-----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, Kt4CHvyv+VztYxzXAaodeBgOsyWQcivru41FTe7TOgORy765k/Ih6RUZvo1EJ2OF 7rV+hrijfmC9MreDac5hyg== 0000891554-00-001050.txt : 20000417 0000891554-00-001050.hdr.sgml : 20000417 ACCESSION NUMBER: 0000891554-00-001050 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000414 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN INTERNATIONAL PETROLEUM CORP /NV/ CENTRAL INDEX KEY: 0000799119 STANDARD INDUSTRIAL CLASSIFICATION: PETROLEUM REFINING [2911] IRS NUMBER: 133130236 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 033-17543 FILM NUMBER: 602508 BUSINESS ADDRESS: STREET 1: 440 MADISON AVE STE 3203 CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2129563333 MAIL ADDRESS: STREET 1: 440 MADISON AVE STE 3203 CITY: NEW YORK STATE: NY ZIP: 10022 10-K 1 ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 Commission file number 0-14905 AMERICAN INTERNATIONAL PETROLEUM CORPORATION (Exact name of registrant as specified in its charter) Nevada 13-3130236 (State of other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 2950 North Loop West, Houston, Texas 77092 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (713) 802-0087 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.08 per share (Title of Each Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in the definitive proxy statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ]. The aggregate market value of the voting stock of the Registrant held by non-affiliates as of March 21, 2000 was approximately $102 million (assuming solely for purposes of this calculation that all directors and officers of the Registrant are "affiliates"). The number of shares of Common Stock of the Registrant outstanding as of March 21, 2000 was 106,871,202. PART I Item 1. BUSINESS General American International Petroleum Corporation ("AIPC" or the "Company"), was organized on April 1, 1929 under the laws of the State of Nevada under the name Pioneer Mines Operating Company. The Company's name was changed to its current name in 1982. The Company implemented the production of asphalt, vacuum gas oil and other products at its subsidiary's Lake Charles, Louisiana refinery in the first quarter of 1998 utilizing low-cost, low-gravity, high-sulpher crudes from Mexico and Venezuela and is engaged in oil and gas exploration and development in western Kazakhstan. The Company is also seeking other oil and gas projects in selected other countries. The Company's wholly-owned subsidiaries, American International Refinery, Inc. ("AIRI") and St. Mark's Refinery Inc. ("St. Marks) own refineries in Lake Charles, Louisiana (the "Refinery") and in St. Marks, Florida, respectively. A certain portion of the Refinery, a 30,000 barrel-per-day crude distillation tower (the "Crude Unit" or "ADU") was leased by AIRI to Gold Line Refining Ltd. ("Gold Line"), an independent refiner, from 1990 to March 20, 1997 under a lease agreement (the "Lease Agreement") between AIRI and Gold Line. The Company has recently agreed to lease its Crude Unit to another party. See "Domestic Operations - Refinery - Recent Developments" below. The Company is now blending asphalt products at the Refinery. The Company has utilized St. Marks since its purchase in 1998, only as a distribution center for its asphalt products. The refinery at St. Marks has been idle and the Company has no current plans to implement refinery operations there. See "Domestic Operations - Refinery" below. The Company's wholly-owned subsidiary, American International Petroleum Kazakhstan ("AIPK") is the owner of a 100% working interest in a 264,000 acre gas concession in Kazakhstan called Shagryly- Shomyshty (the "Shagryly" or "License 1551") and a 70% working interest in a 20,000 square kilometer exploration block in western Kazakhstan ("License 953"). See "International Exploration and Development" below. In February 1998, the Company organized another wholly-owned subsidiary, American Eurasia Petroleum Corporation ("AEPC"), to conduct business in Russia and in Central Asia. In July 1998, the Company organized American International Marine, Inc. ("AIM") to conduct barging and transportation of its own and others' refined products. In August 1998, it organized American International Petroleum Corporation Holding Inc. ("AIPC Holding") to hold 25% of the outstanding shares of Zao Nafta, a Russian closed-stock company, which it received as a default payment in 1999. See "International Exploration and Development - Zao Nafta Acquisition" below. AIM and AIPC Holding are also wholly-owned subsidiaries of the Company. The term the "Company" includes AIPC, AIRI, AIPK, AEPC, AIM, AIPC Holding, and St. Marks unless the context otherwise requires. Some of the information in this document, and in those incorporated by reference herein, may contain forward-looking statements. Such statements can be identified by the use of forward-looking terminology such as "may", "will", "expect", "believe", "intend", "anticipate", "estimate", "continue", or similar words. These statements discuss future expectations, estimate the happening of future events or the Company's financial condition or state other "forward-looking" information. When considering such forward-looking statements, one should keep in mind the risk factors and other cautionary statements in this document and in those incorporated by reference herein, including the Company's continued losses, occasional working capital deficits, the ability to enter into various contracts to operate the Refinery and to sell products therefrom, completion of any necessary financing requirements, the impact of competitive pricing , and other risks detailed from time to time in the Company's SEC reports. Such risk factors could cause the Company's actual results to differ materially from those contained in any forward-looking statement. Domestic Operations Refinery In July 1988, AIRI acquired the Refinery, which is located on 30 acres of land bordering the Calcasieu River near Lake Charles, Louisiana. The Company also owns 25 acres of vacant waterfront property adjacent to the Refinery and another 45 acres of vacant land across the highway from the Refinery. The Calcasieu River connects with the Port of Lake Charles, the Lake Charles Ship Channel and the Intercoastal Waterway. Most of the Refinery's feedstock and refined products are handled through the Refinery's barge dock at the river. 2 The Company recommissioned and tested the Refinery during operations between February and July 1989. During that time it processed up to 24,000 barrels of oil per day. Numerous modifications were designed and implemented to bring the Refinery into compliance with new and existing environmental regulations and to facilitate production of higher value products. Completion of most environmental compliance projects and a military specification jet fuel ("JP-4") upgrade project at the Refinery occurred in 1990. The main unit of the Refinery is the Crude Unit, which is capable of producing light naphtha and the following side cuts: heavy naphtha, kerosene (for jet fuel), #2 diesel, atmospheric gas oil and reduced crude oil sold as special #5 fuel oil. The Crude Unit is also suitable for adaptation to process sour crude oil. In 1989, the Company purchased a 16,500 barrel per day vacuum distillation unit (the "VDU") which was dismantled and moved to the Refinery. Construction of the VDU on the Refinery site was completed in 1993 and partially utilized by Gold Line. For various economic reasons, the VDU was idle until mid-1998 when the Company completed the expansion of, and certain enhancements to, the Crude Unit, VDU, and other components of the Refinery to enable the Company to produce conventional and polymerized asphalt, vacuum gas oil ("VGO"), diesel, and other products. Total petroleum storage capacity at the Refinery is 750,000 barrels. Storage tanks on the Refinery's land include 275,000 barrels of crude storage, 395,000 barrels of storage for finished product sales and 80,000 barrels of product rundown storage. The Crude Unit was leased by AIRI to Gold Line from 1990 to March 20, 1997 under the Lease Agreement. The Lease Agreement was terminated because Gold Line was in default under the terms thereof. With the termination of the Lease Agreement in March 1997, the Company has staffed the Refinery with its own employees and all operations are now under the direct control of its management. St. Marks Refinery In November 1998, the Company purchased 100% of St. Marks Refinery Inc., a 20,000 barrels per day refinery and product storage terminal located on the St. Marks River near Tallahassee, Florida for 1.5 million shares of the Company's common stock. Because of the high price of crude oil feedstock during 1999, St. Marks has remained idle during most of 1999. American International Marine, Inc. Also during 1998, the Company formed a new subsidiary, American International Marine, Inc. ("AIM"), which acquired a 1,750 ton , 27,000 barrel capacity asphalt barge (the "Barge") primarily to shuttle asphalt between the Refinery and the asphalt terminal at St. Marks and to transport refined products for third parties. The Company has utilized the Barge during 1999 to transport its own feedstocks and products. Recent Developments In February 2000, the Company entered into agreements with Maretech Corporation to process condensate crude oil through the ADU using AIRI personnel to operate the daily processing functions. Maretech plans to process condensate crude oil that produces naphtha and gas oil to be marketed as feedstocks and diesel and JP8 to be marketed as finished products. (See "Management's Discussion and Analysis - Liquidity and Capital Resources"). International Exploration and Production Generally, oil and gas exploration is extremely speculative, involving a high degree of risk. Even if reserves are found as a result of drilling, profitable production from reserves cannot be assured. Kazakhstan Agreements License 953 In May 1997, the Company, through its wholly-owned subsidiary, American International Petroleum Kazakhstan ("AIPK"), entered into an agreement (the "Kazakhstan Agreement")with MED Shipping and Trading S.A. ("MED"), a Liberian corporation with offices in Frankfurt, 3 Germany, to buy from MED, 70% of the stock of MED Shipping Usturt Petroleum Ltd. ("MSUP"), a Kazakhstan corporation which owns 100% of the working interest in a Kazakhstan oil and gas concession (the "Concession" or "License Area"). The Concession is located approximately 125 kilometers from Chevron's multi-billion-barrel Tengiz Oil field near the Caspian Sea in the North Usturt Basin. The definitive agreement under which MSUP is to explore and evaluate hydrocarbon reserves in the License Area provides for the payment of a commercial bonus of 0.5% of reserve value, a subscription bonus of $975,000, and grants MSUP the exclusive right to a production license upon commercial discovery. The term of the license is five years and may be extended for an additional 4 years. The five-year minimum work program required by the license calls for MSUP to acquire and process 3,000 kilometers of new seismic data, reprocess 500 kilometers of existing seismic data, and a minimum of 6,000 linear meters of exploratory drilling. Initial production up to 650,000 barrels is exempt from royalty, which otherwise ranges between 6% and 26%, to be negotiated in conjunction with a production agreement with the government. Income tax has been set at 30% and social programs payments at $200,000 annually during exploration. The social program contribution required in the Kazakhstan Agreement is not specific as to any one program. This contribution concept is common to most contracts and the amount is determined at the time of negotiating the respective contracts on a case by case basis. The Company has completed acquisition of 13,500 kilometers of new 2D seismic data and reprocessed about 1,200 kilometers of vintage 2D seismic data over the License Area. The Company drilled one of the gas bearing Eocene structures in December 1998 and a second Eocene prospect in October 1999. Additional flow testing on the 1998 well was conducted in 1999, but only non-commercial rates of gas were measured. The 1999 well was evaluated using electric logging techniques and determined non-commercial. At the time the concession was acquired, a preliminary evaluation indicated potential recoverable reserves from 12 structures of possible oil bearing Jurassic Age sandstones and 8 structures of gas bearing Eocene Age sandstones. As a result of further study of data acquired over the course of the last two years, and the drilling results stated above, the Company's prior assessment of reserve potential of the evaluated structures has been significantly reduced. Because License 953 is known to contain other geological structures with unevaluated geological potential, the Company fully intends to have the required minimum work program completed in accordance with its contract. However, the Company is evaluating various available options with regard to completing the License obligations under reduced-exposure arrangements. License 1551 In February 1999, the Company was officially notified by the Kazakhstan government's State Investment Committee that it had won the tender for the Shagyrly-Shomyshty gas field, ("Shagyrlyyl"), in western Kazakhstan. Fifty-eight of the sixty-nine gas wells drilled to delineate the 200,000 acre gas field were tested to have commercial gas by the regional development authorities. The Company entered into a license agreement in 1999 with the Kazakhstan government for 100% ownership of the Shagyrly, a 30-year agreement with effect from August 31, 1999. The Company's drilling and production development plan involves developing and maintaining daily gas production at 200 MMSCFD (5.7 MCMPD) from the "fairway," the most productive part of the field. Facility start-up and natural gas sales are anticipated to commence late in 2001, provided adequate financing can be obtained. The plan development provides for the initial drilling of approximately 100 horizontal wells, each with a horizontal extension of 1500 feet. Analysis of wells tested to date indicate that individual horizontally drilled wells could achieve an average production rate exceeding 6 MMSCFD. The ultimate field development proposal involves use of modular, movable production process/compression centers. Such facilities are planned to be in service in late 2001 and 50 MMCFD modules would be relocated upon depletion of the reserves at their initial location which are designed to filter, dehydrate, compress, and deliver a total of approximately 200 MMSCFD. Ryder Scott Company, L.P., a Houston-based petroleum consulting firm, reviewed the Company's horizontal drilling and reservoir development studies demonstrating significant recoverable gas reserves at Shagyrly and issued an opinion letter stating that they are in general agreement with the estimates and that the reserves were prepared in accordance with standard industry procedures. The Company's studies included horizontal well recovery analyses for drainage of reservoir areas in the 640-1280 acre range, revised operational plans for horizontal drilling, and detailed analyses of prior gas well completions in the License 1551 area. A pilot development drilling program is tentatively scheduled for the summer of 2000 to verify the horizontal drilling application. . These reserves would have been classified as proven undeveloped ("PUD") had a gas sales contract been in place. A gas sales agreement is currently being negotiated with Gasprom and is expected to be consummated during the second quarter of 2000. Upon consummation, the Company expects to have proved gas reserves in the "fairway" and add more PUD's upon the successful implementation, if any, of the horizontal pilot program. The Company's strategy includes developing shallow gas reserves in Shagyrly and diversified pursuit of field development opportunities in other selected countries and basins where perceived geological and political risks areacceptable. 