and Saratovskoye oil fields, with Zao Nafta ("Nafta") a Russian closed stock company. This agreement gave the company 90 days in which to perform technical and legal due diligence evaluations of the Nafta properties. These oil fields are included in 17 oil and gas licenses (the "Licenses") held by Nafta, covering about 877,000 acres in the Samara and Saratov regions of Southwestern Russia, approximately 600 to 800 kilometers north of the Caspian Sea and southeast of Moscow. Upon favorable completion of the due diligence evaluation, a joint venture will be formed to operate these 17 Licenses with the Company, as Operator, holding a 75% working interest. The Company agreed to pay $11 million for the 75% working interest in the joint venture, $5.0 million in cash and $6.0 million in crude oil from 25% of the Company's future net production. The Company made a refundable advance on the purchase price of $300,000 to Nafta for their use in assisting the Company in completing all legal and contractual conditions required by the Company. Proven recoverable reserves, assigned by governmental authorities for these Licenses, are estimated at about 34 million barrels of oil. The joint venture agreement will provide for the Company, as Operator, to develop and execute an investment program to activate the 16 wells available for re-entry in the Mamourinskoye License. The Company will commit to expend at least $25 million during the first 24 months of the joint venture on this program and other exploration and production activities within the respective License areas, as long as work can be technically and economically justified. However, the Company's commitments are determined by, and limited to, the joint venture programs to be established by the Company, so Nafta will be responsible for contractual License commitments which may exceed these levels. All work programs for Licenses are determined annually by the respective area governmental agencies controlling the Licenses and therefore are subject to change and revisions based on the results of the prior year's activity. Should the Company decide to complete the Nafta transaction, based on existing information, it plans to implement an early oil program which should establish production from at least 7 of the 16 wells located in the Mamourinskoye License. This early oil program is estimated to cost approximately $1 to $2 million and should allow for the trucking of crude production of about 3,000 barrels of oil per day to local refineries within 120 days of the establishment of the joint venture. However, there can be no assurance, at this time, that this level of production will be reached. The License area is approximately 60 to 80 kilometers from some of the largest refineries located in Russia, and the main export pipelines pass within 50 kilometers of each of the 17 License areas. St. Marks Refinery In March 1998, the Company signed an agreement, subject to certain conditions, to purchase the 20,000 barrels per day St. Marks Refinery and product storage terminal located on the St. Marks River near Tallahassee, Florida in a tax free exchange of stock worth up to $4.5 million. If the Company decides not purchase the 55-acre facility, it has agreed to an annual evergreen lease of the Refinery under specific terms and conditions. The primary advantage to the Company of the St. Marks acquisition or lease, is the immediate increase of its retail presence from two to five states along the U.S. Gulf Coast, plus a 50% increase in storage tank capacity by adding 33 more tanks totaling more than 460,000 barrels to the Company assets. This transaction provides an opportunity for the Company to double the retail sales capacity of petroleum products manufactured at its Lake Charles, Louisiana Refinery through access to new asphalt product markets plus jet fuel, diesel and industrial fuel oil sales in Florida, Georgia and Alabama. 5 Financings On April 21, 1998, the Company issued and sold $5,000,000 aggregate principal amount of Convertible Notes to certain of the Selling Securityholders for a total purchase price of $4,950,000 ( the "Initial Closing") pursuant to a Securities Purchase Agreement dated as of April 21, 1998 (the "Securities Purchase Agreement"). The Securities Purchase Agreement provides for the issuance and sale to the Selling Securityholders of an additional $7,000,000 principal amount of Convertible Notes for a purchase price of $6,930,000 on May 15, 1998 or such later date upon which certain conditions precedent to closing have been satisfied or waived by the Selling Securityholders. The obligation of the Selling Securityholders to purchase the additional Convertible Notes shall terminate if such conditions to closing have not been satisfied prior to May 31, 1998. The Convertible Notes are convertible into shares of Common Stock at the option of the holder thereof, commencing upon the earliest of (x) June 30, 1998, (y) the date upon which the Registration Statement of which this Prospectus forms a part (the "Registration Statement") is declared effective by the Commission (the "Effective Date") or (z) the date immediately preceding the occurrence of a "Sale Event" (as defined), at a conversion price equal to 85% of the average of the lowest five consecutive daily weighted average sales price of the Common Stock on the Nasdaq National Market for the 40 trading days ending on the date prior to the conversion date. Interest on the Convertible Notes is payable quarterly on the last day of March, June, September and December of each year commencing June 30, 1998, in cash or additional shares of Common Stock, at the option of the Company, except that interest payable upon conversion of the Convertible Notes is payable in additional shares of Common Stock. In connection with the Selling Securityholders' agreement to purchase the Convertible Notes pursuant to the Securities Purchase Agreement, the Company issued to the Selling Securityholders, at the Initial Closing, warrants to purchase an aggregate of 1,400,000 shares of Common Stock, exercisable at any time prior to April 21, 2003, at an exercise price of $2.76 per share (the "Securities Purchase Agreement Warrants"). The Company also has entered into an Equity Financing Agreement dated as of April 21, 1998 (as amended, the "Equity Financing Agreement") pursuant to which the Selling Securityholders agreed to purchase from the Company, commencing upon the later of (x) 30 days after the Effective Date, and (4) August 1, 1998, shares of Common Stock from time to time on or prior to April 21, 2000, for an aggregate purchase price of up to $40,000,000, subject to the satisfaction of certain specified conditions. The Selling Securityholders are obligated to purchase shares of Common Stock (i) upon request of the Company or (ii) if the ratio of the closing bid price of the Common Stock to the average of the closing bid prices of the Common Stock over the preceding five trading days (the "Average Closing Price") equals or exceeds 1.2 to 1.0. Purchases may not occur more frequently than once every 20 trading days. The purchase price of shares of Common Stock purchased pursuant to the Equity Financing Agreement is 85% of the Average Closing Price. The minimum purchase is $1,000,000 and the maximum purchase is $5,000,000. 6 In connection with the Selling Securityholders' agreement to purchase shares of Common Stock pursuant to the Equity Financing Agreement, the Company issued to the Selling Securityholders additional warrants to purchase an aggregate of 1,595,978 shares (the "Closing Warrants") and 2,000,000 shares (the "Commitment Fee Warrants") of Common Stock, respectively. The Closing Warrants are exercisable at any time prior to April 21, 2003, at an exercise price of $2.76 per share, subject to adjustment in certain events. The Commitment Fee Warrants become exercisable on April 21, 2000, or such earlier date upon which (i) the aggregate purchase price of shares of Common Stock purchased by the Selling Securityholders pursuant to the Equity Financing Agreement equals $40,000,000, less the amount of any commitment reductions (in the minimum amount of $5,000,000) effected by the Company, (ii) the termination of the Equity Financing Agreement, or (iii) upon certain other specified events. In addition, if the Company elects to reduce the commitment, 500 Commitment Fee Warrants will become exercisable for each $1,000,000 reduction in the commitment. The Commitment Fee Warrants may be exercised prior to April 21, 2003 at an exercise price of $2.76 per share, subject to adjustment in certain events. The net proceeds from the issuance and sale of the Convertible Notes and the shares of Common Stock pursuant to the Equity Financing Agreement (if any), together with amounts received upon exercise of the warrants issued in connection with the Securities Purchase Agreements dated as of October 9, 1997, as amended, and April 21, 1998, respectively (collectively, the "Securities Purchase Agreements"), and the Equity Financing Agreement will be used to finance the Company's expansion efforts in Kazakstan and Russia and as working capital. RISK FACTORS In addition to considering the other information set forth in, or incorporated by reference into, this Prospectus, prospective investors should carefully consider the following factors in evaluating an investment in the Company. Statements in this Prospectus include forward looking statements that involve a number of risks and uncertainties. These include the Company's lack of profitability, lack of liquidity, need for additional financing, large amount of outstanding debt, the speculative nature of the oil and gas industry and the other risks detailed from time to time in the Company's SEC Reports. Historical Continuing Losses and Lack of Liquidity; Going Concern Opinion; No Revenues in Last Three Quarters of 1997; Negative Cash Flow of Approximately $5.4 Million for Year Ended December 31, 1997. The Company has not generated a net profit during its last five fiscal years, and no assurance can be given that the Company will generate a profit for any subsequent fiscal year or that the Company will generate sufficient net profits, if any, to repay outstanding indebtedness. In connection with the audit of the Company's financial statements as of December 31, 1997, the Company received a report from Hein + Associates, certified public accountants, which included an explanatory paragraph relating to the Company's ability to continue as a "going concern". Due to the sale of the Columbian properties and the termination of the Refinery lease in the first quarter of 1997, the Company's revenues were only $828,000 for the year ended December 31, 1997, and it incurred a loss of $17,954,000 during such period. The Company has had no revenues from operations for the last three quarters and has had negative cash flow of approximately $5.2 million for the year ended December 31, 1997. The Company will continue to 7 incur losses unless it is successful in its efforts to develop the License Areas in Kazakstan and Russia or the Refinery operations, which business was recently implemented, prove successful. Dependence on Equity Line, Loans, Revenues from Asphalt Operations and Potential Joint Venture Partners for Capital Needs of the Company. During the next 12 months, the Company expects to expend approximately $14 million, of which approximately $2 million will fund the capital equipment expansion and startup costs of its Refinery; approximately $10 million is expected to be spent on costs associated with its Kazakstan project, and approximately $2 million for other corporate uses. However, in the event the Company obtains a joint venture partner in Kazakstan, its capital requirements there should be significantly less than $10 million during the next 12 months. In the event the Company decides to complete the Zao Nafta transaction, a minimum of $6 to $7 million would be initially required in Russia, approximately $5 million in acquisition cost, and $1 million to $2 million in workover costs to bring the existing 16 wells in Samara into production. As of April 30, 1998, the Company's existing working capital was insufficient to provide the Company with all of the capital it requires to complete its obligations. However, the Company believes that the capital available under the Equity Financing Agreement, together with projected cash flows from the Refinery, will satisfy its capital requirements during the next two years. If cash flow from its Refinery operations are less than anticipated, certain projects may be delayed or canceled, unless the Company is able to obtain alternative financing, as to which there can be no assurance. Outstanding Convertible Debt. As of May 5, 1998, the Company had outstanding $5.9 million principal amount of the 1997 Notes and $5.0 million principal amount of the Convertible Notes. The Company may prepay the 1997 Notes at the greater of (x) 100% of the principal amount of the 1997 Notes and (y) the number of shares into which the 1997 Notes are convertible plus accrued interest, minus one-third of the difference between (x) and (y). Holders of the 1997 Notes may convert 1/3 of the original principal amount of the 1997 Notes at any time during May and June 1998, respectively, at the lesser of (i) $6.25 per share, (ii) 85% of the Market Price (as defined) at conversion and (iii) the daily weighted-average sales price reported for the lowest five consecutive trading days during any 40-day period. The proceeds from the 1997 Notes were used for start-up capital for the Refinery and for other corporate projects and general corporate uses. If the Company is unable to repay the 1997 Notes or the Convertible Notes on a timely basis, it believes it will be able to successfully renegotiate new payment terms with the holders of the thereof. However, failure to do so could impede or jeopardize the Company's ability to continue its operations. IRS Excise Tax Claim. In May 1992, AIRI was advised by the Internal Revenue Service ("IRS") that the IRS was considering an assessment of excise taxes, penalties and interest of approximately $3,500,000 related to the sale of fuel products during 1989. 8 In November 1997, the Company reached an agreement (the "IRS Agreement") with the IRS to settle this matter by agreeing to pay an aggregate of $646,633 in tax, plus interest accrued for the applicable periods involved. The method and timing of such payment is now being discussed with IRS Collections in Houston, Texas. The Company's proposal calls for the payment of the tax and interest over a period of approximately one year. In the IRS Agreement, the IRS waived all penalties and 75% of the amount of the originally proposed tax liability. The Company continues to maintain that it is not liable for the excise taxes at issue, but agreed to settle the dispute at a significantly lower amount of liability in order to bring this long-running issue to conclusion. Lack of Proven Reserves of Gas or Oil. Although the Company has identified structures within the Kazakstan License area, the Company has not drilled these prospects and accordingly, does not have any proven reserves of oil and gas. In order to establish such reserves, the Company will have to incur all of the risks associated with such exploration specified below. Risk of Capital Losses Due to Speculative Nature of Oil and Gas Industry. Oil and gas exploration is extremely speculative, involving a high degree of risk. Even if reserves are found as a result of drilling, profitable production from reserves cannot be assured. No assurance can be given that any wells the Company may drill will recover oil or gas reserves, or in the event reserves are found, that favorable market conditions would exist to recover the costs of drilling or to realize profits. There is also no assurance that the Company's current financial condition and available cash resources will enable the Company to drill offset wells. There can be no assurance that the drilling of any new prospects actually will occur or will be profitable. There is also no assurance that wells will produce oil or gas in sufficient amounts to yield profits or even to return the Company's drilling costs. Exposure to Losses From Drilling And Other Hazards. Unusual or unexpected formation pressures, down-hole fires or other hazardous conditions may be encountered in drilling oil and gas wells and in the refining of oil. If such hazards are encountered, completion of wells may be substantially delayed and the costs significantly increased. Even though a well is completed and is found to be productive, water or other deleterious substances may be encountered, which may impair or prevent production of oil or gas, and which may adversely affect the Company's operations. In addition, floods and adverse weather conditions hinder or delay feedstock and product movements at the Refinery and drilling and production operations, as can labor disputes, work stoppages, shortages of equipment and materials or the unavailability of oil barges and drilling rigs. 9 Environmental Hazards. The Company's operations are subject to all of the environmental risks normally incident to oil and gas exploratory, drilling, and refining activities, including, but not limited to, blowouts, pollution and fires. Any of these occurrences could result in environmental damage or destruction, including the discharge of hazardous materials into the environment. Although the Company maintains comprehensive and general liability coverage as is customary in the oil and gas industry, and coverage against certain risks, the Company is not fully covered for damages incurred as a consequence of environmental mishaps. Furthermore, to the extent covered, no assurance can be given that any such coverage would be adequate protection in the event of an environmental problem. Accordingly, no assurance can be given that the Company's operations would not be severely impeded in the event of an environmental mishap or problem. Potential Cost Increases And Delays Due to Possible Shortages of Personnel And Drilling Equipment. It is possible that field personnel, drilling rigs, pipes, casing, or other tubular goods will not be available when needed for the drilling, completion or operation of the Company's prospects and wells. This possibility could result in drilling or completion delays and, in some instances, result in additional costs beyond normal drilling and completion costs, which could have a material adverse effect on the Company. Intense Competition And Uncertain Markets. The oil and gas industry, is highly competitive. Many companies, most of which have greater experience and financial resources than the Company, are likely to compete with the Company for producing properties. There can be no assurance that a market will be available for any oil and gas produced by wells in which the Company owns an interest. The Company's success is dependent not only on the productivity of the producing properties and the ultimate sale of said production, but also on (i) the market prices for oil and gas, which are highly unstable, (ii) operating costs incurred in producing the oil and/or gas, (iii) transportation costs, (iv) the cost of crude oil feedstocks, and (v) other factors which may be beyond the control of the Company. Energy Market Subject to Fluctuation. Revenues generated by the Company's oil and gas operations and the carrying value of its oil and gas properties are highly dependent on the prices for oil and natural gas. The price which the Company receives for its oil is dependent upon numerous factors beyond the control of the Company's Management, the exact effect of which cannot be predicted. These factors include, but are not limited to, (i) the quantity and quality of the oil or gas produced, (ii) the overall supply of domestic and foreign oil or gas from currently producing and subsequently discovered fields, (iii) the extent of importation of foreign oil or gas, (iv) the marketing and competitive position of other fuels, including alternative fuels, as well as other sources of energy, (v) the proximity, capacity and cost of oil or gas pipelines and other facilities for the transportation of oil or gas, (vi) the regulation of allowable production by governmental authorities, and (vii) international political developments, including nationalization of oil wells and political unrest or upheaval the areas of the world in which the Company has an interest or plans to conduct operations. 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 or gas and, thus, the price attainable therefor. 10 Government Legislation May Limit Revenues or Increase Costs. The oil and gas industry is subject to local governmental regulations which, in the case of the Company, will be the Kazakstan government. This jurisdiction is empowered to enact legislation or regulations to limit the rates at which oil and gas is produced and to impose taxes on oil and gas when sold. Since energy policies are uncertain, no prediction can be made as to the ultimate effect of any such governmental policies and controls upon the Company. The Company will also be subject to the laws of jurisdictions through which oil and gas pipe lines traverse. These jurisdictions also have the power to adversely effect the cost of operations and can impose restrictions on transportation of oil and gas to world markets. Political and Economic Situation in Kazakstan. The Company's oil and gas exploration is confined at present to Kazakstan. A favorable political climate in Kazakstan and the openness of its markets to United States trade is essential to the success of the Company. The Confederation of Independent States ("CIS"), of which Kazakstan is part, appear to have embraced political reforms and market economies. However, there are no local procedures for such vast changes; the region has known only totalitarianism and a centrally- planned economy for most of this century. Any reversal in such perceived new political and economic trends and policies, or in international trade policy generally, could materially affect the Company's operations. Moreover, the political situation in the Kazakstan, where the Company expects to generate all of its revenues in the near future, remains in constant transition. Because the CIS countries are in the early stages of development of a market economy, the commercial framework in still developing. New market-oriented laws are being enacted, but their application is still uncertain. Although the Company believes that Kazakstan has advanced in the area of commercial law, Kazakstan laws and courts are not well tested in contract enforcement. Similarly, although Kazakstan law regarding foreign investment provides protection against nationalization and confiscation, there is little or no judicial precedent in this area. There can be no assurance that additional detrimental changes in Kazakstan regulations will not occur. Foreign firms operating in this region may be subject to numerous other risks that are not present in domestic operations, including political strife, the possibility of expropriation, inadequate distribution facilities, restrictions on royalties, dividends and currency remittances, inflation, fluctuations of foreign currencies, high and unpredictable levels of taxation, requirements for governmental approvals for new ventures and local participation in operations. Such problems could have a material adverse effect on the Company's operations abroad. Inability of The Company to Fully Insure Potential Casualty Losses or Possible Liabilities to Others. The Company has general liability insurance, property insurance, and other insurance. Under the terms of such policies, the Company is insured against covered casualty damages to its property and liabilities to others for negligence and other matters. There is a risk, however, that the Company may not be insured against all losses or liabilities which arise from the hazards inherent in the oil and gas industry, either because insurance protecting against such losses or liabilities is unavailable or because damages may exceed the amount of coverage obtained, or because the Company has elected not to purchase such coverage. In the event the Company incurs uninsured losses or liabilities, the 11 Company will have to bear fully such losses directly, and its properties and assets may be exposed to forfeiture. Currency Risks. The recent history of trading in CIS currencies as against the U.S. Dollar has been characterized by significant declines in value and considerable volatility. Although in recent months, CIS currencies have experienced relative stability against the U.S. Dollar, there is a risk of further declines in value and continued volatility in the future. To the extent such major capital expenditures involve importation of equipment and the like, current law permits the conversion of CIS revenues into foreign currency to make such payments. CIS currencies are generally not convertible outside the CIS countries. In the event the Company discovers oil or gas in the License area, the market for the same may exist locally or in world markets. To the extent that production is utilized in the CIS countries, currency liquidity and restrictions may adversely effect the Company. However, the Company may receive and hold U.S. Dollars within the CIS countries, which may mitigate its currency risk there. A market exists within the CIS countries for the conversion of CIS currencies into other currencies, but it is limited in size and is subject to rules limiting the purposes for which conversion may be effected. The limited availability of other currencies may tend to inflate their values relative to the CIS currencies and there can be no assurance that such a market will continue to exist indefinitely. Moreover, the banking systems in the CIS countries are not yet as developed as its Western counterparts and considerable delays may occur in the transfer of funds within, and the remittance of funds out of these countries. Any delay in converting CIS currencies into a foreign currency in order to make a payment or delay in the transfer of such foreign currency could have a material adverse effect on the Company. Currency Controls; Restrictions on Repatriation of Payments. While applicable legislation in the CIS currently permits the repatriation of profits and capital and the making of other payments in hard currency, the ability of the Company to repatriate such profits and capital and to make such other payments is dependent upon the continuation of the existing legal regimes for currency control and foreign investment, administrative policies and practices in the enforcement of such legal regimes and the availability of foreign exchange in sufficient quantities in those countries. Legal Risks. The CIS countries lack a fully developed legal system. Their law is evolving rapidly and in ways that may not always coincide with market developments, resulting in ambiguities, inconsistencies and anomalies, and ultimately in investment risk that would not exist in more developed legal systems. For example, the ability of a creditor both to obtain a lien or other similar priority in payment and to enforce such priority is uncertain. Furthermore, effective redress in CIS courts in respect of a breach of law and regulation, or in an ownership dispute, may be difficult to obtain. Risks Associated with Refinery Operation: Asphalt Production Is a New Venture for the Company. Production and sale of asphalt products is a new business for the Company and has all of the risks and hazards associated with the establishment of a new business. Investors should be aware of the problems, delays, expenses and difficulties encountered by ventures in the early stages of operations. Typical problems include, delays, unanticipated expenses, marketing burdens, the failure to obtain market acceptance of products, competition and production problems, among others. 12 The Company's asphalt operations will be adversely effected by its failure to recognize and solve any such problems as do arise. Operation of The Refinery Is Subject to Many of The Risks Associated With The Oil And Gas Industry. Asphalt is a petroleum product and therefore, the production and sale thereof is subject to many of the risks inherent in such industry. Accordingly, investors should review the risk disclosures relative to the production of oil and gas described above. In particular, the production of asphalt is subject to the adverse effects hazards, such as fire, adverse weather, labor disputes, lack of availability of transportation facilities, environmental hazards, cost increases, shortages of equipment and personnel, competition, fluctuation in the costs of crude oil supplies for the Refinery, fluctuations in the price of finished products and transportation, government regulation and inability to adequately and fully insure potential casualty losses. See Risks Associated with Oil and Gas Exploration and Production for a fuller description of the manner in which such factors may adversely effect the Company's oil and gas operations generally, and the Refinery, particularly. Blank Check Preferred Stock and Control of the Company. The Company's Certificate of Incorporation authorizes the issuance of Preferred Stock with such designations, rights and preferences as may be determined from time to time by the Board of Directors. Accordingly, the Board of Directors is empowered, without shareholder approval, to issue Preferred Stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of the Common Stock. Although there are no present plans, agreements, commitments or undertakings with respect to the Company's issuance of any shares of Preferred Stock, any such issuances may be deemed to be an anti-takeover device which could be utilized as a method of discouraging, delaying or preventing a change in control of the Company or to dilute the public ownership of the Company and give clear control of the Company to current Management, and there can be no assurance that the Company will not issue such shares. Adverse Effect of Potential Future Sales of Common Stock Under Rule 144 or this Registration Statement. Of the Company's 51,573,761 issued and outstanding shares of Common Stock as of May 5, 1998, approximately 1,787,267 shares are "restricted securities" (not including the shares being registered in the Registration Statement), as that term is defined under Rule 144 under the Securities Act. The Company is unable to predict the effect that sales of Common Stock pursuant to the Registration Statement, Rule 144 or otherwise may have on the then existing market price of the Company's Common Stock. The possibility exists that the sale of any of these shares, or even the potential of such sales, may have a depressive effect on the price of the Company's Common Stock in any public trading market. This could impair the Company's ability to raise additional equity capital. Shares Outstanding; Shares Eligible For Future Sale; Future Sale of Shares May Cause Dilution And Adversely Effect Stock Price. The Company has 100,000,000 authorized shares of Common Stock, of which 51,573,761 were issued and outstanding as of May 5, 1998. In the event all of the issued and outstanding options and warrants are exercised and all outstanding convertible debentures are converted pursuant to their terms, approximately 60,479,281 shares of Common Stock would be outstanding as of the date of this filing. Issuance of such securities may have a dilutive effect on the Company's Common Stock and adversely effect the price of the Company's 13 Common Stock in the market. Management will have broad discretion with respect to the issuance of the remaining authorized but unissued shares, including discretion to issue such shares in compensatory and acquisition transactions. In the event that the Company seeks to procure additional financing through the sale and issuance of its securities, or in the event that current warrantholders, optionholders or debentureholders exercise or convert their securities into shares of Common Stock, the then current shareholders of the Company may suffer immediate and substantial dilution in their percentage ownership of shares of the Common Stock. In addition, the future issuance of shares below the then current market price of the Common Stock may have a depressive effect in the future market price of the Common Stock, although such market price is subject to numerous factors, many of which are beyond the Company's control, including general economic business conditions and the then current economic condition of the oil and gas industry. Procurement and Retention of Key Personnel; Dependence on Key Personnel. The success of the Company is dependent upon the efforts, abilities and expertise of its Chief Executive Officer, George N. Faris, as well the Company's Chief Financial Officer, Denis J. Fitzpatrick. The Company has entered into an employment agreement with Dr. Faris. Each of these officers intends to devote substantially all of his business time to the Company's affairs. The Company's future success is also dependent, in part, on the ability of the Company to attract and retain qualified personnel. No assurance can be given, however, that the Company will be able to attract qualified individuals, and if hired, that the Company would be able to retain such persons in its employ. As compared to other publicly traded oil and gas companies, the Company has fewer resources to attract and/or retain key personnel, and the Company does not have the depth of managerial employees to rely upon in the event of the loss of any single employee. Accordingly, the loss of any key employee could have a material adverse affect on the operation of the Company's business and may have greater adverse consequences to the Company than to other publicly traded oil and gas companies. The Company maintains a $2,000,000 key man life insurance policy on the life of its Chief Executive Officer, Dr. George N. Faris. Possible Volatility of Market Price of Common Stock. The market price of the Common Stock may be highly volatile. Factors such as the Company's financial results, financing efforts and various factors affecting the oil and gas industry generally may have a significant impact on the market price of the Company Stock. Additionally, in the last several years, the stock market has experienced a high level of price and volume volatility, and market prices for many companies, particularly small and emerging growth companies, the common stock of which trade in the over-the-counter market, have experienced wide price fluctuations and volatility which have not necessarily been related to the operating performance of such companies. Any such fluctuations, or general economic and market trends, could adversely affect the market price of the Common Stock. Due to all of the foregoing factors, it is likely that in some future quarter the Company's operating results will be below the expectations of public market analysts and investors. In that event, the price of the Common Stock would likely be materially adversely affected. Absence of Dividends. The Company has not paid any cash dividends on its Common Stock since inception and does not expect to declare or pay any cash dividends in the foreseeable future. The Company expects to invest earnings, if any, to finance the Company's operations and to the 14 development of its businesses. Furthermore, the Securities Purchase Agreement prohibits the Company from paying cash dividends or making other Restricted Payments (as defined) in excess of $50,000 per year. Continued Listing Requirements for Nasdaq Securities. The Company's securities are traded on the Nasdaq National Market System ("Nasdaq- NMS"), but there can be no assurance that the Company will meet the maintenance criteria for the continued listing of its securities on Nasdaq-NMS. Continued listing on Nasdaq-NMS requires, among other criteria, a company to have tangible assets of at least $4,000,000 and that the listed security(s) (other than those owned by directors, officers, and other beneficial owners of more than 10% of such securities) have a market value of at least $5,000,000 and a minimum bid price of $1.00. Although the Company currently satisfies Nasdaq-NMS maintenance criteria, there can be no assurance that it will continue to do so. If in the future the Company is unable to satisfy Nasdaq-NMS criteria for continued listing of its securities, they may be delisted therefrom. In that event, the Company would seek to have its securities listed on The Nasdaq Small Cap Market or other securities exchange, subject to the Company's ability to satisfy the eligibility criteria for listing. If the Company were unable to obtain any such listing, trading, if any, in the Company's securities would thereafter have to be conducted in the OTC "Bulletin Board." As a result, an investor might find it more difficult to dispose of the Common Stock due to the reduced visibility of the Company on the market. Disclosure Relating to Low-Priced Stocks. Restrictions on Resales of Low-Priced Stocks and Restrictions on Broker- Dealer Sales. The Commission has adopted rules that regulate broker-dealer practices in connection with transactions in "penny stocks." Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on Nasdaq, provided that current price and volume information with respect to transactions in that security is provided by the exchange or system). The penny stock rules, particularly Rule 15g-9, require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document prepared by the Commission that provides information about penny stocks and the nature and level of risks in the penny stock market. Bid and offer quotations, and the broker dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer's confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from such rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that becomes subject to the penny stock rules. If the Common Stock were no longer traded on Nasdaq, the Common Stock, depending on its market price, would be subject to the penny stock rules. If the Company's securities become subject to the penny stock rules, investors in this offering may find it more difficult to sell the Company's securities. At present, the Company's securities do not come within the definitional scope of these regulations. 15 Speculative Nature of Options And Warrants. As of May 5, 1998, the Company had outstanding an aggregate of 5,328,020 warrants, at exercise prices ranging from $.40 to $3.00 per share with expiration dates of from January 12, 1999 to April 21, 2003. The Company also had outstanding employee stock options to purchase an aggregate of 3,577,500 shares of Common Stock exercisable at exercise prices ranging from $.50 to $4.28 per share with expiration dates of from December 31, 1999 to December 31, 2002. Options and warrants are generally more speculative than Common Stock issuable on the exercise thereof. During the term of the options and warrants, the holders thereof are given the opportunity to profit from a rise in the market price of the Company's Common Stock, subject, in certain cases, to the Company's right of redemption. Historically, the percentage increase or decrease in the market price of an option or warrant has tended to be greater than the percentage increase or decrease in the market price of the underlying common shares. The holders of options and warrants would be most likely to exercise them and purchase the Company's Common Stock at a time when the Company could obtain capital by a new offering of securities on terms more favorable than those provided by the options and warrants. Consequently, the terms on which the Company could obtain additional capital during such period may be adversely affected. SELLING SECURITYHOLDERS The following table sets forth the names of the Selling Securityholders, the number of shares of Common Stock beneficially owned by each Selling Securityholder as of April 21, 1998, and the number of Shares that each may offer, and the number of shares of Common Stock beneficially owned by each Selling Securityholder upon completion of the Offering. The number of Shares sold by each Selling Securityholder may depend upon a number of factors, including, among other things, the market price of the Common Stock. None of the Selling Securityholders has, or within the past three years has had, any position, office or other material relationship with the Company or any of its predecessors or affiliates. 16
- ------------------------------------------------------------------------------------------------------ Shares of Shares of Common Common Stock Shares of Common Stock Owned Before Offered in the Stock Owned Offering(1) Offering After Offering - ------------------------------------------------------------------------------------------------------ Name of Selling Number Percent Number Number Percent Securityholder - ------------------------------------------------------------------------------------------------------ Infinity Emerging 1,002,329(3) 2.0 % 1,634,867(4) (5) (5) Opportunities Limited (2) - ------------------------------------------------------------------------------------------------------ Summit Capital Limited (2) 501,165(3) 1.0 % 1,113,650(4) (5) (5) - ------------------------------------------------------------------------------------------------------ Glacier Capital Limited (2) 501,165(3) 1.0 % 1,113,650(4) (5) (5) - ------------------------------------------------------------------------------------------------------ Infinity Investors Limited (2) 3,006,987(3) 5.9 % 6,547,035(4) (5) (5) - ------------------------------------------------------------------------------------------------------ LKB Financial LLC (6) 261,500(7) * 118,500(8) (5) (5) - ------------------------------------------------------------------------------------------------------
- --------------- * Less than one percent (1%). (1) Unless otherwise indicated, each person has sole investment and voting power with respect to the shares indicated. For purposes of computing the percentage of outstanding shares held by each Selling Securityholder on April 21, 1998, any security which such person has the right to acquire within 60 days after such date is deemed to be outstanding for the purpose of computing the percentage ownership for such person, but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. Each of the Selling Securityholders specifically disclaims beneficial ownership of the shares of Common Stock held (or that it may acquire upon exercise or conversion of any derivative securities held) by the other Selling Securityholders and, as such, the number of shares of Common Stock represented hereby does not reflect any shares of Common Stock beneficially owned by any other Selling Securityholder. (2) The address of the principal business office of the Selling Securityholder is 38 Hertfort Street, London, England W1Y 776. (3) Includes shares acquired upon conversion of the 1997 Notes and shares that may be acquired upon conversion of the Convertible Notes and the exercise of the Securities Purchase Agreement Warrants, the Closing Warrants and the warrants issued in connection with the issuance and sale of the 1997 Notes pursuant to the Securities Purchase Agreement dated as of October 9, 1997, as amended. All information concerning beneficial ownership of the Common Stock by the Selling Securityholders as of April 21, 1998 is based upon a Schedule 13G filed by the Selling Securityholder. Pursuant to the terms of the Securities Purchase Agreements and the Equity Financing Agreement, the securities issued in the transactions which are the subject thereof are not issuable, convertible or exercisable, as the case may be, at any time for any number of shares of Common Stock in excess of that number which would render the Selling Securityholders, as a group, the beneficial owners of more than 9.99% of the then issued and outstanding shares of Common Stock of the Company, except upon the occurrence of certain material contingencies not within the control of the Selling Securityholders, as described in those agreements. 17 (4) Represents shares of Common Stock issuable upon exercise of the warrants issued pursuant to the Securities Purchase Agreements and upon conversion of the Convertible Notes at an assumed conversion price of $1.63, representing 85% of the lowest five consecutive daily weighted average sales price of the Common Stock on the Nasdaq National Market for the 40-day trading period preceding May 11, 1998. (5) Since each of the Selling Securityholders may sell all, some or none of the shares of Common Stock that it holds, no estimate can be given as to the number of shares of Common Stock that will be held by each of the Selling Securityholders upon completion of this offering. See "Plan of Distribution." (6) The address of the principal business of the Selling Securityholder is 4555 Mansell Road, Suite 300, Alpharetta, Georgia 30202. (7) Represents shares of Common Stock issuable upon exercise of warrants issued as a finder's fee in connection with the Securities Purchase Agreement. Additional information concerning the number of shares of Common Stock to be sold by the Selling Securityholders may be set forth from time to time in prospectus supplements to this Prospectus. See "Plan of Distribution." The Shares have been registered pusuant to the registration rights granted to the Selling Securityholders. All of the registration and filing fees, printing expenses, blue sky fees, if any, fees and disbursements of counsel for the Company, and certain fees and disbursements of one counsel for the Selling Securityholders (not to exceed $25,000) will be paid by the Company; provided, however, that any underwriting discounts and selling commissions will be borne by the Selling Securityholders. In addition, the Company has agreed to indemnify the Selling Securityholders, underwriters who may be selected by the Selling Securityholders and certain affiliated parties, against certain liabilities, including liabilities under the Securities Act, in connection with the offering. The Selling Securityholders also have agreed, at the request of the Company, to indemnify its officers, directors and "controlling persons" against such liabilities. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions, the Company has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is therefore unenforceable. 18 PLAN OF DISTRIBUTION Sales of the Shares may be made from time to time by the Selling Securityholders, or, subject to applicable law, by pledgees, donees, distributees, transferees or other successors in interest. Such sales may be made on the Nasdaq National Market or other over-the-counter markets, in privately negotiated transactions or otherwise or in a combination of such transactions at prices and at terms then prevailing or at prices related to the then current market price, or at privately negotiated prices. In addition, any Shares covered by this Prospectus which qualify for sale pursuant to Section 4(1) of the Securities Act or Rule 144 promulgated thereunder may be sold under such provisions rather than pursuant to this Prospectus. Without limiting the generality of the foregoing, the Shares may be sold in one or more of the following types of transactions: (a) a block trade in which the broker-dealer so engaged will attempt to sell the Shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; (b) purchases by a broker or dealer as principal and resale by such broker or dealer for its account pursuant to this Prospectus; (c) ordinary brokerage transactions and transactions in which the broker solicits purchasers; and (d) face-to-face transactions between sellers and purchasers without a broker-dealer. In effecting sales, brokers or dealers engaged by the Selling Securityholders may arrange for other brokers or dealers to participate in the resales. In connection with distributions of the Shares or otherwise, the Selling Securityholders may enter into hedging transactions with broker-dealers. In connection with such transactions, broker-dealers may engage in short sales of the Shares in the course of hedging the positions they assume with Selling Securityholders. The Selling Securityholders also may sell Shares short and deliver the Shares to close out such short positions. The Selling Securityholders also may enter into option or other transactions with broker-dealers which require the delivery to the broker-dealer of the Shares, which the broker-dealer may resell pursuant to this Prospectus. The Selling Securityholders also may pledge the Shares to a broker or dealer and upon a default, the broker or dealer may effect sales of the pledged Shares pursuant to this Prospectus. Brokers, dealers or agents may receive compensation in the form of commissions, discounts or concessions from Selling Securityholders in amounts to be negotiated in connection with the sale. Such brokers or dealers and any other participating brokers or dealers may be deemed to be "underwriters" within the meaning of the Securities Act in connection with such sales and any such commission, discount or concession may be deemed to be underwriting discounts or commissions under the Securities Act. Information as to whether underwriters who may be selected by the Selling Securityholders, or any other broker-dealer, is acting as principal or agent for the Selling Securityholders, the compensation to be received by underwriters who may be selected by the Selling Securityholders, or any broker-dealer, acting as principal or agent for the Selling Securityholders and the compensation to be received by other broker-dealers, in the event the compensation of such other broker-dealers is in excess of usual and customary commissions, will, to the extent required, be set forth in a supplement to this Prospectus (the "Prospectus Supplement"). Any dealer or broker participating in any distribution of the Shares may be required to deliver a copy of this Prospectus, including the 19 Prospectus Supplement, if any, to any person who purchases any of the Shares from or through such dealer or broker. The Company has advised the Selling Securityholders that during such time as they may be engaged in a distribution of the Shares they are required to comply with Regulation M promulgated under the Exchange Act. With certain exceptions, Regulation M precludes any Selling Securityholder, any affiliated purchasers and any broker-dealer or other person who participates in such distribution from bidding for or purchasing, or attempting to induce any person to bid for or purchase any security which is the subject of the distribution until the entire distribution is complete. Regulation M also prohibits any bids or purchases made in order to stabilize the price of a security in connection with the distribution of that security. All of the foregoing may affect the marketability of the Common Stock. It is anticipated that the Selling Securityholders will offer all of the Shares for sale. Further, because it is possible that a significant number of Shares could be sold at the same time hereunder, such sales, or the possibility thereof, may have a depressive effect on the market price of the Company's Common Stock. LEGAL MATTERS The validity of the shares of Common Stock offered hereby has been passed upon for the Company by Snow Becker Krauss P.C., 605 Third Avenue, New York, New York 10158. Snow Becker Krauss P.C. and an affiliated investment partnership hold 586,205 shares of Common Stock, all of which was issued to it in exchange for legal fees and disbursements. EXPERTS The financial statements incorporated in this Prospectus by reference to the Annual Report on Form 10-K of American International Petroleum Corporation for the years ended December 31, 1996 and 1997, have been so incorporated in reliance upon the report (which contains an explanatory paragraph relating to the Company's ability to continue as a going concern as described in Note 2 to the financial statements) of Hein + Associates LLP, independent certified public accountants, given upon the authority of said firm as experts in accounting and auditing for the years. The financial statements incorporated in this Prospectus by reference to the Annual Report on Form 10-K of American International Petroleum Corporation for the year ended December 31, 1995, have been so incorporated in reliance upon the report of Bernardo Villegas Perez, independent auditor, given upon the authority of said firm as an expert in auditing for the year. The financial statements incorporated in this Prospectus by reference to the Annual Report on Form 10-K of American International Petroleum Corporation for the year ended December 31, 1995, have been so incorporated in reliance upon the report (which contains an explanatory paragraph relating to the Company's ability to continue as a going concern as described in Notes 2 and 11 to the financial statements) of Price 20 Waterhouse LLP, independent certified public accountants, given upon the authority of said firm as experts in accounting and auditing for the year. 21 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 14. Other Expenses of Issuance and Distribution The following table sets forth the estimated expenses which will be paid by the Registrant in connection with the issuance and distribution of the shares of Common Stock being registered hereby: Securities and Exchange Commission registration fee..................$ 8,581.72 Legal fees and expenses.............................................. 15,000.00 Accounting fees...................................................... 5,000.00 Printing............................................................. 2,500.00 Miscellaneous........................................................ 1,418.28 ----------- Total.................................................$ 32,500.00 =========== Item 15. Indemnification of Directors and Officers Under Section 78.751 of the Nevada Corporation Law ("NCL"), directors and officers may be indemnified against judgments, fines and amounts paid in settlement and reasonable expenses (including attorneys' fees), actually and reasonably incurred as a result of specified actions or proceedings (including appeals), whether civil or criminal (other than an action by or in the right of the corporation - a "derivative action") if they acted in good faith and for a purpose which they reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe their conduct was unlawful. A similar standard of care is applicable in the case of derivative actions, except that indemnification only extends to amounts paid in settlement and reasonable expenses (including attorneys' fees) actually and reasonably incurred by them in connection with the defense or settlement of such an action (including appeals), except in respect of a claim, issue or matter as to which such person shall have been finally adjudged to be liable to the corporation, unless and only to the extent a court of competent jurisdiction deems proper. In accordance with Section 78.037(1) of the NCL, Article VIII of the Registrant's Certificate of Incorporation, as amended, eliminates the personal liability of the Registrant's directors to the Registrant or its shareholders for monetary damages for breach of their fiduciary duties as directors, with certain limited exceptions set forth in said Article VIII and Section 78.037(1). Article VII of the Registrant's Bylaws provides for indemnification of directors, officers and others as follows: "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 II-1 threatened to be made, a party to an action or proceeding, civil or criminal, including an action by or in the right of any other corporation of any type or kind, domestic or foreign, or any partnership, joint venture, trust, employee benefit plan or other enterprise which any director or officer of the Corporation served in any capacity at the request of the Corporation, by reason of the fact that he, his testator or intestate, was a director or officer of the joint venture, trust, employee benefit plan or other enterprise in any capacity, against judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees of any such action or proceeding, or any appeal therein, and (b) the Corporation may pay, in advance of final disposition of any such action or proceeding, expenses incurred by such person in defending such action or proceeding. On the terms, to the extent, and subject to the conditions prescribed by statute and by such rules and regulations, not inconsistent with statute, as the Board of Directors may in its discretion impose in general or particular cases or classes of cases, (a) the Corporation shall indemnify any person made a party to an action by or in the right of the Corporation to procure a judgment in its favor, by reason of the fact that he, his testator or intestate, is or was a director or officer of the Corporation, against the reasonable expenses, including attorneys' fees, actually and necessarily incurred by him in connection with the defense of such action, or in connection with an appeal therein, and (b) the Corporation may pay, in advance of final disposition of any such action, expenses incurred by such person in defending such action or proceeding." The Registrant maintains insurance, at its expense, to reimburse itself and directors and officers of the Registrant and of its direct and indirect subsidiaries against any expense, liability or loss arising out of indemnification claims against directors and officers and to the extent otherwise permitted under the NCL. Section 2.7(a) of the Registration Rights Agreement among the Registrant and the Selling Securityholders provides for indemnification by the Registrant of the Selling Securityholders, any underwriters who participate in the distribution of the Shares of Common Stock offered hereby on behalf of the Selling Securityholders, the directors, officers and any persons who control the Selling Securityholders against certain liabilities under the Securities Act. In addition, Section 2.7(b) of the Registration Rights Agreement provides that, at the request of the Registrant, the Selling Securityholders will indemnify the Registrant and its directors, officers and any persons who control the Registrant against certain liabilities under the Securities Act (the "Securities Act"). Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling the Registrant pursuant to the foregoing provisions, the Registrant has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. II-2 Item 16. Exhibits 4.1 Form of 14% Convertible Note due April 21, 2000 4.2 Form of Warrant issued pursuant to the Securities Purchase Agreement dated as of April 21, 1998. 4.3* Form of Warrant issued pursuant to the Securities Purchase Agreement dated as of October 9, 1997. 4.4 Securities Purchase Agreement dated as of April 21, 1998. 4.5 Agreement and First Amendment dated as of April 21, 1998 to Securities Purchase Agreement dated as of October 9, 1997. 4.6 Registration Rights Agreement dated as of April 21, 1998. 5.1 Opinion of Snow Becker Krauss P.C. 23.1 Consent of Snow Becker Krauss P.C. (contained in Exhibit 5.1). 23.2 Consent of Price Waterhouse LLP. 23.3 Consent of Hein + Associates LLP. 23.4 Consent of Bernardo Villagas Perez 24.1 Powers of Attorney (included on the signature page of this Registration Statement) - ---------- * Incorporated by reference to the Registrant's Quarterly Report on Form 10-QSB for the fiscal quarter ended September 30, 1997. Item 17. Undertakings. The undersigned Registrant hereby undertakes that it will: II-3 (a) (l) File, during any period in which it offers or sells the securities offered hereby, a post-effective amendment to this registration statement to: (i) Include any prospectus required by Section 10(a)(3) of the Securities Act. (ii) Reflect in the prospectus any facts or events which, individually or in the aggregate, represents a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) Include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) For determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) Remove from registration by means of a post-effective amendment any of the securities being registered that remain unsold at the termination of the offering. (b) The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or controlling persons of the Registrant pursuant to any arrangement, provision or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on May 11, 1998. AMERICAN INTERNATIONAL PETROLEUM CORPORATION By: /s/ Dr. George N. Faris Dr. George N. Faris Chief Executive Officer POWER OF ATTORNEY Each of the undersigned hereby authorizes George N. Faris and/or Denis J. Fitzpatrick as his attorneys-in-fact to execute in the names of each such person and to file such amendments (including post-effective amendments) to this registration statement as the Registrant deems appropriate and appoints such persons as attorneys-in-fact to sign on his behalf individually and in each capacity stated below and to file all amendments, exhibits, supplements and post-effective amendments to this registration statement. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons on May 11, 1998 in the capacities stated. Signature Title /s/ George N. Faris - ------------------- George N. Faris Chief Executive Officer and Chairman of the Board of Directors (principal executive officer) /s/ Denis J. Fitzpatrick - ------------------------ Denis J. Fitzpatrick Vice President, Chief Financial Officer and Secretary (principal financial and accounting officer) /s/ Donald G. Rynne - ------------------- Donald G. Rynne Director /s/ Daniel Y. Kim - ----------------- Daniel Y. Kim Director /s/ William R. Smart - -------------------- William R. Smart Director EXHIBIT INDEX Exhibit No. Description 4.1 Form of 14% Convertible Note due April 21, 2000 4.2 Form of Warrant issued pursuant to the Securities Purchase Agreement dated as of April 21, 1998. 4.3* Form of Warrant issued pursuant to the Securities Purchase Agreement dated as of October 9, 1997. 4.4 Securities Purchase Agreement dated as of April 21, 1998. 4.5 Agreement and First Amendment dated as of April 21, 1998 to Securities Purchase Agreement dated as of October 9, 1997. 4.6 Registration Rights Agreement dated as of April 21, 1998. 5.1 Opinion of Snow Becker Krauss P.C. 23.1 Consent of Snow Becker Krauss P.C. (contained in Exhibit 5.1). 23.2 Consent of Price Waterhouse LLP. 23.3 Consent of Hein + Associates LLP. 23.4 Consent of Bernardo Villagas Perez 24.1 Powers of Attorney (included on the signature page of this Registration Statement) - ---------- * Incorporated by reference to the Registrant's Quarterly Report on Form 10-QSB for the fiscal quarter ended September 30, 1997. EX-4.1 2 FORM OF 14% CONVERTIBLE NOTE DUE APRIL 21, 2000 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING SUCH SECURITIES AGREES FOR THE BENEFIT OF THE COMPANY THAT SUCH SECURITIES MAY BE OFFERED, SOLD OR OTHERWISE TRANSFERRED ONLY (A) TO THE COMPANY, (B) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT, OR (C) IF REGISTERED UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS. IN ADDITION, A SECURITIES PURCHASE AGREEMENT, DATED AS OF THE DATE HEREOF, A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY AT ITS PRINCIPAL EXECUTIVE OFFICE, CONTAINS CERTAIN ADDITIONAL AGREEMENTS AMONG THE PARTIES, INCLUDING, WITHOUT LIMITATION, PROVISIONS WHICH (A) LIMIT THE CONVERSION RIGHTS OF THE HOLDER, (B) SPECIFY VOLUNTARY AND MANDATORY REPAYMENT, PREPAYMENT AND REDEMPTION RIGHTS AND OBLIGATIONS AND (C) SPECIFY EVENTS OF DEFAULT FOLLOWING WHICH THE REMAINING BALANCE DUE AND OWING HEREUNDER MAY BE ACCELERATED. No. 1 $2,000,000 AMERICAN INTERNATIONAL PETROLEUM CORPORATION 14% Convertible Note due April 21, 2000 AMERICAN INTERNATIONAL PETROLEUM CORPORATION, a Nevada corporation (together with its successors, the "Company"), for value received hereby promises to pay to: INFINITY EMERGING OPPORTUNITIES LIMITED (the "Holder") and registered assigns, the principal sum of Two Million Dollars ($2,000,000) or, if less, the principal amount of this Note then outstanding, on the Maturity Date by wire transfer of immediately available funds to the Holder in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, and to pay interest, quarterly in arrears, on (i) the last day of March, June, September and December of each year until the Maturity Date, commencing June 30, 1998 (unless such day is not a Business Day, in - -------------------------------------------------------------------------------- 14% CONVERTIBLE NOTE - Page 1 which event on the next succeeding Business Day) (each an "Interest Payment Date"), (ii) the Maturity Date, (iii) each Conversion Date, as hereafter defined, and (iv) the date the principal amount of the Convertible Notes shall be declared to be or shall automatically become due and payable, on the principal sum hereof outstanding in like coin or currency, at the rates per annum set forth below, from the most recent Interest Payment Date to which interest has been paid on this Convertible Note, or if no interest has been paid on this Convertible Note, from the date of this Convertible Note until payment in full of the principal sum hereof has been made. The interest rate shall be fourteen percent (14%) per annum (the "Interest Rate") or, if less, the maximum rate permitted by applicable law. Past due amounts (including interest, to the extent permitted by law) will also accrue interest at the Interest Rate plus 2% per annum or, if less, the maximum rate permitted by applicable law, and will be payable on demand ("Default Interest"). Interest on this Convertible Note will be calculated on the basis of a 360-day year of twelve 30 day months. All payments of principal and interest hereunder shall be made for the benefit of the Holder pursuant to the terms of the Agreement (hereafter defined). At the option of the Company, interest may be paid in cash or in shares of Common Stock. If the Company determines to pay interest in shares of Common Stock, it shall be required to notify the Holder of such election at least five (5) Business Days prior to the applicable Interest Payment Date. On each Conversion Date, interest shall be paid in shares of Common Stock on the portion of the principal balance of the Convertible Note then being converted. The number of shares of Common Stock issued as interest shall be determined by dividing the dollar amount of interest due on the applicable Interest Payment Date by the product of 85% multiplied by the Conversion Price then in effect. This Convertible Note (this "Convertible Note") is one of a duly authorized issuance of $12,000,000 aggregate principal amount of Convertible Notes of the Company referred to in that certain Securities Purchase Agreement dated as of the date hereof between the Company and the Purchasers named therein (the "Agreement"). The Agreement contains certain additional agreements among the parties with respect to the terms of this Convertible Note, including, without limitation, provisions which (A) limit the conversion rights of the Holder, (B) specify voluntary and mandatory repayment, prepayment and redemption rights and obligations and (C) specify Events of Default following which the remaining balance due and owing hereunder may be accelerated. All such provisions are an integral part of this Convertible Note and are incorporated herein by reference. This Convertible Note is transferable and assignable to one or more Persons, in accordance with the limitations set forth in the Agreement. The Company shall keep a register (the "Register") in which shall be entered the names and addresses of the registered holder of this Convertible Note and particulars of this Convertible Note held by such holder and of all transfers of this Convertible Note. References to the Holder or "Holders" shall mean the Person listed in the Register as the registered holder of such Convertible Notes. The ownership of this Convertible Note shall be proven by the Register. - -------------------------------------------------------------------------------- 14% CONVERTIBLE NOTE - Page 2 1. Certain Terms Defined. All terms defined in the Agreement and not otherwise defined herein shall have for purposes hereof the meanings provided for in the Agreement. 2. Covenants. Unless the Majority Holders otherwise consent in writing, the Company covenants and agrees to observe and perform each of its covenants, obligations and undertakings contained in the Agreement, which obligations and undertakings are expressly assumed herein by the Company and made for the benefit of the holder hereof. 3. Payment of Principal. The Company shall repay the remaining unpaid balance on this Convertible Note on the Maturity Date. The Company may, and shall be obligated to, prepay all or a portion of this Convertible Note on the terms specified in the Agreement. 4.1 Conversion of Convertible Note. The Holder shall have the right, at its option, at any time from and after the earlier to occur of (x) June 30, 1998, (y) the date the Registration Statement has been declared effective by the Commission or (z) immediately preceding the occurrence of a Sale Event, convert the principal amount of this Convertible Note, or any portion of such principal amount, into that number of fully paid and nonassessable shares of Common Stock (as such shares shall then be constituted) determined pursuant to this Section 4.1. The number of shares of Common Stock to be issued upon each conversion of this Convertible Note shall be determined by dividing the Conversion Amount (as defined below) by the Conversion Price in effect on the date (the "Conversion Date") a Notice of Conversion is delivered to the Company by the Holder by facsimile or other reasonable means of communication dispatched prior to 5:00 p.m., New York City Time. The term "Conversion Amount" means, with respect to any conversion of this Convertible Note, the sum of (1) the principal amount of this Convertible Note to be converted in such conversion plus (2) accrued and unpaid interest, if any, on such principal amount at the interest rates provided in this Convertible Note to the Conversion Date plus (3) Default Interest, if any, on the interest referred to in the immediately preceding clause (2) plus (4) at the Holder's option, any amounts owed to the Holder pursuant to Section 4.3 hereof, Section 10.1 of the Agreement or Section 10.4 of the Agreement. 4.2 Conversion Price. This Convertible Note shall be converted into a number of shares of Common Stock at a conversion price (the "Conversion Price") based on a formula F/P, where F = the principal amount of the Convertible Note being converted plus accrued and unpaid interest thereon through the date of conversion plus Default Interest, if any, on such interest, and P = the product of 85% multiplied by the average of the lowest five (5) consecutive DWASP for the Common Stock for the forty (40) Trading Days ending on the day prior to the Conversion Date (subject, in each case, to equitable adjustments for stock splits, stock dividends or rights offerings by the Company relating to the Company's securities or the securities of any subsidiary of the Company, combinations, recapitalization, reclassifications, extraordinary distributions and similar - -------------------------------------------------------------------------------- 14% CONVERTIBLE NOTE - Page 3 events as contemplated by Article XI of the Agreement). The term "DWASP" means, for any security as of any date, the daily-weighted average sales price on the Nasdaq Market as reported by Bloomberg or, if the Nasdaq Market is not the principal trading market for such security, the dailyweighted average sales price of such security on the principal securities exchange or trading market where such security is listed or traded as reported by Bloomberg, or if the foregoing do not apply, the daily-weighted average sales price of such security in the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg, or, if no daily-weighted average sales price is reported for such security by Bloomberg, then the average of the bid prices of any market makers for such security as reported in the "pink sheets" by the National Quotation Bureau, Inc. If the DWASP cannot be calculated for such security on such date on any of the foregoing bases, the DWASP of such security on such date shall be the fair market value as mutually determined by the Company and the Holders of a majority in interest of Convertible Notes being converted for which the calculation of the closing bid price is required in order to determine the Conversion Price of such Convertible Notes. 4.3 Authorized Shares. (a) Consistent with Section 7.11 of the Agreement, the Company (i) shall promptly irrevocably instruct its transfer agent to issue certificates for the Common Stock issuable upon conversion of this Convertible Note and (ii) agrees that its issuance of this Convertible Note shall constitute full authority to its officers and agents who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of Common Stock in accordance with the terms and conditions of this Convertible Note. (b) If at any time a Holder of this Convertible Note submits a Notice of Conversion (x) the Company does not have sufficient authorized but unissued shares of Common Stock available to effect such conversion in full in accordance with the provisions of this Article 4 or (y) the Company is prohibited by the applicable rules of the Nasdaq Market to effect such conversion in full as provided in subsection (d) below, without stockholder approval (each, a "Conversion Default"), the Company shall issue to the Holder all of the shares of Common Stock which are then available to effect such conversion. The portion of this Convertible Note which the Holder included in its Conversion Notice and which exceeds the amount which is then convertible into available shares of Common Stock (the "Excess Amount") shall, notwithstanding anything to the contrary contained herein, not be convertible into Common Stock in accordance with the terms hereof until (and at the Holder's option at any time after) the date additional shares of Common Stock are authorized by the Company, or its stockholders, as applicable, at which time the Conversion Price in respect thereof shall be the lower of (i) the Conversion Price on the Conversion Default Date (as defined below) and (ii) the Conversion Price on the Conversion Date thereafter elected - -------------------------------------------------------------------------------- 14% CONVERTIBLE NOTE - Page 4 by the Holder in respect thereof. The Company shall pay to the Holder payments ("Conversion Default Payments") for a Conversion Default in the amount of (N/365) x .24 x the Excess Amount on the Conversion Date in respect of the Conversion Default (the "Conversion Default Date"), where N = the number of days from the Conversion Default Date to the date (the "Authorization Date") that the Company, or its stockholders, as applicable, authorizes a sufficient number of shares of Common Stock to effect conversion of the full outstanding principal balance of this Convertible Note. The Company shall use its best efforts to authorize, or cause its stockholders to authorize within 90 days of the occurrence of a Conversion Default, as applicable, a sufficient number of shares of Common Stock as soon as practicable following the earlier of (i) such time that the Holder notifies the Company or that the Company otherwise becomes aware that there are or likely will be insufficient shares to allow full conversion thereof and (ii) a Conversion Default. The Company shall send notice to the Holder of the authorization of additional shares of Common Stock, the Authorization Date and the amount of Holder's accrued Conversion Default Payments. The accrued Conversion Default Payments for each calendar month shall be paid in cash or shall be convertible into Common Stock (at such time as there are sufficient authorized shares of Common Stock) at the Market Price, at the Holder's option, as follows: (i) In the event the Holder elects to take such payment in cash, cash payment shall be made to Holder by the fifth Business Day of the month following the month in which it has accrued; and (ii) In the event the Holder elects to take such payment in Common Stock, the Holder may convert such payment amount into Common Stock at the Conversion Price (as in effect at the time of conversion) at any time after the fifth Business Day of the month following the month in which it has accrued (at such time as there are sufficient authorized shares of Common Stock) in accordance with the terms of this Article 4. (c) The Holder's election pursuant to this Section 4.3 shall be made in writing to the Company at any time prior to 5:00 p.m., New York City Time, on the third Business Day of the month following the month in which Conversion Default payments have accrued. If no election is made, the Holder shall be deemed to have elected to receive cash. Nothing herein shall limit the Holders right to pursue actual damages (to the extent in excess of the Conversion Default Payments) due to the Company's failure to maintain a sufficient number of authorized shares of Common Stock. (d) In no event shall the Company issue more than the Maximum Number of Shares upon conversion of this Convertible Note, unless the Company shall have obtained Stockholder Approval (as defined below) or a waiver of such requirement by the Nasdaq - -------------------------------------------------------------------------------- 14% CONVERTIBLE NOTE - Page 5 Market. As used herein, Stockholder Approval means approval by the stockholders of the Company in accordance with Rule 4460(i) of the rules of the Nasdaq Market. Once the Maximum Number of Shares has been issued (the date of which is hereinafter referred to as the "Maximum Conversion Date"), unless the Company shall have obtained Stockholder Approval or a waiver of such requirement by the Nasdaq Market within 90 days of the Maximum Conversion Date, the Company shall pay to the Holder within five (5) Business Days of the Maximum Conversion Date (or, if the Company is, in good faith, using its best efforts to obtain Stockholder Approval, then the earlier of (x) 90 days following the Maximum Conversion Date, and (y) such date that it becomes reasonably apparent that Stockholder Approval will not be obtained within such 90 day period), the Formula Price plus accrued and unpaid Default Interest, if any. The Maximum Number of Shares shall be subject to adjustment from time to time for stock splits, stock dividends, combinations, capital reorganizations and similar events relating to the Common Stock occurring after the date hereof as contemplated by Article XI of the Agreement. With respect to each Holder of Convertible Notes, the Maximum Number of Shares shall refer to such Holder's pro rata share thereof based upon the aggregate principal balance of the Convertible Notes then outstanding. In the event that the Company obtains Stockholder Approval, the approval of the Nasdaq Market or otherwise is able to increase the number of shares to be issued above the Maximum Number of Shares (such increased number being the "New Maximum Number of Shares"), the references to Maximum Number of Shares above shall be deemed to be, instead, references to the New Maximum Number of Shares. 4.4 Method of Conversion (a) Notwithstanding anything to the contrary set forth herein, upon conversion of this Convertible Note in accordance with the terms hereof, the Holder shall not be required to physically surrender this Convertible Note to the Company unless the entire unpaid principal amount of this Convertible Note is so converted. Rather, records showing the principal amount converted (or otherwise repaid) and the date of such conversion or repayment shall be maintained on a ledger substantially in the form of Annex A attached hereto (a copy of which shall be delivered to the Company or transfer agent with each Notice of Conversion). It is specifically contemplated that the Holder hereof shall act as the calculation agent for conversions and repayments. In the event of any dispute or discrepancies, such records maintained by the Holder shall be controlling and determinative in the absence of manifest error. The Holder and any assignee, by acceptance of this Convertible Note, acknowledge and agree that, by reason of the provisions of this paragraph, following a conversion of a portion of this Convertible Note, the principal amount represented by this Convertible Note will be the amount indicated on Annex A attached hereto (which may be less than the amount stated on the face hereof). - -------------------------------------------------------------------------------- 14% CONVERTIBLE NOTE - Page 6 (b) The Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of shares of Common Stock or other securities or property on conversion of this Convertible Note in a name other than that of the Holder (or in street name), and the Company shall not be required to issue or deliver any such shares or other securities or property unless and until the person or persons (other than the Holder or the custodian in whose street name such shares are to be held for the Holder's account) requesting the issuance thereof shall have paid to the Company the amount of any such tax or shall have established to the satisfaction of the Company that such tax has been paid. (c) Upon receipt by the Company of a Notice of Conversion, the Holder shall be deemed to be the holder of record of the Common Stock issuable upon such conversion, the outstanding principal amount and the amount of accrued and unpaid interest on this Convertible Note shall be reduced to reflect such conversion, and, unless the Company defaults on its obligations under this Article 4, all rights with respect to the portion of this Convertible Note being so converted shall forthwith terminate except the right to receive the Common Stock or other securities, cash or other assets, as herein provided, on such conversion. If the Holder shall have given a Notice of Conversion as provided herein, the Company's obligation to issue and deliver the certificates for shares of Common Stock shall be absolute and unconditional, irrespective of the absence of any action by the Holder to enforce the same, any waiver or consent with respect to any provision thereof, the recovery of any judgment against any person or any action by the Holder to enforce the same, any failure or delay in the enforcement of any other obligation of the Company to the Holder of record, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder of any obligation to the Company, and irrespective of any other circumstance which might otherwise limit such obligation of the Company to the Holder in connection with such conversion. The date of receipt (including receipt via telecopy) of such Notice of Conversion shall be the Conversion Date so long as it is received before 5:00 p.m., New York City Time, on such date. (d) Notwithstanding the foregoing, if a Holder has not received certificates for all shares of Common Stock prior to the expiration of the Deadline with respect to a conversion of any portion of this Convertible Note for any reason, then (unless the Holder otherwise elects to retain its status as a holder of Common Stock by so notifying the Company), the Holder shall regain the rights of a Holder of this Convertible Note with respect to such unconverted portions of this Convertible Note and the Company shall, as soon as practicable, return such unconverted Convertible Note to the holder or, if the Convertible Note has not been - -------------------------------------------------------------------------------- 14% CONVERTIBLE NOTE - Page 7 surrendered, adjust its records to reflect that such portion of this Convertible Note has not been converted. In all cases, the Holder shall retain all of its rights and remedies (including, without limitation, (i) the right to receive Conversion Default Payments to the extent required thereby for such Conversion Default and any subsequent Conversion Default and (ii) the right to have the Conversion Price with respect to subsequent conversions determined in accordance with Section 4.3 for the Company's failure to convert this Convertible Note. (e) In lieu of delivering physical certificates representing the Common Stock issuable upon conversion, provided the Company's transfer agent is participating in the Depository Trust Company ("DTC") Fast Automated Securities Transfer program, upon request of the Holder and its compliance with the provisions contained in Section 4.1 and in this Section 4.4, the Company shall use its best efforts to cause its transfer agent to electronically transmit the Common Stock issuable upon conversion to the Holder by crediting the account of Holder's Prime Broker with DTC through its Deposit Withdrawal Agent Commission system. 5. Miscellaneous. This Convertible Note shall be deemed to be a contract made under the laws of the State of New York, and for all purposes shall be governed by and construed in accordance with the laws of said State. The parties hereto, including all guarantors or endorsers, hereby waive presentment, demand, notice, protest and all other demands and notices in connection with the delivery, acceptance, performance and enforcement of this Convertible Note, except as specifically provided herein, and assent to extensions of the time of payment, or forbearance or other indulgence without notice. The Company hereby submits to the exclusive jurisdiction of the United States District Court for the Southern District of New York and of any New York state court sitting in New York City for purposes of all legal proceedings arising out of or relating to this Convertible Note. The Company irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. The Company hereby irrevocably waives any and all right to trial by jury in any legal proceeding arising out of or relating to this Convertible Note. The Holder of this Convertible Note by acceptance of this Convertible Note agrees to be bound by the provisions of this Convertible Note which are expressly binding on such Holder. [Signature page follows] - -------------------------------------------------------------------------------- 14% CONVERTIBLE NOTE - Page 8 IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed. Dated: April 21, 1998 AMERICAN INTERNATIONAL PETROLEUM CORPORATION By: s/ George N. Faris ---------------------------- Name: George N. Faris Title: Chief Executive Officer - -------------------------------------------------------------------------------- 14% CONVERTIBLE NOTE - Page 9 ANNEX A CONVERSION AND REPAYMENT LEDGER