4 Zao Nafta Acquisition On March 18, 1998, the Company signed an agreement (the "Option") with Zao Nafta ("ZN") a Russian closed stock company in which the Company received a 90-day option to acquire a 75% working interest in a joint venture for the development of 17 oil and gas licenses (the "Licenses") in the Samara and Saratov regions of European Russia, covering approximately 877,000 acres (a "closed stock company" is a company which has its equity ownership measured in registered shares. The shares are not publicly traded or readily available for sale to another party without first offering other shareholders proportional participation in the purchase of the shares to be sold). During its due diligence process, the Company was unable to reach an agreement with the owner of ZN over who would control and manage development of the acquired fields. As a result, the Company informed the owner that it would not pursue the purchase and requested a refund of $300,000 deposit called for in the Option. When the refund was not paid by the owner, the Company exercised its right under the Option to demand 25% of the outstanding shares of ZN (the "ZN Shares") from the owner. The ZN Shares may be sold or traded in private commercial transactions, as they are not listed or traded on any organized exchange. The shares are in the process of being delivered to the Company's counsel in Russia and will be held by AIPC Holding until a decision is made on how or if to proceed. The Company continues to consider various alternatives including the sale or barter of the ZN Shares to acquire petroleum interests in the Samara region of Russia. Recent Developments In January 2000, the Company reached an agreement with Mercantile International Petroleum, Inc. ("MIP") the purchaser of its South American oil and gas properties in February 1997, whereby MIP agreed to repay approximately $2.9 million in indebtedness to the Company by means of a secured 11.5% convertible debenture, payable to the Company in monthly installments (See "Management's Discussion and Analysis - Liquidity and Capital Resources"). Competition The Company has been approached by severalcompanies during 1999 to process crude oil at the Refinery. However, the lack of a favorable "crack spread" during most of the year caused hesitancy on the part of the customers. Later in 1999, the industry experienced "backwardation" causing great risk for processors. Backwardation is a term used when the current price is very high and the price for subsequent months are lower. Most recently there has been a drawback on crude pricing coupled with a reasonable crack spread therefore, AIRI is seeing renewed interest in processing through the VDU. During 1999, most State Departments of Transportation converted to Strategic Highway Research Program (SHRP) performance graded (PG) asphalt specifications. Therefore, the number of asphalt competitors continues to decline. In the past year, several major oil companies have announced mergers and formed joint operation spin-off companies in a move to consolidate resources, reduce redundant operation, and increase efficiency. This has resulted in a supply/demand shift that is favorable to the Company's business. As a consequence of these consolidations, the number of major oil company asphalt refiner/suppliers has been reduced by almost 60% over the past two years. The geographic location of the Refinery in Lake Charles, Louisiana gives the Company a distinct freight advantage over other asphalt suppliers in the area. Most of the Company's competition in its planned asphalt manufacturing business will come from those refiners who do not have downstream processing options such as residual coking capacity. The major competitor in the local truck rack market is a blending plant operation over 75 miles away. The average distance from the Company's refinery to the nearest competing truck rack asphalt producing refinery is over 150 miles away. The Company's major competitor for barge sales is located over 400 miles farther away from the Company's major market than the Refinery. This distance equates to more than a $1.30 per barrel freight advantage to the Company into the same markets. Exxon announced during 1999 that the strategic decision had been made to withdraw from the Texas asphalt market based in Baytown (Houston), Texas. It has built a coker unit to convert asphalt to gasoline and heating oil. Exxon has been one of AIRI's major competitors in eastern Texas over the past several years. A major consolidation involving Marathon Petroleum and Ashland Oil during 1999 has created the largest downstream asphalt marketing company in the United States. Marathon Ashland Petroleum (MAP) recently upgraded their Garyville (New Orleans), Louisiana asphalt rack at great expense and has subsequently become very competitive in eastern Louisiana and western Mississippi. Another consolidation involving American Petrofina (Fina) Ultramar Diamond Shamrock (UDS) and Total has produced a combined UDS and Total asphalt business while Fina has remained independent to date. This consolidation may have long-term implications for AIRI's growth into Western Texas. 5 The oil and gas industry, including oil refining, is highly competitive. The Company is in competition with numerous major oil and gas companies and large independent companies for prospects, skilled labor, drilling contracts, equipment and product sales contracts. Many of these competitors have greater resources than the Company's. Revenues generated by the Company's oil and gas operations and the carrying value of its oil and gas properties are highly dependent on the prices of oil and natural gas. The price which the Company receives for the oil or natural gas it may produce is dependent upon numerous factors beyond the control of the Company's management, the exact effect of which cannot be predicted. These factors include, but are not limited to, (i) the quantity and quality of the oil or gas produced, (ii) the overall supply of domestic and foreign oil or gas from currently producing and subsequently discovered fields, (iii) the extent of importation of foreign oil or gas, (iv) the marketing and competitive position of other fuels, including alternative fuels, as well as other sources of energy, (v) the proximity, capacity and cost of oil or gas pipelines and other facilities for the transportation of oil or gas, (vi) the regulation of allowable production by governmental authorities, (vii) the regulations of the Federal Energy Regulatory Commission governing the transportation and marketing of oil and gas, and (viii) international political developments, including nationalization of oil wells and political unrest or upheaval. All of the aforementioned factors, coupled with the Company's ability or inability to engage in effective marketing strategies, may affect the supply or demand for the Company's oil, gas and other products and, thus, the price attainable for those products. The Shagryl development has the usual geological, mechanical and competitive risks associated with development of oil and gas reservoirs, and in addition, bears additional risk unique to its location in a former Soviet Union republic. The gas production from the field will be transferred to markets in Western Europe via a Russian-owned Gazprom line. Therefore the project bears political risks of both Russia and Kazakhstan, as well as market risks as Europe enters a deregulated environment. Cost of transportation as well as cost of equipment and drilling and completion services, are subject to escalation if oil and gas development activity escalate. Financial Information Relating to Foreign and Domestic Operations and Export Sales The table below sets forth, for each of the last three fiscal years, the amounts of revenue, operating profit or loss and assets attributable to each of the Company's geographical areas, and the amount of its export sales.
1999 1998 1997 ---- ---- ---- Sales to unaffiliated customers: United States $ 8,137,867 $ 11,394,009 $ 23,298 Colombia(1) -- -- 292,947 Peru(1) -- -- * Kazakhstan -- -- -- Sales or transfers between geographic areas: United States -- -- -- Colombia(1) -- -- -- Peru(1) -- -- -- Kazakhstan -- -- -- Operating profit or (loss): United States $ (4,978,963) $ (2,820,758) $ (1,165,890) Colombia(1) -- -- (170,424) Peru(1) -- -- * Kazakhstan -- -- -- Identifiable assets: United States $ 33,877,437 $ 35,234,530 $ 21,159,627 Colombia(1) -- -- -- Peru(1) -- -- -- Kazakhstan $ 32,162,385 $ 22,677,073 $ 11,724,477
Export sales: (1) These properties were sold in February 1997. 6 *Information was not available due to dispute with partner, which dispute was settled subsequent to the sale of these properties in February 1997. Insurance; Environmental Regulations The Company's operations are subject to all risks normally incident to (i) the refining and manufacturing of petroleum products; and (ii) oil and gas exploratory and drilling activities, including, but not limited to, blowouts, extreme weather conditions, pollution and fires. Any of these occurrences could result in damage to or destruction of oil and gas wells, related equipment and production facilities and may otherwise inflict damage to persons and property. The Company maintains comprehensive and general liability coverage, as is customary in the oil and gas industry and coverage against customary risks, although no assurance can be given that such coverage will be sufficient to cover all risks, be adequate in amount, or that any damages suffered will not be governed by exclusionary clauses, thereby rendering such coverage incomplete or non-existent to protect the Company's interest in specific property. The Company is not fully covered for damages incurred as a consequence of environmental mishaps. The Company believes it is presently in compliance with government regulations and follows safety procedures which meet or exceed industry standards. Extensive national and/or local environmental laws and regulations in both the United States and Kazakhstan affect nearly all of the operations of the Company. These laws and regulations set various standards regulating certain aspects of health and environmental quality, provide for penalties and other liabilities for the violation of such standards and establish in certain circumstances obligations to remediate current and former facilities and off-site locations. There can be no assurance that the Company will not incur substantial financial obligations in connection with environmental compliance. The Company is occasionally subject to nonrecurring environmental costs. The annual cost incurred in connection with these assessments varies from year to year, depending upon the Company's activities in that year. The costs of such environmental impact assessments were not material in 1999, and are not expected to be material in future years, however, there can be no assurance these costs will not be material. The Company is not aware of any other anticipated nonrecurring environmental costs. Kazakhstan has comprehensive environmental laws and regulations and has adopted the environmental standards set out by the World Bank organizations. Enforcement is administered through the Kazakhstan Ministry of Environment and related local state agencies. The Company's operations require a comprehensive environmental permit for all drilling and exploration activities. The Company has no currently outstanding or anticipated reclamation issues in the United State or abroad. Marketing After satisfactorily completing the qualification requirements and asphalt facility inspection, the Company has received approval from the Louisiana Department of Transportation Materials Inspection Division ("LADOT") to have its paving asphalt products placed on the QPL-41 list of eligible suppliers. This enables the Company to bid on state and federal highway projects in the State of Louisiana and provides an asphalt quality assurance endorsement for non-state and federal projects as well. The Company maintains an aggressive posture in its efforts to secure asphalt supply sales agreements with Louisiana hot mix manufacturers both at highway bid lettings and through private conventional paving projects. In July of 1999, the Company received full accreditation certification for its asphalt quality control and testing program from the American Association of State Highway and Transportation officials (AASHTO). This was followed in November, 1999, by the awarding of the Louisiana approved supplier certification by the Louisiana Department of Transportation and Development, for the Company to self-certify its own asphalt products. The Company is the first and, to date, the only asphalt supplier in Louisiana to achieve this level of proficiency. Total asphalt sales for 1999 were 63,910 tons with income from sales of $7,645,948 for an average price per ton of $119.64. Sales to Louisiana customers made up approximately 80 percent of the total, while sales to Texas customers accounted for the remainder. Approximately 60% of the Company's asphalt sales volumes in 1999 were higher-margin polymer modified products and about 40% were conventional. The rapid escalation of crude oil prices, combined with a very slow reacting asphalt retail rack market in the southeast during 1999, created an unprofitable economic scenario for sales out of St. Marks in 1999. Consequently, in a move to control overhead and manufacturing costs, the Company temporarily suspended operations at St. Marks. The Company has mitigated this problem in the future by including escalation clauses in all of its new asphalt sales agreements which allows the Company to increase its contract sales price by 5% per quarter 7 if feedstock prices increase to certain levels. The Company continually monitors the market conditions in the region and should general industry conditions change in future months, the Company will reconsider asphalt operations at St. Marks. In addition, the Company continues to investigate the possibility of establishing more truck rack retail locations outside the immediate area of its current facility. These market opportunities have the potential to increase the Company's expansion into new profitable retail sales outlets at greater net-back margins than can be achieved in the wholesale barge markets. As of March 2000, the Company continues to be successful at the state highway lettings and has already accumulated a firm backlog of orders and sales agreements in excess of $10.5 million for its polymerized and conventional asphalt products, compared to approximately $6.5 million at the same date last year. The Transportation and Equity Act for the 21st Century ("TEA-21") authorizes $173 billion over six years (1998-2003) for construction and maintenance of federal highways. The six-state Gulf Coast market where the Company sells its conventional and polymerized asphalt products has been allocated more than $32 billion in federal funding under TEA-21, a 61% increase over the previous highway spending program. TEA-21 is expected to provide a significant increase in the overall demand for asphalt in the Company's markets. In addition, matching state DOT highway funds could increase the total spending for highway construction by another 10% - 50%. The Company is committed to continue an aggressive, expanding, retail market growth program across the Gulf Coast and into other various profitable geographic areas. James Corporation, Davison Petroleum Products, R.E. Heidt Construction and O.S. Johnson accounted for 16%, 15%, 13% and 10% of the Company's sales during 1999, respectively. Oil and Gas In May 1994, AIPCC entered into an agreement with Carbopetrol S.A. to sell all of its crude oil produced in Colombia. Payments were made in Colombian Pesos adjusted for expected exchange fluctuation. Prices were based on the price of local fuel oil and had an average price, net of transportation costs, of approximately $11.81 per barrel of oil in 1997. In Peru, PAIPC's contract with PetroPeru provided for a flexible royalty rate based on the amount of production and world basket price for this contract area providing a net sales price to PAIPC of approximately 65% of the world basket price for the field, which, based on an average gross price of $16.53 per barrel of oil in 1997, which provided a net price to the Company of approximately $10.75 per barrel of oil. Sales of the Company's crude oil to Carbopetrol S.A. in Colombia accounted for 29% of the Company's 1997 revenues. Sales to Ecopetrol accounted for approximately 11% of the Company's 1997 revenues. The Company had no sales in 1999 and 1998 in Colombia because it sold its assets in Colombia and Peru in February 1997 to Mercantile International Petroleum Inc. ("MIP") (the "S.A. Sale"). The Company is currently engaged in negotiations with Gazprom, the Russian gas transport company, for the transportation and sale of its anticipated Shagryly gas production. It is anticipated that a U.S. Dollar or Eurodollar backed contract will be concludedduring the second quarter of 2000. Sources and Availability of Raw Materials AIRI requires sour asphaltic crudes and/or performance grade asphalts as a feedstock to produce its asphalt, which are generally in available supply within the western hemisphere. However, fast-rising crude oil prices and slower-rising product prices dramatically reduced the "crack spread", starting in the first quarter of 1999 and continuing throughout the year. Consumption of light products such as gasoline and distillates remained relatively static while rack prices for asphalt products lagged crude prices in spite of reduced production. Competitive realities forced AIRI to maintain the refinery in a "warm" condition to enable it to operate on short notice. Because of the high price of crude oil during 1999, AIRI switched from processing Mexican crude oil as an asphalt feedstock to purchasing wholesale asphalt for blending and polymer enhancement. Primary sources of feedstock include Mexico, Venezuela, Colombia, Ecuador, Canada, and the wholesale asphalt markets in the U.S. "Roofer's flux" crudes can be sourced from Saudi Arabia, Oman, U.S. Gulf off-shore, Texas and Louisiana sweet lights. Many crudes can be blended into the primary base crudes. AIRI personnel have the experience and ability to source the necessary feedstocks. Employees As of March 31, 2000, the Company employed 60 persons on a full-time basis, including 12 persons who are engaged in management, accounting and administrative functions for AIPC and 37 who are employed by AIRI on a full-time basis, including 16 persons who are engaged in management and administrative functions, and 6 persons who are employed by AIPK in management and administrative 8 positions. Two persons are employed by St. Marks, none of which are in management and administration. The Company frequently engages the services of consultants who are experts in various phases of the oil and gas industry, such as petroleum engineers, refinery engineers, geologists and geophysicists. The Company has no collective bargaining agreements and believes that relations with its employees are satisfactory. Item 2. PROPERTIES Office Facilities The Company leases approximately 4,800 square feet of office space at 444 Madison Avenue, New York, N.Y. 10022. This space comprises the Company's principal executive office. The space was leased for a period of seven years at a monthly rental rate of $19,600 and expires on December 31, 2005. The Company has recently agreed to sublet 2/3 of its space to another Company for $152,472 per year through the end of its lease in New York. In addition, the Company leases approximately 10,500 square feet of office space in Houston, Texas at a monthly rental of $17,929. This lease expires on December 12, 2003. The Company also owns 90 acres of vacant land in Lake Charles, Louisiana where the Refinery is located. In addition to the structures and equipment comprising the Refinery facility (See "Item 1 - Business - Domestic Operations - Refinery"), the Refinery assets include an approximately a 4,400 square foot office building, a new 2,200 square foot asphalt plant office, and a state-of-the-art laboratory, and two metal building structures serving as work shops, maintenance and storage facilities with an aggregate square footage of approximately 4,300 square feet. The Company also owns approximately 68 acres of vacant land adjacent to the St. Marks Refinery in Florida. Oil and Gas Acreage and Wells Gross acreage presented below represents the total acreage in which the Company owned a working interest on December 31, 1999, and net acreage represents the sum of the fractional working interests owned by the Company in such acreage. The table below indicates the Company's developed and undeveloped acreage as of December 31, 1999.
Gross Gross Net Net Developed Undeveloped Developed Undeveloped Acreage Acreage Acreage Acreage ------- ------- ------- ------- Kazakhstan License 953 -- 4,734,097 -- 3,313,868 License 1551 263,853 4,997,950 263,853 3,577,721
The table below indicates the Company's gross and net oil and gas wells as of December 31, 1999. Gross wells represents the total wells in which the Company owned a working interest, and net wells represents the sum of the fractional working interests owned by the Company in such wells. Productive Wells ----------------
Total Oil Gas ----- --- --- Gross Net Gross Net Gross Net ----- --- ----- --- ----- --- Kazakhstan -- -- -- -- -- --
9 Oil and Gas Production The table below indicates the Company's net oil and gas production, by country, for each of the three years in the periods ended December 31, 1999, 1998, and 1997, along with the average sales prices for such production during these periods. Production Oil (in Average Net Sales Gas Sales Price Barrels) Price (per Barrel) (in mcf) (per mcf) -------- ------------------ -------- --------- 1999 -Kazakhstan -- $ -- -- $ -- -Colombia(1) -- -- -- -- -Peru(1) -- -- -- -- 1998 -Kazakhstan -- $ -- -- $ -- -Colombia(1) -- -- -- -- -Peru(1) * * * * 1997-Kazakhstan -- $ -- -- $ -- Colombia(1) 18,625 11.81 -- -- Peru(1) * * -- -- Average foreign lifting cost in 1997 was approximately $5.31 per equivalent barrel of oil. The Company incurred no lifting costs in 1998 and 1999 due to the S.A. Sale. (1) These properties were sold in February 1997. *Information not available due to dispute with partner, which dispute was resolved subsequent to the S.A. Sale. Reserves Huddleston & Co., Inc., petroleum and geological engineers, performed an evaluation to estimate proved reserves and future net revenues from oil and gas interests owned by AIPCC as of January 1, 1997. As of January 1, 1997, all of the Company's proved reserves were located in Colombia. The report, dated February 6, 1997, is summarized below. Future net revenues were calculated after deducting applicable taxes and after deducting capital costs, transportation costs and operating expenses, but before consideration of Federal income tax. Future net revenues were discounted at a rate of ten percent to determine the "present worth". The present worth was shown to indicate the effect of time on the value of money and should not be construed as being the fair market value for the Company's properties. Estimates of future revenues did not include any salvage value for lease and well equipment or the cost of abandoning any properties.
Colombian Reserves ------------------ Future Revenues Net Oil Future Discounted (Barrels) Net Gas (mmcf) Revenues at 10% --------- -------------- -------- ------ Proved Developed Producing 917,522 1,121.1 $ 9,379,548 $ 5,899,502 Proved Developed Non-Producing 31,199 5,200.0 4,070,584 2,274,369 Proved Undeveloped 3,061,698 8,358.3 28,474,585 14,183,770 --------- -------- ----------- ----------- TOTAL 4,010,419 14,679.4 $41,924,717 $22,357,641 ========= ======== =========== ===========
Huddleston & Co., Inc. used the net market price, exclusive of transportation cost, of $12.20 per average barrel of oil, $0.40 per MCF for Toqui gas and $1.00 per MCF for Puli gas in their report. The oil prices utilized were the prices received by AIPCC as of December 31, 1996 for oil produced from AIPCC's leaseholds. The gas prices utilized were based on the Ecopetrol spot price at December 31, 1996. The prices were held constant throughout the report except for where contracts provide for increases. Operating costs for AIPCC's and PAIPC's leaseholds included direct leasehold expenses only. Capital expenditures were included as required for new development wells, developed non-producing wells and current wells requiring restoration to operational status on the basis of prices supplied by the Company. 10 The report indicates that the reserves were estimates only and should not be construed as being exact quantities. In evaluating the information at their disposal concerning the report, Huddleston & Co. excluded from consideration all matters as to which legal or accounting interpretation may be controlling. As in all aspects of oil and gas evaluation, there are uncertainties inherent in the interpretation of engineering data and such conclusions necessarily represent only informed professional judgments. The data used in the Huddleston & Co. estimates were obtained from the Company and were assumed to be accurate by Huddleston & Co.. Basic geologic, engineering and field performance data are now maintained on file by Mercantile International Petroleum Inc., who purchased these properties from the Company in February 1997. Drilling The Company sold all of its oil and gas producing properties in February 1997, as previously discussed, and has not yet implemented production operations in Kazakhstan, therefore it had no exploration or development wells during the current year. The following table sets forth the gross and net exploratory and development wells which were completed, capped or abandoned in which the Company participated during the years indicated.
1999 1998 1997 ---- ---- ---- Gross Net Gross Net Gross Net ----- --- ----- --- ----- --- Exploratory Wells: Kazakhstan Oil -- -- -- -- -- -- Gas -- -- -- -- -- -- Dry 2 1.4 -- -- -- -- ----- ----- ----- ----- ----- ----- TOTAL 2 1.4 -- -- -- Development Wells: Kazakhstan -- -- -- -- -- -- South America -- -- -- -- -- -- ----- ----- ----- ----- ----- ----- TOTAL -- -- -- -- -- -- ----- ----- ----- ----- ----- ----- TOTAL 2 1.4 -- -- -- -- ===== ===== ===== ===== ===== =====
Item 3. LEGAL PROCEEDINGS In 1998, Neste Trifinery ("Trifinery"), filed suit in a Harris County District Court against the Company and its wholly-owned subsidiary, American International Refinery, Inc. ("AIRI") (Neste Trifinery v. American International Refinery, Inc. Etc. Case No. 98-11453; in the 269th Judicial District; in and For Harris County, Texas). Trifinery has asserted claims for recovery of compensatory and punitive damages based on the following theories of recovery; (1) breach of contract, (2) disclosure of confidential information; and (3) tortuous interference with existing contractual relations. Generally, Trifinery has alleged that in connection with the due diligence conducted by the Company and AIRI of the business of Trifinery, the Company and AIRI had access to confidential or trade secret information and that the Company and AIRI have exploited that information, in breach of an executed Confidentiality Agreement, to the detriment of Trifinery. Trifinery seeks the recovery of $20,000,000 in compensatory damages and an undisclosed sum in connection with its claim for the recovery of punitive damages. In addition to seeking the recovery of compensatory and punitive damages, Trifinery sought injunctive relief. Specifically, Trifinery sought to enjoin the Company and AIRI from: (1) offering employment positions to the key employees of Trifinery; (2) contacting the suppliers, joint venture partners and customers of Trifinery in the pursuit of business opportunities; (3) interfering with the contractual relationship existing between Trifinery and St. Marks Refinery, Inc.; and (4) disclosing or using any confidential information obtained during the due diligence process to the detriment of Trifinery. The Company and AIRI have asserted to a general denial to the allegations asserted by Trifinery. The Company and AIRI also moved the district court to refer the matter to arbitration, as provided for in the Confidentiality Agreement, and to stay the pending litigation. On March 27, 1998, the district court referred the matter to arbitration, as requested by the Company and AIRI, and stayed litigation. At present, the dispute existing between the Company, AIRI and Trifinery in Texas will be decided by a panel of three arbitration judges under the American Arbitration Association rules for commercial disputes. Two arbitrators 11 have been identified by the parties and the third is in the process of being chosen. The Company and AIRI are vigorously defending this matter and the Company's counsel anticipates a favorable outcome, although a definitive outcome is not yet determinable. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 12 PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on NASDAQ/NMS under the symbol "AIPN". The following table sets forth, for the periods indicated, the range of closing high and low bid prices of the Common Stock and the as reported by NASDAQ. Common Stock ------------ High Bid Low Bid -------- ------- 1999 First Quarter $1.067 $.978 Second Quarter 1.072 .951 Third Quarter 1.008 .920 Fourth Quarter .649 .539 1998 First Quarter $4.91 $3.19 Second Quarter 4.34 1.53 Third Quarter 1.94 0.94 Fourth Quarter 2.50 0.69 At March 21, 2000, the Company had approximately 1,726 shareholders of record of its Common Stock. The Company estimates that an additional 18,000 shareholders hold Common Stock in street name. During the fourth quarter 1999, the Company issued an aggregate of 13,521,285 shares of Common Stock upon conversion of, and in payment of accrued interest, on its convertible debentures. The issuance of those shares were exempt from the Registration requirements of the Securities Act under Sections 3(a)(9) and 4(2), respectively of the Securities Act. Dividend Policy The policy of the Board of Directors is to retain earnings to finance the operations and development of the Company's business. Accordingly, the Company has never paid cash dividends on its Common Stock, and no cash dividends are contemplated to be paid in the foreseeable future. Item 6. SELECTED FINANCIAL INFORMATION The following selected financial data for each of the five years in the period ended December 31, 1999 have been derived from the audited consolidated financial statements for those respective years. The selected financial data should be read in conjunction with the consolidated financial statements of the Company and the related notes included elsewhere herein:
For the Years Ended December 31, -------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Condensed consolidated statement of operations: Revenues $ 8,352,038 $ 11,854,606 $ 827,964 $ 4,003,006 $ 2,811,308 Net loss(1) (14,917,868) (9,103,113) (17,953,621) (4,652,207) (4,338,322) Net loss per share - basic and diluted (0.20) (0.17) (0.43) (0.16) (0.20) At December 31, --------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Condensed consolidated balance sheet: Working capital (deficit) $ (5,004,658) $ (4,596,152) $ (693,676) $ (9,823,229) $ (3,402,543) Total assets 69,658,269 60,861,334 41,839,860 34,492,431 32,640,362 Total current liabilities 8,903,689 7,914,250 9,335,479 13,164,713 11,349,670 Long-term debt 11,984,592 6,110,961 -0- 6,766,592 7,302,671 Stockholders' equity 48,464,032 46,530,167 32,504,381 21,327,718 21,290,692 Cash Dividends declared -0- -0- -0- -0- -0-
1) Net loss in 1996 included a provision for the write down of the carrying costs of oil and gas properties of $200,000. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13 Results of Operations The following table highlights the results of operations for the years ended December 31, 1999, 1998 and 1997. For the Years Ended December 31, -------------------------------- 1999 1998 1997 ---- ---- ---- Refinery Processing Operations: Refinery product revenues (000's) $8,138 $11,394 -- Product Costs (000's) $5,944 $8,194 -- Operating Costs (000's) $2,727 $3,087 Exploration and Production Activity: Colombia Properties(1): Revenue - Oil Sales (000's) -- -- $261 Lease Operating Expenses (000's) -- -- $99 Production Volume - Barrels -- -- 318,625 Average Price per Bbl -- -- $14.01 Production Cost per Bbl -- -- $5.31 DD&A per Bbl (2) -- -- $3.77 Peru Properties: Revenue - Oil Sales (000's) -- -- -- Lease Operating Expenses (000's) -- -- -- Production Volume - Bbls -- -- -- Average Price per Bbl -- -- -- Production Cost per Bbl -- -- -- DD&A per Bbl -- -- -- Refinery Operations: Refinery Lease Fees (000's) -- -- -- Average Daily Throughput (Bbls) -- -- -- Average Throughput Fee -- -- -- - ---------- (1) Reflects activity through the closing of the S.A. Sale. (2) Excludes provision for reduction of oil and gas properties of $200,000 in 1996. Refinery Operations For the Year Ended December 31, 1999 compared to the Year Ended December 31, 1998 During 1999, the Company generated revenues of approximately $7,621,000 in asphalt sales from its Lake Charles facility and approximately $513,000 from sales of certain light-end and other products, compared to approximately $5,965,000 and $3,357,000, respectively, generated in 1998. Although the Company's asphalt volumes were up only approximately 10% over last year, revenues were up approximately 28%, primarily due to a greater demand for the higher priced, higher grades of polymer asphalt by its customers. However, polymerized asphalts only accounted for approximately 60% of the Company's asphalt sales volumes in 1999. Most of its sales backlog was incurred late in 1998 and in early 1999 when crude oil and asphalt sales prices were much lower. Consequently, the Company was committed to selling low-priced conventional asphalts at a loss or at break-even throughout most of 1999 and early 2000. Asphalt prices, particularly polymerized asphalts, have begun to rise in response to high crude oil prices incurred in 1999 and early 2000, therefore the Company expects its asphalt margins to improve in 2000 as compared to 1999, when only 60% of its asphalt sales volumes were polymerized asphalts and asphalt prices were significantly lower. In addition, the Company has implemented the use of escalation provisions in its asphalt sales contracts, which enable it to increase contracted sales price by 5% per quarter if its feedstock prices rise to certain levels. This should mitigate the problem the Company incurred in 1999 by committing to long-term supply contracts at fixed 14 prices. The Company's sales prices on its retail asphalt ranged from approximately $78 to $162 a ton. Due to the significant increases in world oil prices that occurred throughout 1999, it was not economically feasible for the Company to purchase and process crude oil through its crude unit to manufacture asphalt as it had done in 1998. Because of this, the light-ends and other products provided though this process were significantly decreased in 1999 and was the primary reason for the decrease in light-end and other product sales in 1999 compared to 1998. The Company purchased general grade asphalt on the spot market to blend and supply various grades of asphalt to its Louisiana and Texas customers. Operating and inventory costs attributed to the related revenues for 1999 were approximately $8,486,000, compared to approximately $9,500,000 of operating and inventory costs in 1998. The relatively high operating and inventory costs during the year are partially attributable to the increase in the world oil prices and the non-availability of certain types of crude oil during the year, the related increase in asphalt feed stock prices that the Company had to incur for its asphalt, and to an increase in operating costs to maintain the refinery during this period. Even though the Company has not operated the crude unit since January of 1999, it has had to maintain the unit in a state of readiness and thus has incurred additional operating overhead costs attributed to maintaining the unit. Some of these overhead costs were incurred in preparing the crude unit and related equipment to process products for a third party with which the Company has entered into an agreement. (See Item 