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EX-4.2 3 FORM OF WARRANT THIS COMMON STOCK PURCHASE WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING THIS COMMON STOCK PURCHASE WARRANT, AGREES FOR THE BENEFIT OF THE COMPANY THAT SUCH SECURITIES MAY BE OFFERED, SOLD OR OTHERWISE TRANSFERRED ONLY (A) TO THE COMPANY, (B) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT, OR (C) IF REGISTERED UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS. IN ADDITION, A SECURITIES PURCHASE AGREEMENT, DATED THE DATE HEREOF, A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY AT ITS PRINCIPAL EXECUTIVE OFFICE, CONTAINS CERTAIN ADDITIONAL AGREEMENTS AMONG THE PARTIES, INCLUDING, WITHOUT LIMITATION, PROVISIONS WHICH LIMIT THE EXERCISE RIGHTS OF THE HOLDER AND SPECIFY MANDATORY REDEMPTION OBLIGATIONS OF THE COMPANY. AMERICAN INTERNATIONAL PETROLEUM CORPORATION COMMON STOCK PURCHASE WARRANT - -------------------------------------------------------------------------------- No. 1 Number of Shares: 560,000 Holder: Infinity Emerging Opportunities Limited 38 Hertford Street Purchase Price: $2.76 London, England W1Y 7TG Expiration Date: April 21, 2003 For identification only. The governing terms of this Warrant are set forth below. - -------------------------------------------------------------------------------- AMERICAN INTERNATIONAL PETROLEUM CORPORATION, a Nevada corporation (the "Company"), hereby certifies that, for value received, INFINITY EMERGING OPPORTUNITIES LIMITED or assigns, is entitled, subject to the terms set forth below, to purchase from the Company at any time or from time to time after the date hereof and prior to the fifth anniversary hereof (the "Exercise Period"), at the Purchase Price hereinafter set forth, five hundred sixty thousand (560,000) shares of the fully paid and nonassessable shares of Common Stock of the Company. The number and character of such shares of Common Stock and the Purchase Price are subject to adjustment as provided herein. This Warrant (this "Warrant"; such term to include any warrants issued in substitution therefor) is one of a series of 1,400,000 Common Stock Purchase Warrants issued in connection with that certain Securities Purchase Agreement (the "Purchase Agreement") dated of even date herewith among the initial Holder hereof, the Company and certain other parties thereto. The purchase price per share of Common Stock issuable upon exercise of this Warrant (the "Purchase Price") shall initially be $2.76; provided, however, that the Purchase Price shall be adjusted from time to time as provided herein. Capitalized terms used herein not otherwise defined shall have the meanings ascribed thereto in the Purchase Agreement. As used herein the following terms, unless the context otherwise requires, have the following respective meanings: (a) The term "Company" shall include American International Petroleum Corporation and any corporation that shall succeed or assume the obligations of such corporation hereunder. (b) The term "Common Stock" includes (a) the Company's common stock, par value $.08 per share, (b) any other capital stock of any class or classes (however designated) of the Company, authorized on or after such date, the Holders of which shall have the right, without limitation as to amount, either to all or to a share of the balance of current dividends and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference, and the Holders of which shall ordinarily, in the absence of contingencies, be entitled to vote for the election of a majority of directors of the Company (even though the right so to vote has been suspended by the happening of such a contingency) and (c) any other securities into which or for which any of the securities described in (a) or (b) may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise. (c) The term "Other Securities" refers to any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) that the Holder of this Warrant at any time shall be entitled to receive, or shall have received, on the exercise of this Warrant, in lieu of or in addition to Common Stock, or that at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to Section 4 or otherwise. 1. Exercise of Warrant. 1.1. Method of Exercise. (a) This Warrant may be exercised in whole or in part (but not as to a fractional share of Common Stock), at any time and from time to time during the Exercise Period by the Holder hereof by delivery of a notice of exercise (a "Notice of Exercise") substantially in the form attached hereto as Exhibit A via facsimile to the Company. Promptly thereafter the Holder shall surrender this Warrant to the Company at its principal office, accompanied by payment of the Purchase Price multiplied by the number of shares of Common Stock for which this Warrant is being exercised (the "Exercise Price"). Payment of the Exercise Price shall be made, at the option of the Holder, (i) by check or bank draft payable to the order of the Company, (ii) by wire transfer to the account of the Company, (iii) in shares of Common Stock having a Market Value on the Exercise Date (as hereinafter defined) equal to the - -------------------------------------------------------------------------------- COMMON STOCK PURCHASE WARRANT - Page 2 aggregate Exercise Price or (iv) by presentation and surrender of this Warrant to the Company for cashless exercise (a "Cashless Exercise"), with such surrender being deemed a waiver of the Holder's obligation to pay all or any portion of the Exercise Price. In the event the Holder elects a Cashless Exercise (which such election shall be irrevocable) the Holder shall exchange this Warrant for that number of shares of Common Stock determined by multiplying the number of shares of Common Stock being exercised by a fraction, the numerator of which shall be the difference between the then current Market Value of the Common Stock and the Purchase Price, and the denominator of which shall be the then current Market Value of the Common Stock. If the amount of the payment received by the Company is less than the Exercise Price, the Holder will be notified of the deficiency and shall make payment in that amount within five (5) business days. In the event the payment exceeds the Exercise Price, the Company will promptly refund the excess to the Holder. Upon exercise, the Holder shall be entitled to receive, promptly after payment in full, one or more certificates, issued in the Holder's name or in such name or names as the Holder may direct, subject to the limitations on transfer contained herein, for the number of shares of Common Stock so purchased. The shares of Common Stock so purchased shall be deemed to be issued as of the close of business on the date on which the Company shall have received from the Holder payment in full of the Exercise Price (the "Exercise Date"). (b) Notwithstanding anything to the contrary set forth herein, upon exercise of all or a portion of this Warrant in accordance with the terms hereof, the Holder shall not be required to physically surrender this Warrant to the Company. Rather, records showing the amount so exercised and the date of exercise shall be maintained on a ledger substantially in the form of Annex B attached hereto (a copy of which shall be delivered to the Company or transfer agent with each Notice of Exercise). It is specifically contemplated that the Holder hereof shall act as the calculation agent for all exercises of this Warrant. In the event of any dispute or discrepancies, such records maintained by the Holders shall be controlling and determinative in the absence of manifest error. The Holder and any assignee, by acceptance of this Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following an exercise of a portion of this Warrant, the number of shares of Common Stock represented by this Warrant will be the amount indicated on Annex B attached hereto (which may be less than the amount stated on the face hereof). 1.2. Regulation D Restrictions. The Holder hereof represents and warrants to the Company that it has acquired this Warrant and anticipates acquiring the shares of Common Stock issuable upon exercise of the Warrant solely for its own account for investment purposes and not with a view to or for resale of such securities unless such resale has been registered with the Commission or an applicable exemption is available therefor. At the time this Warrant is exercised, the Company may require the Holder to state in the Notice of Exercise such representations concerning the Holder as are necessary or appropriate to assure compliance by the Holder with the Securities Act. - -------------------------------------------------------------------------------- COMMON STOCK PURCHASE WARRANT - Page 3 1.3. Company Acknowledgment. The Company will, at the time of the exercise of this Warrant, upon request of the Holder hereof, acknowledge in writing its continuing obligation to afford to such Holder the registration rights to which such Holder shall continue to be entitled after such exercise in accordance with the provisions of a Registration Rights Agreement dated the date hereof (the "Registration Rights Agreement"). If the Holder shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford such Holder any such rights. 1.4. Limitation on Exercise.. Notwithstanding the rights of the Holder to exercise all or a portion of this Warrant as described herein, such exercise rights shall be limited, solely to the extent set forth in the Purchase Agreement as if such provisions were specifically set forth herein. In addition, the number of shares of Common Stock issuable upon exercise of this Warrant is subject to reduction as specified in Section 6.2 of the Purchase Agreement. 2. Delivery of Stock Certificates, etc., on Exercise. As soon as practicable after the exercise of this Warrant, and in any event within five (5) business days thereafter, the Company at its expense (including the payment by it of any applicable issue, stamp or transfer taxes) will cause to be issued in the name of and delivered to the Holder thereof, or, to the extent permissible hereunder, to such other person as such Holder may direct, a certificate or certificates for the number of fully paid and nonassessable shares of Common Stock (or Other Securities) to which such Holder shall be entitled on such exercise, plus, in lieu of any fractional share to which such Holder would otherwise be entitled, cash equal to such fraction multiplied by the then applicable Purchase Price, together with any other stock or other securities and property (including cash, where applicable) to which such Holder is entitled upon such exercise pursuant to Section 1 or otherwise. 3. Adjustment for Extraordinary Events. The Purchase Price to be paid by the Holder upon exercise of this Warrant, and the consideration to be received upon exercise of this Warrant, shall be adjusted in case at any time or from time to time pursuant to Article XI of the Purchase Agreement as if such provisions were specifically set forth herein. 4. No Impairment. The Company will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder of this Warrant against impairment. Without limiting the generality of the foregoing, the Company (a) will not increase the par value of any shares of stock receivable on the exercise of this Warrant above the amount payable therefor on such exercise, (b) will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of stock on the exercise of this Warrant, and (c) will not transfer all or substantially all of its properties and assets to any other person (corporate - -------------------------------------------------------------------------------- COMMON STOCK PURCHASE WARRANT - Page 4 or otherwise), or consolidate with or merge into any other person or permit any such person to consolidate with or merge into the Company (if the Company is not the surviving person), unless such other person shall expressly assume in writing and will be bound by all the terms of this Warrant. 5. Accountants' Certificate as to Adjustments. In each case of any adjustment or readjustment in the shares of Common Stock (or Other Securities) issuable on the exercise of this Warrant, the Company at its expense will promptly cause independent certified public accountants of national standing selected by the Company to compute such adjustment or readjustment in accordance with the terms of this Warrant and prepare a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based, including a statement of (a) the consideration received or receivable by the Company for any additional shares of Common Stock (or Other Securities) issued or sold or deemed to have been issued or sold, (b) the number of shares of Common Stock (or Other Securities) outstanding or deemed to be outstanding, and (c) the Purchase Price and the number of shares of Common Stock to be received upon exercise of this Warrant, in effect immediately prior to such issue or sale and as adjusted and readjusted as provided in this Warrant. The Company will forthwith mail a copy of each such certificate to the Holder of this Warrant, and will, on the written request at any time of the Holder of this Warrant, furnish to such Holder a like certificate setting forth the Purchase Price at the time in effect and showing how it was calculated. 6. Notices of Record Date, etc. In the event of (a) any taking by the Company of a record of the Holders of any class or securities for the purpose of determining the Holders thereof who are entitled to receive any dividend or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or (b) any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any transfer of all or substantially all the assets of the Company to or consolidation or merger of the Company with or into any other person, or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company, then and in each such event the Company will mail or cause to be mailed to the Holder of this Warrant a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, and (ii) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up is to take - -------------------------------------------------------------------------------- COMMON STOCK PURCHASE WARRANT - Page 5 place, and the time, if any, as of which the Holders of record of Common Stock (or Other Securities) shall be entitled to exchange their shares of Common Stock (or Other Securities) for securities or other property deliverable on such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up. Such notice shall be mailed at least 20 days prior to the date specified in such notice on which any action is to be taken. 7. Reservation of Stock, etc. Issuable on Exercise of Warrant. The Company will at all times reserve and keep available, solely for issuance and delivery on the exercise of this Warrant, all shares of Common Stock (or Other Securities) from time to time issuable on the exercise of this Warrant. 8. Exchange of Warrant. (a) On surrender for exchange of this Warrant, properly endorsed and in compliance with the restrictions on transfer set forth in the legend on the face of this Warrant, to the Company, the Company at its expense will issue and deliver to or on the order of the Holder thereof a new Warrant of like tenor, in the name of such Holder or as such Holder (on payment by such Holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face of the Warrant so surrendered. (b) Upon written notice from the Purchasers pursuant to Section 2.1(d) of the Purchase Agreement that the Purchasers have elected to transfer amongst each other a portion of this Warrant, and on surrender for amendment and restatement of this Warrant, the Company at its expense will issue and deliver to or on the order of the Holder hereof a new Warrant of like tenor, in the name of such Holder, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock as set forth in such notice reflecting such transfer. 9. Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of this Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 10. Remedies. The Company stipulates that the remedies at law of the Holder of this Warrant in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate, and that such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise. - -------------------------------------------------------------------------------- COMMON STOCK PURCHASE WARRANT - Page 6 11. Negotiability, etc. This Warrant is issued upon the following terms, to all of which each Holder or owner hereof by the taking hereof consents and agrees: (a) title to this Warrant may be transferred by endorsement and delivery in the same manner as in the case of a negotiable instrument transferable by endorsement and delivery. (b) any person in possession of this Warrant properly endorsed is authorized to represent himself as absolute owner hereof and is empowered to transfer absolute title hereto by endorsement and delivery hereof to a bona fide purchaser hereof for value; each prior taker or owner waives and renounces all of his equities or rights in this Warrant in favor of each such bona fide purchaser, and each such bona fide purchaser shall acquire absolute title hereto and to all rights represented hereby; (c) until this Warrant is transferred on the books of the Company, the Company may treat the registered Holder hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary; and (d) notwithstanding the foregoing, this Warrant may not be sold, transferred or assigned except pursuant to an effective registration statement under the Securities Act or pursuant to an applicable exemption therefrom. 12. Registration Rights. The Company is obligated to register the shares of Common Stock issuable upon exercise of this Warrant in accordance with the terms of the Registration Rights Agreement. 13. Notices, etc. All notices and other communications from the Company to the Holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company in writing by such Holder or, until any such Holder furnishes to the Company an address, then to, and at the address of, the last Holder of this Warrant who has so furnished an address to the Company. 14. Miscellaneous. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant shall be construed and enforced in accordance with and governed by the internal laws of the State of Nevada. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. [Signature Page Follows] - -------------------------------------------------------------------------------- COMMON STOCK PURCHASE WARRANT - Page 7 DATED as of April 21, 1998. AMERICAN INTERNATIONAL PETROLEUM CORPORATION By: s/ George N. Faris ---------------------------- Name: George N. Faris Title: Chief Executive Officer [Corporate Seal] Attest: By: s/ Denis J. Fitzpatrick ---------------------------- Secretary - -------------------------------------------------------------------------------- COMMON STOCK PURCHASE WARRANT - Page 8 EXHIBIT A FORM OF NOTICE OF EXERCISE - WARRANT (To be executed only upon exercise of the Warrant in whole or in part) To American International Petroleum Corporation The undersigned registered Holder of the accompanying Warrant hereby exercises such Warrant or portion thereof for, and purchases thereunder, ______________(1) shares of Common Stock (as defined in such Warrant) and herewith makes payment therefor in the amount and manner set forth below, as of the date written below. The undersigned requests that the certificates for such shares of Common Stock be issued in the name of, and delivered to, _________________________________ whose address is _____________________________ _______________________________________________________________________________. The Exercise Price is paid as follows: Bank draft payable to the Company in the amount of $__________. Wire transfer to the account of the Company in the amount of $________. Delivery of ___________ previously held shares of Common Stock having an aggregate Market Value of $_________. Cashless exercise. Surrender of __________ shares purchasable under this Warrant for such shares of Common Stock issuable in exchange therefor pursuant to the Cashless Exercise provisions of the Warrant, as provided in Section 1.1(iv) thereto. Upon exercise pursuant to this Notice of Exercise, the Holder will be in compliance with the Limitation on Exercise (as defined in the Securities Purchase Agreement pursuant to which this Warrant was issued). Dated: _______________ _________________________________________________ (Name must conform to name of Holder as specified on the face of the Warrant) By:______________________________ Name:________________________ Title:_______________________ Address of Holder:_______________ _______________ _______________ Date of exercise:______________ - ---------- (1) Insert the number of shares of Common Stock as to which the accompanying Warrant is being exercised. In the case of a partial exercise, a new Warrant or Warrants will be issued and delivered, representing the unexercised portion of the accompanying Warrant, to the holder surrendering the same. EX-4.4 4 SECURITIES PURCHASE AGREEMENT Exhibit 4.4 SECURITIES PURCHASE AGREEMENT dated as of April 21, 1998 by and among AMERICAN INTERNATIONAL PETROLEUM CORPORATION, as the Issuer, and THE PURCHASERS LISTED ON SCHEDULE I ATTACHED HERETO SECURITIES PURCHASE AGREEMENT AGREEMENT, dated as of April 21, 1998, among American International Petroleum Corporation (the "Company") and the Purchasers listed on Schedule I attached hereto (each a "Purchaser" and collectively, the "Purchasers"). R E C I T A L S: WHEREAS, the Company desires to sell and issue to the Purchasers, and the Purchasers desire to purchase from the Company, $12,000,000 aggregate principal amount of the Company's 14% Convertible Notes due April 21, 2000 (the "Convertible Notes"), with terms and conditions as set forth in the form of Convertible Note attached hereto as Exhibit A; and WHEREAS, the Convertible Notes will be convertible into shares of the Company's common stock, par value $.08 per share (the "Common Stock"); and WHEREAS, in order to induce the Purchasers to enter into the transactions described in this Agreement, the Company desires to issue to the Purchasers an aggregate of 1,400,000 warrants to purchase shares of Common Stock on the terms and conditions described in the form of the common stock purchase warrant attached hereto as Exhibit B (the "Warrants"); and WHEREAS, the Purchasers will have certain registration rights with respect to such shares of Common Stock issuable (i) as interest under, and upon conversion of, the Convertible Notes (collectively, the "Conversion Shares"), and (ii) upon exercise of the Warrants (the "Warrant Shares") as set forth in the Registration Rights Agreement in the form attached hereto as Exhibit C; and NOW, THEREFORE, in consideration of the foregoing premises and the covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: DEFINITIONS SECTION 1.1. Definitions. The following terms, as used herein, have the following meanings: "Additional Shares of Common Stock" has the meaning set forth in Section 11.6. "Affiliate" means, with respect to any Person (the "Subject Person"), (i) any other Person (a "Controlling Person") that directly, or indirectly through one or more intermediaries, Controls the - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 1 Subject Person or (ii) any other Person (other than the Subject Person or a Consolidated Subsidiary of the Subject Person) which is Controlled by or is under common Control with a Controlling Person. "Agreement" means this Securities Purchase Agreement, as amended, supplemented or otherwise modified from time to time in accordance with its terms. "Amendment Agreement" has the meaning set forth in Section 6.1(r). "Asset Sale" has the meaning set forth in Section 8.5. "Balance Sheet Date" has the meaning set forth in Section 4.7. "Benefit Arrangement" means at any time an employee benefit plan within the meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan and which is maintained or otherwise contributed to by the Company. "Benefit Plans" has the meaning set forth in Section 4.9(b). "Budget" has the meaning set forth in Section 4.27. "Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in the City of New York are authorized or required by law to close. "Capital Reorganization" has the meaning set forth in Section 11.5. "Change of Control" means (i) after the date of this Agreement, any person or group of persons (within the meaning of Sections 13 and 14 of the Exchange Act and the rules and regulations of the Commission relating to such sections) other than the Purchasers shall have acquired beneficial ownership (within the meaning of Rules 13d-3 and 13d-5 promulgated by the Commission pursuant to the Exchange Act) of 33?% or more of the outstanding shares of Common Stock of the Company; (ii) any sale or other disposition (other than by reason of death or disability) to any Person of more than 25,000 shares of Common Stock of the Company by any executive officers and/or directors of the Company (including, but not limited to, George Faris, William Tracy and Denis Fitzpatrick) within ten (10) Trading Days following the delivery of any Purchase Notice pursuant to the terms of the Equity Agreement (as such term is defined therein); (iii) individuals constituting the Board of Directors of the Company on the date hereof (together with any new Directors whose election by such Board of Directors or whose nomination for election by the stockholders of the Company was approved by a vote of at least 50.1% of the Directors still in office who are either Directors as of the date hereof or - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 2 whose election or nomination for election was previously so approved), cease for any reason to constitute at least two-thirds of the Board of Directors of the Company then in office. "Closing Bid Price" shall mean for any security as of any date, the lowest closing bid price as reported by Bloomberg, L.P. ("Bloomberg") on the principal securities exchange or trading market where such security is listed or traded or, if the foregoing does not apply, the lowest closing bid price of such security in the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg, or, if no lowest trading price is reported for such security by Bloomberg, then the average of the bid prices of any market makers for such securities as reported in the "Pink Sheets" by the National Quotation Bureau, Inc. If the lowest closing bid price cannot be calculated for such security on such date on any of the foregoing bases, the lowest closing bid price of such security on such date shall be the fair market value as mutually determined by the Purchasers and the Company for which the calculation of the closing bid price requires, and in the absence of such mutual determination, as determined by the Board of Directors of the Company in good faith. "Closing Date" means the First Closing Date or the Second Closing Date, as applicable, and "Closing Date" or "Closings" means both of such dates. "Code" means the Internal Revenue Code of 1986, as amended. "Commission" means the Securities and Exchange Commission or any entity succeeding to all of its material functions. "Common Stock" means the common stock, $.08 par value per share, of the Company. "Company" means American International Petroleum Corporation, a Nevada corporation, and its successors. "Company Corporate Documents" means the certificate of incorporation and by-laws of the Company. "Consolidated Net Worth" means at any date the total shareholder's equity which would appear on a consolidated balance sheet of the Company prepared as of such date. - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 3 "Consolidated Subsidiary" means at any date with respect to any Person any Subsidiary or other entity, the accounts of which would be consolidated with those of such Person in its consolidated financial statements if such statements were prepared as of such date. "Control" (including, with correlative meanings, the terms "Controlling," "Controlled by" and under "common Control with"), as used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of that Person, whether through the ownership of voting securities, by contract or otherwise . "Conversion Date" shall mean the date of delivery (including delivery via telecopy) of a Notice of Conversion for all or a portion of a Convertible Note by the holder thereof to the Company as specified in each Convertible Note. "Conversion Price" has the meaning set forth in the Convertible Notes. "Conversion Shares" has the meaning set forth in the Recitals. "Convertible Notes" means the Company's 14% Convertible Notes substantially in the form set forth as Exhibit A hereto. "Deadline" has the meaning set forth in Section 10.1. "Debt" of any Person means at any date, without duplication, (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes, or other similar instruments issued by such Person, (iii) all obligations of such Person as lessee which (y) are capitalized in accordance with GAAP or (z) arise pursuant to sale-leaseback transactions, (iv) all reimbursement obligations of such Person in respect of letters of credit or other similar instruments, (v) all Debt of others secured by a Lien on any asset of such Person, whether or not such Debt is otherwise an obligation of such Person and (vi) all Debt of others Guaranteed by such Person. "Default" means any event or condition which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Default Fee" has the meaning set forth in the Section 10.4. "Derivative Securities" has the meaning set forth in Section 8.7. - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 4 "Discounted Equity Offerings" has the meaning set forth in Section 8.7. "Directors" means the individuals then serving on the Board of Directors or similar such management council of the Company. "Disposition" has the meaning set forth in Section 7.15. "Environmental Laws" means any and all federal, state, local and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or other governmental restrictions relating to the environment or to emissions, discharges or releases of pollutants, contaminants, petroleum or petroleum products, chemicals or industrial, toxic or hazardous substances or wastes into the environment, including, without limitation, ambient air, surface water, ground water, or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, petroleum or petroleum products, chemicals or industrial, toxic or hazardous substances or wastes or the cleanup or other remediation thereof. "Equity Agreement" has the meaning set forth in Section 6.1(q). "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, or any successor statute. "ERISA Group" means the Company and each Subsidiary and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Company or any Subsidiary, are treated as a single employer under the Code. "Event of Default" has the meaning set forth in Article XII hereof. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Expense Reimbursement Fee" has the meaning set forth in Section 13.4. "Financing" means a public or private financing consummated (meaning closing and funding) through the issuance of debt or equity securities (or securities convertible into or exchangeable for debt or equity securities) of the Company, other than Permitted Financings. - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 5 "First Closing Date" means the date on which all of the conditions set forth in Sections 6.1 and 6.3 shall have been satisfied and Convertible Notes in the aggregate principal amount of $5,000,000 and Warrants to acquire 1,400,000 shares of Common Stock are issued by the Company to the Purchasers. "Fixed Price(s)" has the meaning set forth in Section 11.1. "Formula Price" shall mean a dollar amount equal to the greater of (i) the aggregate principal amount of the Convertible Notes then outstanding, together with all accrued and unpaid interest thereon, and (ii) the sum of (A) the product of (x) the number of shares of Common Stock into which the Convertible Notes being redeemed are then convertible at the then current Conversion Price and (y) the Market Price as reported by Bloomberg, L.P. on the applicable date the Convertible Notes are redeemed, plus (B) accrued and unpaid interest on the Convertible Notes through the date of repayment. "GAAP" has the meaning set forth in Section 1.2. "Guarantee" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing (whether by virtue of partnership arrangements, by agreement to keep well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain a minimum net worth, financial ratio or similar requirements, or otherwise) any Debt of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or (ii) entered into for the purpose of assuring in any other manner the holder of such Debt of the payment thereof or to protect such holder against loss in respect thereof (in whole or in part); provided that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. The term Guarantee used as a verb has a corresponding meaning. "Hazardous Materials" means any hazardous materials, hazardous wastes, hazardous constituents, hazardous or toxic substances or petroleum products (including crude oil or any derivative or fraction thereof), defined or regulated as such in or under any Environmental Laws. "Intellectual Property" has the meaning set forth in Section 4.20. - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 6 "Investment" means any investment in any Person, whether by means of share purchase, partnership interest, capital contribution, loan, time deposit or otherwise. "Lien" means, any lien, mechanic's lien, materialmen's lien, lease, easement, charge, encumbrance, mortgage, conditional sale agreement, title retention agreement, agreement to sell or convey, option, claim, title imperfection, encroachment or other survey defect, pledge, restriction, security interest or other adverse claim, whether arising by contract or under law or otherwise (including, without limitation, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction in respect of any of the foregoing). "Liquidity Event" has the meaning set forth in Section 10.4(b). "Listing Applications" has the meaning set forth in Section 4.4. "Majority Holders" means (i) as of the Closing Date, the Purchasers and (ii) at any time thereafter, the holders of more than 50% in aggregate principal amount of the Convertible Notes outstanding at such time. "Market Price" shall mean the Closing Bid Price of the Common Stock preceding the date of determination. "Market Price Test" has the meaning set forth in Section 6.2. "Material Plan" means at any time a Plan or Plans having aggregate Unfunded Liabilities in excess of $500,000. "Material Transaction" has the meaning set forth in Section 10.3(b). "Maturity Date" shall mean the date of maturity of the Convertible Notes; specifically, April 21, 2000. "Maximum Number of Shares" shall mean 19.9% of the then issued and outstanding shares of Common Stock of the Company as of the applicable date of determination, or such greater number of shares as the stockholders of the Company may have previously approved pursuant to Section 4.3 of each Convertible Note. - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 7 "Nasdaq Market" means the Nasdaq Stock Market's National Market System. "Nasdaq Redemption Event" has the meaning set forth in Section 3.4. "Net Cash Proceeds" means, with respect to any transaction, the total amount of cash proceeds received by the Company or any Subsidiary less (i) reasonable underwriters' fees, brokerage commissions, reasonable professional fees and other customary out- of-pocket expenses payable in connection with such transaction, and (ii) in the case of dispositions of assets, (A) actual transfer taxes (but not income taxes) payable with respect to such dispositions, and (B) the amount of Debt, if any, secured by a Lien on the asset or assets disposed of and required to be, and actually repaid by the Company or any Subsidiary in connection therewith, and any trade payables specifically relating to such asset or assets sold by the Company or any Subsidiary that are not assumed by the purchaser of such asset or assets. "Non-Recourse Financing" means Debt of the Company or any Subsidiary which, by its terms, bars the lender thereof from any action against the Company or any Subsidiary, as borrower or guarantor, if the security value of the project or asset pledged in respect thereof falls below the amount required to repay such Debt. "Notice of Conversion" means the form to be delivered by a holder of a Convertible Note upon conversion of all or a portion thereof to the Company substantially in the form of Exhibit A to the form of Convertible Note. "Notice of Exercise" means the form to be delivered by a holder of a Warrant upon exercise of all or a portion thereof to the Company substantially in the form of Exhibit A to the form of Warrant. "Officer's Certificate" shall mean a certificate executed by the President, chief executive officer or chief financial officer of the Company in the form of Exhibit F attached hereto. "Other Taxes" has the meaning set forth in Section 3.6(b). "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Permits" means all domestic and foreign licenses, franchises, grants, authorizations, permits, easements, variances, exemptions, consents, certificates, orders and approvals necessary to own, lease and operate the properties of, and to carry n the business of the Company and the Subsidiaries. - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 8 "Permitted Financings" shall mean (i) any Financing which is followed by (x) a reduction of the Commitment (as such term is defined in the Equity Agreement) to zero and (y) the payment of all amounts and consideration due and owing to the Purchasers upon the occurrence of such event as contemplated by the Equity Agreement, (ii) a Non-Recourse Financing transaction for a specific project or asset of the Company, (iii) an underwritten offering of the Common Stock, provided such offering provides for the registration as part of the underwritten offering of all shares of Common Stock which are Registrable Securities, and (iv) Financings associated with the projects described on Schedule 4.1 hereof. "Person" means an individual, corporation, partnership, trust, incorporated or unincorporated association, joint venture, joint stock company, government (or any agency or political subdivision thereof) or other entity of any kind. "Plan" means at any time an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under the Code and either (i) is maintained, or contributed to, by any member of the ERISA group for employees of any member of the ERISA group or (ii) has at any time within the preceding five years been maintained, or contributed to, by any Person which was at such time a member of the ERISA Group for employees of any Person which was at such time a member of the ERISA group. "Purchase Price" means the purchase price for the Securities set forth in Section 2.2 hereof. "Purchasers" means, collectively, those entities listed on the signature page hereto and their successors and assigns, including holders from time to time of the Convertible Notes. "Registrable Securities" has the meaning set forth in Section 10.4(a). "Registration Default" has the meaning set forth in Section 10.4(e). "Registration Maintenance Period" has the meaning set forth in Section 10.4(c). "Registration Statement" has the meaning set forth in Section 10.4(b). "Registration Rights Agreement" means the agreement between the Company and the Purchasers dated the date hereof substantially in the form set forth in Exhibit C attached hereto. - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 9 "Required Effectiveness Date" has the meaning set forth in Section 10.4(b). "Reserve Amount" has the meaning set forth in Section 7.10. "Restricted Payment" means, with respect to any Person, (i) any dividend or other distribution on any shares of capital stock of such Person (except dividends payable solely in shares of capital stock of the same or junior class of such Person and dividends from a wholly-owned direct or indirect Subsidiary of the Company to its parent corporation), (ii) any payment on account of the purchase, redemption, retirement or acquisition of (a) any shares of such Person's capital stock or (b) any option, warrant or other right to acquire shares of such Person's capital stock or (iii) any loan, or advance or capital contribution to any Person (a "Stockholder") owning any capital stock of such Person other than relocation, travel or like advances to officers and employees in the ordinary course of business, and other than reasonable compensation as determined by the Board of Directors. "Rights Offering" has the meaning set forth in Section 11.3. "Sale Event" has the meaning in Section 3.4. "SEC Reports" shall have the meaning set forth in Section 4.7. "Second Closing Date" means the date that all conditions set forth in Sections 6.2 and 6.3 have been satisfied and the Company has issued an additional $7,000,000 of Convertible Notes to the Purchasers. "Securities" means the Convertible Notes, the Warrants and, as applicable, the Conversion Shares and the Warrant Shares. "Securities Act" means the Securities Act of 1933, as amended. "Share Reorganization" has the meaning set forth Section 11.2. "Solvency Certificate" shall mean a certificate executed by the chief financial officer of the Company as to the solvency of the Company, the adequacy of its capital and its ability to pay its debts, all after giving effect to the issuance and sale of the Convertible Notes and the completion of the offering (including without limitation the payment of any fees or expenses in connection therewith), which such Solvency Certificate shall be in the form of Exhibit E attached hereto. "Special Distribution" has the meaning set forth in Section 11.4. - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 10 "Subsidiary" means, with respect to any Person, any corporation or other entity of which (x) a majority of the capital stock or other ownership interests having ordinary voting power to elect a majority of the Board of Directors or other persons performing similar functions are at the time directly or indirectly owned by such Person or (y) the results of operations, the assets and the liabilities of which are consolidated with such Person under GAAP. "Subsidiary Corporate Documents" means the certificates of incorporation and by-laws of each Subsidiary. "Taxes" has the meaning set forth in Section 3.6. "Trading Day" shall mean any Business Day in which the Nasdaq Market or other automated quotation system or exchange on which the Common Stock is then traded is open for trading for at least four (4) hours. "Transaction Agreements" means this Agreement, the Convertible Notes, the Warrants, and the Registration Rights Agreement. "Transfer" means any disposition of Securities that would constitute a sale thereof under the Securities Act. "Unfunded Liabilities" means, with respect to any Plan at any time, the amount (if any) by which (i) the present value of all benefits under such Plan exceeds (ii) the fair market value of all Plan assets allocable to such benefits (excluding any accrued but unpaid contributions), all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the ERISA Group to the PBGC or any other Person under Title IV of ERISA. "Warrants" means the Common Stock Purchase Warrants issued to the Purchasers for 1,400,000 shares of Common Stock in the aggregate on the First Closing Date in the form of Exhibit B hereto. "Warrant Shares" has the meaning set forth in the Recitals. SECTION 1.2. Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared, in accordance with generally accepted accounting principles as in effect from time to time, applied on a - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 11 consistent basis (except for changes concurred in by the Company's independent public accountants) ("GAAP"). All references to "dollars," "Dollars" or "$" are to United States dollars unless otherwise indicated. ARTICLE II PURCHASE AND SALE OF SECURITIES SECTION 2.1. Purchase and Sale of Convertible Notes. (a) Subject to the terms and conditions set forth herein, the Company agrees to issue and sell to each Purchaser, and each Purchaser severally agrees to purchase from the Company, Convertible Notes in the aggregate principal amount of up to $12,000,000. (b) Each Purchaser shall acquire a portion of the Convertible Notes on the applicable Closing Date in an aggregate principal amount as set forth on a schedule to be delivered by such Purchasers to the Company on the applicable Closing Date. Five million dollars ($5,000,000) principal amount of Convertible Notes will be acquired on the First Closing Date and seven million dollars ($7,000,000) principal amount of Convertible Notes will be acquired on the Second Closing Date, subject, however, to satisfaction of all conditions precedent to each such Closing, unless the Purchasers agree otherwise, in their sole discretion. c) In connection with the Purchasers agreement to purchase the Convertible Notes specified in this Article II, the Company shall issue and deliver to the Purchasers on the First Closing Date Warrants to purchase an aggregate of 1,400,000 shares of Common Stock. (d) The portion of the Convertible Notes and Warrants to be acquired by each Purchaser on the First Closing Date is set forth on Schedule I attached hereto. The Purchasers may, by mutual agreement, and by written notice to the Company, determine to acquire the Convertible Notes to be issued on the Second Closing Date in different proportions than as set forth on Schedule I. In such event, the Company shall, if directed in writing by all Purchasers, amend and restate the Warrants issued on the First Closing Date to the Purchasers to reflect an ownership thereof based upon the aggregate pro rata portion of all Convertible Notes held by the applicable Purchasers after the Second Closing Date. SECTION 2.2. Purchase Price. The purchase price for the Convertible Notes shall be 99% of the principal amount thereof. No part of the purchase price of the Convertible Notes shall be allocated to the Warrants. Therefore, the aggregate - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 12 consideration payable by the Purchasers to the Company for the Convertible Notes and the Warrants shall be (x) $4,950,000 on the first Closing Date and (y) $6,930,000 on the Second Closing Date (the "Purchase Price"). SECTION 2.3 Closing and Mechanics of Payment. (a) On each Closing Date, subject to the satisfaction of all terms and conditions set forth herein, each of the Purchasers shall deliver by wire transfer to the Company immediately available funds in an amount equal to the portion of the Purchase Price of the Convertible Notes to be purchased by such Purchaser on such Closing Date. On the First Closing Date, each Purchaser shall subtract from such Purchase Price such Purchaser's ratable share of $25,000, representing an estimate of the Expense Reimbursement Fee. Within ten (10) days of the receipt of notice from the Purchasers, the Company shall pay any funds due and owing as the Expense Reimbursement Fee in excess of the estimated Expense Reimbursement Fee withheld from the Purchase Price as described herein. (b) Subject to satisfaction of the conditions set forth in Sections 6.1 and 6.3 hereof, the First Closing Date shall occur on April 21, 1998. (c) The Second Closing Date shall occur on a date selected by the Purchasers no later than (x) May 15, 1998 or (y) the date all conditions precedent of the Company set forth in Section 6.2 shall have been satisfied, whichever shall be the latter to occur. (d) On each Closing Date, against payment as set forth in subsection 2.3(a) above, the Company shall deliver to each Purchaser (i) a single Convertible Note for each Purchaser representing the principal amount of such Convertible Note issued to such Purchaser as of each Closing Date, and (ii) on the First Closing Date a single Warrant for each Purchaser representing the number of Warrants issued to such Purchaser as of the First Closing Date. (e) The Warrants and the Convertible Notes issued on both the First Closing Date and the Second Closing Date shall be dated the date hereof; provided; however, interest shall accrue on the applicable Convertible Notes only from and after the date of funding thereof. - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 13 ARTICLE III PAYMENT TERMS OF CONVERTIBLE NOTE SECTION 3.1. Payment of Principal and Interest; Payment Mechanics. The Company will pay all amounts due on each Convertible Note by the method and at the address specified for such purpose by the applicable Purchaser in writing, without the presentation or surrender of any Convertible Note or the making of any notation thereon, except that upon written request of the Company made concurrently with or reasonably promptly after payment or prepayment in full of this Convertible Note, the holder shall surrender the Convertible Note for cancellation, reasonably promptly after any such request, to the Company at its principal executive office. Prior to any sale or other disposition of any Convertible Note, the holder thereof will, at its election, either endorse thereon the amount of principal paid thereon and the last date to which interest has been paid thereon or surrender the Convertible Note to the Company in exchange for a new Convertible Note or Convertible Notes. The Company will afford the benefits of this Section 3.1 to any direct or indirect transferee of the Convertible Note purchased under this Agreement and that has made the same agreement relating to this Convertible Note as the Purchaser has in this Section 3.1; provided that such transferee is an "accredited investor" under Rule 501 of the Securities Act. SECTION 3.2 Payment of Interest. Interest shall accrue on the outstanding principal amount of each Convertible Note and shall be payable as specified therein. SECTION 3.3. Voluntary Prepayment. For so long as no Event of Default shall have occurred and is continuing, the Company may, at its option, repay, in whole or in part, the Convertible Notes at the Formula Price thereof following at least five (5) Business Days prior written notice to the Purchasers (the expiration of such five (5) Business Day period being referred to as the "prepayment date"); provided, however, that if such date is not a Business Day, the prepayment date shall be the next Business Day thereafter. Partial prepayments shall be in an aggregate principal amount of at least $500,000 or a multiple of $100,000 thereof. - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 14 SECTION 3.4. Mandatory Prepayments. (a) Upon (i) the occurrence of a Change of Control of the Company, (ii) a transfer of all or substantially all of the assets of the Company to any Person in a single transaction or series of related transactions, (iii) a consolidation, merger or amalgamation of the Company with or into another Person in which the Company is not the surviving entity (other than a merger which is effected solely to change the jurisdiction of incorporation of the Company and results in a reclassification, conversion or exchange of outstanding shares of Common Stock solely into shares of Common Stock) (each of items (i), (ii) and (iii) being referred to as a "Sale Event"), or (iv) the occurrence of a Registration Default which continues uncured for a period of forty-five (45) days, then, in each case, the Company shall, upon request of the Majority Holders, redeem this Convertible Note in cash for the Formula Price. (b) Upon the consummation of one or more Financings, the Company shall use 100% of the Net Cash Proceeds therefrom (unless such Net Cash Proceeds from each such Financing is less than $250,000) to redeem the Convertible Notes. The redemption price payable upon any such redemption shall be the Formula Price. (c) Upon the issuance of the Maximum Number of Shares and the failure within 90 days of such issuance to obtain shareholder approval to issue additional shares of Common Stock (the "Nasdaq Redemption Event"), the Company shall redeem the outstanding balance of each Convertible Note for the Formula Price as set forth in Section 4.3 of the Convertible Notes. SECTION 3.5. Prepayment Procedures. (a) Any permitted prepayment or redemption of the Convertible Notes pursuant to Sections 3.3 or 3.4 above shall be deemed to be effective and consummated (for purposes of determining the Formula Price and the time at which the Purchasers shall thereafter not be entitled to deliver a Notice of Conversion for the Convertible Notes) as follows: (I) A prepayment pursuant to Section 3.3, the "prepayment date" specified therein; (II) A redemption pursuant to Section 3.4(a), the date of consummation of the applicable Sale Event or the Registration Default; (III) A redemption pursuant to Section 3.4(b), three (3) Business Days following the date of consummation of the applicable Financing (meaning closing and funding); and - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 15 (IV) A redemption pursuant to Section 3.4(c), the date specified in each Convertible Note. (b) On the Maturity Date and on the effective date of a repayment or redemption of the Convertible Notes as specified in Section 3.5(a) above, the Company shall deliver by wire transfer of funds the repayment/redemption price to each Purchaser of the Convertible Notes subject to redemption. Should any Purchaser not receive payment of any amounts due on redemption of its Convertible Notes by reason of the Company's failure to make payment at the times prescribed above for any reason, the Company shall pay to the applicable holder on demand (x) interest on the sums not paid when due at an annual rate equal to the lesser of (I) the maximum lawful rate and (II) 18% per annum, compounded at the end of each thirty (30) days, until the applicable holder is paid in full and (y) all costs of collection, including, but not limited to, reasonable attorneys' fees and costs, whether or not suit or other formal proceedings are instituted. (c) The Company shall select the Convertible Notes to be redeemed in any redemption in which not all of the Convertible Notes are to be redeemed so that the ratio of the Convertible Notes of each holder selected for redemption to the total Convertible Notes owned by that holder shall be the same as the ratio of all such Convertible Notes selected for redemption bears to the total of all then outstanding Convertible Notes. Should any Convertible Notes required to be redeemed under the terms hereof not be redeemed solely by reason of limitations imposed by law, the applicable Convertible Notes shall be redeemed on the earliest possible dates thereafter to the maximum extent permitted by law. (d) Any Notice of Conversion delivered by any Purchaser (including delivery via telecopy) to the Company prior to the (x) Maturity Date or (y) effective date of a voluntary repayment pursuant to Section 3.3 or a mandatory prepayment pursuant to Section 3.4 as specified in Section 3.5(a) above), shall be honored by the Company and the conversion of the Convertible Notes shall be deemed effected on the Conversion Date. In addition, between the effective date of a voluntary prepayment pursuant to Section 3.3 or a mandatory prepayment pursuant to Section 3.4 as specified in Section 3.5(a) above and the date the Company is required to deliver the redemption proceeds in full to the Purchasers, the Purchasers may deliver a Notice of Conversion to the Company. Such notice will be (x) of no force or effect if the Company timely pays the redemption proceeds to the Purchasers when due or (y) honored on or as of the date the Notice of Conversion if the Company fails to timely pay the redemption proceeds to the Purchasers when due. - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 16 SECTION 3.6 Payment of Additional Amounts. (a) Any and all payments by the Company hereunder or under the Convertible Notes to any Purchaser and each "qualified assignee" thereof shall be made free and clear of and without deduction or withholding for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto (all such taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes") unless such Taxes are required by law or the administration thereof to be deducted or withheld. If the Company shall be required by law or the administration thereof to deduct or withhold any Taxes from or in respect of any sum payable under the Convertible Notes (i) the holders of Convertible Notes subject to such Taxes shall have the right, but not the obligation, for a period of thirty (30) days commencing upon the day it shall have received written notice form the Company that it is required to withhold Taxes to transfer all or any portion of the Convertible Notes to a qualified assignee to the extent such transfer can be effected in accordance with the other provisions of this Agreement and applicable law; (ii) the Company shall make such deductions or withholdings; (iii) the sum payable shall be increased as may be necessary so that after making all required deductions or withholdings (including deductions or withholdings applicable to additional amounts paid under this Section 3.6) such Purchaser receives an amount equal to the sum it would have received if no such deduction or withholding had been made; and (iv) the Company shall forthwith pay the full amount deducted or withheld to the relevant taxation or other authority in accordance with applicable law. A "qualified assignee" of a Purchaser is a Person that is organized under the laws of (I) the United States or (II) any jurisdiction other than the United States or any political subdivision thereof and that (y) represents and warrants to the Company that payments of the Company to such assignee under the laws in existence on the date of this Agreement would not be subject to any Taxes and (z) from time to time, as and when requested by the company, executes and delivers to the Company and the Internal Revenue Service forms, and provides the Company with any information necessary to establish such assignee's continued exemption from Taxes under applicable law. (b) The Company shall forthwith pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies (all such taxes, charges and levies hereinafter referred to as "Other Taxes") which arise from any payment made under any of the Transaction Agreements or from the execution, delivery or registration of, or otherwise with respect to, this Agreement other than Taxes payable solely as a result of the transfer from the Purchasers to a Person of any Security. (c) The Company shall indemnify each Purchaser, or qualified assignee, for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 3.6) paid by each Purchaser, or qualified assignee, and any liability (including penalties, interest and expenses) - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 17 arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted. Payment under this indemnification shall be made within 30 days from the date such Purchaser or assignee makes written demand therefor. A certificate as to the amount of such Taxes or Other Taxes submitted to the Company by such Purchaser or assignee shall be conclusive evidence of the amount due from the Company to such party. (d) Within 30 days after the date of any payment of Taxes, the Company will furnish to each Purchaser the original or a certified copy of a receipt evidencing payment thereof. (e) Each Purchaser shall provide to the Company a Form W-8, stating that it is a non-U.S. person, together with any additional tax forms which may be required under the Code, as amended after the date hereof, to allow interest payments to be made to it without deduction. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to the Purchasers, and each of them, as of the Closing Date the following: SECTION 4.1. Organization and Qualification. The Company and each Subsidiary is a corporation (or other legal entity) duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, with full power and authority to own, lease, use and operate its properties and to carry on its business as and where now owned, leased, used, operated and conducted. Schedule 4.1 sets forth a list of all Subsidiaries and the country or jurisdiction in which each is incorporated. The Company and each of its Subsidiaries is duly qualified to conduct business as a foreign corporation and is in good standing in every jurisdiction in which the nature of the business conducted by it makes such qualification necessary, except where such failure would not have a Material Adverse Effect. A "Material Adverse Effect" means any material adverse effect on the operations, results of operations, properties, assets or condition (financial or otherwise) of the Company or the Company and its Subsidiaries, taken as a whole, or on the transactions contemplated hereby or by the agreements or instruments to be entered into in connection herewith. SECTION 4.2. Authorization and Execution. (a) The Company has all requisite corporate power and authority to enter into and perform each Transaction Agreement and to consummate the transactions contemplated hereby and thereby and to issue the Securities in accordance with the terms hereof and thereof. - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 18 (b) The execution, delivery and performance by the Company of each Transaction Agreement and the issuance by the Company of the Securities have been duly and validly authorized and no further consent or authorization of the Company, its Board of Directors or its shareholders is required. (c) This Agreement has been duly executed and delivered by the Company. (d) This Agreement constitutes, and upon execution and delivery thereof by the Company, each of the other Transaction Agreements will constitute, a valid and binding agreement of the Company, in each case enforceable against the Company in accordance with its respective terms. SECTION 4.3. Capitalization. As of the date hereof, the authorized, issued and outstanding capital stock of the Company is as set forth on Schedule 4.3 hereto and no other shares of capital stock of the Company will be outstanding as of the Closing Date. All of such outstanding shares of capital stock are, or upon issuance will be, duly authorized, validly issued, fully paid and non-assessable. No shares of capital stock of the Company are subject to preemptive rights or similar rights of the stockholders of the Company or any liens or encumbrances imposed through the actions or failure to act of the Company. Other than as set forth on Schedule 4.3 hereto, as of the date hereof, (i) there are no outstanding options, warrants, scrip, rights to subscribe for, puts, calls, rights of first refusal, agreements, understandings, claims or other commitments or rights of any character whatsoever relating to, or securities or rights convertible into or exchangeable for any shares of capital stock of the Company or any of its Subsidiaries, or arrangements by which the Company or any of its Subsidiaries is or may become bound to issue additional shares of capital stock of the Company or any of its Subsidiaries, and (ii) there are no agreements or arrangements under which the Company or any of its Subsidiaries are obligated to register the sale of any of its or their securities under the Securities Act (except pursuant to the Registration Rights Agreement) and (iii) there are no anti-dilution or price adjustment provisions contained in any security issued by the Company (or in any agreement providing rights to security holders) that will be triggered by the issuance of the Convertible Notes, Conversion Shares, Warrants or Warrant Shares. The Company has furnished to Purchasers true and correct copies of the Company's Corporate Documents, and the terms of all securities convertible into or exercisable for Common Stock and the material rights of the holders thereof in respect thereto. SECTION 4.4. Governmental Authorization. The execution and delivery by the Company of the Transaction Agreements does not and will not, the issuance and sale by the Company of the Securities does not and will not, and the consummation of the transactions contemplated hereby and by the other Transaction Agreements will not, require any action by or in respect of, or filing with, any governmental body, agency or governmental official except (a) such actions or filings that have been undertaken or made prior to the date hereof and that will be in full - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 19 force and effect (or as to which all applicable waiting periods have expired) on and as of the date hereof or which are not required to be filed on or prior to the Closing Date, (b) such actions or filings that, if not obtained, would not result in a Material Adverse Effect, (c) listing applications ("Listing Applications") to be filed with the Nasdaq Market relating to the Conversion Shares and Warrant Shares of Common Stock issuable upon conversion of the Convertible Notes and exercise of the Warrants, and (d) the filing of a "Form D" as described in Section 7.13 below. SECTION 4.5. Issuance of Shares. Upon conversion in accordance with the terms of the Convertible Notes or upon exercise in accordance with the terms of the Warrants (assuming the payment of the exercise price set forth in the Warrants), the Conversion Shares and Warrant Shares shall be duly and validly issued and outstanding, fully paid and nonassessable, free and clear of any Taxes, Liens and charges with respect to issuance and shall not be subject to preemptive rights or similar rights of any other stockholders of the Company. Assuming the representations and warranties of the Purchasers herein are true and correct in all material respects, each of the Securities will have been issued in material compliance with all applicable U.S. federal and state securities laws. The Company understands and acknowledges that, in certain circumstances, the issuance of Conversion Shares and Warrant Shares could dilute the ownership interests of other stockholders of the Company. The Company further acknowledges that its obligation to issue Conversion Shares upon conversion of the Convertible Notes, and Warrant Shares upon exercise of the Warrants, is absolute and unconditional regardless of the dilutive effect that such issuance may have on the ownership interests of other stockholders of the Company. SECTION 4.6. No Conflicts. The execution and delivery by the Company of the Transaction Agreements to which it is a party did not and will not, the issuance and sale by the Company of the Securities did not and will not and the consummation of the transactions contemplated hereby and by the other Transaction Agreements will not, contravene or constitute a default under or violation of (i) any provision of applicable law or regulation, (ii) the Company Corporate Documents, (iii) any agreement, judgment, injunction, order, decree or other instrument binding upon the Company or any Subsidiary or any of their respective assets, or result in the creation or imposition of any Lien on any asset of the Company or any Subsidiary. The Company and each Subsidiary is in compliance with and conforms to all statutes, laws, ordinances, rules, regulations, orders, restrictions and all other legal requirements of any domestic or foreign government or any instrumentality thereof having jurisdiction over the conduct of its businesses or the ownership of its properties, except where such failure would not have a Material Adverse Effect. SECTION 4.7. Financial Information and SEC Reports. Since January 1, 1996, the Company has timely filed all forms, reports and documents with the Commission required to be filed by it under the Exchange Act through the date hereof (all of the foregoing filed prior to the date hereof and all exhibits included therein and financial statements and schedules thereto and documents (other than exhibits) incorporated by reference therein, being referred to herein collectively as the "SEC Reports"). The Company has delivered to each Purchaser true and - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 20 complete copies of the SEC Reports, except for such exhibits and incorporated documents. Such SEC Reports, at the time filed, complied in all material respects with the requirements of the Exchange Act and the rules and regulations of the Commission thereunder applicable to such SEC Reports. None of the SEC Reports, including without limitation, any financial statements or schedules included therein, contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. There have been no material adverse changes in the Company's business, properties, results of operations, condition (financial or otherwise) or prospects since the date of the Company's most recent Report on Form 10-K for the year ended December 31, 1997 which have not been disclosed in the Company's SEC Reports or to the Purchasers in writing. The audited and unaudited consolidated balance sheets of the Company and its Subsidiaries contained in the SEC Reports, and the related consolidated statements of income, changes in stockholders' equity and changes in cash flows for the periods then ended, including the footnotes thereto, except as indicated therein, (i) complied in all material respects with applicable accounting requirements and the published rules and regulations of the Commission with respect thereto and (ii) have been prepared in accordance with GAAP consistently applied throughout the periods indicated, except that the unaudited financial statements do not contain notes and may be subject to normal audit adjustments and normal annual adjustments. Such financial statements fairly present the financial condition of the Company and its Subsidiaries at the dates indicated and the consolidated results of their operations and cash flows for the periods then ended and, except as indicated therein, reflect all claims against and all Debts and liabilities of the Company and its Subsidiaries, fixed or contingent. Since December 31, 1997 (the "Balance Sheet Date"), except as disclosed in the SEC Reports, there has been (x) no material adverse change in the assets or liabilities, or in the business or condition, financial or otherwise, or in the results of operations or prospects, of the Company and its Subsidiaries, whether as a result of any legislative or regulatory change, revocation of any license or rights to do business, fire, explosion, accident, casualty, labor trouble, flood, drought, riot, storm, condemnation, act of God, public force or otherwise and (y) no material adverse change in the assets or liabilities, or in the business or condition, financial or otherwise, or in the results of operations or prospects, of the Company and its Subsidiaries except in the ordinary course of business; and no fact or condition exists or is contemplated or threatened which might cause such a change in the future. SECTION 4.8. Litigation. Except as set forth in the SEC Reports, there is no action, suit or proceeding pending or, to the knowledge of the Company, threatened against the Company or any Subsidiary, before any court or arbitrator or any governmental body, agency or official in which there is a reasonable possibility of an adverse decision which could materially adversely affect the business, condition (financial or otherwise), operations, performance, properties or prospects of the Company or which challenges the validity of any Transaction Agreements. - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 21 SECTION 4.9. Compliance with ERISA and other Benefit Plans. (a) Each member of the ERISA Group has fulfilled its obligations under the minimum funding standards of ERISA and the Code with respect to each Plan and is in compliance in all material respects with the presently applicable provisions of ERISA and the Code with respect to each Plan. No member of the ERISA Group has (i) sought a waiver of the minimum funding standard under Section 412 of the Code in respect of any Plan, (ii) failed to make any required contribution or payment to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement, or made any amendment to any Plan or Benefit Arrangement, which has resulted or could result in the imposition of a Lien or the posting of a bond or other security under ERISA or the Code or (iii) incurred any liability under Title IV of ERISA other than a liability to the PBGC for premiums under Section 4007 of ERISA. (b) The benefit plans not covered under clause (a) above (including profit sharing, deferred compensation, stock option, employee stock purchase, bonus, retirement, health or insurance plans, collectively the "Benefit Plans") relating to the employees of the Company are duly registered where required by, and are in good standing in all material respects under, all applicable laws. All required employer and employee contributions and premiums under the Benefit Plans to the date hereof have been made, the respective fund or funds established under the Benefit Plans are funded in accordance with applicable laws, and no past service funding liabilities exist thereunder. (c) No Benefit Plans have any unfunded liabilities, either on a "going concern" or "winding up" basis and determined in accordance with all applicable laws and actuarial practices and using actuarial assumptions and methods that are reasonable in the circumstances. No event has occurred and no condition exists with respect to any Benefit Plans that has resulted or could reasonably be expected to result in any pension plan having its registration revoked or wound up (in whole or in part) or refused for the purposes of any applicable laws or being placed under the administration of any relevant pension benefits regulatory authority or being required to pay any taxes or penalties (in any material amounts) under any applicable laws. SECTION 4.10. Environmental Matters. The costs and liabilities associated with Environmental Laws (including the cost of compliance therewith) are unlikely to have a material adverse effect on the business, condition (financial or otherwise), operations, performance, properties or prospects of the Company or any Subsidiary. Each of the Company and the Subsidiaries conducts its businesses in compliance in all material respects with all applicable Environmental Laws. SECTION 4.11. Taxes. All United States federal, state, county, municipality local or foreign income tax returns and all other material tax returns (including foreign tax returns) which are required to be filed by or on behalf of the Company and each Subsidiary have been filed and all material taxes due pursuant to such returns or pursuant to any assessment received by the Company and each Subsidiary have been paid except those being disputed in good faith and for which - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 22 adequate reserves have been established. The charges, accruals and reserves on the books of the Company and each Subsidiary in respect of taxes or other governmental charges have been established in accordance with GAAP. SECTION 4.12. Investments, Joint Ventures. Other than as set forth on Schedule 4.1, , the Company has no Subsidiaries or other direct or indirect Investment in any Person, and the Company is not a party to any partnership, management, shareholders' or joint venture or similar agreement. SECTION 4.13. Not an Investment Company. Neither the Company nor any Subsidiary is an "investment company" within the meaning of the Investment Company Act of 1940, as amended. SECTION 4.14. Full Disclosure. The information heretofore furnished by the Company to the Purchasers for purposes of or in connection with this Agreement or any transaction contemplated hereby does not, and all such information hereafter furnished by the Company or any Subsidiary to the Purchasers will not (in each case taken together and on the date as of which such information is furnished), contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained therein, in the light of the circumstances under which they are made, not misleading. SECTION 4.15. No Solicitation; No Integration with Other Offerings. No form of general solicitation or general advertising was used by the Company or, to the best of its actual knowledge, any other Person acting on behalf of the Company, in connection with the offer and sale of the Securities. Neither the Company, nor, to its knowledge, any Person acting on behalf of the Company, has, either directly or indirectly, sold or offered for sale to any Person (other than the Purchasers) any of the Securities or, within the six months prior to the date hereof, any other similar security of the Company except as contemplated by this Agreement, and the