7. "Management's Discussion - Liquidity and Capital Resources"). This will not preclude the Company from operating its vacuum unit or its asphalt blending business. Additionally, costs, and likewise, revenues and margins, will vary depending upon a number of factors, including but not limited to feedstock type and prices, and from the Company's product mix, which are determined over time as the Company's markets are developed and redefined in the different areas it services. The Company's terminal in St. Marks Florida was not operational during 1999 and had no revenues but incurred approximately $96,000 of maintenance and security costs during the year, compared to revenues of approximately $2,000,000 and related costs of approximately $1,800,000 in 1998. Due to the increased costs and the subsequent decrease in supply of product brought on by the increase in world oil prices, the Company determined it to be more economically feasible to direct its sales efforts and strategy to the high demand, high quality and high margin asphalt in the Louisiana and Texas markets rather than shipping lower margin conventional asphalt for sale into the St. Marks, Florida market. For the Year Ended December 31, 1998 compared to the Year Ended December 31, 1997 During 1997, the Company commenced expansion of the Refinery and conversion of the crude unit to a heavy crude processing unit to enable the manufacture of asphalt and other products. During 1998 the Company undertook extensive testing of its refinery equipment and processing capabilities. The Refinery did extensive process sampling with various types of crude oils in an effort to determine the most economical and technically acceptable crude feedstock to develop and produce the basic asphalt material to be used in developing the specialty asphalts the asphalt road construction industry will require, and in some areas is currently requiring, to be used. As a result of the Refinery's testing activity in 1998, it manufactured products which generated revenues of approximately $6 million dollars from asphalt products and approximately $3.4 million dollars from certain light-end and other products. The Company's sales prices on its retail asphalt ranged from $75 to $187 a ton. The Company incurred approximately $6.8 million in product costs related to those revenues and approximately $2.7 in operating costs during this extensive testing period throughout 1998. Because of very low operating levels during most of 1998 and redundant processing and blending of feedstock and asphalt during the testing process, the Company's margins were severely distorted and were not indicative of margins expected during normal operating conditions. Costs, and likewise, revenues and margins, will vary depending upon a number of factors, including but not limited to feedstock prices, and from the Company's product mix, which will be determined over time as the Company's markets are further developed. The Refinery's terminal operations in St. Marks, Florida, which commenced in June 1998, had revenues of approximately $2 million dollars from sales of asphalt and costs of sales of approximately $1.8 million related to those sales during 1998. Oil and Gas Production Activity For the Year Ended December 31, 1999 compared to the Year ended December 31, 1998 The Company had no oil and gas production activity during the year ended December 31, 1999 For the Year Ended December 31, 1998 compared to the Year Ended December 31, 1997 The Company had no oil and gas production activity during the year ended December 31, 1998. The oil and gas production revenues reflected are the results of operations for Colombia and Peru for 1997 and reflect results for the period through February 25, 1997, the date of the sale of the Colombia and Peru subsidiaries. 15 Other Income For the Year Ended December 31, 1999 compared to the Year Ended December 31, 1998. Other income decreased during 1999 by approximately $246,000 to $214,000 compared to 1998, primarily from a $251,000 decrease in interest income due to decrease in funds on deposit in 1999 compared to those on deposit in 1998. For the Year Ended December 31, 1998 compared to the Year Ended December 31, 1997. Other income decreased during 1998 by approximately $107,000 to $461,000 compared to 1997, primarily from a $63,000 decrease in interest income due to reduced funds on deposit in 1998 compared to those on deposit in 1997. An additional decrease of approximately $50,000 in 1998 compared to 1997 was attributable to a one-time $50,000 non-cash reduction of an accounts payable item recorded as income in 1997. General and Administrative For the Year ended December 31, 1999 compared to the Year ended December 31, 1998 Total General and Administrative expenses ("G&A") increased by approximately $693,000, or 12%, in 1999 compared to 1998. The acquisition of the St. Marks refinery at the end of 1998 accounted for an increase of approximately $180,000 of G&A related to payroll and insurance costs. Other payroll and employee related costs increased approximately $285,000. Insurance cost increased approximately $183,000 in 1999 compared to 1998 due to additional coverage on new additions to the refinery at end of 1998. Rents increased approximately $281,000 in 1999 compared to 1998. The Company has entered into a agreement to sublease out part of it's available office space which will be effective during the second quarter 2000, and will effectively reduce the Company's current rent expense by approximately $161,000 a year. The Company did not capitalize any G&A during 1999, compared to approximately $578,000 capitalized in 1998. For the Year ended December 31, 1998 compared to the Year ended December 31, 1997 Total G&A increased by approximately $469,870, or 10%, in 1998 compared to 1997. The Company incurred approximately $1.4 million in additional G&A during 1998, principally due to increased activity at the Refinery, which were offset by an aggregate of approximately $1.0 million in reduced G&A resulting from a reduction of $279,000 related to the sale of its Colombia and Peru oil and gas operations in 1997 and a non-cash charge of $745,000 in 1997 in connection with the issuance of stock options. In addition, legal expenses decreased by approximately $90,000 due primarily to the settlement of the IRS Excise tax case and an environmental lawsuit. Due to the increased activity at the refinery, payroll and related employee expenses increased by approximately $434,000 and general insurance costs increased by approximately $86,000 due to increased coverage of the Refinery equipment and liability. General office administrative expenses increased by $80,000 due to the increased sales and operations at the refinery. Additional costs of approximately $70,000 were incurred in upgrading computers systems due in part to Year 2000 compliance considerations. Investor relations increased in 1998 by approximately $111,000 compared to 1997 and professional consulting fees increased by approximately $500,000. The Company capitalized approximately $578,000 of G&A in 1998 compared to approximately $622,000 in 1997 in connection with the Refinery expansion. Depreciation, Depletion and Amortization For the Year ended December 31, 1999 compared to the Year ended December 31, 1998 Depreciation, Depletion and Amortization ("DDA") increased approximately $918,000 in 1999 compared to the same period in 1998. DDA in 1999 reflects the increased depreciation of the Company's $18.6 million dollar asphalt and related equipment construction project at its refinery that commenced in 1996 and was completed in December of 1998. This new addition doubled the book value of the refinery and accounts for the 100% increase in DDA. In addition, the Company commenced depreciating the St Marks facility and its marine equipment during the first quarter of 1999. For the Year ended December 31, 1998 compared to the Year ended December 31, 1997 Depreciation, Depletion and Amortization ("DDA") increased approximately $39,000 in 1998 compared to the same period in 1997. The 16 increase in 1998 of $124,000, due to an increase in refinery depreciable assets during 1998, was offset by a decrease in 1998 of depreciation and depletion attributable to the Colombia and Peru operations that were sold in 1997. Interest Imputed interest of approximately $3,044,000, $6,042,000, and $1,899,000 in 1999, 1998,and 1997, respectively, was related to the presumed incremental yield the investor may derive from the discounted conversion rate of debt instruments issued by the Company during these years. Management believes that the related amount of interest recorded by the Company is not necessarily the true cost to the Company of the instruments it issued and that it may be reasonable to conclude that the fair value of the Common Stock into which these securities may be converted was less than such stock's quoted market price at the date the convertible securities were issued (considering factors such as the period for which sale of the stock is restricted, which in certain cases was as long as six months, large block factors, lack of a sufficiently-active market into which the stock can be quickly sold, time value, etc.). However, generally accepted accounting principles requires that the "intrinsic value" of the conversion feature at the date of issuance should be accounted for and that such incremental yield should be measured based on the stock's quoted market price at the date of issuance, regardless if such yield is assured. The Company expenses and also capitalizes certain other costs associated with the offering and sale of debentures. Capitalized costs are amortized as interest expense over the life of the related debt instrument. These costs include the accounting for Common Stock warrants issued with and related to certain convertible debentures, commissions paid, and certain legal expenses For the Year ended December 31, 1999 compared to the Year ended December 31, 1998 Interest expense for 1999 was $6,500,579, net of capitalized interest of $547,786, compared to interest expense of $1,912,949, net of capitalized interest of $7,055,340 in 1998. The Company incurred approximately $1,898,000 of interest on debentures and short-term notes outstanding during the year, expensed non-cash imputed interest, as discussed above, of approximately $2,882,000, interest on trade notes of approximately $638,000, approximately $1,619,000 of non-cash interest related to amortized bond costs. For the Year ended December 31, 1998 compared to the Year ended December 31, 1997 Interest expense for 1998 was $1,912,949, net of capitalized interest of $7,055,340, compared to an interest expense of $6,663,992, net of capitalized interest of $340,988 in 1997. The Company incurred approximately $1,670,000 of interest on debentures outstanding during the year. The Company also incurred approximately $2,118,000 of imputed interest costs on the sale of its $12 million debentures in April 1998 and amortized an additional $3,924,000 related to the conversion of debentures held at December 31, 1997. The Company capitalized interest expense of $7,055,000 incurred in connection with its oil and gas and refinery projects during 1998. Realized and Unrealized Loss on Marketable Securities The Company neither held nor sold any Marketable Securities during 1999. As partial proceeds from the S.A. Sale, the Company received approximately $4.4 million shares of MIP common stock valued at $2.00 per share. However, during 1997 and 1998, the market value of MIP's shares declined significantly. During 1997, the Company sold and disposed of approximately 1,441,000 shares of the MIP shares for proceeds of approximately $1,979,000 and recorded an aggregate net realized and unrealized loss of $6,053,000 for the year ended December 31, 1997. During 1998 the Company sold all of its remaining MIP shares for proceeds of approximately $377,000 and recorded an aggregate net realized loss of approximately $369,000. Loss on Sale of Assets The Company recorded an aggregate $564,000 loss in 1997 on the sale of two of its' wholly-owned subsidiaries which includes the current discount to fair value of the $3 million Exchangeable Debenture and the $1.4 million performance earn-out, both received in the S.A. Sale. Liquidity and Capital Resources During the year ended December 31, 1999, the Company used a net amount of approximately $7,306,000 for operations, which reflects approximately $6,320,000 in non-cash provisions, including depreciation, depletion and amortization of $5,717,000. Approximately $832,000 was provided during the period to decrease product and feedstock inventory and $459,000 was provided by an increase in accounts payable and accrued liabilities and in current assets other than cash. Additional uses of funds during 1999 included additions to oil and gas properties and Refinery property and equipment of $5,980,000 and $801,000, respectively. Cash for operations was provided, in part, by proceeds from the exercise of certain warrants and options and the sale of marketable securities of 17 $769,000, and from proceeds from long and short-term debt of approximately $19,216,000. At December 31, 1999, the Company had negative working capital of approximately $5.0 million dollars. During 1999, the Company issued an aggregate of $17,250,000 principal amount of 5% and 6% convertible debentures. As of March 21, 2000, only approximately $6.8 million remained outstanding. The proceeds derived from these private placements were utilized to fund the Company's projects in Kazakhstan, expand the Refinery, repay debt, and for working capital purposes. Also during 1999, the Company borrowed an aggregate of approximately $10 million for feedstock purchases and expansion at the Refinery, funding certain expenditures in Kazakhstan, and for working capital purposes. The Company utilized its inventory, receivables , St Marks and its adjacent real estate as collateral. Of this amount, approximately $3.8 million remained outstanding as of December 31, 1999. The Company plans to begin its Shagryly gas field development in the summer of 2000. The initial phase of the development will cost approximately $4.5 million and is expected to be funded from the proceeds derived from the sale of a portion of Shagryly and from financing to be provided by the purchaser, which financing is expected to also be provided to fund the Company's remaining interest in the project subsequent to the sale. The total development costs for the project is estimated at approximately $160 million to $180 million. The Company is also having discussions with other financing entities, suppliers and export credit agencies regarding project financing for the development of Shagryly. However, the Company's strategy is to sell a minimum of 50% of Shagryly prior to commencing the main phase of development. If the Company is unable to sell a portion of Shagryly, the development could be delayed until adequate financing is appropriated. The Company met its minimum work and monetary obligations on its License 953 in Kazakhstan during 1999. Its year 2000 obligation amounts to approximately $1.7 million, which it expects to fund with proceeds derived from the partial sale of Shagryly and/or from supplemental financing. The Company has no current plans to spend any additional amounts on License 953 during the year 2000. As mentioned above, the Company is currently engaged in negotiations with Gasprom, the Russian gas transport company, for the transportation and sale of its anticipated Shagryly gas production. The Company expects that a U.S. Dollar or Eurodollar-based gas sales and transportation