Company represents that neither itself nor any Person authorized to act on its behalf (except that the Company makes no representation as to the Purchasers and their Affiliates) will sell or offer for sale any such security to, or solicit any offers to buy any such security from, or otherwise approach or negotiate in respect thereof with, any Person or Persons so as thereby to cause the issuance or sale of any of the Securities to be in violation of any of the provisions of Section 5 of the Securities Act. The issuance of the Securities to the Purchasers will not be integrated with any other issuance of the Company's securities (past, current or future) which requires stockholder approval under the rules of the Nasdaq Market. SECTION 4.16. Permits. (a) Each of the Company and its Subsidiaries has all material Permits; (b) all such Permits are in full force and effect, and each of the Company and its Subsidiaries has fulfilled and performed all material obligations with respect to such Permits; (c) no event has occurred which allows, or after notice or lapse of time would allow, revocation or - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 23 termination by the issuer thereof or which results in any other material impairment of the rights of the holder of any such Permit; and (d) the Company has no reason to believe that any governmental body or agency is considering limiting, suspending or revoking any such Permit. SECTION 4.17. Leases. Except as disclosed on Schedule 4.17 hereto, neither the Company nor any Subsidiary is a party to any capital lease obligation with a value greater than $100,000 or to any operating lease with an aggregate annual rental greater than $100,000 during the life of such lease. SECTION 4.18. Absence of Any Undisclosed Liabilities or Capital Calls. There are no liabilities of the Company or any Subsidiary of any kind whatsoever, whether accrued, contingent, absolute, determined, determinable or otherwise, and there is no existing condition, situation or set of circumstances which could reasonably be expected to result in such a liability, other than (i) those liabilities provided for in the financial statements delivered pursuant to Section 4.7 hereof and (ii) other undisclosed liabilities which, individually or in the aggregate, would not have a Material Adverse Effect. SECTION 4.19. Public Utility Holding Company. Neither the Company nor any Subsidiary is, or will be upon the issuance and sale of the Securities and the use of the proceeds described herein, subject to regulation under the Public Utility Holding Company Act of 1935, as amended, the Federal Power Act, the Interstate Commerce Act or to any federal or state statute or regulation limiting its ability to issue and perform its obligations under any Transaction Agreement. SECTION 4.20. Intellectual Property Rights. Each of the Company and its Subsidiaries owns, or is licensed under, and has the rights to use, all material patents, trademarks, trade names, copyrights, technology, know-how and processes (collectively, "Intellectual Property") used in, or necessary for the conduct of its business; no claims have been asserted by any Person to the use of any such Intellectual Property or challenging or questioning the validity or effectiveness of any license or agreement related thereto. To the best of the Company's and its Subsidiaries' knowledge, there is no valid basis for any such claim and the use of such Intellectual Property by the Company and its Subsidiaries will not infringe upon the rights of any Person. SECTION 4.21. Insurance. The Company and its Subsidiaries maintain, with financially sound and reputable insurance companies, insurance in at least such amounts and against such risks such that any uninsured loss would not have a Material Adverse Effect. All insurance coverages of the Company and its Subsidiaries are in full force and effect and there are no past due premiums in respect of any such insurance. SECTION 4.22. Title to Properties. The Company and its Subsidiaries have good and marketable title to all their respective properties reflected on the financial statements referred to in Section 4.7, free and clear of all Liens, other than Liens set forth on Schedule 4.22. - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 24 SECTION 4.23. Eligibility to Use Form S-3. As of the date hereof, the Company meets the "registrant eligibility" requirements set forth in the general instructions applicable to registration statements on Form S-3 covering the resale of the Registrable Securities. SECTION 4.24. Internal Accounting Controls. The Company and each of its Subsidiaries maintain a system of internal accounting controls sufficient, in the judgment of the Company's Board of Directors, to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management's general or specific authorization and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. SECTION 4.25. Year 2000 Compliance. (a) Computer and Other Systems. All software programs and computer hardware that are owned, leased or licensed by the Company and each Subsidiary, or used by third parties on behalf of the Company and each Subsidiary ("Computer Systems"), are designated to be used prior to, during and after the calendar year 2000 A.D., including leap years; (b) all other operational systems that use software or equipment that are owned, leased, or licensed by the Company and each Subsidiary, or used by third parties on behalf of the Company and each Subsidiary ("Other Systems"), are designated to be used prior to, during and after the calendar year 2000 A.D., including leap years; (c) the Computer Systems and Other Systems will properly operate during each such period without error or degradation of performance caused by a lack of Year 2000 Capabilities, and (d) the Computer Systems and Other Systems will properly operate during each such period without requiring intervention or modification to Date Data. (b) Capabilities of Suppliers, Vendors and Landlords. To the best of the Company's knowledge after specific inquiry of all of its material suppliers, vendors and landlords, the Company and each Subsidiary will not suffer a loss from interruption or cessation of business operations, in whole or in part, as a result of such suppliers, vendors or landlords failing to provide materials, labor, supplies or access to leased space for the operation of the Company and each Subsidiary as a result of such suppliers or vendors not having Year 2000 Capabilities. (c) For purposes of this Agreement, (x) "Year 2000 Capabilities" means the ability to: (i) manage and manipulate data involving dates, including single century formulas and multi-century formulas, in a manner that will not cause an abnormally ending scenario or generate incorrect values or invalid results involving such dates, (ii) include the indication of proper century dates in all date-related user interface functions and date fields, and (iii) operate with proper century dates in date-related software or hardware interface functions and (y) "Date Data" means any existing data or input of date which includes an indication of or reference to date. - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 25 SECTION 4.26. Foreign Practices. Neither the Company nor any of its Subsidiaries nor, to the Company's knowledge, any employee or agent of the Company or any Subsidiary has made any payments of funds of the Company or any Subsidiary, or received or retained any funds, in each case (x) in violation of any law, rule or regulation or (y) of a character required to be disclosed by the Company in any of the SEC Reports. SECTION 4.27 Future Outside Capital. Attached hereto as Schedule 4.27 is a copy of the Company's Budget (the "Budget"), detailing the proposed use of the proceeds obtained from this financing transaction and the Equity Agreement. The Budget has not been materially altered since the date listed therein. As of the date hereof, and for a period of twenty-four (24) months from the date hereof, based on the Budget, the Company and its Subsidiaries will have no further need for outside capital other than (i) Purchase Price to be paid by the Funds on the Second Closing Date, (ii) Non-Recourse Financings for specific projects not expected to exceed $20,000,000 in the aggregate as contemplated by the Budget and (iii) net proceeds from draws pursuant to the Equity Agreement. ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS SECTION 5.1. Purchasers. Each Purchaser severally (and not jointly) hereby represents and warrants to the Company solely as to such Purchaser that: (a) the Purchaser is an "accredited investor" within the meaning of Rule 501(a) under the Securities Act and the Securities to be acquired by it pursuant to this Agreement are being acquired for its own account and, as of the date hereof, not with a view toward, or for sale in connection with, any distribution thereof except in compliance with applicable United States federal and state securities law; provided that the disposition of the Purchaser's property shall at all times be and remain within its control; (b) the execution, delivery and performance of this Agreement and the purchase of the Securities pursuant hereto are within the Purchaser's corporate or partnership powers, as applicable, and have been duly and validly authorized by all requisite corporate or partnership action; (c) this Agreement has been duly executed and delivered by the Purchaser. (d) the execution and delivery by the Purchaser of the Transaction Agreements to which it is a party does not, and the consummation of the transactions contemplated hereby and thereby will not, contravene or constitute a default under or violation of (i) any - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 26 provision of applicable law or regulation, or (ii) any agreement, judgment, injunction, order, decree or other instrument binding upon such Purchaser; (e) such Purchaser understands that the Securities have not been registered under the Securities Act and may not be transferred or sold except as specified in this Agreement or the remaining Transition Agreements; (f) this Agreement constitutes a valid and binding agreement of the Purchaser enforceable in accordance with its terms, subject to (i) applicable bankruptcy, insolvency or similar laws affecting the enforceability of creditors rights generally and (ii) equitable principles of general applicability; (g) the Purchaser has such knowledge and experience in financial and business matters so as to be capable of evaluating the merits and risks of its investment in the Securities and the Purchaser is capable of bearing the economic risks of such investment; (h) the Purchaser is knowledgeable, sophisticated and experienced in business and financial matters; the Purchaser has previously invested in securities similar to the Securities and fully understands the limitations on transfer described herein; the Purchaser has been afforded access to information about the Company and the financial condition, results of operations, property, management and prospects of the Company sufficient to enable it to evaluate its investment in the Securities; the Purchaser has been afforded the opportunity to ask such questions as it has deemed necessary of, and to receive answers from, representatives of the Company concerning the terms and conditions of the offering of the Securities and the merits and the risks of investing in the Securities; and the Purchaser has been afforded the opportunity to obtain such additional information which the Company possesses or can acquire that is necessary to verify the accuracy and completeness of the information given to the Purchaser concerning the Company. The foregoing does not in any way relieve the Company of its representations and other undertakings hereunder, and shall not limit any Purchaser's ability to rely thereon; (i) no part of the source of funds used by the Purchaser to acquire the Securities constitutes assets allocated to any separate account maintained by the Purchaser in which any employee benefit plan (or its related trust) has any interest; and (j) the Purchaser is a corporation organized under the laws of the Nevis West Indies. - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 27 ARTICLE VI CONDITIONS PRECEDENT TO PURCHASE OF SECURITIES SECTION 6.1. Conditions Precedent to the Purchasers' Obligation to Purchase. The obligation of each Purchaser hereunder to purchase the Convertible Notes at the Closing is subject to the satisfaction, on or before the Closing Date of each of the following conditions, provided that these conditions are for such Purchaser's sole benefit and may be waived by such Purchaser at any time in its sole discretion: (a) The Company shall have executed this Agreement and the Registration Rights Agreement and delivered the same to the Purchasers; (b) The Company shall have delivered to the Purchasers duly executed certificates representing the Convertible Notes and the Warrants in accordance with Section 2.3 hereof; (c) The Company shall have delivered the Solvency Certificate; (d) The representations and warranties of the Company contained in each Transaction Agreement shall be true and correct in all material respects as of the date when made and as of the Closing Date as though made at such time (except for representations and warranties that speak as of a specified date) and the Company shall have performed, satisfied and complied with all covenants, agreements and conditions required by such Transaction Agreements to be performed, satisfied or complied with by it at or prior to the Closing Date. The Purchasers' shall have received an Officer's Certificate executed by the chief executive officer of the Company, dated as of the Closing Date, to the foregoing effect and as to such other matters as may be reasonably requested by the Purchasers, including but not limited to certificates with respect to the Company Corporate Documents, resolutions relating to the transactions contemplated hereby and the incumbencies of certain officers and Directors of the Company. The form of such certificate is attached hereto as Exhibit F; (e) The Company shall have received all governmental, Board of Directors, shareholders and third party consents and approvals necessary or desirable in connection with the issuance and sale of the Securities; (f) All applicable waiting periods in respect to the issuance and sale of the Securities shall have expired without any action having been taken by any competent authority that could restrain, prevent or impose any materially adverse conditions thereon or that could seek or threaten any of the foregoing; - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 28 (g) No law or regulation shall have been imposed or enacted that, in the judgment of the Purchasers, could adversely affect the transactions set forth herein or in the other Transaction Agreements, and no law or regulation shall have been proposed that in the reasonable judgment of Purchasers could reasonably have any such effect; (h) Each of the Purchasers shall have received an opinion, dated the Closing Date, of counsel to the Company, substantially in the form attached as Exhibit G hereto; (i) All fees and expenses due and payable by the Company on or prior to the Closing Date shall have been paid; (j) The Company Corporate Documents and the Subsidiary Corporate Documents, if any, shall be in full force and effect and no term or condition thereof shall have been amended, waived or otherwise modified without the prior written consent of the Purchasers; (k) There shall have occurred no material adverse change in the business, condition (financial or otherwise), operations, performance, properties or prospects of the Company or any Subsidiary since December 31, 1997; (l) There shall exist no action, suit, investigation, litigation or proceeding pending or threatened in any court or before any arbitrator or governmental instrumentality that challenges the validity of or purports to affect this Agreement or any other Transaction Agreement, or other transaction contemplated hereby or thereby or that could reasonably be expected to have a Material Adverse Effect, or any material adverse effect on the enforceability of the Transaction Agreements or the Securities or the rights of the holders of the Securities or the Purchasers hereunder; (m) The Purchasers shall have confirmed receipt of the Convertible Notes and the Warrants to be issued, duly executed by the Company in the denominations and registered in the names of the Purchasers specified in or pursuant to Schedule I; (n) There shall not have occurred any disruption or adverse change in the financial or capital markets generally, or in the market for the Common Stock (including but not limited to any suspension or delisting), which the Purchasers reasonably deem material in connection with the purchase of the Securities; (o) Immediately before and after the Closing Date, no Default or Event of Default shall have occurred and be continuing; - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 29 (p) The Purchasers shall have received all other opinions, resolutions, certificates, instruments, agreements or other documents as they shall reasonably request; (q) An Equity Financing Agreement in the form attached as Exhibit D hereto between certain of the Purchasers and the Company (the "Equity Agreement") shall be executed by the Company; and (r) An Amendment Agreement in the form attached hereto as Exhibit H hereto between certain of the Purchasers and the Company amending certain of the terms of a Securities Purchase Agreement (and the related documents executed in connection therewith) dated October 9, 1997 (the "Amendment Agreement") shall be executed by the Company. SECTION 6.2. Conditions Precedent to Second Closing Date. The obligation of the Purchasers to purchase Convertible Notes pursuant to this Agreement on the Second Closing Date is subject to the satisfaction, on or before the Second Closing Date, of each of the following conditions, provided that these conditions are for such Purchaser's sole benefit and may be waived by such Purchaser at any time in its sole discretion: (a) The Company shall have delivered to each of the Purchasers, with respect to the Second Closing Date, the agreements, certificates, evidences, assurances and related documents as are required by Section 6.1 to be delivered on the First Closing Date, including the certificates specified in Sections 6.1(c), (d) and (p); (b) There shall have occurred no material adverse change in the business, condition (financial or otherwise), operations, performance, properties or prospects of the Company or any Subsidiary since the First Closing Date; (c) The representations and warranties of the Company contained in this Agreement shall be true and correct in all material respects as of the date when made at such time (except for representations and warranties that speak as of a specified date), and as of the Second Closing Date as though made on and as of such date; (d) The Convertible Notes being purchased by the Purchaser on the Second Closing Date shall have been executed and delivered to the Purchasers by the Company; (e) The Company shall have timely performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by each Transaction Agreement (without incurring any liquidated damage penalties contemplated by any Transaction Document) to be performed, satisfied or complied with by the Company at or prior to the Second Closing Date and no Default or Event of Default shall have occurred and then be continuing; - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 30 (f) The trading in the Common Stock shall not have been suspended by the Commission or the Nasdaq Market (except for any suspension of trading of limited duration solely to permit dissemination of material information regarding the Company); (g) No event requiring redemption of the Convertible Notes as specified in Section 3.4 shall have occurred; (h) The Registration Statement covering resales of the Registrable Securities shall have been filed with the Commission; and (i) The average of the DWASP (as such term is defined in the Convertible Notes) for the five (5) Trading Days immediately preceding the Second Closing Date shall be equal to or grater than $2.00 per share of Common Stock (the "Market Price Test"). The failure of the Company to satisfy each of the foregoing conditions prior to May 31, 1998 shall result in the termination of the Purchasers' obligation to purchase Convertible Notes on the Second Closing Date. If the Second Closing Date has not occurred prior to May 31, 1998 and the Purchasers have elected to terminate their obligation to purchase the Convertible Notes on the Second Closing Date solely as a result of the failure of the Company to satisfy the Market Price Test specified in Section 6.2(i) above, then the number of Warrants shall be reduced to an amount equal to the product of 1,400,000 multiplied by a fraction, the numerator of which is the aggregate stated principal amount of the Convertible Notes as funded by the Purchasers as of the date of such termination of such commitment and the denominator of which is $12,000,000. SECTION 6.3. Conditions to the Company's Obligations. The obligations of the Company to issue and sell the Securities to the Purchasers pursuant to this Agreement are subject to the satisfaction, at or prior to any Closing Date, of the following conditions: (a) The representations and warranties of the Purchasers contained herein shall be true and correct in all material respects on the Closing Date and the Purchasers shall have performed and complied in all material respects with all agreements required by this Agreement to be performed or complied with by the Purchasers at or prior to the Closing Date; (b) The issue and sale of the Securities by the Company shall not be prohibited by any applicable law, court order or governmental regulation; (c) Receipt by the Company of duly executed counterparts of this Agreement and the Registration Rights Agreement signed by the Purchasers; - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 31 (d) The Company shall have received payment of the Purchase Price, less the Expense Reimbursement Fee; (e) The Equity Agreement shall have been executed and delivered by the Purchasers named therein; and (f) The Amendment Agreement shall have been executed and delivered by the Purchasers named therein. ARTICLE VII AFFIRMATIVE COVENANTS The Company hereby agrees that, from and after the date hereof for so long as any Convertible Notes remain outstanding (except for Sections 7.1(a) and (d), 7.10, 7.11, 7.12 and 7.13, which shall apply for so long as any Convertible Notes or Warrants remain outstanding) and for the benefit of the Purchasers: SECTION 7.1. Information. The Company will deliver to each holder of the Convertible Notes: (a) promptly upon the filing thereof, copies of (i) all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent), and (ii) all reports on Forms 10-K, 10-Q and 8-K (or their equivalents) which the Company or any Subsidiary has filed with the Commission; (b) simultaneously with the delivery of each item referred to in clause (a) above, a certificate from the chief financial officer of the Company stating that no Default or Event of Default has occurred and is continuing, or, if as of the date of such delivery a Default shall have occurred and be continuing, a certificate from the Company setting forth the details of such Default or Event of Default and the action which the Company is taking or proposes to take with respect thereto; (c) within two (2) days after any officer of the Company obtains knowledge of a Default or Event of Default, or that any Person has given any notice or taken any action with respect to a claimed Default hereunder, a certificate of the chief financial officer of the Company setting forth the details thereof and the action which the Company is taking or proposes to take with respect thereto; - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 32 (d) promptly upon the mailing thereof to the shareholders of the Company generally, copies of all financial statements, reports and proxy statements so mailed and any other document generally distributed to shareholders; (e) at least two (2) Business Days prior to the consummation of any Financing or other event requiring a repayment of the Convertible Notes under Section 3.4, notice thereof together with a summary of all material terms thereof and copies of all documents and instruments associated therewith; (f) notice promptly upon the occurrence of any event by which the Reserved Amount becomes less than the sum of (i) 1.5 times the maximum number of Conversion Shares, plus (ii) the maximum number of Warrant Shares, in each case issuable pursuant the Transaction Agreements; and (g) promptly following the commencement thereof, notice and a description in reasonable detail of any litigation or proceeding to which the Company or any Subsidiary is a party in which the amount involved is $250,000 or more and not covered by insurance or in which injunctive or similar relief is sought or which the Company is required to disclose in its SEC Reports. SECTION 7.2. Payment of Obligations. The Company will, and will cause each Subsidiary to, pay and discharge, at or before maturity, all their respective material obligations, including, without limitation, tax liabilities, except where the same may be contested in good faith by appropriate proceedings and will maintain, in accordance with GAAP, appropriate reserves for the accrual of any of the same. SECTION 7.3. Maintenance of Property; Insurance. The Company will, and will cause each Subsidiary to, keep all property useful and necessary in its business in good working order and condition, ordinary wear and tear excepted. In addition, the Company and each Subsidiary will maintain insurance in at least such amounts and against such risks as it has insured against as of the Closing Date. SECTION 7.4. Maintenance of Existence. The Company will, and will cause each Subsidiary to, continue to engage in business of the same general type as now conducted by the Company and such Subsidiaries, and will preserve, renew and keep in full force and effect its respective corporate existence and their respective material rights, privileges and franchises necessary or desirable in the normal conduct of business. SECTION 7.5. Compliance with Laws. The Company will, and will cause each Subsidiary to, comply, in all material respects, with all federal, state, municipal, local or foreign applicable laws, ordinances, rules, regulations, municipal by-laws, codes and requirements of - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 33 governmental authorities (including, without limitation, Environmental Laws and ERISA and the rules and regulations thereunder) except (i) where compliance therewith is contested in good faith by appropriate proceedings or (ii) where non-compliance therewith could not reasonably be expected, in the aggregate, to have a material adverse effect on the business, condition (financial or otherwise), operations, performance, properties or prospects of the Company or such Subsidiary. SECTION 7.6. Inspection of Property, Books and Records. The Company will, and will cause each Subsidiary to, keep proper books of record and account in which full, true and correct entries shall be made of all dealings and transactions in relation to their respective businesses and activities; and will permit, during normal business hours, the Purchasers' Representative or an affiliate thereof, as representatives of the Purchasers, to visit and inspect any of their respective properties, upon reasonable prior notice, to examine and make abstracts from any of their respective books and records and to discuss their respective affairs, finances and accounts with their respective executive officers and independent public accountants (and by this provision the Company authorizes its independent public accountants to disclose and discuss with the Purchasers the affairs, finances and accounts of the Company and its Subsidiaries), all at such reasonable times. SECTION 7.7. Investment Company Act. The Company will not be or become an open-end investment trust, unit investment trust or face-amount certificate company that is or is required to be registered under Section 8 of the Investment Company Act of 1940, as amended. SECTION 7.8. Use of Proceeds. The proceeds from the issuance and sale of the Convertible Notes by the Company shall be used to finance the Company's expansion efforts in Kazakstan and Russia and for other working capital purposes as described in the Budget. None of the proceeds from the issuance and sale of the Convertible Notes by the Company pursuant to this Agreement will be used directly or indirectly for the purpose, whether immediate, incidental or ultimate, of purchasing or carrying any "margin stock" within the meaning of Regulation G of the Board of Governors of the Federal Reserve System. SECTION 7.9. Compliance with Terms and Conditions of Material Contracts. The Company will, and will cause each Subsidiary to, comply, in all respects, with all terms and conditions of all material contracts to which it is subject. - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 34 SECTION 7.10. Reserved Shares and Listings (a) The Company shall at all times have authorized, and reserved for the purpose of issuance, a sufficient number of shares of Common Stock to provide for the full conversion of the outstanding Convertible Notes and issuance of the Conversion Shares (based on the conversion price of the Convertible Notes in effect from time to time) and the exercise in full of the Warrants and the issuance of the Warrant Shares (based on the exercise price of the Warrants) (collectively, the "Reserved Amount"). The Company shall not reduce the Reserved Amount without the prior written consent of each Purchaser. With respect to all Securities which contain an indeterminate number of shares of Common Stock issuable in connection therewith (such as the Convertible Notes), the Company shall include in the Reserve Amount, no less than two (2) times the number of shares that is then actually issuable upon conversion or exercise of such Securities. If at any time the number of shares of Common Stock authorized and reserved for issuance is below the number of Conversion Shares issued or issuable upon conversion of the Convertible Notes and exercise of the Warrants, the Company will promptly take all corporate action necessary to authorize and reserve a sufficient number of shares, including, without limitation, either (x) calling a special meeting of shareholders to authorize additional shares, in the case of an insufficient number of authorized shares or (y) in lieu thereof, consummating the immediate repurchase of the Convertible Notes and Warrants contemplated in Section 4.3 of each Convertible Note and Sections 3.4(c) and 10.3 hereof, respectively. (b) The Company shall promptly file the Listing Applications and secure the listing of the Conversion Shares and Warrant Shares upon each national securities exchange or automated quotation system, if any, upon which shares of Common Stock are then listed (subject to official notice of issuance) and shall maintain, so long as any other shares of Common Stock shall be so listed, such listing of all Conversion Shares and Warrant Shares from time to time issuable upon conversion or exercise of the Convertible Notes and Warrants. The Company will obtain and maintain the listing and trading of its Common Stock on the Nasdaq Market, the Nasdaq SmallCap Market, the New York Stock Exchange, Inc., or the American Stock Exchange Inc., and will comply in all respects with the Company's reporting, filing and other obligations under the bylaws or rules of the National Association of Securities Dealers, Inc. (the "NASD") and such exchanges, as applicable. The Company shall promptly provide to each Purchaser copies of any notices it receives from Nasdaq regarding the continued eligibility of the Common Stock for listing on the Nasdaq Market. SECTION 7.11. Irrevocable Instructions. Upon receipt of a Notice of Conversion or Notice of Exercise, as applicable, the Company shall immediately issue irrevocable instructions to its transfer agent to issue certificates, registered in the name of each Purchaser or its nominee, for the Conversion Shares or Warrant Shares, as applicable, in such amounts as specified from time to time by each Purchaser to the Company upon proper conversion of the Convertible Notes or exercise of the Warrants. Upon conversion of any Convertible Notes in accordance with their terms and/or - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 35 exercise of any Warrants in accordance with their terms, the Company will, and will use its best lawful efforts to cause its transfer agent to, issue one or more certificates representing shares of Common Stock in such name or names and in such denominations specified by a Purchaser in a Notice of Conversion or Notice of Exercise, as the case may be. As long as the Registration Statement contemplated by the Registration Rights Agreement shall remain effective, the shares of Common Stock issuable upon conversion of any Convertible Notes or exercise of any Warrants shall be issued to any transferee of such shares from a Purchaser without any restrictive legend. The Company further warrants and agrees that no instructions other than these instructions have been or will be given to its transfer agent. Nothing in this Section 7.11 shall affect in any way a Purchaser's obligation to comply with all securities laws applicable to such Purchaser upon resale of such shares of Common Stock, including any prospectus delivery requirements. SECTION 7.12. Maintenance of Reporting Status; Supplemental Information. So long as any of the Securities are outstanding, the Company shall timely file all reports required to be filed with the Commission pursuant to the Exchange Act. The Company shall not terminate its status as an issuer required to file reports under the Exchange Act, even if the Exchange Act or the rules and regulations thereunder would permit such termination. If at anytime the Company is not subject to the requirements of Section 13 or 15(d) of the Exchange Act, the Company will promptly furnish at its expense, upon request, for the benefit of the holders from time to time of Securities, and prospective purchasers of Securities, information satisfying the information requirements of Rule 144 under the Securities Act. SECTION 7.13. Form D; Blue Sky Laws. The Company agrees to file a "Form D" with respect to the Securities as required under Regulation D of the Securities Act and to provide a copy thereof to each Purchaser promptly after such filing. The Company shall, on or before the Closing Date, take such action as the Company shall reasonably determine is necessary to qualify the Securities for sale to the Purchasers at the Closing pursuant to this Agreement under applicable securities or "blue sky" laws of the states of the United States (or to obtain an exemption from such qualification), and shall provide evidence of any such action so taken to each Purchaser on or prior to the First Closing Date. SECTION 7.14. [Intentionally Omitted] SECTION 7.15. Shareholder Restrictions. Attached hereto as Schedule 7.15 is a list of all executive officers and directors of the Company. Each of George Faris, Denis Fitzpatrick and William Tracy covenants and agrees that he will not (and the Company agrees to ensure that such persons will not) directly or indirectly, offer, sell, contract to sell, grant any option to purchase or otherwise dispose of (a "disposition") more than an aggregate of 25,000 shares of Common Stock legally or beneficially owned by them for a period of ten (10) Trading Days following each draw date under the Equity Agreement. The Company shall obtain the agreement of each executive officer and director of the Company within thirty (30) days of the date hereof to the restriction set - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 36 forth in this Section 7.15, other than George Faris, Denis Fitzpatrick and William Tracy, each of whom shall have agreed to this restriction on the date hereof by their countersignature to this Agreement. ARTICLE VIII NEGATIVE COVENANTS The Company hereby agrees that, from and after the date hereof for so long as any Convertible Notes remain outstanding and for the benefit of the Purchasers: SECTION 8.1. Limitation on Debt or Other Liabilities. Neither the Company nor any Subsidiary will create, incur, assume or suffer to exist (at any time after the Closing Date, after giving effect to the application of the proceeds of the issuance of the Securities) (i) any Debt except (x) Debt incurred in a Permitted Financing, (y) Debt incurred in connection with equipment leases to which the Company or its Subsidiaries are a party incurred in the ordinary course of business; and (z) Debt incurred in connection with trade accounts payable, imbalances and refunds arising in the ordinary course of business and (ii) any equity securities (including Derivative Securities) (other than those securities that are issuable (x) under or pursuant to stock option plans, warrants or other rights programs that exist as of the date hereof and as are described on Schedule 8.1, (y) pursuant to the Equity Agreement or (z) in connection with the acquisition (including by merger) of a business or of assets otherwise permitted under this Agreement), unless the Company complies with the mandatory prepayment terms of Section 3.4(b) hereof. SECTION 8.2. Restricted Payments. Neither the Company nor any Subsidiary will declare or make Restricted Payments in excess of $50,000 during any calendar year, except Restricted Payments from the Subsidiaries listed on Schedule 4.1 to the stockholders thereof (including the Company) pro rata in relation to the percentage ownership of such Subsidiary as disclosed thereon. SECTION 8.3. Transactions with Affiliates. The Company and each Subsidiary will not, directly or indirectly, pay any funds to or for the account of, make any investment (whether by acquisition of stock or indebtedness, by loan, advance, transfer of property, guarantee or other agreement to pay, purchase or service, directly or indirectly, any Debt, or otherwise) in, lease, sell, transfer or otherwise dispose of any assets, tangible or intangible, to, or participate in, or effect any transaction in connection with any joint enterprise or other joint arrangement with, any Affiliate, except, (1) pursuant to those agreements specifically identified on Schedule 8.3 attached hereto (with a copy of such agreements annexed to such Schedule 8.3) and (2) on terms to the Company or such Subsidiary no less favorable than terms that could be obtained by the Company or such Subsidiary from a Person that is not an Affiliate of the Company upon negotiation at arms' length, as determined - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 37 in good faith by the Board of Directors of the Company; provided that no determination of the Board of Directors shall be required with respect to any such transactions entered into in the ordinary course of business. SECTION 8.4. Merger or Consolidation. The Company will not, in a single transaction or a series of related transactions (i) consolidate with or merge with or into any other Person, or (ii) permit any other Person to consolidate with or merge into it, unless the Company shall be the survivor of such merger or consolidation and (x) immediately before and immediately after giving effect to such transaction (including any indebtedness incurred or anticipated to be incurred in connection with the transaction), no Default or Event of Default shall have occurred and be continuing; and (y) the Company has delivered to the Purchasers an Officer's Certificate stating that such consolidation, merger or transfer complies with this Agreement, and that all conditions precedent in this Agreement relating to such transaction have been satisfied. SECTION 8.5 Limitation on Asset Sales. Neither the Company nor any Subsidiary will consummate an Asset Sale of material assets of the Company or any Subsidiary without the prior written consent of the Purchasers, which consent shall not be unreasonably withheld; provided, no consent of the Purchasers will be required for the disposition or farm-out all or a portion of the Company's working interest in Med Shipping Usturt Petroleum Limited and any disposition of the NAFTA project described on Schedule 4.1. As used herein, "Asset Sale" means any sale, lease, transfer or other disposition (or series of related sales, leases, transfers or dispositions) or sales of capital stock of a Subsidiary (other than directors' qualifying shares), property or other