contract will concluded in the second quarter of 2000. In the event the contract is consummated, the Company expects to have a significant amount of proved gas reserves, which it could utilize as a borrowing base for various Company capital requirements, including the development of the Shagryly gas field. It has also been having discussions with the drilling subsidiary of Gasprom regarding a drilling contract to develop the Shagryly gas field. In February 1999, Mercantile International Petroleum, Inc. ("MIP") failed to pay the $1.6 million outstanding balance due to the Company of the 5% convertible debenture it issued to the Company as partial payment for the purchase of the Company's oil and gas properties in Columbia and Peru, South America in February 1997. In January 2000, the parties reached an agreement (the "MIP Agreement"), whereby MIP acknowledged its indebtedness to the Company in the amount of $1,581,000 for the outstanding balance of the 5% convertible debenture and an additional amount of $1,306,258 in connection with the "earnout provision" of the original purchase agreement. MIP also agreed to repay the aggregate debt due to the Company of $2,887,508 by issuing a new 11.5% convertible debenture to the Company, which is secured by MIP's Colombian oil production. Beginning in February 2000, MIP agreed to pay monthly to the Company the greater of $70,000 or 80% of its Colombian subsidiary's net income during the calendar year 2000. Thereafter, MIP will pay monthly the greater of $80,000 or 80% of the subsidiary's net income until the debt is retired. The unpaid portion of the debt is convertible into MIP common stock at the option of the Company, at any time at $1.50 per share. MIP also agreed to issue the Company warrants entitling it at any time prior to December 31, 2002 to purchase an aggregate of 2,347,000 common shares of MIP: (i) during the year 2000, at the greater of $.25 per share or the weighted average trading price for the first 10 days after MIP's shares resume trading (MIP was delisted from the Toronto Exchange in 1999), to a maximum of $.50; (ii) during the year 2001, at $1.00 per share; and (iii) during the year 2002, at $1.50 per share. A dedicated bank account has been set up in Bogota, Columbia for deposit of oil sales proceeds and disbursement of payments due to the Company pursuant to the MIP Agreement. The Company has received the initial monthly payment and expects no interruption in the future. 18 In February 2000, AIRI entered into lease and service agreements (the "Maretech Agreements") with Maretech Corporation ("Maretech"), an independent refinery whereby Maretech will lease AIRI's ADU and process condensate crude oil utilizing AIRI's personnel to operate the daily processing functions. Maretech plans to produce naphtha and gas oil to be sold as feedstocks and diesel and JP8 to be marketed as finished products. The term of the Maretech Agreements is one year renewable at the contract anniversary date. Maretech has the right to terminate the Maretech Agreement if its operation is unprofitable over any 30-day period. Maretech will pay AIRI $.20 per barrel of feedstock run through the ADU as a lease fee, which lease fees shall not be lower that $45,000 per month. In addition, Maretech will pay all expenses directly associated with the operation of the ADU including, but not limited to, wages, office expense, normal maintenance, property taxes, utilities, fuel, chemicals, and insurance. All payments will be made directly to each vendor by Maretech for services and materials. The Agreement also calls for AIRI to receive 25% of Maretech's profits from the operations. Maretech has obtained financing guarantees for its feedstock supplies from a large financial institution and has also provided AIRI with an Irrevocable Letter of Credit in the amount of $400,000 to protect AIRI in the event of a default by Maretech. Since the Maretech Agreements only involve the ADU (although there is some shared usage of other AIRI facilities provided for in the Maretech Agreements, such as the dock facilities), AIRI will still operate its asphalt processing facilities. As of March 21, 2000, AIRI had approximately $10.5 million in firm backlog of orders and sales agreements, of which approximately 95% is for higher-margin polymerized asphalt products. Asphalt prices, particularly polymerized asphalts, have begun to rise in response to high crude oil prices incurred in 1999 and early 2000, therefore the Company expects its asphalt margins to improve in 2000 as compared to 1999, when only 60% of its asphalt sales volumes were polymerized asphalts and asphalt prices were significantly lower. In addition, the Company has implemented the use of escalation clauses in its asphalt sales contracts, which enable it to increase its contracted sales price by 5% per quarter if its feedstock prices rise to certain levels. This should mitigate the problem the Company incurred in 1999 by committing to long-term supply contracts at fixed prices. As long as crude oil prices continue at current high levels, AIRI plans to purchase wholesale asphalts to utilize as feedstock for blending and polymer enhancement. The Company's strategy is to sell only higher-margin polymerized asphalt products, which asphalts are expected approximate 95% of its asphalt sales during 2000. The Company has a $2 million credit facility for its feedstock purchases, which it has utilized since June 1999. The combination of the proceeds to be derived from the MIP Agreement, the Maretech Agreements and the Company's asphalt operations are expected to provide sufficient cash flows to support all of the Company's domestic operations through the year 2000 and beyond. The Company plans to repay the outstanding aggregate balance of its Bridge Loans (approximately $4.35 million) with the proceeds expected from the sale of a portion of its License 1551. It is also seeking other sources of capital for the repayment of this debt as well as its outstanding 5% Convertible Debentures. If the Company is unable to obtain the necessary working capital from the Refinery, St. Marks, AIM, the sale of a portion of License 1551, or from one or more joint venture partners in Kazakhstan to support its operations during 2000, or obtain the necessary financing to adequately supplement or provide all of its funding needs, its ability to continue operations could be materially and adversely effected. Y2K Issues The Company evaluated the potential impact of the nearly universal practice in the computer industry of using two digits rather than four to designate the calendar year, leading to incorrect results when computer software performs arithmetic operations, comparisons or date field sorting involving years later than 1999. Management believes that in light of the limited nature of the computer software used by the Company and the limited scope of its electronic interaction with other entities, issues relating to modification or replacement of existing systems will not have a material effect on the operations or financial condition of the Company. Although the Company is not aware of any circumstances in which the failure of a supplier or customer to deal successfully with such issues would have a material impact, there can be no assurance that such will be the case. As of March 31, 2000, the Company had not encountered any negative effects relating to the Year 2000 issues, either internally or with any of its vendors or suppliers. Market Risk The Company is exposed to various types of market risk in the normal course of business, including the impact of interest rate changes and foreign currency exchange rate fluctuations. The Company does not employ risk management strategies, such as derivatives or various interest rate and currency swaps, to mitigate these risks. 19 Foreign Exchange Risk The Company is subject to risk from changes in foreign exchange rates for its international operations which uses a foreign currency as their functional currency and are translated to U.S. dollars. The Company has not experienced any significant gains or losses from such events. Interest Rate Risk The Company is exposed to interest rate risk from its various financing activities. The following table provides information, by maturity date, about the Company's interest rate sensitive financial instruments, which are fixed rate debt obligations. The fair value of financial instruments closely approximates the carrying values of the instruments due to the short-term or recent issuance of such instruments. Total Recorded Fair 2000 2004 Amount Value ---- ---- -------- ----- Debt: $3,853,480 $12,621,250 $16,474,730 $16,474,730 11.3% 27.5% A 10% increase in interest rates would decrease the Company's cash flow by approximately $1,650,000 and would decrease the fair value of the Company's debt instruments. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 20 PART III. Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth information concerning the Company's executive officers and directors. Year First Became a Director Name Age Position(s) or Officer ---- --- ----------- ----------------- George N. Faris 59 Chairman of the Board 1981 Joe Michael McKinney 60 Chief Executive Officer 1999 William R. Smart 79 Director 1987 Daniel Y. Kim 75 Director 1987 Donald G. Rynne 77 Director 1992 John H. Kelly 60 Director 1999 Denis J. Fitzpatrick 55 Vice President, Secretary and 1994 Chief Financial Officer William L. Tracy 52 Treasurer and Controller 1992 - ---------- Biographical Information Dr. George N. Faris has served as Chairman of the Board of Directors of the Company since 1981 He served as Chief Executive Officer from 1981 to December 1999 . Dr. Faris was the founder of ICAT, an international engineering and construction company, and served as its President from ICAT's inception in 1972 until October 1985. Prior to 1972, Dr. Faris was the President and Chairman of the Board of Directors of Donbar Development Corporation, a company engaged in the patent development of rotary heat exchangers, devices which exchange heat from medium to medium and on which Dr. Faris was granted a number of patents. Dr. Faris received a Ph.D. in Mechanical Engineering from Purdue University in 1968. Mr. Joe Michael McKinney joined the Company in July 1999 as Chief Operating Officer and was appointed Chief Executive Officer and a Director of the Company in December 1999. Mr. McKinney was Vice President and General Manager of all domestic onshore operations at Union Texas Petroleum from 1987 until 1991. He was Senior Vice President of International Operations at Enron Oil & Gas Corporation from 1991-1993 and was promoted to President and Chief Operating Officer responsible for all exploration and development activies outside of North America from 1994 until 1996. From 1996 until 1999, Mr. McKinney was employed by Wind Walker Consulting as a petroleum management and business consultant to companies in the energy field. Mr. McKinney is a registered Professional Engineer and is a member of the Society of Petroleum Engineers and the Association of International Petroleum Negotiators. He received his B.S. degree in Mechanical Engineering from Texas Tech University in 1962. Mr. William R. Smart has served as a member of the Company's Board of Directors since June 1987. Since November 1, 1983, Mr. Smart has been Senior Vice President of Cambridge Strategic Management Group, a management consulting firm. Mr. Smart was Chairman of the Board of Directors of Electronic Associates, Inc., a manufacturer of electronic equipment, from May 1984 until May 1992. He has served on the Board of Directors of Apollo Computer Company and Executone Information Systems, Inc. Mr. Smart is presently a director of National Datacomputer Company and Hollingsworth and Voss Company. Mr. Smart received a B.S. degree in Electrical Engineering from Princeton University in 1941. Dr. Daniel Y. Kim has served as a member of the Company's Board of Directors since July 1987. Dr. Kim is a Registered Professional Geophysicist in California and Colorado. From 1981 until 1984, Dr. Kim was President and Chief Executive Officer of Kim Tech, Inc., a 21 research and development company. In 1984, Kim Tech, Inc. was merged into Bolt Industries, a public company engaged in the manufacture of air guns and auxiliary equipment used to generate shock waves in seismic exploration for oil, gas and minerals. Dr. Kim has been a director of Bolt Industries since 1984. From 1977 to 1980, Dr. Kim was Chief Consulting Geophysicist for Standard Oil Company of Indiana. Dr. Kim received a B.S. degree in Geophysics and a Ph.D. degree in Geophysics from the University of Utah in 1951 and 1955, respectively. Mr. Donald G. Rynne has served as a member of the Company's Board of Directors since September 1992. Mr. Rynne has been Chairman of the Board of Directors of Donald G. Rynne & Co., Inc., a privately owned company engaged in international consulting and trading, since founding that company in 1956. Mr. Rynne is involved in international maritime trading and consulting, dealing primarily in the Middle East in hydrocarbon products and capital equipment. Mr. Rynne received a B.A. degree from Columbia University in 1949. Ambassador John H. Kelly has served as a member of the Company's Board of Directors since December 1999. Ambassador Kelly was Assistant Secretary of State for South Asian and Near Eastern affairs from 1989 to 1991 and is currently Ambassador in Residence at the Center for International Strategy, Technology, and Policy at the Sam Nunn School of International Affairs at Georgia Tech in Atlanta. Ambassador Kelly is a career diplomat and was four times Deputy Assistant Secretary of State as well as Ambassador to Finland and Lebanon. He attended Emory University and the Armed Forces Staff College. He has been a frequent commentator for "Meet the Press", the "Today Show", and on CNN, C-Span BBC, and other media. The business background of each executive officer of the Company, to the extent not set forth above, is described below. Mr. Denis J. Fitzpatrick joined the Company in August 1994 as Vice President, Secretary and Chief Financial Officer. During the previous five years, Mr. Fitzpatrick was the Chief Financial Officer of Nahama & Weagant Energy Company, a publicly traded independent exploration and production company. Mr. Fitzpatrick has held various accounting and financial management positions during his 24 years in the oil and gas industry. He has also served as a Director or Officer of the Council of Petroleum Accountants Society; served on the Tax Committee of the American Petroleum Institute and as a member of the American Management Association. Mr. Fitzpatrick received a B.S. degree in Accounting from the University of Southern California in 1974. Mr. William L. Tracy has been employed by the Company since February 1992 and has been Treasurer and Controller of the Company since August 1993. From May 1989 until February 1992, Mr. Tracy was self-employed as an energy consultant with the Commonwealth of Kentucky. From June 1985 until May 1989, Mr. Tracy served as President of City Gas and Transmission Corp., a public oil and gas production and refining company. He received his BBA from Bellarmine College in Louisville, Kentucky in 1974. The Company's executive officers are appointed annually by the Board to serve until their successors are duly elected and qualified. Item 11. EXECUTIVE COMPENSATION The following table discloses compensation for services rendered by the Company's Chief Executive Officer and all other executive officers of the Company whose compensation exceeded $100,000 in 1999, 1998 and 1997.