assets (each referred to for the purposes of this definition as a "disposition"), including any disposition by means of a merger, consolidation or similar transaction other than a disposition of property or assets at fair market value in the ordinary course of business. SECTION 8.6. Restrictions on Certain Amendments. Neither the Company nor any Subsidiary will waive any provision of, amend, or suffer to be amended, any provision of such entity's existing Debt, any material contract or agreement previously or hereafter filed by the Company with the Commission as part of its SEC Reports, any Company Corporate Document or Subsidiary Corporate Document if such amendment, in the Company's reasonable judgment, would materially adversely affect the Purchasers or the holders of the Securities without the prior written consent of the Purchasers. - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 38 SECTION 8.7 Prohibition on Discounted Equity Offerings; Registration Rights. (a) In addition to and not in lieu of the covenant specified in Section 8.1 above, until such time as all of the Convertible Notes have been either redeemed or converted into Conversion Shares in full, the Company agrees that it will not issue any of its equity securities (or securities convertible into or exchangeable or exercisable for equity securities (the "Derivative Securities"), on terms that allow a holder thereof to acquire such equity securities (or Derivative Securities) at a discount to the Market Price of the Common Stock at the time of issuance or, in the case of Derivative Securities at a conversion price based on any formula (other than standard anti-dilution provisions) based on the Market Price on a date later than the date of issuance so long as such conversion is not below the Market Price on the date of issuance (each such event, a "Discounted Equity Offering"). As used herein, "discount" shall include, but not be limited to, (i) any warrant, right or other security granted or offered in connection with such issuance which, on the applicable date of grant, is offered with an exercise or conversion price, as the case may be, at less than the then current Market Price of the Common Stock or, if such security has an exercise or conversion price based on any formula (other than standard anti-dilution provisions) based on the Market Price on a date later than the date of issuance, then at a price below the Market Price on such date of exercise or conversion, as the case may be, or (ii) any commissions, fees or other allowances paid in connection with such issuances (other than customary underwriter or placement agent commissions, fees or allowances). For the purposes of determining the Market Price at which Common Stock is acquired under this Section, normal underwriting commissions and placement fees (including underwriters' warrants) shall be excluded. (b) Until such time as all of the Convertible Notes have been either redeemed or converted into Conversion Shares in full, the Company agrees it will not issue any of its equity securities (or Derivative Securities), unless any shares of Common Stock issued or issuable in connection therewith are "restricted securities". As used herein "restricted securities" shall mean securities which may not be sold by virtue of contractual restrictions imposed by the Company either pursuant to an exemption from registration under the Securities Act or pursuant to a registration statement filed by the Company with the Commission, in each case prior to twelve (12) months following the date of issuance of such securities. (c) The restrictions contained in this Section 8.7 shall not apply to the issuance by the Company of (or the agreement to issue) Common Stock or Derivative Securities in connection with (i) the acquisition (including by merger) of a business or of assets otherwise permitted under this Agreement, (ii) stock option or other compensatory plans, or (iii) issuance of Common Stock pursuant to the terms of the Equity Agreement. - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 39 SECTION 8.8. Limitation on Stock Repurchases. The Company shall not, without the written consent of the Majority Holders, redeem, repurchase or otherwise acquire (whether for cash or in exchange for property or other securities or otherwise) any shares of capital stock of the Company or any warrants, rights or options to purchase or acquire any such shares. SECTION 8.9. Pension Plans. The Company shall not, without the written consent of the Majority Holders, which shall not be unreasonably withheld, create any Plan. SECTION 8.10. Consolidated Net Worth. Beginning with the fiscal quarter ending December 31, 1997, the Company will not permit its Consolidated Net Worth at the end of any fiscal quarters to be less than $25 million. ARTICLE IX RESTRICTIVE LEGENDS SECTION 9.1. Restrictions on Transfer. From and after their respective dates of issuance, none of the Securities shall be transferable except upon the conditions specified in this Article IX, which conditions are intended to ensure compliance with the provisions of the Securities Act in respect of the Transfer of any of such Securities or any interest therein. Each Purchaser will use its best efforts to cause any proposed transferee of any Securities held by it to agree to take and hold such Securities subject to the provisions and upon the conditions specified in this Article IX. SECTION 9.2. Restrictive Legends. (a) Each certificate for Securities issued to a Purchaser or to a subsequent transferee shall (except as contemplated by Section 7.11 and Section 9.1 hereof) include a legend in substantially the following form: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING SUCH SECURITIES, AGREES FOR THE BENEFIT OF THE CORPORATION THAT SUCH SECURITIES MAY BE OFFERED, SOLD OR OTHERWISE TRANSFERRED ONLY (A) TO THE CORPORATION, (B) PURSUANT TO THE EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT, OR (C) IF REGISTERED UNDER THE SECURITIES ACT. SECTION 9.3. Notice of Proposed Transfers. Prior to any proposed Transfer of the Securities (other than a Transfer (i) registered or exempt from registration under the Securities Act, (ii) to an affiliate of a Purchaser which is an "accredited investor" within the meaning of Rule 501(a) - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 40 under the Securities Act, provided that any such transferee shall agree to be bound by the terms of this Agreement and the Registration Rights Agreement, or (iii) to be made in reliance on Rule 144 under the Securities Act), the holder thereof shall give written notice to the Company of such holder's intention to effect such Transfer, setting forth the manner and circumstances of the proposed Transfer, which shall be accompanied by (A) an opinion of counsel reasonably acceptable to the Company, confirming that such transfer does not give rise to a violation of the Securities Act, (B) representation letters in form and substance reasonably satisfactory to the Company to ensure compliance with the provisions of the Securities Act and (C) letters in form and substance reasonably satisfactory to the Company from each such transferee stating such transferee's agreement to be bound by the terms of this Agreement and the Registration Rights Agreement. Such proposed Transfer may be effected only if the Company shall have received such notice of transfer, opinion of counsel, representation letters and other letters referred to in the immediately preceding sentence, whereupon the holder of such Securities shall be entitled to Transfer such Securities in accordance with the terms of the notice delivered by the holder to the Company. ARTICLE X ADDITIONAL AGREEMENTS AMONG THE PARTIES SECTION 10.1. Liquidated Damages. (a) The Company shall, and shall use its best efforts to cause its transfer agent to, issue and deliver shares of Common Stock consistent with Section 7.11 hereof within five (5) New York Stock Exchange Trading Days of delivery of a Notice of Conversion or Notice of Exercise, as applicable (the "Deadline") to the Purchaser (or any party receiving Securities by transfer from such Purchaser) at the address of the Purchaser set forth in the Notice of Conversion or Notice of Exercise, as the case may be. The Company understands that a delay in the issuance of such certificates after the Deadline could result in economic loss to the Purchaser. (b) Without in any way limiting the Purchaser's right to pursue other remedies, including actual damages and/or equitable relief, the Company agrees that if delivery of the Conversion Shares or Warrant Shares is more than one (1) Business Day after the Deadline (other than a failure due to the circumstances described in Section 4.3 of the Convertible Notes, which failure shall be governed by such Section) the Company shall pay to each Purchaser, as liquidated damages and not as a penalty, $500 for each $100,000 of Convertible Notes then outstanding per day in cash, for each of the first ten (10) days beyond the Deadline, and $1,000 for each $100,000 of Convertible Notes then outstanding per day in cash for each day thereafter that the Company fails to deliver such Common Stock. Such cash amount shall be paid to each Purchaser by the fifth day of the month following the month in which it has accrued or, at the option of the Purchaser (by written notice to the - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 41 Company by the first day of the month following the month in which it has accrued), shall be added to the principal amount of the Convertible Note (if then outstanding) payable to such Purchaser, in which event interest shall accrue thereon in accordance with the terms of the Convertible Notes and such additional principal amount shall be convertible into Common Stock in accordance with the terms of the Convertible Notes. SECTION 10.2. Conversion Notice. The Company agrees that, in addition to any other remedies which may be available to the Purchasers, including, but not limited to, the remedies available under Section 10.1, in the event the Company fails for any reason (other than as a result of actions taken by a Purchaser in breach of this Agreement) to effect delivery to a Purchaser of certificates with or without restrictive legends as contemplated by Article IX representing the shares of Common Stock on or prior to the Deadline after conversion of any Convertible Notes or exercise of any Warrant, such Purchaser will be entitled, if prior to the delivery of such certificates, to revoke the Notice of Conversion or Notice of Exercise, as applicable, by delivering a notice to such effect to the Company whereupon the Company and the Purchaser shall each be restored to their respective positions immediately prior to delivery of such Notice of Conversion or Notice of Exercise. - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 42 SECTION 10.3 Conversion Limit. (a) Notwithstanding the conversion rights under the Convertible Notes and exercise rights under the Warrants, unless the Purchaser delivers a waiver in accordance with the immediately following sentence, in no event shall the Purchaser be entitled to convert any portion of the Convertible Notes or exercise any portion of the Warrants, in excess of that portion of the Convertible Notes or Warrants upon conversion and exercise, as applicable, of which the sum of (i) the number of shares of Common Stock beneficially owned by the Purchaser and its Affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unconverted portion of the Convertible Note and unexercised portion of the Warrants, or other Derivative Securities convertible into or exchangeable for shares of Common Stock which contain a limitation similar to that set forth in this Section 10.3), and (ii) the number of shares of Common Stock issuable upon the conversion of the portion of the Convertible Note or issuable upon exercise the portion of the Warrants with respect to which this determination is being made, would result in beneficial ownership by the Purchaser and its Affiliates of more than 9.99% of the outstanding shares of Common Stock. For purposes of this Section 10.3(a), beneficial ownership shall be determined in accordance with Rule 13d-3 of the Exchange Act and Regulations 13 D-G thereunder, except as otherwise provided in this Section 10.3(a). The foregoing limitation shall not apply and shall be of no further force or effect (i) immediately preceding and upon the occurrence of any voluntary or mandatory redemption or repayment transaction described herein or in the Convertible Notes, (ii) immediately preceding and upon any Sale Event, (iii) on the Maturity Date or (iv) following the occurrence of any Event of Default which is not cured within the greater of the applicable time period specified in either (A) such written notice of Purchaser or (B) Section 12.1 hereof. (b) Upon the occurrence of a Nasdaq Redemption Event, if the Company is obligated to repay the Convertible Notes at the Formula Price as described in Section 4.3 thereof, the Company shall, in addition thereto, redeem the Warrants contemporaneous with the repayment of the Convertible Notes at the Warrant Redemption Price. The term "Warrant Redemption Price" shall mean the greater of (x) the appraised value of the Warrants on the date they are called for redemption (determined with reference to the "Black Scholes" or similar option pricing model) and (y) the product of the excess of (i) the Market Value of the Common Stock on the date that the Warrants are redeemed over (ii) the exercise price of the Warrants. SECTION 10.4 Registration Rights. (a) The Company shall grant the Purchasers registration rights covering the Conversion Shares and Warrant Shares (the "Registrable Securities") on the terms set forth in the Registration Rights Agreement and herein. - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 43 (b) The Company shall prepare and file within 21 days of the First Closing Date a registration statement (the "Registration Statement") on Form S-3 (or such other form as is then available for registration) covering the sale of the Registrable Securities. The Company shall use its best efforts to cause the Registration Statement to be declared effective by the Commission no later than the earlier to occur of (x) 111 days following the First Closing Date, (y) 90 days following the filing of the Registration Statement or (z) ten (10) Business Days after the receipt of a "no review" or similar letter from the Commission (the "Required Effectiveness Date"). The Company shall pay all expenses of registration (other than underwriting fees and discounts, if any, in respect of Registrable Securities offered and sold under such Registration Statement by the Purchasers). (c) If the Registration Statement is (x) not declared effective by the Commission by the Required Effectiveness Date, or (y) such effectiveness is not maintained for a period of six (6) years after the Closing (including but not limited to the occurrence of any event that results in any prospectus or supplemental prospectus containing an untrue statement of a material fact or omitting a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances in which they were made, not misleading) (subject to the right of the Company to suspend the effectiveness thereof for not more than 10 consecutive days or an aggregate of 30 days during such six (6) year period) (the "Registration Maintenance Period"), the Company shall pay to the Purchasers monthly, as liquidated damages and not as a penalty, an aggregate amount of $500 for each day the Registration Statement is not declared effective by the Commission by the Required Effectiveness Date or such effectiveness is not maintained for the Required Maintenance Period (the "Default Fee") for so long as more than 10,000 shares of Common Stock are held, directly or beneficially as a result of the terms of the Convertible Notes, Warrants, Equity Agreement or the Common Stock Purchase Warrants issued pursuant to the terms of the Equity Agreement, by any of the Purchasers. (d) Any such Default Fee shall be paid in cash by the Company to the Purchasers by wire transfer in immediately available funds on the last day of each calendar week following the event requiring its payment. (e) If, for any reason (including but not limited to the issuance of all shares of Common Stock covered by the prospectus included in the Registration Statement), the Default Fee is incurred for a period of forty-five (45) days (a "Registration Default"), the holders of a majority of the Convertible Notes then outstanding may elect to cause the Company to repay the Convertible Notes in full at the Formula Price. - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 44 ARTICLE XI ADJUSTMENT OF FIXED PRICE SECTION 11.1. Reorganization. The exercise price of the Warrants. the Conversion Price and the dollar amount set forth in Section 6.2(h) (collectively, the "Fixed Prices") shall be adjusted, as applicable, as hereafter provided. SECTION 11.2. Share Reorganization. If and whenever the Company shall: (i) subdivide the outstanding shares of Common Stock into a greater number of shares; (ii) consolidate the outstanding shares of Common Stock into a smaller number of shares; (iii) issue Common Stock or securities convertible into or exchangeable for shares of Common Stock as a stock dividend to all or substantially all the holders of Common Stock; or (iv) make a distribution on the outstanding Common Stock to all or substantially all the holders of Common Stock payable in Common Stock or securities convertible into or exchangeable for Common Stock; any of such events being herein called a "Share Reorganization", then in each such case the applicable Fixed Price shall be adjusted, effective immediately after the record date at which the holders of Common Stock are determined for the purposes of the Share Reorganization or, if no record date is fixed, the effective date of the Share Reorganization, by multiplying the applicable Fixed Price in effect on such record or effective date, as the case may be, by a fraction of which: (I) the numerator shall be the number of shares of Common Stock outstanding on such record or effective date (without giving effect to the transaction); and (II) the denominator shall be the number of shares of Common Stock outstanding after giving effect to such Share Reorganization, including, in the case of a distribution of securities convertible into or exchangeable for shares of Common Stock, the number of shares of Common Stock that would have been outstanding if such securities had been converted into or exchanged for Common Stock on such record or effective date. - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 45 SECTION 11.3. Rights Offering. If and whenever the Company shall issue to all or substantially all the holders of Common Stock, rights, options or warrants under which such holders are entitled, during a period expiring not more than 45 days after the record date of such issue, to subscribe for or purchase Common Stock (or Derivative Securities), at a price per share (or, in the case of securities convertible into or exchangeable for Common Stock, at an exchange or conversion price per share at the date of issue of such securities) of less than 95% of the Market Price of the Common Stock on such record date (any such event being herein called a "Rights Offering"), then in each such case the applicable Fixed Price shall be adjusted, effective immediately after the record date at which holders of Common Stock are determined for the purposes of the Rights Offering, by multiplying the applicable Fixed Price in effect on such record date by a fraction of which: (i) the numerator shall be the sum of: (I) the number of shares of Common Stock outstanding on such record date; and (II) a number obtained by dividing: (A) either, (x) the product of the total number of shares of Common Stock so offered for subscription or purchase and the price at which such shares are so offered, or (y) the product of the maximum number of shares of Common Stock into or for which the convertible or exchangeable securities so offered for subscription or purchase may be converted or exchanged and the conversion or exchange price of such securities, or, as the case may be, by (B) the Market Price of the Common Stock on such record date; and (ii) the denominator shall be the sum of: (I) the number of shares of Common Stock outstanding on such record date; and (II) the number of shares of Common Stock so offered for subscription or purchase (or, in the case of Derivative Securities, the maximum number of shares of Common Stock for or into which the securities so offered for subscription or purchase may be converted or exchanged). - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 46 To the extent that such rights, options or warrants are not exercised prior to the expiry time thereof, the applicable Fixed Price shall be readjusted effective immediately after such expiry time to the applicable Fixed Price which would then have been in effect upon the number of shares of Common Stock (or Derivative Securities) actually delivered upon the exercise of such rights, options or warrants. SECTION 11.4. Special Distribution. If and whenever the Company shall issue or distribute to all or substantially all the holders of Common Stock: (i) shares of the Company of any class, other than Common Stock; (ii) rights, options or warrants; or (iii) any other assets (excluding cash dividends and equivalent dividends in shares paid in lieu of cash dividends in the ordinary course); and if such issuance or distribution does not constitute a Share Reorganization or a Rights Offering (any such event being herein called a "Special Distribution"), then in each such case the applicable Fixed Price shall be adjusted, effective immediately after the record date at which the holders of Common Stock are determined for purposes of the Special Distribution, by multiplying the applicable Fixed Price in effect on such record date by a fraction of which: (i) the numerator shall be the difference between: (A) the product of the number of shares of Common Stock outstanding on such record date and the Market Price of the Common Stock on such date; and (B) the fair market value, as determined by the Directors (whose determination shall be conclusive), to the holders of Common Stock of the shares, rights, options, warrants, evidences of indebtedness or other assets issued or distributed in the Special Distribution (net of any consideration paid therefor by the holders of Common Stock), and (ii) the denominator shall be the product of the number of shares of Common Stock outstanding on such record date and the Market Price of the Common Stock on such date. SECTION 11.5. Capital Reorganization. If and whenever there shall occur: (i) a reclassification or redesignation of the shares of Common Stock or any change of the shares of Common Stock into other shares, other than in a Share Reorganization; - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 47 (ii) a consolidation, merger or amalgamation of the Company with, or into another body corporate; or (iii) the transfer of all or substantially all of the assets of the Company to another body corporate; (any such event being herein called a "Capital Reorganization"), then in each such case the holder who exercises the right to convert Convertible Notes or exercise the Warrants after the effective date of such Capital Reorganization shall be entitled to receive and shall accept, upon the exercise of such right, in lieu of the number of shares of Common Stock to which such holder was theretofore entitled upon the exercise of the conversion privilege, the aggregate number of shares or other securities or property of the Company or of the body corporate resulting from such Capital Reorganization that such holder would have been entitled to receive as a result of such Capital Reorganization if, on the effective date thereof, such holders had been the holder of the number of shares of Common Stock to which such holder was theretofore entitled upon conversion; provided, however, that no such Capital Reorganization shall be consummated in effect unless all necessary steps shall have been taken so that such holders shall thereafter be entitled to receive such number of shares or other securities of the Company or of the body corporate resulting from such Capital Reorganization, subject to adjustment thereafter in accordance with provisions the same, as nearly as may be possible, as those contained above. SECTION 11.6 Purchase Price Adjustments. In case at any time and from time to time the Company shall issue any shares of Common Stock or Derivative Securities convertible or exercisable for shares of Common Stock (the number of shares so issued, or issuable upon conversion or exercise of such Derivative Securities, as applicable, being referred to as "Additional Shares of Common Stock") for consideration less than the then Market Price at the date of issuance of such shares of Common Stock or such Derivative Securities, in each such case the Conversion Price shall, concurrently with such issuance, be adjusted by multiplying the Conversion Price immediately prior to such event by a fraction: (i) the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to the issuance of such Additional Shares of Common Stock plus the number of shares of Common Stock that the aggregate consideration received by the Company for the total number of such Additional Shares of Common Stock so issued would purchase at the Market Price and (ii) the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to the issuance of Additional Shares of Common Stock plus the number of such Additional Shares of Common Stock so issued or sold. SECTION 11.7. Adjustment Rules. The following rules and procedures shall be applicable to adjustments made in this Article XI: - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 48 (a) no adjustment in the applicable Fixed Price shall be required unless such adjustment would result in a change of at least 1% in the applicable Fixed Price then in effect, provided, however, that any adjustments which, but for the provisions of this clause would otherwise have been required to be made, shall be carried forward and taken into account in any subsequent adjustment; (b) if any event occurs of the type contemplated by the adjustment provisions of this Article XI but not expressly provided for by such provisions, the Company will give notice of such event as provided herein, and the Company's board of directors will make an appropriate adjustment in the Fixed Price so that the rights of the holders of the applicable Security shall not be diminished by such event; and (c) if a dispute shall at any time arise with respect to any adjustment of the applicable Fixed Price, such dispute shall be conclusively determined by the auditors of the Company or, if they are unable or unwilling to act, by a firm of independent chartered accountants selected by the Directors and any such determination shall be binding upon the Company and Purchasers. SECTION 11.8. Certificate as to Adjustment. The Company shall from time to time promptly after the occurrence of any event which requires an adjustment in the applicable Fixed Price deliver to the Purchasers a certificate specifying the nature of the event requiring the adjustment, the amount of the adjustment necessitated thereby, the applicable Fixed Price after giving effect to such adjustment and setting forth, in reasonable detail, the method of calculation and the facts upon which such calculation is based. SECTION 11.9. Notice to Noteholders. If the Company shall fix a record date for: (a) any Share Reorganization (other than the subdivision of outstanding Common Stock into a greater number of shares or the consolidation of outstanding Common Stock into a smaller number of shares), (b) any Rights Offering., (c) any Special Distribution, (d) any Capital Reorganization (other than a reclassification or redesignation of the Common Stock into other shares), (e) Sale Event; or (f) any cash dividend, - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 49 the Company shall, not less than 10 days prior to such record date or, if no record date is fixed, prior to the effective date of such event, give to the Purchasers notice of the particulars of the proposed event or the extent that such particulars have been determined at the time of giving the notice. ARTICLE XII EVENTS OF DEFAULT SECTION 12.1. Events of Default. If one or more of the following events (each an "Event of Default") shall have occurred and be continuing: (a) failure by the Company to pay or prepay when due, all or any part of the principal on any of the Convertible Notes (whether by virtue of the agreements specified in this Agreement or the Convertible Notes); (b) failure by the Company to pay (i) within five (5) Business Days of the due date thereof any interest on any Convertible Notes or (ii) within five (5) Business Days following the delivery of notice to the Company of any fees or any other amount payable (not otherwise referred to in (a) above or this clause (b)) by the Company under this Agreement or any other Transaction Agreement or pursuant to the Equity Agreement; (c) failure by the Company to timely comply with the requirements of Section 7.11 or 10.1 hereof, which failure is not cured within five (5) Business Days of such failure; (d) failure on the part of the Company to observe or perform any covenant contained in Sections 7.10, 7.11, 7.14, 7.15 or Article VIII of this Agreement; (e) failure on the part of the Company to observe or perform any covenant or agreement contained in any Transaction Agreement (other than those covered by clauses (a), (b), (c), (d) or (e) above) for 30 days from the date of such occurrence; (f) the trading in the Common Stock shall have been suspended by the Commission or by the Nasdaq Market (except for any suspension of trading of limited duration solely to permit dissemination of material information regarding the Company and except if, at the time there is any suspension on the Nasdaq Market, the Common Stock is then listed and approved for trading on either the New York Stock Exchange, the American Stock Exchange, the Nasdaq Stock market's Small Cap Market, or the Nasdaq National Market within ten (10) Trading Days thereof); - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 50 (g) failure of the Company to file the Listing Applications within twenty (20) Business Days of the Closing Date, which failure is not cured within five (5) Business Days of such failure; (h) the Company shall have its Common Stock delisted from the Nasdaq Market for at least ten (10) consecutive Trading Days and is unable to obtain a listing on either the New York Stock Exchange, the American Stock Exchange, the Nasdaq Stock market's Small Cap Market or the Nasdaq Stock Market's National Market within such ten (10) Trading Days; (i) the Registration Statement shall not have been declared effective by the Commission by the Required Effectiveness Date, or such effectiveness shall not be maintained for the Registration Maintenance Period, in each case which results in the Company incurring the Default Fee for a period in excess of 45 days; (j) the Company or any Subsidiary has commenced a voluntary case or other proceeding seeking liquidation, winding-up, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency, moratorium or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or has consented to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or has made a general assignment for the benefit of creditors, or has failed generally to pay its debts as they become due, or has taken any corporate action to authorize any of the foregoing; (k) an involuntary case or other proceeding has been commenced against the Company or any Subsidiary seeking liquidation, winding-up, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency, moratorium or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days, or an order for relief has been entered against the Company or any Subsidiary under the federal bankruptcy laws as now or hereafter in effect; (l) default in any provision (including payment) of any agreement governing the terms of any Debt of the Company or any Subsidiary in excess of $1,000,000, which has not been cured within any applicable period of grace associated therewith; (m) judgments or orders for the payment of money which in the aggregate at any one time exceed $1,000,000 and are not covered by insurance have been rendered against the - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 51 Company or any Subsidiary by a court of competent jurisdiction and such judgments or orders shall continue unsatisfied and unstayed for a period of 60 days; or (n) any representation, warranty, certification or statement made by the Company in any Transaction Agreement or which is contained in any certificate, document or financial or other statement furnished at any time under or in connection with any Transaction Agreement shall prove to have been untrue in any material respect when made. then, and in every such occurrence, any Purchaser may, with respect to an Event of Default specified in paragraphs (a) or (b), and the Majority Holders may, with respect to any other Event of Default, by notice to the Company, declare the Convertible Notes to be, and the Convertible Notes shall thereon become immediately due and payable; provided that in the case of any of the Events of Default specified in paragraph (k) or (l) above with respect the Company or any Subsidiary, then, without any notice to the Company or any other act by any Purchaser, the entire amount of the Convertible Notes shall become immediately due and payable, provided further, if any Event of Default has occurred and is continuing, and irrespective of whether any Convertible Note has been declared immediately due and payable hereunder, any Purchaser of Convertible Notes may proceed to protect and enforce the rights of such Purchaser by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained herein or in any Convertible Note, or for an injunction against a violation of any of the terms hereof or thereof, or in aid of the exercise of any power granted hereby or thereby or by law or otherwise, and provided further, in the case of any Event of Default, the amount declared due and payable on the Convertible Notes shall be the Formula Price thereof. SECTION 12.2. Powers and Remedies Cumulative. No right or remedy herein conferred upon or reserved to the Purchasers is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. Every power and remedy given by the Convertible Notes or by law may be exercised from time to time, and as often as shall be deemed expedient, by the Purchasers. - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 52 ARTICLE XIII MISCELLANEOUS SECTION 13.1. Notices. All notices, demands and other communications to any party hereunder shall be in writing (including telecopier or similar writing) and shall be given to such party at its address set forth on the signature pages hereof, or such other address as such party may hereafter specify for the purpose to the other parties. Each such notice, demand or other communication shall be effective (i) if given by telecopy, when such telecopy is transmitted to the telecopy number specified on the signature page hereof, (ii) if given by mail, four days after such communication is deposited in the mail with first class postage prepaid, addressed as aforesaid or (iii) if given by any other means, when delivered at the address specified in or pursuant to this Section. SECTION 13.2. No Waivers; Amendments. (a) No failure or delay on the part of any party in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. (b) Any provision of this Agreement may be amended, supplemented or waived if, but only if, such amendment, supplement or waiver is in writing and is signed by the Company and the Majority Holders; provided, that without the consent of each holder of any Convertible Note affected thereby, an amendment or waiver may not (a) reduce the aggregate principal amount of Convertible Notes whose holders must consent to an amendment or waiver, (b) reduce the rate or extend the time for payment of interest on any Convertible Note, (c) reduce the principal amount of or extend the stated maturity of any Convertible Note or (d) make any Convertible Note payable in money or property other than as stated in such Convertible Note. In determining whether the holders of the requisite principal amount of Convertible Notes have concurred in any direction, consent, or waiver as provided in any Transaction Agreement, Convertible Notes which are owned by the Company or any other obligor on or guarantor of the Convertible Notes, or by any Person Controlling, Controlled by, or under common Control with any of the foregoing, shall be disregarded and deemed not to be outstanding for the purpose of any such determination; and provided further that no such amendment, supplement or waiver which affects the rights of the Purchasers and their affiliates otherwise than solely in their capacities as holders of Convertible Notes shall be effective with respect to them without their prior written consent. SECTION 13.3. Indemnification. - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 53 (a) The Company agrees to indemnify and hold harmless each Purchaser, its Affiliates, and each Person, if any, who controls such Purchaser, or any of its Affiliates, within the meaning of the Securities Act or the Exchange Act (each, a "Controlling Person"), and the respective partners, agents, employees, officers and Directors of each Purchaser, their Affiliates and any such Controlling Person (each an "Indemnified Party" and collectively, the "Indemnified Parties"), from and against any and all losses, claims, damages, liabilities and expenses (including, without limitation and as incurred, reasonable costs of investigating, preparing or defending any such claim or action, whether or not such Indemnified Party is a party thereto, provided that the Company shall not be obligated to advance such costs to any Indemnified Party other than the Purchasers unless it has received from such Indemnified Party an undertaking to repay to the Company the costs so advanced if it should be determined by final judgment of a court of competent jurisdiction that such Indemnified Party was not entitled to indemnification hereunder with respect to such costs) which may be incurred by such Indemnified Party in connection with any investigative, administrative or judicial proceeding brought or threatened that relates to or arises out of, or is in connection with any activities contemplated by any Transaction Agreement or any other services rendered in connection herewith; provided that the Company will not be responsible for any claims, liabilities losses, damages or expenses that are determined by final judgment of a court of competent jurisdiction to result from such Indemnified Party's gross negligence, willful misconduct or bad faith. (b) If any action shall be brought against an Indemnified Party with respect to which indemnity may be sought against the Company under this Agreement, such Indemnified Party shall promptly notify the Company in writing and the Company, at its option, may, assume the defense thereof, including the employment of counsel reasonably satisfactory to such Indemnified Party and payment of all reasonable fees and expenses. The failure to so notify the Company shall not affect any obligations the Company may have to such Indemnified Party under this Agreement or otherwise unless the Company is materially adversely affected by such failure. Such Indemnified Party shall have the right to employ separate counsel in such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party, unless: (i) the Company has failed to assume the defense and employ counsel or (ii) the named parties to any such action (including any impleaded parties) include such Indemnified Party and the Company, and such Indemnified Party shall have been advised by counsel that there may be one or more legal defenses available to it which are different from or additional to those available to the Company, in which case, if such Indemnified Party notifies the Company in writing that it elects to employ separate counsel at the expense of the Company, the Company shall not have the right to assume the defense of such action or proceeding on behalf of such Indemnified Party, provided, however, that the Company shall not, in connection with any one such action or proceeding or separate but substantially similar or related actions or proceedings in the same jurisdiction arising out of the same general - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 54 allegations or circumstances, be responsible hereunder for the reasonable fees and expenses of more than one such firm of separate counsel, in addition to any local counsel, which counsel shall be designated by the Purchasers. The Company shall not be liable for any settlement of any such action effected without the written consent of the Company (which shall not be unreasonably withheld) and the Company agrees to indemnify and hold harmless each Indemnified Party from and against any loss or liability by reason of settlement of any action effected with the consent of the Company. In addition, the Company will not, without the prior written consent of the Purchasers, settle or compromise or consent to the entry of any judgment in or otherwise seek to terminate any pending or threatened action, claim, suit or proceeding in respect to which indemnification or contribution may be sought hereunder (whether or not any Indemnified Party is a party thereto) unless such settlement, compromise, consent or termination includes an express unconditional release of the Purchasers and the other Indemnified Parties, satisfactory in form and substance to the Purchasers, from all liability arising out of such action, claim, suit or proceeding. (c) If for any reason the foregoing indemnity is unavailable (otherwise than pursuant to the express terms of such indemnity) to an Indemnified Party or insufficient to hold an Indemnified Party harmless, then in lieu of indemnifying such Indemnified Party, the Company shall contribute to the amount paid or payable by such Indemnified Party as a result of such claims, liabilities, losses, damages, or expenses (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and by the Purchasers on the other from the transactions contemplated by this Agreement or (ii) if the allocation provided by clause (i) is not permitted under applicable law, in such proportion as is appropriate to reflect not only the relative benefits received by the Company on the one hand and the Purchasers on the other, but also the relative fault of the Company and the Purchasers as well as any other relevant equitable considerations. Notwithstanding the provisions of this Section 13.3, the aggregate contribution of all Indemnified Parties shall not exceed the amount of interest and fees actually received by the Purchasers pursuant to this Agreement. It is hereby further agreed that the relative benefits to the Company on the one hand and the Purchasers on the other with respect to the transactions contemplated hereby shall be determined by reference to, among other things, whether any untrue or alleged untrue statement of material fact or the omission or alleged omission to state a material fact related to information supplied by the Company or by the Purchasers and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. (d) The indemnification, contribution and expense reimbursement obligations set forth in this Section 13.3 (i) shall be in addition to any liability the Company may have to any Indemnified Party at common law or otherwise, (ii) shall survive the termination of this - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 55 Agreement and the other Transaction Agreements and the payment in full of the Convertible Notes and (iii) shall remain operative and in full force and effect regardless of any investigation made by or on behalf of the Purchasers or any other Indemnified Party. SECTION 13.4. Expenses: Documentary Taxes. The Company agrees to pay (i) the greater of $25,000 or all actual reasonable out-of-pocket expenses of the Purchasers, including fees and disbursements of counsel (the "Expense Reimbursement Fee"), in connection with (x) the negotiation and preparation of the Transaction Agreements and (y) any waiver or consent hereunder or under any other Transaction Agreement or any amendment hereof or thereof and (ii) all reasonable out-of-pocket expenses of the Purchasers and each holder of Securities, including fees and disbursements of counsel, in connection with any collection, bankruptcy, insolvency and other enforcement proceedings resulting therefrom. In addition, the Company agrees to pay any and all stamp, transfer and other similar taxes, assessments or charges payable in connection with the execution and delivery of any Transaction Agreement or the issuance of the Securities to the Purchasers, excluding their assigns. SECTION 13.5. Payment. The Company agrees that, so long as a Purchaser shall own any Convertible Notes purchased by it from the Company hereunder, the Company will make payments to such Purchaser of all amounts due thereon by wire transfer by 4:00 P.M. (New York City time). SECTION 13.6. Successors and Assigns. This Agreement shall be binding upon the Company and upon the Purchasers and their respective successors and assigns; provided that the Company shall not assign or otherwise transfer its rights or obligations under this Agreement to any other Person without the prior written consent of the Majority Holders. All provisions hereunder purporting to give rights to Purchasers and their affiliates or to holders of Securities are for the express benefit of such Persons and their successors and assigns. SECTION 13.7. Brokers. Except for a cash fee of one percent (1%) of the aggregate funded amount of the Convertible Notes (and Warrants equal to one percent (1%) of the funded amount of the Convertible Notes) payable to LKB Financial, LLC, the Company represents and warrants that it has not employed any broker, finder, financial advisor or investment banker who would be entitled to any brokerage, finder's or other fee or commission payable by the Company or the Purchasers in connection with the sale of the Securities. SECTION 13.8. New York Law; Submission to Jurisdiction; Waiver of Jury Trial; Appointment of Agent. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. EACH PARTY HERETO HEREBY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK AND OF ANY NEW YORK STATE COURT SITTING IN NEW YORK CITY FOR PURPOSES OF ALL - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 56 LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH PARTY HERETO IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. SECTION 13.9. Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated unless a failure of consideration would result thereby. SECTION 13.10 Survival. All provisions contained in this Agreement (unless specifically noted to the contrary) shall survive the payment in full of the Convertible Notes and shall remain operative and in full force and effect. SECTION 13.11. Counterparts. This Agreement may be executed by telecopy signature and in any number of counterparts each of which shall be an original with the same effect as if the signatures there to and hereto were upon the same instrument. [Signature page follows] - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 57 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers, as of the date first above written. AMERICAN INTERNATIONAL PETROLEUM CORPORATION By: s/ Denis J. Fitzpatrick ----------------------------------- Name: Denis J. Fitzpatrick ----------------------------------- Title: Vice President and Chief Financial Officer ----------------------------------- Address: 444 Madison Avenue New York, New York 10022 Fax: (212) 688-6657 Attn: George Faris INFINITY INVESTORS LIMITED By: s/ James A. Loughran ----------------------------------- Name: James A. Loughran ----------------------------------- Title: Director ----------------------------------- Address: 38 Hertford Street London, England W1Y 7TG Fax: 011-33-171-355-4975 Attn: J. A. Loughran With copy to: HW Partners, L.P. 1601 Elm Street 4000 Thanksgiving Tower Dallas, Texas 75201 Telephone: (214) 720-1600 Fax: (214) 720-1667 Attn.: Stuart Chasanoff, Esq. INFINITY EMERGING OPPORTUNITIES LIMITED By: s/ James A. Loughran ----------------------------------- Name: James A. Loughran ----------------------------------- Title: Director ----------------------------------- Address: 38 Hertford Street London, England W1Y 7TG Fax: 011-44-171-355-4975 Attn: J. A. Loughran - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 58 With a copy to: HW Partners, L.P. 1601 Elm Street 4000 Thanksgiving Tower Dallas, Texas 75201 Telephone: (214) 720-1600 Fax: (214) 720-1667 Attn.: Stuart Chasanoff, Esq. SUMMIT CAPITAL LIMITED By: s/ James E. Martin ----------------------------------- Name: James E. Martin ----------------------------------- Title: President ----------------------------------- Address: 38 Hertford Street London, England W1Y 7TG Fax: 011-44-171-355-4975 Attn: J. A. Loughran With a copy to: HW Partners, L.P. 1601 Elm Street 4000 Thanksgiving Tower Dallas, Texas 75201 Telephone: (214) 720-1600 Fax: (214) 720-1667 Attn.: Stuart Chasanoff, Esq. GLACIER CAPITAL LIMITED By: s/ James E. Martin ----------------------------------- Name: James E. Martin ----------------------------------- Title: President ----------------------------------- Address: 38 Hertford Street London, England W1Y 7TG Fax: 011-44-171-355-4975 Attn: J. A. Loughran With a copy to: HW Partners, L.P. 1601 Elm Street 4000 Thanksgiving Tower Dallas, Texas 75201 Telephone: (214) 720-1600 Fax: (214) 720-1667 Attn.: Stuart Chasanoff, Esq. - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 59 ACKNOWLEDGMENT OF SECTION 7.15 The undersigned persons hereby acknowledge Section 7.15 of this Agreement and agree to be bound by the restrictions imposed by such Section in their individual capacities. s/ Denis J. Fitzpatrick ------------------------------ Denis J. Fitzpatrick s/ George N. Faris - --------------------------- George N. Faris s/ William Tracy - --------------------------- William Tracy - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 60 SCHEDULES I. Allocation of Securities Among Purchasers 4.1 List of Subsidiaries; Description of NAFTA and St. Mark's Projects 4.3 Capitalization 4.17 Leases 4.22 Liens 4.27 Budget 7.15 List of Executive Officers and Directors 8.1 Stock Option Plans 8.3 Affiliates Agreements EXHIBITS Exhibit A - Form of Convertible Note Exhibit B - Form of Warrant Exhibit C - Form of Registration Rights Agreement Exhibit D - Form of Equity Agreement Exhibit E - Form of Solvency Certificate Exhibit F - Form of Officer's Certificate Exhibit G - Form of Company Counsel's Opinion Exhibit H - Form of Amendment Agreement - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT - Page 61 SCHEDULE 2.1 SECURITIES
- ------------------------------------------------------------------------------------------ Aggregate Principal Number of Name/Address Amount of Notes Purchase Price Warrant Shares - ------------------------------------------------------------------------------------------ Glacier Capital Limited $1,500,000 1,485,000 420,000 - ------------------------------------------------------------------------------------------ Summit Capital Limited $1,500,000 1,485,000 420,000 - ------------------------------------------------------------------------------------------ Infinity Emerging Opportunities Limited $2,000,000 1,980,000 560,000 - ------------------------------------------------------------------------------------------ TOTAL $5,000,000 $4,950,000 1,400,000 - ------------------------------------------------------------------------------------------
EX-4.5 5 AGREEMENT AND FIRST AMENDMENT AGREEMENT AND FIRST AMENDMENT TO SECURITIES PURCHASE AGREEMENT AND RELATED DOCUMENTS THIS AGREEMENT AND FIRST AMENDMENT TO SECURITIES PURCHASE AGREEMENT AND RELATED DOCUMENTS (the "Amendment") dated as of April 21, 1998 among AMERICAN INTERNATIONAL PETROLEUM CORPORATION, a Nevada corporation (the "Company"), INFINITY INVESTORS LIMITED and INFINITY EMERGING OPPORTUNITIES LIMITED (collectively, the "Purchasers"). R E C I T A L S: A. The Company and the Purchasers have entered into that certain Securities Purchase Agreement dated as of October 9, 1997 (the "Initial Purchase Agreement"). B. The Company and the Purchasers have entered into that certain Securities Purchase Agreement dated as of April 21, 1998 (the "Subsequent Securities Purchase Agreement"). C. The Company and the Purchasers now desire to amend the Initial Purchase Agreement and certain of the related Transaction Agreements (as defined in the Initial Purchase Agreement) executed and delivered in connection therewith in order to (i) make certain amendments to the Transaction Agreements and (ii) confirm the continued legality, validity and binding effect of the Transaction Agreements, as amended by this Amendment. NOW, THEREFORE, in consideration of the premises herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE D. Definitions Section 0.1 Definitions. Capitalized terms used in this Amendment, to the extent not otherwise defined herein, shall have the same meanings as in the Initial Purchase Agreement. - -------------------------------------------------------------------------------- AGREEMENT AND FIRST AMENDMENT TO SECURITIES PURCHASE AGREEMENT - Page 1 (American International Petroleum Corporation) ARTICLE I. Agreements The Company and the Purchasers hereby agree as follows: Section 1 Purchasers Conversion Restrictions. (a) Section 4.1 of all Convertible Notes held by the Purchaser pursuant to the Initial Purchase Agreement (the "October Notes") shall be amended to add the following: "(c) The Company shall have the option to require that the Holder forego its option to convert an amount not to exceed two-thirds (2/3) of the aggregate outstanding principal amount of this Convertible Note during the month of April, 1998 (the "April Lockout Option"). The April Lockout Option may be exercised by written notice furnished by the Company to the Holder, specifying the principal amount of this Convertible Note subject to the April Lockout Option (the "April Lockout Amount"). In the event the Company exercises its April Lockout Option, the Company will pay the Holder in cash a fee of one-third of one percent of the April Lockout Amount at the time the April Lockout Option is exercised. (d) The Company shall have the option to require that the Holder forego its option to convert during the month of May, 1998, an amount not to exceed one-third (1/3) of the aggregate principal amount of this Convertible Note which remains outstanding as of the latter to occur of (x) May 1, 1998 or (y) the date of receipt of the May Notice (as hereafter defined) (the "May Lockout Option"). The May Lockout Option may be exercised by written notice (the "May Notice") furnished by the Company to the Holder, specifying the principal amount of the Convertible Note subject to the May Lockout Option. In the event that the Company exercises its May Lockout Option, the Company will pay the Holder in cash a fee of one percent (1%) of the May Lockout Amount at the time such May Lockout Option is exercised." (b) The Company and the Purchasers hereby acknowledge and agree that (x) the Company has exercised the April Lockout Option for $6,666,666 principal amount of the Convertible Notes and (y) the Company shall pay in cash to the Purchasers contemporaneous herewith the sum of $22,222 associated therewith (the "April Fee"). - -------------------------------------------------------------------------------- AGREEMENT AND FIRST AMENDMENT TO SECURITIES PURCHASE AGREEMENT - Page 2 (American International Petroleum Corporation) Section 2.2 Voluntary Prepayment. Effective as of the date hereof, Section 3.2 of the Initial Purchase Agreement is amended to read in its entirety as follows: "Section 3.2.Voluntary Prepayment. The Company may, at its option, repay, in whole or in part, the Convertible Notes at the Formula Price thereof following five (5) Business Days prior written notice to the Purchasers (the expiration of such five (5) Business Day period being referred to as the "Prepayment Date"); provided, however, that if such date is not a Business Day, the Prepayment Date shall be the next Business Day thereafter. Any partial prepayment shall be in an aggregate principal amount of at least Five Hundred Thousand Dollars ($500,000) or a multiple of One Hundred Thousand Dollars ($100,000) thereof." Section 2.3 Prepayment Procedures. Effective as of the date hereof, Section 3.4(a)(I) is amended to read in its entirety as follows: "(I) A prepayment pursuant to Section 3.2, the "prepayment date" specified therein;" Section 2.4 October Warrant Registration Rights. The Company acknowledges that the shares of Common Stock issuable upon exercise of the Common Stock Purchase Warrants issued to the Purchasers pursuant to the Initial Purchase Agreement (the "October Warrants") shall be registered for resale pursuant to a registration statement to be filed with the Commission on the terms set forth in the Registration Rights Agreement attached as an exhibit to the Subsequent Securities Purchase Agreement. Section 2.5 October Warrant Repricing. The October Warrants are hereby amended by changing the exercise price set forth therein from $6.25 per share to $3.00 per share. Section 2.6 Mandatory Prepayments. Effective as of the date hereof, Section 3.3(a) of the Initial Purchase Agreement is amended to read in its entirety as follows: "(a) Upon (i) the occurrence of a Change of Control of the Company, (ii) a transfer of all or substantially all of the assets of the Company to any Person in a single transaction or series of related transactions, (iii) a consolidation, merger or amalgamation of the Company with or into another Person in which the Company is not the surviving entity (other than a merger which is effected solely to change the jurisdiction of incorporation of the Company and results in a reclassification, conversion or exchange of outstanding shares of Common Stock solely into shares of Common Stock) (each of items (i), (ii) and (iii) being referred to as a "Sale Event"), or (iv) the occurrence of a Registration Default which continues uncured - -------------------------------------------------------------------------------- AGREEMENT AND FIRST AMENDMENT TO SECURITIES PURCHASE AGREEMENT - Page 3 (American International Petroleum Corporation) for a period of thirty (30) days, then, in each case, the Company shall, upon request of the Majority Holders, redeem this Convertible Note in cash for the Formula Price." Section 2.7 Conversion Limit. Effective as of the date hereof, Section 10.3(a) of the Initial Purchase Agreement is amended to read in its entirety as follows: "SECTION 10.3 Conversion Limit. (a) Notwithstanding the conversion rights under the Convertible Notes and exercise rights under the Warrants, unless the Purchaser delivers a waiver in accordance with the immediately following sentence, in no event shall the Purchaser be entitled to convert any portion of the Convertible Notes or exercise any portion of the Warrants, in excess of that portion of the Convertible Notes or Warrants upon conversion and exercise, as applicable, of which the sum of (i) the number of shares of Common Stock beneficially owned by the Purchaser and its Affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unconverted portion of the Convertible Note and unexercised portion of the Warrants, or other Derivative Securities convertible into or exchangeable for shares of Common Stock which contain a limitation similar to that set forth in this Section 10.3) and (ii) the number of shares of Common Stock issuable upon the conversion of the portion of the Convertible Note or issuable upon exercise the portion of the Warrants with respect to which this determination is being made, would result in beneficial ownership by the Purchaser and its Affiliates of more than nine and nine-tenths percent (9.9%) of the outstanding shares of Common Stock. For purposes of this Section 10.3(a), (i) beneficial ownership shall be determined in accordance with Rule 13d-3 and Regulation 13 D-G promulgated under the Exchange Act, except as otherwise provided in this Section 10.3(a) and (ii) the Holder may waive the limitations set forth therein by written notice to the Company upon not less than sixty-one (61) days prior notice (with such waiver taking effect only upon the expiration of such 61 day notice period). The foregoing limitation shall not apply and shall be of no further force or effect (i) upon the occurrence of any voluntary or mandatory redemption or repayment transaction described herein or in the Convertible Notes, (ii) any Sale Event, (iii) on the Maturity Date or (iv) following the occurrence of any Event of Default which is not cured within the greater of the applicable time period specified in either (A) such written notice of Purchaser or (B) Section 12.1 hereof." ARTICLE I. Conditions Precedent - -------------------------------------------------------------------------------- AGREEMENT AND FIRST AMENDMENT TO SECURITIES PURCHASE AGREEMENT - Page 4 (American International Petroleum Corporation) Section 0.1 Conditions Precedent. The obligation of the Purchasers to enter into this Amendment is subject to the conditions precedent that on or before the date hereof the Purchasers shall have received all of the following in form and substance acceptable to it and its counsel: (a) this Amendment dated as of the date hereof duly executed by the Company; (b) a certificate of the secretary of the Company setting forth resolutions of its board of directors with respect to the authorization, execution, delivery and performance of this Amendment and the other transactions contemplated hereby (collectively, the "Amendment Agreements"), as the case may be, the officers of the Company authorized to sign such agreements and instruments, and specimen signatures of the officers so authorized; and (c) payment of the April Fee. ARTICLE I. Ratifications: Representations and Warranties Section 0.1 Ratifications. The terms and provisions of the Transaction Agreements, as modified by this Amendment, are ratified and confirmed and shall continue in full force and effect. The Company acknowledges and agrees that each of the Transaction Agreements, as amended hereby, is and shall remain in full force and effect and is and shall continue to be the legal, valid and binding obligation of the Company, enforceable against it in accordance with their respective terms. Section 0.1.0.1 Representations and Warranties. The Company hereby represents and warrants to the Purchasers that (a) the execution, delivery and performance of each of the Amendment Agreements and all other documents executed and/or delivered in connection herewith and all transactions and documents contemplated hereby and thereby have been authorized by all requisite corporate action on the part of the Company; (b) each of the Amendment Agreements and all other documents executed and/or delivered in connection herewith constitute legal, valid and binding obligations of the Company, enforceable against the Company in accordance with its terms, subject to or limited by liquidation, bankruptcy, conservatorship, insolvency, reorganization, rearrangement, moratorium, or other similar laws relating to or affecting the rights of creditors generally and general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law); (c) there is no provision of law, in the charter or bylaws of the Company, and no provision of any existing mortgage, contract, lease, indenture or agreement binding on any of them, which would be contravened by the making or delivery of any of the - -------------------------------------------------------------------------------- AGREEMENT AND FIRST AMENDMENT TO SECURITIES PURCHASE AGREEMENT - Page 5 (American International Petroleum Corporation) Amendment Agreements or any other document executed and/or delivered in connection herewith, or by the performance or observance of any of the terms hereof or thereof; and (d) the execution, delivery and performance of the Amendment Agreements and the transactions contemplated hereby and thereby do not require any approval or consent of, or filing or registration with, any governmental or any other agency or authority, of stockholders, or of any other party or, if such approval or consent is required, the same has been obtained. ARTICLE I. Miscellaneous Section 0.1 Survival of Representations, Warranties and Covenants. All representations, warranties and covenants made in this Amendment or any other document furnished in connection with this Amendment shall survive the execution and delivery of this Amendment, and no investigation by the Purchasers or any closing shall affect the representations, warranties and covenants or the right of the Purchasers to rely upon them. Section 0.1.0.1 References to Transaction Agreements. The Transaction Agreements and any and all other agreements, documents or instruments now or hereafter executed and delivered pursuant to the terms hereof or pursuant to the terms of the Transaction Agreements, as amended hereby, are hereby amended so that any reference therein to the Transaction Agreements shall mean a reference to the Transaction Agreements as amended hereby. Section 0.1.0.2 Further Assurances. The Company agrees that at any time and from time to time, upon the written request of the Purchasers, it will execute and deliver such further documents and do such further acts and things as the Purchasers may reasonably request in order to fully effect the purposes of this Amendment and to provide for the continued perfection and priority of the security interests granted to the Purchasers in the Transaction Agreements. Section 0.1.0.3 Severability. Any provision of this Amendment held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Amendment and the effect thereof shall be confined to the provision so held to be invalid or unenforceable. - -------------------------------------------------------------------------------- AGREEMENT AND FIRST AMENDMENT TO SECURITIES PURCHASE AGREEMENT - Page 6 (American International Petroleum Corporation) Section 0.1.0.4 Applicable Law. This Amendment and all other documents executed pursuant hereto shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to any choice of law or conflict of law provision or rule that would cause the application of the laws of any jurisdiction other than the State of New York. Section 0.1.0.5 Successors and Assigns. This Amendment is binding upon and shall inure to the benefit of the Purchasers and the Company, and their respective successors and assigns, except the Company may not assign or transfer any of its rights or obligations hereunder without the prior written consent of the Purchasers. Section 0.1.0.6 Effect of Waiver. No consent or waiver, express or implied, by the Purchasers to or for any breach of or deviation from any covenant, condition or duty by the Company shall be deemed a consent or waiver to or of any other breach of the same or any other covenant, condition or duty. Section 0.1.0.7 ENTIRE AGREEMENT. THE PURCHASE AGREEMENT AS AMENDED HEREBY, THE OTHER TRANSACTION AGREEMENTS AND ALL AGREEMENTS EXECUTED IN CONNECTION WITH THIS AMENDMENT REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES WITH RESPECT TO THE SUBJECT MATTER THEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. Section 0.1.0.8 Headings. The headings, captions, and arrangements used in this Amendment are for convenience only and shall not affect the interpretation of this Amendment. [Signature page follows] - -------------------------------------------------------------------------------- AGREEMENT AND FIRST AMENDMENT TO SECURITIES PURCHASE AGREEMENT - Page 7 (American International Petroleum Corporation) EXECUTED as of the date first written above. AMERICAN INTERNATIONAL PETROLEUM CORPORATION By: s/ Denis J. Fitzpatrick ----------------------------------- Name: Denis J. Fitzpatrick ----------------------------------- Title: Vice President and Chief Financial Officer ----------------------------------- INFINITY INVESTORS LIMITED By: s/ James A. Loughran ----------------------------------- Name: James A. Loughran ----------------------------------- Title: Director ----------------------------------- INFINITY EMERGING OPPORTUNITIES LIMITED By: s/ James A. Loughran ----------------------------------- Name: James A. Loughran ----------------------------------- Title: Director ----------------------------------- - -------------------------------------------------------------------------------- AGREEMENT AND FIRST AMENDMENT TO SECURITIES PURCHASE AGREEMENT - Page 8 (American International Petroleum Corporation) EX-4.6 6 REGISTRATION RIGHTS AGREEMENT Exhibit 4.6 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of April 21, 1998, among AMERICAN INTERNATIONAL PETROLEUM CORPORATION, a Nevada corporation (the "Company"), and the other undersigned parties hereto (collectively, the "Funds"). 1. Introduction. (a) Securities Purchase Agreement. The Company and the Funds have today executed that certain Securities Purchase Agreement (the "Securities Purchase Agreement"), pursuant to which the Company has agreed, among other things, to issue an aggregate of $12,000,000 (U.S.) principal amount of 14% Convertible Notes of the Company (the "Notes") to the Funds or their successors, assigns or transferees (collectively, the "Holders"). The Notes are convertible into an indeterminable number of shares (the "Note Conversion Shares") of the Company's common stock, par value $.08 per share (the "Common Stock"), pursuant to the terms of the Notes. In addition, pursuant to the terms of the Securities Purchase Agreement and the transactions contemplated thereby, the Company has issued to the Funds Common Stock Purchase Warrants exercisable for an aggregate of 1,400,000 shares of Common Stock (the "Warrant Shares"). The number of Note Conversion Shares and Warrant Shares is subject to adjustment upon the occurrence of stock splits, recapitalizations and similar events occurring after the date hereof. (b) Equity Financing Agreement. The Company and the Funds have today executed that certain Equity Financing Agreement (the "Equity Agreement"), pursuant to which the Company has agreed, among other things, to issue shares of Common Stock for an aggregate consideration of up to $40,000,000 (the "Equity Shares") to the Funds. In addition, pursuant to the terms of the Equity Agreement and the transactions contemplated thereby, the Company has issued to the Funds (x) Common Stock Purchase Warrants exercisable for an aggregate of 1,595,978 shares of Common Stock (the "Initial Warrant Shares") and (y) Common Stock Purchase Warrants exercisable, subject to the vesting schedule therein, for a maximum aggregate of 2,000,000 shares of Common Stock (the "Additional Warrant Shares"). The number of Equity Shares, Initial Warrant Shares and Additional Warrant Shares is subject to adjustment upon the occurrence of stock splits, recapitalizations and similar events occurring after the date hereof. (c) October Financing. The Company and certain of the Funds entered into that certain Securities Purchase Agreement dated October 9, 1997, pursuant to which, among other items, the Company issued to the Funds listed therein Common Stock Purchase Warrants exercisable for an aggregate of 1,500,000 shares of Common Stock (the "October Warrant Shares"). The number - -------------------------------------------------------------------------------- REGISTRATION RIGHTS AGREEMENT - Page 1 of October Warrant Shares is subject to adjustment upon the occurrence of stock splits, recapitalizations and similar events occurring after the date hereof. (d) Definition of Securities. The Note Conversion Shares, Warrant Shares, Equity Shares, Initial Warrant Shares, Additional Warrant Shares and October Warrant Shares are collectively herein referred to as the "Securities." (e) National Market Representation. The Company represents and warrants that the Company's Common Stock is currently eligible for trading on the Nasdaq Stock Market's National Market ("National Market") under the symbol "AIPN". Certain capitalized terms used in this Agreement are defined in Section 3 hereof; references to sections shall be to sections of this Agreement. 2. Registration under Securities Act, etc. 2.1 Mandatory Registration. (a) Registration of Registrable Securities. Within twenty one (21) days of the date hereof, the Company shall prepare and file a registration statement to effect the registration under the Securities Act of all, but not less than all, of the Registrable Securities which relate (or, because of the indeterminable number thereof, which could reasonably be deemed to relate) to the Securities; all to the extent requisite to permit the public disposition of such Registrable Securities so to be registered. The Company shall use its best efforts to cause the Registration Statement which is the subject of this Section 2.1(a) (the "Registration Statement") to be declared effective by the Commission upon the earlier to occur of (i) 111 days after the date hereof, (ii) 90 days following the filing of the Registration Statement contemplated by this Section 2.1, or (iii) ten (10) business days after receipt of a "no review" or similar letter from the Commission (the "Required Effectiveness Date"). Nothing contained herein shall be deemed to limit the number of Registrable Securities to be registered by the Company hereunder. As a result, should the Registration Statement not relate to the maximum number of Registrable Securities acquired by (or potentially acquirable by) the holders thereof upon conversion of the Notes, issuance of the Equity Shares, or exercise of the Common Stock Purchase Warrants described in Section 1 above, the Company shall be required to promptly file a separate registration statement (utilizing Rule 462 promulgated under the Exchange Act, where applicable) relating to such Registrable Securities which then remain unregistered. The provisions of this Agreement shall relate to such separate registration statement as if it were an amendment to the Registration Statement. - -------------------------------------------------------------------------------- REGISTRATION RIGHTS AGREEMENT - Page 2 (b) Registration Statement Form. Registrations under this Section 2.1 shall be on Form S-3 or such other appropriate registration form of the Commission as shall permit the disposition of such Registrable Securities in accordance with the intended method or methods of disposition specified by the Funds; provided, however, such intended method of disposition shall not include an underwritten offering of the Registrable Securities. (c) Expenses. The Company will pay all Registration Expenses in connection with any registration required by this Section 2.1. (d) Effective Registration Statement. A registration requested pursuant to this Section 2.1 shall not be deemed to have been effected (i) unless a registration statement with respect thereto has become effective within the time period specified herein, provided that a registration which does not become effective after the Company has filed a registration statement with respect thereto solely by reason of the refusal to proceed of any holder of Registrable Securities (other than a refusal to proceed based upon the advice of counsel in the form of a letter signed by such counsel and provided to the Company relating to a disclosure matter unrelated to such holder) shall be deemed to have been effected by the Company unless the holders of the Registrable Securities shall have elected to pay all Registration Expenses in connection with such registration, (ii) if, after it has become effective, such registration becomes subject to any stop order, injunction or other order or extraordinary requirement of the Commission or other governmental agency or court for any reason or (iii) if, after it has become effective, such registration ceases to be effective for more than an aggregate of ninety (90) days. (e) Plan of Distribution. The Company hereby agrees that the Registration Statement shall include a plan of distribution section reasonably acceptable to the Funds and substantially in the form annexed hereto; provided, however, such plan of distribution section shall be modified by the Company so as to not provide for the disposition of the Registrable Securities on the basis of an underwritten offering. 2.2 Incidental Registration. (a) Right to Include Registrable Securities. If at any time after the date hereof but before the third anniversary of the date hereof, the Company proposes to register any of its securities under the Securities Act (other than by a registration in connection with an acquisition in a manner which would not permit registration of Registrable Securities for sale to the public, on Form S-8, or any successor form thereto, on Form S-4, or any successor form thereto and other than pursuant to Section 2.1), on an underwritten basis (either best-efforts or firm-commitment), then, the Company will each such time give prompt written notice to all Holders of its intention to do so and - -------------------------------------------------------------------------------- REGISTRATION RIGHTS AGREEMENT - Page 3 of such Holders' rights under this Section 2.2. Upon the written request of any such Holder made within twenty (20) days after the receipt of any such notice (which request shall specify the Registrable Securities intended to be disposed of by such Holder and the intended method of disposition thereof), the Company will, subject to the terms of this Agreement, effect the registration under the Securities Act of the Registrable Securities, to the extent requisite to permit the disposition (in accordance with the intended methods thereof as aforesaid) of such Registrable Securities so to be registered, by inclusion of such Registrable Securities in the registration statement which covers the securities which the Company proposes to register, provided that if, at any time after giving written notice of its intention to register any securities and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason either not to register or to delay registration of such securities, the Company may, at its election, give written notice of such determination to each Holder and, thereupon, (i) in the case of a determination not to register, shall be relieved of its obligation to register any Registrable Securities in connection with such registration (but not from its obligation to pay the Registration Expenses in connection therewith), without prejudice, however, to the rights of any holder or holders of Registrable Securities entitled to do so to request that such registration be effected as a registration under Section 2.1, and (ii) in the case of a determination to delay registering, shall be permitted to delay registering any Registrable Securities, for the same period as the delay in registering such other securities. No registration effected under this Section 2.2 shall relieve the Company of its obligation to effect any registration upon request under Section 2.1, nor shall any such registration hereunder be deemed to have been effected pursuant to Section 2.1. The Company will pay all Registration Expenses in connection with each registration of Registrable Securities requested pursuant to this Section 2.2. The right provided the Holders of the Registrable Securities pursuant to this Section shall be exercisable at their sole discretion and will in no way limit any of the Company's obligations to pay the Securities according to their terms. (b) Priority in Incidental Registrations. If the managing underwriter of the underwritten offering contemplated by this Section 2.2 shall inform the Company and holders of the Registrable Securities requesting such registration by letter of its belief that the number of securities requested to be included in such registration exceeds the number which can be sold in such offering, then the Company will include in such registration, to the extent of the number which the Company is so advised can be sold in such offering, (i) first securities proposed by the Company to be sold for its own account, and (ii) second Registrable Securities and securities of other selling security holders requested to be included in such registration pro rata on the basis of the number of shares of such securities so proposed to be sold and so requested to be included; provided, however, the holders of Registrable Securities shall have priority to all shares sought to be included by officers and directors of the Company as well as holders of ten percent (10%) or more of the Company's Common Stock. 2.3 Registration Procedures. - -------------------------------------------------------------------------------- REGISTRATION RIGHTS AGREEMENT - Page 4 If and whenever the Company is required to effect the registration of any Registrable Securities under the Securities Act as provided in Section 2.1 and, as applicable, 2.2, the Company shall, as expeditiously as possible: (i) prepare and file with the Commission the Registration Statement to effect such registration (including such audited financial statements as may be required by the Securities Act or the rules and regulations promulgated thereunder) and thereafter use its best efforts to cause such registration statement to be declared effective by the Commission, as soon as practicable, but in any event no later than the Required Effectiveness Date (with respect to a registration pursuant to Section 2.1); provided, however, that before filing such registration statement or any amendments thereto, the Company will furnish to the counsel selected by the holders of Registrable Securities which are to be included in such registration, copies of all such documents proposed to be filed; (ii) with respect to any Registration Statement pursuant to Section 2.1, prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by such registration statement (including, without limitation, any amendment to the selling stockholder table to reflect any transfers among the Funds of the Securities or Registrable Securities as a result of the provisions contained in Section 2.1(d) of the Securities Purchase Agreement or Section 2.5(b)(iii) of the Equity Agreement), until the earlier to occur of six (6) years after the date of this Agreement (subject to the right of the Company to suspend the effectiveness thereof for not more than 10 consecutive days or an aggregate of 30 days in such six (6) years period) or such time as all of the securities which are the subject of such registration statement cease to be Registrable Securities (such period, in each case, the "Registration Maintenance Period"); (iii) furnish to each seller of Registrable Securities covered by such registration statement such number of conformed copies of such registration statement and of each such amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus contained in such registration statement (including each preliminary prospectus and any summary prospectus) and any other prospectus filed under Rule 424 under the Securities Act, in conformity with the requirements of the Securities Act, and such other documents, as such seller and underwriter, if any, may reasonably request in order to facilitate the public sale or other disposition of the Registrable Securities owned by such seller; - -------------------------------------------------------------------------------- REGISTRATION RIGHTS AGREEMENT - Page 5 (iv) use its reasonable efforts to register or qualify all Registrable Securities and other securities covered by such registration statement under such other securities laws or blue sky laws as any seller thereof shall reasonably request, to keep such registrations or qualifications in effect for so long as such registration statement remains in effect, and take any other action which may be reasonably necessary to enable such seller to consummate the disposition in such jurisdictions of the securities owned by such seller, except that the Company shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction wherein it would not but for the requirements of this subdivision (iv) be obligated to be so qualified or to consent to general service of process in any such jurisdiction; (v) use its best efforts to cause all Registrable Securities covered by such registration statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the seller or sellers thereof to consummate the disposition of such Registrable Securities; (vi) furnish to each seller of Registrable Securities a signed counterpart, addressed to such seller, and the underwriters, if any, of: (A) an opinion of counsel for the Company, dated the effective date of such registration statement (or, if such registration includes an underwritten public offering, an opinion dated the date of the closing under the underwriting agreement), reasonably satisfactory in form and substance to such seller) including that the prospectus and any prospectus supplement forming a part of the Registration Statement does not contain an untrue statement of a material fact or omits a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, and (B) a "comfort" letter (or, in the case of any such Person which does not satisfy the conditions for receipt of a "comfort" letter specified in Statement on Auditing Standards No. 72, an "agreed upon procedures" letter), dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, a letter of like kind dated the date of the closing under the underwriting agreement), signed by the independent public accountants who have certified the Company's financial statements included in such registration statement, covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of the accountants' letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to the underwriters in underwritten public offerings of securities (with, in the case of an "agreed upon procedures" letter, such modifications or deletions as may be required under Statement on Auditing Standards No. 35) and, in the case of the accountants' letter, - -------------------------------------------------------------------------------- REGISTRATION RIGHTS AGREEMENT - Page 6 such other financial matters, and, in the case of the legal opinion, such other legal matters, as such seller (or the underwriters, if any) may reasonably request; (vii) notify the Sellers' Representative and its counsel promptly and confirm such advice in writing promptly after the Company has knowledge thereof: (v) when the Registration Statement, the prospectus or any prospectus supplement related thereto or post-effective amendment to the Registration Statement has been filed, and, with respect to the Registration Statement or any post-effective amendment thereto, when the same has become effective; (w) of any request by the Commission for amendments or supplements to the Registration Statement or the prospectus or for additional information; (x) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings by any Person for that purpose; and (y) of the receipt by the Company of any notification with respect to the suspension of the qualification of any Registrable Securities for sale under the securities or blue sky laws of any jurisdiction or the initiation or threat of any proceeding for such purpose; (viii) notify each seller of Registrable Securities covered by such registration statement, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, upon discovery that, or upon the happening of any event as a result of which, the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing, and at the request of any such seller promptly prepare and furnish to such seller a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; (ix) use its best efforts to obtain the withdrawal of any order suspending the effectiveness of the Registration Statement at the earliest possible moment; (x) otherwise use its best efforts to comply with all applicable rules and regulations of the Commission, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months, but not more than - -------------------------------------------------------------------------------- REGISTRATION RIGHTS AGREEMENT - Page 7 eighteen months, beginning with the first full calendar month after the effective date of such registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder; (xi) enter into such agreements and take such other actions as the Sellers' Representative shall reasonably request in writing (at the expense of the requesting or benefiting sellers) in order to expedite or facilitate the disposition of such Registrable Securities; and (xii) use its best efforts to list all Registrable Securities covered by such registration statement on any securities exchange on which any of the Registrable Securities are then listed. The Company may require each seller of Registrable Securities as to which any registration is being effected to furnish the Company such information regarding such seller and the distribution of such securities as the Company may from time to time reasonably request in writing. The Company will not file any registration statement pursuant to Section 2.1, or amendment thereto or any prospectus or any supplement thereto (including such documents incorporated by reference and proposed to be filed after the initial filing of the Registration Statement) to which the Sellers' Representative shall reasonably object, provided that the Company may file such document in a form required by law or upon the advice of its counsel. The Company represents and warrants to each holder of Registrable Securities that it has obtained all necessary waivers, consents and authorizations necessary to execute this Agreement and consummate the transactions contemplated hereby other than such waivers, consents and/or authorizations specifically contemplated by the Securities Purchase Agreement. Each Fund agrees that, upon receipt of any notice from the Company of the occurrence of any event of the kind described in subdivision (viii) of this Section 2.3, such Fund will forthwith discontinue such Fund's disposition of Registrable Securities pursuant to the Registration Statement relating to such Registrable Securities until such Fund's receipt of the copies of the supplemented or amended prospectus contemplated by subdivision (viii) of this Section 2.3 and, if so directed by the Company, will deliver to the Company (at the Company's expense) all copies, other than permanent file copies, then in such Fund's possession of the prospectus relating to such Registrable Securities current at the time of receipt of such notice. - -------------------------------------------------------------------------------- REGISTRATION RIGHTS AGREEMENT - Page 8 2.4 Underwritten Offerings. (a) Incidental Underwritten Offerings. If the Company at any time proposes to register any of its securities under the Securities Act as contemplated by Section 2.2 and such securities are to be distributed by or through one or more underwriters, the Company will, if requested by any holder of Registrable Securities as provided in Section 2.2 and subject to the provisions of Section 2.2(a), use its reasonable efforts to arrange for such underwriters to include all the Registrable Securities to be offered and sold by such holder among the securities to be distributed by such underwriters. (b) Holdback Agreements. Subject to such other reasonable requirements as may be imposed by the underwriter as a condition of inclusion of a Fund's Registrable Securities in the registration statement, each Fund agrees by acquisition of Registrable Securities, if so required by the managing underwriter, not to sell, make any short sale of, loan, grant any option for the purchase of, effect any public sale or distribution of or otherwise dispose of, except as part of such underwritten registration, any equity securities of the Company, during such reasonable period of time requested by the underwriter; provided however, such period shall not exceed the 120 day period commencing 30 days prior to the commencement of such underwritten offering and ending 90 days following the completion of such underwritten offering. (c) Participation in Underwritten Offerings. No holder of Registrable Securities may participate in any underwritten offering under Section 2.2 unless such holder of Registrable Securities (i) agrees to sell such Person's securities on the basis provided in any underwriting arrangements approved, subject to the terms and conditions hereof, by the holders of a majority of Registrable Securities to be included in such underwritten offering and (ii) completes and executes all questionnaires, indemnities, underwriting agreements and other documents (other than powers of attorney) required under the terms of such underwriting arrangements. Notwithstanding the foregoing, no underwriting agreement (or other agreement in connection with such offering) shall require any holder of Registrable Securities to make any representations or warranties to or agreements with the Company or the underwriters other than representations and warranties contained in a writing furnished by such holder expressly for use in the related registration statement or representations, warranties or agreements regarding such holder, such holder's Registrable Securities and such holder's intended method of distribution and any other representation required by law. 2.5 Preparation; Reasonable Investigation. - -------------------------------------------------------------------------------- REGISTRATION RIGHTS AGREEMENT - Page 9 In connection with the preparation and filing of each registration statement under the Securities Act pursuant to this Agreement, the Company will give the holders of Registrable Securities registered under such registration statement, and their respective counsel and accountants, the opportunity to participate in the preparation of such registration statement, each prospectus included therein or filed with the Commission, and each amendment thereof or supplement thereto, and will give each of them such access to its books and records and such opportunities to discuss the business of the Company with its officers and the independent public accountants who have certified its financial statements as shall be necessary, in the reasonable opinion of such holders' and such underwriters' respective counsel, to conduct a reasonable investigation within the meaning of the Securities Act. 2.6 Registration Default Fee. If the Registration Statement contemplated in Section 2.1 is (x) not declared effective by the Required Effectiveness Date or (y) such effectiveness is not maintained for the Registration Maintenance Period, then the Company shall pay to the Funds the Default Fee specified in Section 10.4 of the Securities Purchase Agreement. In addition, if the Registration Statement contemplated in Section 2.1 is not declared effective by the Required Effectiveness Date, then, as specified in Section 2.5 of the Equity Agreement, the Commitment Period (as defined therein) shall expire and twenty five percent (25%) of the Initial Warrant Shares shall be fully vested. In such event, the remainder of such Initial Warrant Shares, and all Additional Warrant Shares, shall not vest and shall be cancelled. - -------------------------------------------------------------------------------- REGISTRATION RIGHTS AGREEMENT - Page 10 2.7 Indemnification. (a) Indemnification by the Company. In the event of any registration of any securities of the Company under the Securities Act, the Company will, and hereby does agree to, indemnify and hold harmless the holder of any Registrable Securities covered by such registration statement, its directors and officers, each other Person who participates as an underwriter in the offering or sale of such securities and each other Person, if any, who controls such holder or any such underwriter within the meaning of the Securities Act against any losses, claims, damages or liabilities, joint or several, to which such holder or any such director or officer or underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the Securities Act, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Company will reimburse such holder and each such director, officer, underwriter and controlling person for any legal or any other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, liability, action or proceeding, provided that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment or supplement in reliance upon and in conformity with written information furnished to the Company by such holder or underwriter stating that it is for use in the preparation thereof and, provided further that the Company shall not be liable to any Person who participates as an underwriter in the offering or sale of Registrable Securities or to any other Person, if any, who controls such underwriter within the meaning of the Securities Act, in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of such Person's failure to send or give a copy of the final prospectus, as the same may be then supplemented or amended, within the time required by the Securities Act to the Person asserting the existence of an untrue statement or alleged untrue statement or omission or alleged omission at or prior to the written confirmation of the sale of Registrable Securities to such Person if such statement or omission was corrected in such final prospectus or an amendment or supplement thereto. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such holder or any such director, officer, underwriter or controlling person and shall survive the transfer of such securities by such holder. - -------------------------------------------------------------------------------- REGISTRATION RIGHTS AGREEMENT - Page 11 (b) Indemnification by the Sellers. The Company may require, as a condition to including any Registrable Securities in any registration statement filed pursuant to this Agreement, that the Company shall have received an undertaking satisfactory to it from the prospective seller of such Registrable Securities, to indemnify and hold harmless (in the same manner and to the same extent as set forth in subdivision (a) of this Section 2.7) the Company, each director of the Company, each officer of the Company and each other Person, if any, who controls the Company within the meaning of the Securities Act, with respect to any statement or alleged statement in or omission or alleged omission from such registration statement, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, if such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company through an instrument duly executed by such seller specifically stating that it is for use in the preparation of such registration statement, preliminary prospectus, final prospectus, summary prospectus, amendment or supplement. Any such indemnity shall remain in full force and effect, regardless of any investigation made by or on behalf of the Company or any such director, officer or controlling person and shall survive the transfer of such securities by such seller. (c) Notices of Claims, etc. Promptly after receipt by an indemnified party of notice of the commencement of any action or proceeding involving a claim referred to in the preceding subdivisions of this Section 2.7, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action, provided that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under the preceding subdivisions of this Section 2.7, except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. In case any such action is brought against an indemnified party, unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist in respect of such claim, the indemnifying party shall be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified, to the extent that the indemnifying party may wish, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the consent of the indemnified party, consent to entry of any judgment or enter into any settlement of any such action which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability, or a covenant not to sue, in respect to such claim or litigation. No indemnified party shall consent to entry of any judgment or enter into any settlement of any such action the defense of which has been assumed by an indemnifying party without the consent of such indemnifying party. - -------------------------------------------------------------------------------- REGISTRATION RIGHTS AGREEMENT - Page 12 (d) Other Indemnification. Indemnification similar to that specified in the preceding subdivisions of this Section 2.7 (with appropriate modifications) shall be given by the Company and each seller of Registrable Securities (but only if and to the extent required pursuant to the terms of 2.7(b)) with respect to any required registration or other qualification of securities under any Federal or state law or regulation of any governmental authority, other than the Securities Act. (e) Indemnification Payments. The indemnification required by this Section 2.7 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred. (f) Contribution. If the indemnification provided for in the preceding subdivisions of this Section 2.7 is unavailable to an indemnified party in respect of any expense, loss, claim, damage or liability referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such expense, loss, claim, damage or liability (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the holder or underwriter, as the case may be, on the other from the distribution of the Registrable Securities or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and of the holder or underwriter, as the case may be, on the other in connection with the statements or omissions which resulted in such expense, loss, damage or liability, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the holder or underwriter, as the case may be, on the other in connection with the distribution of the Registrable Securities shall be deemed to be in the same proportion as the total net proceeds received by the Company from the initial sale of the Registrable Securities by the Company to the purchasers bear to the gain, if any, realized by all selling holders participating in such offering or the underwriting discounts and commissions received by the underwriter, as the case may be. The relative fault of the Company on the one hand and of the holder or underwriter, as the case may be, on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or omission to state a material fact relates to information supplied by the Company, by the holder or by the underwriter and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission, provided that the foregoing contribution agreement shall not inure to the benefit of any indemnified party if indemnification would be unavailable to such indemnified party by reason of the provisions contained in the first sentence of subdivision (a) of this Section 2.7, and in no event shall the obligation of any indemnifying party to contribute under this subdivision (f) exceed the amount that such indemnifying party would have been obligated to pay by way of indemnification if the indemnification provided for under subdivisions (b) of this Section 2.7 had been available under the circumstances. - -------------------------------------------------------------------------------- REGISTRATION RIGHTS AGREEMENT - Page 13 The Company and the holders of Registrable Securities agree that it would not be just and equitable if contribution pursuant to this subdivision (f) were determined by pro rata allocation (even if the holders and any underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth in the preceding sentence and subdivision (c) of this Section 2.7, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subdivision (f), no holder of Registrable Securities or underwriter shall be required to contribute any amount in excess of the amount by which (i) in the case of any such holder, the net proceeds received by such holder from the sale of Registrable Securities or (ii) in the case of an underwriter, the total price at which the Registrable Securities purchased by it and distributed to the public were offered to the public exceeds, in any such case, the amount of any damages that such holder or underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 3. Definitions. As used herein, unless the context otherwise requires, the following terms have the following respective meanings: "Additional Warrant Shares": As defined in Section 1. "Agreement": As defined in Section 1. "Commission": The Securities and Exchange Commission or any other Federal agency at the time administering the Securities Act. "Common Stock": As defined in Section 1. "Company": As defined in the introductory paragraph of this Agreement. "Conversion Shares": As defined in Section 1. "Equity Shares": As defined in Section 1. - -------------------------------------------------------------------------------- REGISTRATION RIGHTS AGREEMENT - Page 14 "Exchange Act": The Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder. "Initial Warrant Shares": As defined in Section 1. "National Market": As defined in Section 1. "Notes": As defined in Section 1, such term to include any securities issued in substitution of or in addition to such Notes. "October Warrant Shares": As defined in Section 1. "Person": A corporation, association, partnership, organization, business, individual, governmental or political subdivision thereof or a governmental agency. "Registrable Securities": The Securities and any securities issued or issuable with respect to such Securities by way of stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or otherwise. Once issued such securities shall cease to be Registrable Securities when (a) a registration statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of in accordance with such registration statement, (b) they shall have been distributed to the public pursuant to Rule 144 (or any successor provision) under the Securities Act, (c) they shall have been otherwise transferred, new certificates for them not bearing a legend restricting further transfer shall have been delivered by the Company and subsequent disposition of them shall not require registration or qualification of them under the Securities Act or any similar state law then in force, (d) they shall have ceased to be outstanding, (e) on the expiration of the applicable Registration Maintenance Period or (f) any and all legends restricting transfer thereof have been removed in accordance with the provisions of Rule 144(k) (or any successor provision) under the Securities Act. "Registration Expenses": All expenses incident to the Company's performance of or compliance with this Agreement, including, without limitation, all registration, filing and NASD fees, all stock exchange and National Market listing fees, all fees and expenses of complying with securities or blue sky laws, all word processing, duplicating and printing expenses, messenger and delivery expenses, the fees and disbursements of counsel for the Company and of its independent public accountants, including the expenses of any special audits or "cold comfort" letters required by or incident to such performance and compliance, the reasonable fees and disbursements of not more than one law firm (not to exceed $25,000) retained by the holder or holders of more than 50% of the Registrable Securities, premiums and other costs of policies of insurance of the Company against liabilities arising out of the public offering of the Registrable Securities being registered and - -------------------------------------------------------------------------------- REGISTRATION RIGHTS AGREEMENT - Page 15 any fees and disbursements of underwriters customarily paid by issuers or sellers of securities, but excluding underwriting discounts and commissions and transfer taxes, if any, provided that, in any case where Registration Expenses are not to be borne by the Company, such expenses shall not include salaries of Company personnel or general overhead expenses of the Company, auditing fees, premiums or other expenses relating to liability insurance required by underwriters of the Company or other expenses for the preparation of financial statements or other data normally prepared by the Company in the ordinary course of its business or which the Company would have incurred in any event. "Registration Maintenance Period": As defined in Section 2.3. "Required Effectiveness Date": As defined in Section 2.1. "Securities Act": The Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder. "Securities Purchase Agreement": As defined in Section 1. "Sellers' Representative": Infinity Investors Limited or such Person designated by Infinity Investors Limited (or subsequent Sellers' Representative) at the time of disposition of the last of the Notes held by one or more of the Funds (or subsequent Sellers' Representative). 4. Rule 144. The Company shall timely file the reports required to be filed by it under the Securities Act and the Exchange Act (including but not limited to the reports under Sections 13 and 15(d) of the Exchange Act referred to in subparagraph (c) of Rule 144 adopted by the Commission under the Securities Act) and the rules and regulations adopted by the Commission thereunder (or, if the Company is not required to file such reports, will, upon the request of any holder of Registrable Securities, make publicly available other information) and will take such further action as any holder of Registrable Securities may reasonably request, all to the extent required from time to time to enable such holder to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by (a) Rule 144 under the Securities Act, as such Rule may be amended from time to time, or (b) any similar rule or regulation hereafter adopted by the Commission. Upon the request of any holder of Registrable Securities, the Company will deliver to such holder a written statement as to whether it has complied with the requirements of this Section 4. 5. Amendments and Waivers. - -------------------------------------------------------------------------------- REGISTRATION RIGHTS AGREEMENT - Page 16 This Agreement may be amended and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Company shall have obtained the written consent to such amendment, action or omission to act, of the holder or holders of the sum of the 51% or more of the shares of (i) Registrable Securities issued at such time, plus (ii) Registrable Securities issuable upon exercise or conversion of the Securities then constituting derivative securities (if such Securities were not fully exchanged or converted in full as of the date such consent is sought). Each holder of any Registrable Securities at the time or thereafter outstanding shall be bound by any consent authorized by this Section 5, whether or not such Registrable Securities shall have been marked to indicate such consent. 6. Nominees for Beneficial Owners. In the event that any Registrable Securities are held by a nominee for the beneficial owner thereof, the beneficial owner thereof may, at its election, be treated as the holder of such Registrable Securities for purposes of any request or other action by any holder or holders of Registrable Securities pursuant to this Agreement or any determination of any number or percentage of shares of Registrable Securities held by any holder or holders of Registrable Securities contemplated by this Agreement. If the beneficial owner of any Registrable Securities so elects, the Company may require assurances reasonably satisfactory to it of such owner's beneficial ownership of such Registrable Securities. 7. Notices. Except as otherwise provided in this Agreement, all notices, requests and other communications to any Person provided for hereunder shall be in writing and shall be given to such Person (a) in the case of a party hereto other than the Company, addressed to such party in the manner set forth in the Securities Purchase Agreement or at such other address as such party shall have furnished to the Company in writing, or (b) in the case of any other holder of Registrable Securities, at the address that such holder shall have furnished to the Company in writing, or, until any such other holder so furnishes to the Company an address, then to and at the address of the last holder of such Registrable Securities who has furnished an address to the Company, or (c) in the case of the Company, at the address set forth on the signature page hereto, to the attention of its President, or at such other address, or to the attention of such other officer, as the Company shall have furnished to each holder of Registrable Securities at the time outstanding. Each such notice, request or other communication shall be effective (i) if given by mail, 72 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (ii) if given by any other means (including, without limitation, by fax or air courier), when delivered at the address specified above, provided that any such notice, request or communication shall not be effective until received. - -------------------------------------------------------------------------------- REGISTRATION RIGHTS AGREEMENT - Page 17 8. Assignment. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto. In addition, and whether or not any express assignment shall have been made, the provisions of this Agreement which are for the benefit of the parties hereto other than the Company shall also be for the benefit of and enforceable by any subsequent holder of any Registrable Securities. Each of the Holders of the Registrable Securities agrees, by accepting any portion of the Registrable Securities after the date hereof, to the provisions of this Agreement including, without limitation, appointment of the Sellers' Representative to act on behalf of such Holder pursuant to the terms hereof which such actions shall be made in the good faith discretion of the Sellers' Representative and be binding on all persons for all purposes. 9. Descriptive Headings. The descriptive headings of the several sections and paragraphs of this Agreement are inserted for reference only and shall not limit or otherwise affect the meaning hereof. 10. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAWS OF THE STATE OF NEW YORK WITHOUT REFERENCE TO THE PRINCIPLES OF CONFLICTS OF LAWS. 11. Counterparts. This Agreement may be executed by facsimile and may be signed simultaneously in any number of counterparts, each of which shall be deemed an original, but all such counterparts shall together constitute one and the same instrument. 12. Entire Agreement. This Agreement embodies the entire agreement and understanding between the Company and each other party hereto relating to the subject matter hereof and supersedes all prior agreements and understandings relating to such subject matter. 13. Severability. If any provision of this Agreement, or the application of such provisions to any Person or circumstance, shall be held invalid, the remainder of this Agreement, or the application - -------------------------------------------------------------------------------- REGISTRATION RIGHTS AGREEMENT - Page 18 of such provision to Persons or circumstances other than those to which it is held invalid, shall not be affected thereby. [Signature Page Follows] - -------------------------------------------------------------------------------- REGISTRATION RIGHTS AGREEMENT - Page 19 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their respective officers thereunto duly authorized as of the date first above written. AMERICAN INTERNATIONAL PETROLEUM CORPORATION By: s/ Denis J. Fitzpatrick ----------------------------------- Name: Denis J. Fitzpatrick ----------------------------------- Title: Vice President and Chief Financial Officer ----------------------------------- Address: 444 Madison Avenue New York, New York 10022 Telephone: (212) 688-3333 ------------------------------- Fax: (212)688-6657 Attn: George Faris INFINITY INVESTORS LIMITED By: s/ James A. Loughran ----------------------------------- Name: James A. Loughran ----------------------------------- Title: Director ----------------------------------- Address: 38 Hertford Street London, England WIY 7TG Telephone: 011-44-171-355-4975 Attn: J. A. Loughran With copy to: HW Partners, L.P. 1601 Elm Street 4000 Thanksgiving Tower Dallas, Texas 75201 Telephone: (214) 720-1600 Fax: (214) 720-1662 Attn.: Stuart Chasanoff, Esq. - -------------------------------------------------------------------------------- REGISTRATION RIGHTS AGREEMENT - Page 20 INFINITY EMERGING OPPORTUNITIES LIMITED By: s/ James A. Loughran ----------------------------------- Name: James A. Loughran ----------------------------------- Title: Director ----------------------------------- Address: 38 Hertford Street London, England W1Y 7TG Telephone: 011-44-171-355-4975 Attn: J. A. Loughran With copy to: HW Partners, L.P. 1601 Elm Street 4000 Thanksgiving Tower Dallas, Texas 75201 Telephone: (214) 720-1600 Fax: (214) 720-1662 Attn.: Stuart Chasanoff, Esq. GLACIER CAPITAL LIMITED By: s/ James E. Martin ----------------------------------- Name: James E. Martin ----------------------------------- Title: President ----------------------------------- Address: 38 Hertford Street London, England W1Y 7TG Telephone: 011-44-171-355-4975 Attn: J. A. Loughran With copy to: HW Partners, L.P. 1601 Elm Street 4000 Thanksgiving Tower Dallas, Texas 75201 Telephone: (214) 720-1600 Fax: (214) 720-1662 Attn.: Stuart Chasanoff, Esq. - -------------------------------------------------------------------------------- REGISTRATION RIGHTS AGREEMENT - Page 21 SUMMIT CAPITAL LIMITED By: s/ James E. Martin ----------------------------------- Name: James E. Martin ----------------------------------- Title: President ----------------------------------- Address: 38 Hertford Street London, England W1Y 7TG Telephone: 011-44-171-355-4975 Attn: J. A. Loughran With copy to: HW Partners, L.P. 1601 Elm Street 4000 Thanksgiving Tower Dallas, Texas 75201 Telephone: (214) 720-1600 Fax: (214) 720-1662 Attn.: Stuart Chasanoff, Esq. - -------------------------------------------------------------------------------- REGISTRATION RIGHTS AGREEMENT - Page 22 EX-5.1 7 OPINION OF SNOW BECKER KRAUSS P.C. Exhibit 5.1 SNOW BECKER KRAUSS P.C. 605 Third Avenue New York, NY 10158 Phone: (212) 687-3860 Fax: (212) 949-7052 May 11, 1998 Board of Directors American International Petroleum Corporation 444 Madison Avenue New York, New York 10022 Ladies and Gentlemen: You have requested our opinion, as counsel for American International Petroleum Corporation, a Nevada corporation (the "Company"), in connection with the registration statement (the "Registration Statement") on Form S-3, under the Securities Act of 1933 (the "Act"), filed by the Company with the Securities and Exchange Commission. The Registration Statement relates to an offering of the shares (the "Shares") of common stock, par value $0.08 ("Common Stock"), of the Company by the selling securityholders named in the Registration Statement. The Shares are issuable (i) upon conversion of the Company's 14% Convertible Notes due April 21, 2002 (the "Convertible Notes"), and (ii) upon exercise of various warrants (collectively, the "Warrants") to purchase an aggregate of 3,018,500 shares of Common Stock issued to the Selling Securityholders, as described in the Registration Statement. We have examined such records and documents and made such examinations of law as we have deemed relevant in connection with this opinion. Based upon the foregoing, it is our opinion that: 1. The Company has been duly organized is validly existing and in good standing under the laws of the State of Nevada. 2. The Shares have been duly authorized, and when issued upon conversion of the Convertible Notes in accordance with the terms thereof, or upon payment of this exercise price specified in the Warrants as the case may be, will be legally issued, fully paid and nonassessable. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to our firm under the caption Legal Matters in the Registration Statement. In so doing, we do not admit that we are in the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Securities and Exchange Commission promulgated thereunder. Very truly yours, s/ SNOW BECKER KRAUSS P.C. SNOW BECKER KRAUSS P.C. EX-23.2 8 CONSENT OF PRICE WATERHOUSE LLP Exhibit 23.2 Consent of Independent Accountants We hereby consent to the incorporation by reference in the Prospectus constituting part of this Registration Statement on Form S-3 of our report dated April 9, 1996 appearing on page F-2 of American International Petroleum Corporation's Annual Report on Form 10-K for the year ended December 31, 1997. We also consent to the reference to us under the heading "Experts" in such Prospectus. PRICE WATERHOUSE LLP Houston, Texas May 8, 1998 EX-23.3 9 CONSENT OF HEIN & ASSOCIATES LLP INDEPENDENT AUDITOR'S CONSENT The Board of Directors American International Petroleum Corporation: We hereby consent to the incorporation by reference in the Registration Statement on Form S-3, and the accompanying Prospectus, of our report dated April 9, 1997, appearing on page F-1 of American International Petroleum Corporation's Annual Report on Form 10-K for the year ended December 31, 1997. We also consent to the reference to us under the heading "Experts" in the Prospectus filed herewith. /s/ Hein + Associates LLP HEIN + ASSOCIATES LLP Houston, Texas May 11, 1998 EX-23.4 10 CONSENT OF BERNARDO VILLEGAS PEREZ EXHIBIT 23.4 BERNARDO VILLEGAS PEREZ Contador Publico Martricula 4962A CONSENT OF INDEPENDENT AUDITOR I hereby consent to the incorporation by reference in the prospectus constituting part of this Registration Statement on Form S-3 of my report dated March 15, 1996 appearing on pages F-2 and F-3 of American International Petroleum Corporation's Annual Report on Form 10-K for the year ended December 31, 1995. I also consent to the reference to me under the heading "Expert" in such Prospectus. /s/ BERNARDO VILLEGAS PEREZ BERNARDO VILLEGAS PEREZ Auditor Professional Card No., 4962-A -----END PRIVACY-ENHANCED MESSAGE-----