Annual Compensation Long Term Compensation - ------------------------------------------------------------- ---------------------------------------------- Name and Principal Other Annual All Other Position Year Salary Bonus Compensation 0ptions(#) Compensation - ----------- ---- ------ ----- ------------ ---------- ------------ George N. Faris 1999 $335,769 $ 41,250 $ -- 500,000 $ -- Chairman of the 1998 330,000 120,000 -- 1,000,000(1) -- Board 1997 312,000 257,000 7,200(2) 750,000 193,000(3) Joe Mike McKinney 1999 $118,461 $5,625 $2,500(2) 700,000 $ 2,500(2) Chief Executive Officer 1998 -- (6) -- -- -- 1997 -- (6) -- -- -- Denis J. Fitzpatrick 1999 $135,769 $ 15,000 $ -- 100,000 $ -- Secretary, Vice 1998 140,000 31,250 -- 170,000(4) -- President and Chief 1997 118,000 102,000 -- 125,000 25,000(5) Financial Officer William L. Tracy 1999 $100,000 $ 10,006 $ -- 75,000 $ -- Treasurer and 1998 100,000 13,500 -- 106,000(7) -- Controller 1997 88,000 62,000 -- 75,000 23,000(5)
22 (1) Includes 420,000 regular options which vest 25% per year beginning December 31, 1998 and 580,000 contingent options which will vest only if the Company's common stock trades at $5.00 per share for 15 consecutive days at any time before December 31, 1999. (2) Vehicle allowance. (3) Includes deferred salary payment of $109,000 and income tax reimbursement of $84,000. (4) Includes 70,000 regular options which vest 25% per year beginning December 31, 1998 and 100,000 contingent options which will vest only if the Company's common stock trades at $5.00 per share for 15 consecutive days at any time before December 31, 1999. (5) Deferred salary payment. (6) Mr. McKinney was hired in July 1999. He was granted 200,000 options as a signing bonus. (7) Includes 56,000 regular options which vest 25% per year beginning December 31, 1998 and 50,000 contingent options which will vest only if the Company's common stock trades at $5.00 per share for 15 consecutive days at any time before December 31, 1999. Note: The contingent options terminated, since the Company's common stock did not trade at $5.00 per share for 15 consecutive days prior to December 31, 1999. STOCK OPTION PLAN The Company has established a 1998 Stock Option Plan (the "1998 Plan"). The 1998 Plan was approved by the Board of Directors on May 29, 1998 and by the Company's shareholders on June 29, 1998. The 1998 Plan is administered by the Board of Directors of the Company or a Committee designated by them. Under the 1998 Plan employees, including officers and managerial or supervising personnel, are eligible to receive Incentive Stock Options ("ISO's") or ISO's in tandem with stock appreciation rights ("SAR's"), and employees, Directors, contractors and consultants are eligible to receive non-qualified stock options ("NQSO's") or NQSO's in tandem with SAR's. Options may be granted under the 1998 Plan to purchase an aggregate of 5,000,000 shares of Common Stock. If an option granted under the 1998 Plan terminates or expires without having been exercised in full, the unexercised shares subject to that option will be available for a further grant of options under the 1998 Plan. Options may not be transferred other than by will or the laws of descent and distribution and, during the lifetime of the optionee, may be exercised only by the optionee. Options may not be granted under the 1998 Plan after May 29, 2008. The exercise price of the options granted under the 1998 Plan cannot be less than the fair market value of the shares of Common Stock on the date the option is granted. ISO's granted to shareholders owning 10% or more of the outstanding voting power of the Company must be exercised at a price equal to at least 110% of the fair market value of the shares of Common Stock on the date of grant. The aggregate fair market value of Common Stock, as determined at the time of the grant with respect to which ISO's are exercisable for the first time by any employee during any calendar year, shall not exceed $100,000. Any additional Common Stock as to which options become exercisable for the first time during any such year are treated as NQSO's. The total number of options granted under the 1998 Plan, as of March 21, 1999 was 4,249,275 of which 1,260,000 were conditional options which expired and were placed back in the 1998 Plan for future issuance. 23 OPTION GRANTS IN LAST FISCAL YEAR The table below includes the number of stock options granted to certain executive officers during the year ended December 31, 1999, exercise information and potential realizable value.
Individual Grants Potential Realizable ----------------- Value at Assumed Number of Percent of Annual Rates of Stock Securities Total Options Price Appreciation Underlying Granted to for Option Term Options Employees in Exercise Expiration --------------------- Name Granted(#) Fiscal Year Price($/sh) Date 5%($) 10%($) ---- ---------- ----------- ----------- ---------- ----- ------ George Faris 500,000 24% $0.825 03/30/04 $ -0- $ -0- Joe Michael McKinney 200,000 10% $ 1.24 07/21/04 $ -0- $ -0- 250,000 12% $ 0.50 12/31/04 $ -0- $ -0- 250,000 12% $ 1.00 12/31/04 $ -0- $ -0- Denis Fitzpatrick 100,000 5% $0.825 03/30/04 $ -0- $ -0- William L. Tracy 75,000 4% $0.825 03/30/04 $ -0- $ -0-
AGGREGATE OPTION EXERCISES IN 1999 AND OPTION VALUES AT DECEMBER 31, 1999 The table below includes the number of shares covered by both exercisable and non-exercisable stock options owned by certain executive officers as of December 31, 1999. Also reported are the values for "in-the-money" options which represent the positive spread between exercise price of any such existing stock options and the year-end price.
Shares ------ Acquired on Value Number of Unexercised Value of Unexercised Name Exercised Realized Options at Year End In-the-money Options - ----- --------- --------- ------------------- -------------------- Exercisable Unexercisable Exercisable Unexercisable ----------- ------------- ----------- ------------- George N. Faris -- -- 2,308,334 564,166 $75,156 $ -- Denis J. Fitzpatrick 120,000 146,227 226,666 68,334 $ -- $ -- Joe Michael McKinney -- -- 125,000 575,000 $ 3,906 $ 11,719 William L. Tracy 51,000 82,988 153,000 53,000 $ -- $ --
EMPLOYMENT CONTRACTS Effective July 21, 1999 the Company entered into a one (1) year employment agreement with Joe Michael McKinney to serve as President of the Company at an annual salary of $300,000, 25,000 shares of the Company's stock, and five (5) year options to purchase 200,000 shares of Company stock with an exercise price equal to 110% of the market price on July 21, 1999 and vest over a three (3) year period. On November 18, 1999 Mr. McKinney's employment agreement was amended to a three (3) year agreement, with successive one (1) year renewals, to serve as the Company's Chief Executive Officer and President at an annual salary, effective January 1, 2000, of $350,000 with additional five (5) year options to purchase 500,000 shares of Company stock at exercise prices of $0.50 to $1.00 and vesting over a two year period. The agreement also provides for, a) a severance payment for termination without cause equal to one month of salary for each full year of prior employment with the Company, and b) a change in control payment in the amount equal to 2.99 times annual base salary in effect immediately prior to termination as a result of a change in control of the Company. 24 Simultaneously with the appointment of Mr. McKinney to the position of Chief Executive Officer and President on November 18, 1999, the Company's existing employment agreement with Dr. George N. Faris was amended to provide for Dr. Faris to continue to serve as Chairman of the Board of the Company for an initial term of three years at an annual salary of $250,000, and if the initial term is not extended by in writing by both parties, the Company agrees to retain Dr. Faris, at his discretion, as a consultant for a period of two calendar years ending December 31, 2004 at an annual salary equal to 50% of his annual base salary at December 31, 2002. The agreement also provides for, a) a severance payment equal to one month's salary for each full year of employment beginning January 1, 1995, based on base salary at December 31, 1999 and b) a change in control payment equal to 2.99 times the greater of (i) $350,000 or (ii) his base salary in effect on date of termination as a result of a change in control of the Company. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION No member of the Compensation Committee was an officer or employee of the Company or of any of its subsidiaries during the prior year or was formerly an officer of the Company or any of its subsidiaries. During the last fiscal year, none of the executive officers of the Company has served on the Board or Compensation Committee of any other entity whose officers served either on the Board of Directors of the Company or on the Compensation Committee of the Company. Item 12. SECURITIES OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS The following table sets forth certain information, as of March 21, 2000, regarding the beneficial ownership of Common Stock of (i) each person known by the Company to be the beneficial owner of more than 5% of the Common Stock; (ii) each Director; (iii) each executive officer named in the Summary Compensation Table below; and (iv) all Directors and executive officers as a group. Name and Address Amount and Nature of Percent of Beneficial Holder(1) Beneficial Ownership of Class - ----------------------- -------------------- -------- George N. Faris 3,826,944(2) 3.5% Joe Michael McKinney 72,833(3) * Daniel Y. Kim 223,378(4) * Donald G. Rynne 729,092 * William R. Smart 250,012 * John Kelly 52,000(5) * Denis J. Fitzpatrick 122,187(6) * William L. Tracy 137,571(7) * All officers and Directors as a group (consisting of 8 persons) 5,414,017(8) 4.8% The Palladin Group, L.P. 11,766,627(9) 9.9% 195 Maplewood Avenue Maplewood, NJ 07040 - ---------- * Less than 1% of class (1) All officers and Directors have an address c/o the Company, 444 Madison Avenue, New York, NY 10022. 25 (2) Includes 770,834 shares of common stock issuable upon the exercise of stock options owned by Dr. Faris. Excludes 376,667 options not exercisable within 60 days. (3) Excludes 575,000 stock options owned by Mr. McKinney, which are not exercisable within 60 days. (4) Includes 205,500 shares of common stock issuable upon the exercise of stock options owned by Dr. Kim. (5) Includes 50,000 shares of common stock issuable upon the exercise of stock options of common stock owned by Ambassador Kelly. Excludes 50,000 option not exercisable within 60 days. (6) Includes 34,667 shares of common stock issuable upon the exercise of stock options owned by Mr. Fitzpatrick. Excludes 68,333 options not exercisable within 60 days. (7) Includes 28,000 shares of common stock issuable upon the exercise of stock options owned by Mr. Tracy. Excludes 53,000 options not exercisable within 60 days. (8) Includes all of the shares of common stock issuable upon the exercise of options described in Notes (2) through (7) above. (9) The Palladin Group, L.P. serves as investment advisor to Hallifax Fund, L.P. ("Hallifax"), the registered owners of the Company's 5% Convertible Secured Debenture (the "5% Debenture") and warrants to purchase Common Stock, and has been granted investment discretion over the securities of the Company owned by this fund. In this capacity, The Palladin Group, L.P. may be deemed to have voting and dispositive power over such securities. Mr. Jeffrey Devers is the principal officer of The Palladin Group. The terms of the 5% Debenture and warrants provide that the number of shares that the registered owners may acquire upon conversion or exercise may not exceed that number that would render Hallifax Fund, L.P. as the beneficial owner of more than 9.99% of the then outstanding shares of Common Stock. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and Directors, and persons who own more than 10 percent of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Such reporting persons are required by regulation to furnish the Company with copies of all Section 16(a) reports that they file. Based solely on its review of the copies of such reports received by it, or written representations from certain reporting persons that no Form 5 was required for those persons, the Company believes that, during the period from January 1, 1999 through December 31, 1999, all filing requirements applicable to its officers, Directors and greater than 10 percent beneficial owners were complied with. 26 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS During 1999 the Company's Chairman and CEO, Dr. George Faris, loaned the Company an aggregate of $500,000 at an annual interest rate of 10% per annum. The Company repaid $765,000 ($265,000 of a remaining balance from 1998 and the $500,000 balance from 1999) in the second quarter of 1999. Also during 1999, Mr. Donald Rynne, a current member of the Company's Board of Directors, loaned the Company an aggregate of $140,000 at an annual interest rate of 10% per annum. The Company repaid the entire amount during the second quarter of 1999. 27 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K (a) Documents Filed as Part of the Report (1) Financial Statements. Page No. Reports of Independent Accountants F-1 Consolidated Balance Sheets(2) December 31, 1999 and 1998 F-2 Consolidated Statement of Operations Years Ended December 31, 1999, 1998 and 1997 F-3 Consolidated Statement of Cash Flows Years Ended December 31, 1999, 1998 and 1997 F-4 Consolidated Statement of Changes in Stockholders' Equity - Years Ended December 31, 1999, 1998 and 1997 F-5 Notes to Consolidated Financial Statements F-8 Supplementary Oil and Gas Information F-27 (2) Financial Statement Schedules. None. (3) Exhibits. 2.1 Share Purchase Agreement dated February 25, 1997, among Registrant and AIPCC, PAIPC and MIP. (8) 3.1 Restated Articles of Incorporation of the Registrant. (6) 3.2 By-laws of the Registrant, as amended. (11) 4.1 Form of Class A Warrant. (3) 4.2 1995 Stock Option Plan and Form of related Option Agreements of the Registrant. (5) 4.3 Form of 8% Convertible Subordinated Debentures due August 1, 1999. (9) 4.4 Form of Subscription Agreement used in connection with the offering of the Registrants' debentures referenced in Exhibit 4.3. (9) 4.5 Form of Warrant to purchase shares of the Registrants' Common Stock issued in connection with the offering of the Registrants' debentures referenced in Exhibit 4.3. (9) 4.6 Form of Registration Agreement used in connection with the offering of the Registrants' debentures referenced in Exhibit 4.3.(9) 4.7 Form of 14% convertible Notes due October 15, 1999. (10) 4.8 Form of Subscription Agreement used in connection with the offering of the Registrants' debentures referenced in Exhibit 4.7. (10) 28 4.9 Form of Warrant to purchase shares of the Registrants' common Stock issued in connection with the offering of the Registrants' debentures referenced in Exhibit 4.7. (10) 4.10 Form of Registration Rights Agreement used in connection with the offering of the Registrants' debentures referenced in Exhibit 4.7. (10) 4.11 Form of Subscription Agreement used in connection with the repayment of debt to a foreign individual. (10) 4.12 Form of Subscription Agreement used in connection with the Registrant's purchase of a 70% interest of MED Shipping Usturt Petroleum Company Ltd.(10) 4.13 Form of Warrant to purchase shares of the Registrant's common Stock issued in connection with the purchase referenced in Exhibit 4.12. (10) 4.14 1998 Stock Option Plan of the Registrant.(14) 4.15 1998 Stock Award Plan of the Registrant.(14) 4.16 14% Convertible Note due April 21, 2000 (12) 4.17 Securities Purchase Agreement dated April 21, 2000 (12) 4.18 Agreement and First Amendment dated April 21, 1998 to the Securities Purchase Agreement dated October 9, 1997. (12) 4.19 Form of Warrant issued pursuant to the Securities Purchase and Equity Agreements associated with Exhibits 4.17 and 4.20 (12) 4.20 Equity Financing Agreement dated April 21, 1998. (12) 4.21 Registration Rights Agreement dated April 21, 1998. (12) 4.22 Letter Agreement dated June 26, 1998 between the Registrant and certain investors. (13) 4.23 Convertible Debenture Purchase Agreement dated February 18, 1999. (2) 4.24 Form of 5% Convertible Secured Debenture dated February 18, 1999. (2) 4.25 Form of Warrant issued pursuant to Convertible Secured Debenture dated February 11, 1999. (2) 4.26 Form of Registration Rights Agreement dated February 18, 1999. (2) 4.27 Form of Mortgage and Security Agreement issued pursuant to the Convertible Secured Debentures dated February 11, 1999. (2) 4.28 Form of 6% Convertible Debenture Purchase Agreement dated August 19, 1999. (15) 4.29 Form of 6% Convertible Secured Debenture issued in connection with the 6% Convertible Debentures referenced in Exhibit 4.28 (15) 4.30 Form of Warrant issued in connection with the 6% Convertible Debentures referenced in Exhibit 4.28. (15) 4.31 Form of Registration Rights Agreement issued in connection with the 6% Convertible Debentures in Exhibit 4.28. (15) 4.32 Form of Security Agreement issued in connection with the 6% Convertible Debentures in Exhibit 4.28. (15) 4.33 Form of Securities Purchase Agreement dated December 1, 1999 by and among the Registrant and GCA Investment Fund Limited. 29 4.34 Form of Mortgage and Security Agreement between St. Marks Refinery, Inc. and GCA Strategic Investment Fund. 4.35 Form of Warrant issued in connection with the Securities Purchase Agreement referenced in Exhibit 4.33. 10.1 Employment Agreement dated May 1, 1989 by and between George N. Faris and the Registrant. (1) 10.2 Amendment #1 to Employment Agreement, dated May 1, 1989, between George N. Faris and the Registrant. (6) 10.3 Registration Rights Agreement dated July 11, 1996 between George N. Faris and the Registrant. (6) 10.4 $3 million Exchangeable Debenture, granted by AIPCC to the Registrant due February 25, 1999. (8) 10.5 Agreement dated April 22, 1997 between the Registrant and MED Shipping and Trading S.A. used in connection with the Registrant's purchase of a 70% interest of MED Shipping Usturt Petroleum Company Ltd. (10) 10.6 Amendment dated May 9, 1997 to the Agreement attached hereto as Exhibit 10.5. (10) 10.7 Consulting Agreement dated December 2, 1998. (15) 10.8 Amendement #2 to Employment Agreement dated May 1, 1989 by and between Registrant and George N. Faris. 10.9 Employment Agreement dated July 21, 1999 by and between the Registrant and Joe Michael McKinney. 10.10 Amendment #1 to Employment Agreement dated July 21, 1999 by and between the Registrant and Joe Michael McKinney. 21.1 Subsidiaries of the Registrant. 27.1 Financial Data Schedule. - ---------- (1) Incorporated herein by reference to the Registration Statement on Form S-1 declared effective on February 13, 1990. (2) Incorporated herein by reference to the Registrant's form 8-K, dated March 1, 1999, as amended April 26, 1999. (3) Incorporated herein by reference to the Registration Statement on Form S-3, declared effective January 15, 1998. (4) Incorporated herein by reference to Amendment #19 to Schedule 13D of George N. Faris for October 13, 1995. (5) Incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. (6) Incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 (7) Incorporated herein by reference to the Registrant's Form 8-K dated August 19, 1996. (8) Incorporated herein by reference to the Registrant's Form 8-K dated March 12, 1997. (9) Incorporated herein by reference to the Registrant's Quarterly Report on Form 10-QA for the quarter ended June 30, 1997. (10) Incorporated herein by reference to the Registrant's Quarterly Report on Form 10-QA for the quarter ended September 30, 1997. (11) Incorporated herein by reference to the Registrant's Annual Report on Form 10-KA for the year ended December 31, 1997. (12) Incorporated by reference to the Registrants' Quarterly Report on Form 10-Q-A for the quarter ended March 31, 1998 30 (13) Incorporated by reference to the Registrants' Quarterly Report on Form 10-Q-A for the quarter ended June 30, 1998 (14) Incorporated by reference to the Registrants' Report on Form S-8 dated January 4, 1999. (15) Incorporated by reference to the Registrants' Report on Form 8-K dated September 9, 1999. (b) Reports on Form 8-K None. 31 INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Stockholders American International Petroleum Corporation We have audited the accompanying consolidated balance sheets of American International Petroleum Corporation and Subsidiaries as of December 31, 1999 and 1998, and related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of American International Petroleum Corporation and Subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles. The Company reported a net loss of approximately $14.9 million during 1999, of which approximately $6.3 million represented non-cash items and has a working capital deficit of approximately $5.0 million at December 31, 1999. The Company had limited revenue generating operating activities during 1999 and does not, as of December 31, 1999, have the resources to fulfill its operating and capital commitments. The Company's refinery facility suspended operations in late 1999 and is not expected to resume operation before the second quarter of 2000. These matters raise a substantial doubt about the Company's ability to continue as a going concern. Management's plans in regards to these matters are discussed in Note 2 to the financial statements. As of December 31, 1999, the Company has costs capitalized in the accompanying balance sheet of approximately $31,600,000 relating to unevaluated oil and properties in Kazakhstan. At the present time, the Company has no commercially feasible means of transporting any oil and gas production it may produce from the Kazakhstan properties. The Company will require a substantial amount of additional capital expenditures to recover its investment in the oil and gas concession. At the present time, the Company does not have the resources to develop these properties and to meet the minimum work program required. HEIN + ASSOCIATES, LLP Houston, Texas March 30, 2000 F-1 AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, -------------------------------- 1999 1998 ------------- ------------- Assets Current assets: Cash and cash equivalents $ 1,753,707 $ 376,745 Accounts and notes receivable, net 497,553 548,442 Inventory 723,088 1,554,694 Deferred financing costs 130,727 8,563 Prepaid expenses 793,956 829,654 ------------- ------------- Total current assets 3,899,031 3,318,098 ------------- ------------- Property, plant and equipment: Unevaluated oil and gas property 31,556,376 23,438,886 Refinery property and equipment 37,999,682 36,935,705 Other 1,005,886 626,910 ------------- ------------- 70,561,944 61,001,501 Less - accumulated depreciation, depletion, and amortization (6,470,672) (4,707,103) ------------- ------------- Net property, plant and equipment 64,091,272 56,294,398 Notes receiviable, less current portion 1,252,696 1,118,200 Other long-term assets, net 415,270 130,638 ------------- ------------- Total assets $ 69,658,269 $ 60,861,334 ============= ============= Liabilities and Stockholders' Equity Current liabilities: Short-term debentures $ 2,223,500 $ -- Notes payable - trade 1,736,831 1,725,350 Notes payable - officers -- 266,850 Accounts payable 3,641,886 4,081,557 Accrued liabilities 1,301,472 1,840,493 ------------- ------------- Total current liabilities 8,903,689 7,914,250 Long-term debt 11,984,592 6,110,961 ------------- ------------- Total liabilities 20,888,281 14,025,211 ------------- ------------- Commitments and contingent liabilities (Note 10) -- -- Minority Interest Liability 305,956 305,956 Stockholders' equity: Preferred stock, par value $0.01, 7,000,000 shares authorized, none issued Common stock, par value $.08, 200,000,000 shares authorized, 91,282,773 and 65,992,328 shares issued outstanding at December 31, 1999 and December 31, 1998, respectively 7,302,621 5,279,385 Additional paid-in capital 145,605,966 129,711,531 Common stock held in escrow as collateral (1,065,938) -- Accumulated deficit (103,378,617) (88,460,749) ------------- ------------- Total stockholders' equity 48,464,032 46,530,167 ------------- ------------- Total liabilities and stockholders' equity $ 69,658,269 $ 60,861,334 ============= =============
The accompanying notes are an integral part of these consolidated fnancial statements. F-2 AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, ------------------------------------------------ 1999 1998 1997 ------------ ------------ ------------ Revenues: Oil and gas production and pipeline fees $ -- $ -- $ 260,579 Refinery operating revenues 8,137,867 11,394,009 -- Other 214,171 460,597 567,385 ------------ ------------ ------------ Total revenues 8,352,038 11,854,606 827,964 ------------ ------------ ------------ Expenses: Lease operating -- -- 98,766 Costs of goods sold - refinery 8,670,760 11,281,139 -- General and administrative 6,367,857 5,097,468 4,627,598 Depreciation, depletion and amortization 1,730,710 813,088 774,264 Interest 6,500,579 1,912,949 6,663,992 Realized and unrealized loss on marketable securities -- 359,325 6,053,298 Loss on sale of subsidiaries -- -- 563,667 Provison for bad debts -- 1,493,750 -- ------------ ------------ ------------ Total expenses 23,269,906 20,957,719 18,781,585 ------------ ------------ ------------ Net loss $(14,917,868) $ (9,103,113) $(17,953,621) ============ ============ ============ Net loss per share of common stock - basic and diluted $ (0.20) $ (0.17) $ (0.43) ============ ============ ============ Weighted-average number of shares of common stock outstanding 72,855,230 53,741,498 41,309,102 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-3 AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, ------------------------------------------------ 1999 1998 1997 ------------ ------------ ------------ Cash flows from operating activities: Net loss $(14,917,868) $ (9,103,113) $(17,953,621) Adjustments to reconcile net loss to net cash (used) by operating activities: Depreciation, depletion, amortization and accretion of discount on debt 5,716,550 2,472,751 5,125,934 Accretion of premium on notes receivable (50,604) (208,886) (167,167) Provision for bad debts -- 1,493,750 -- Realized and unrealized loss on marketable securities -- 359,325 6,053,298 Loss on sale of subsidiaries -- -- 563,667 Issuance of stock for compensation expense 186,233 196,900 40,000 Forgiveness of debt -- -- (50,342) Compensatory stock options -- -- 744,700 Issuance of stock and options for services 468,220 255,814 247,607 Changes in assets and liabilities: Accounts and notes receivable 50,889 1,313,816 57,835 Inventory 831,606 (798,974) (698,746) Prepaid and other (86,466) 426,060 (1,387,484) Accounts payable and accrued liabilities 495,021 2,968,458 (16,688) ------------ ------------ ------------ Net cash (used in) operating activities (7,306,419) (624,099) (7,441,007) ------------ ------------ ------------ Cash flows from investing activities: Additions to oil and gas properties (5,980,341) (8,512,328) (2,663,694) Additions to refinery property and equipment (800,974) (8,578,049) (5,581,714) Proceeds from sales of marketable securities -- 376,633 1,979,494 Proceeds from sale of subsidiaries -- -- 1,764,548 Additions to other long term assets (752,988) (592,444) (94,191) ------------ ------------ ------------ Net cash used in investing activities (7,534,303) (17,306,188) (4,595,557) ------------ ------------ ------------ Cash flows from financing activities: Net increase in short-term debt 2,500,000 -- -- Net increase (decrease) in notes payable 11,481 1,725,350 (237,162) Increase (decrease) in notes payable - officers (266,850) 266,850 -- Repayments of long-term debt (3,500,000) -- (5,791,420) Proceeds from issuance of common stock and warrants, net -- -- 447,810 Proceeds from exercise of stock warrants and options 768,877 738,482 1,272,333 Proceeds from issuance of debentures, net 16,704,176 11,855,000 20,055,295 ------------ ------------ ------------ Net cash provided by financing activities 16,217,684 14,585,682 15,746,856 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents 1,376,962 (3,344,605) 3,710,292 Cash and cash equivalents at beginning of year 376,745 3,721,350 11,058 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 1,753,707 $ 376,745 $ 3,721,350 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-4 AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Additional Common stock paid-in Common Stock Accumulated Shares Amount capital Held In Escrow deficit ---------- ------------- ------------- ---------- ------------- Balance, January 1, 1999 65,992,328 $ 5,279,385 $ 129,711,531 -- $ (88,460,749) Conversions of debentures 17,574,305 1,405,944 6,196,429 -- -- Issuance of stock in lieu of current liabilities 1,798,968 143,917 1,329,796 -- -- Issuance of stock for compensation 223,919 17,914 168,319 -- -- Issuance of stock and options for services 425,000 34,000 434,220 -- -- Issuance of stock for property and equipment 2,090,000 167,200 1,685,166 -- -- Issuance of stock options and warrants -- -- 1,455,835 -- -- Options and warrants exercised 1,283,253 102,661 666,216 -- -- Imputed interest on debentures convertible at a discount to market -- -- 3,044,116 -- -- Issuance of stock for collateral on debt 1,895,000 151,600 914,338 (1,065,938) -- Net loss for the year -- -- -- -- (14,917,868) ---------- ------------- ------------- ---------- ------------- Balance, December 31, 1999 91,282,773 $ 7,302,621 $ 145,605,966 (1,065,938) $(103,378,617) ========== ============= ============= ============= =============
Total ------------- Balance, January 1, 1999 $ 46,530,167 Conversions of debentures 7,602,373 Issuance of stock in lieu of current liabilities 1,473,713 Issuance of stock for compensation 186,233 Issuance of stock and options for services 468,220 Issuance of stock for property and equipment 1,852,366 Issuance of stock options and warrants 1,455,835 Options and warrants exercised 768,877 Imputed interest on debentures convertible at a discount to market 3,044,116 Issuance of stock for collateral on debt Net loss for the year (14,917,868) ------------- Balance, December 31, 1999 $ 48,464,032 =============
The accompanying notes are an integral part of these consolidated financial statements. F-5 AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Additional Common stock paid-in Accumulated Shares Amount capital deficit Total ------------ ------------ ------------ ------------ ------------ Balance, January 1, 1998 48,436,576 $ 3,874,926 $107,987,091 $(79,357,636) $ 32,504,381 Conversions of Debentures 13,794,032 1,103,521 14,422,859 -- 15,526,380 Issuance of stock in lieu of current liabilities 1,506,347 120,508 1,549,209 -- 1,669,717 Issuance of stock for compensation 50,000 4,000 192,900 -- 196,900 Issuance of stock and options for services 100,000 8,000 247,814 -- 255,814 Issuance of stock for refinery property and equipment - Regulation S Offering 1,500,000 120,000 1,567,500 -- 1,687,500 Issuance of stock options and warrants -- -- 936,459 -- 936,459 Options and warrants exercised 605,373 48,430 690,052 -- 738,482 Imputed interest on debentures convertible at a discount to market -- -- 2,117,647 -- 2,117,647 Net loss for the year -- -- -- (9,103,113) (9,103,113) ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1998 65,992,328 $ 5,279,385 $129,711,531 $(88,460,749) $ 46,530,167 ============ ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-6 AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Additional Common stock paid-in Accumulated Shares Amount capital deficit Total ------------ ------------ ------------ ------------ ------------ Balance, January 1, 1997 34,458,921 $ 2,756,714 $ 79,975,019 $(61,404,015) $ 21,327,718 Conversions of debentures 7,246,882 579,751 8,763,271 -- 9,343,022 Issuance of stock in lieu of current liabilities 243,459 19,477 214,082 -- 233,559 Issuance of stock for compensation 100,000 8,000 32,000 -- 40,000 Issuance of stock for services 260,000 20,800 226,807 -- 247,607 Issuance of stock - Reg S Offering 1,635,593 130,847 314,465 -- 445,312 Issuance of stock for oil and gas properties - Reg S Offering 3,250,000 260,000 8,275,938 -- 8,535,938 Issuance of stock warrants for oil and gas properties -- -- 718,750 -- 718,750 Issuance of stock warrants -- -- 6,264,411 -- 6,264,411 Options and warrants exercised 1,241,721 99,337 694,189 -- 793,526 Imputed interest on debentures convertible at a discount to market -- -- 1,763,459 -- 1,763,459 Compensatory stock options -- -- 744,700 -- 744,700 Net loss for the year -- -- -- (17,953,621) (17,953,621) ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1997 48,436,576 $ 3,874,926 $107,987,091 $(79,357,636) $ 32,504,381 ============ ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-7 AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - GENERAL, ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES: American International Petroleum Corporation (the "Company") was incorporated in the State of Nevada and, through its wholly-owned subsidiaries, is the owner of a refinery in Lake Charles, Louisiana, which processes and sells asphalt into the Gulf Coast asphalt market and has the capability to refine other crude oil products, such as vacuum gas oil, naptha and diesel, a refinery and terminal in St. Marks, Florida, which it utilizes as a distribution facility to market some of its asphalt, a 26,000 barrel asphalt transport barge, a 100% working interest in a gas concession and a 70% working interest in an oil and gas concession in Kazakhstan. The Company is also seeking domestic and international oil and gas properties and projects. Sale of Subsidiaries On February 25, 1997, the Company sold all of the issued and outstanding common stock of two of its wholly-owned subsidiaries, American International Petroleum Corporation of Colombia ("AIPCC") and Pan American Petroleum Corporation ("PAIPC") to Mercantile International Petroleum Inc. ("MIP"). Consequently, all references to these subsidiaries herein are presented in the past tense. The assets of AIPCC and PAIPC consisted of oil and gas properties and equipment in South America with an aggregate net book value of approximately $17.9 million. The total aggregate purchase price payable by MIP for the Purchased Shares was valued at up to approximately $20.2 million, determined as follows: (a) Cash payments of approximately $3.9 million, of which approximately $2.2 million was paid simultaneously with the closing to retire the Company's 12% Secured Debentures due December 31, 1997, which were secured by the Company's shares of AIPCC, (b) assumption of AIPCC and PAIPC debt of an aggregate amount of $634,000, (c) 4,384,375 shares of MIP Common Stock (the "MIP Shares") with a trading price of approximately $2.00 per share on the date the parties agreed in principle to the sale, (d) a two-year $3 million 5% exchangeable subordinated debenture of AIPCC (the "Exchangeable Debenture"), exchangeable into shares of common stock of MIP on the basis of $3 principal amount of such debenture for one share of MIP on or after February 25, 1998; or Registrant may demand payment on that date of $1.5 million of the principal balance thereof, (e) a $1.4 million "performance earn-out" from future production in Colombia, plus interest at 8% per annum, (f) up to $2.5 million (reduced proportionately to the extent the Net Operating Loss and Deferred Cost Deductions accrued by AIPCC through December 31, 1996 ("Accrued Tax benefit Deductions") is less than $50 million but more than $20 million (payable from 25% of AIPCC's future tax savings related to Accrued Tax Benefit Deductions, if any, available to AIPCC on future tax filings in Colombia). In January 1998, the Company demanded payment of $1.5 million in principal, which was received by the Company in February 1998. The purchase price included an aggregate of approximately $2.5 million in payments from MIP in connection with MIP's future potential tax savings in Colombia and $3 million of long and short-term notes at face value (not discounted to present value). Taking into consideration the $2.5 million tax payments, which were not recorded because of their contingent nature, and the discounted portion of the notes of approximately $452,000, the Company recorded an aggregate loss of approximately $564,000 on the sale of the subsidiaries. Principles of consolidation The consolidated financial statements of the Company include the accounts of the Company and its wholly-owned subsidiaries, American International Refinery, Inc. ("AIRI"), American International Marine, Inc. ("AIM"), St. Marks Refinery, Inc. ("SMR") American International Petroleum Kazakhstan ("AIPK"), American Eurasia Petroleum Corporation ("AEPC"), American International Petroleum Corporation Holding, Inc. ("AIPC Holdings), AIPCC and PAIPC. Intercompany balances and transactions are eliminated in consolidation. Cash and cash equivalents All liquid short-term instruments purchased with original maturities of three months or less are considered cash equivalents F-8 Marketable Securities Marketable securities classified as available-for-sale are stated at market value, with unrealized gains and losses reported as a separate component of stockholders' equity, net of deferred income taxes. If a decline in market value is determined to be other than temporary, any such loss is charged to earnings. Trading securities are stated at fair value, with unrealized gains and losses recognized in earnings. The Company records the purchases and sales of marketable securities and records realized gains and losses on the trade date. Realized gains or losses on the sale of securities are recognized on the specific identification method. The Company held 2,943,818 shares of MIP at December 31, 1997. During the year the Company sold or dispersed 1,440,557 shares for net cash proceeds of $1,979,494. The realized losses on shares disposed of during 1997 was $901,616. The unrealized loss on shares available for sale at December 31, 1997 was $5,151,682. The MIP stock was deemed permanently impaired at December 31, 1997 and the unrealized loss at that date was recognized as a loss during 1997. The impairment is reflected in realized and unrealized loss on marketable securities in the accompanying Statement of Operations. During 1998, the Company sold all its remaining shares of MIP for net cash proceeds of $376,633, recording a realized loss of $359,325. Inventory Inventory consists of crude oil and asphalt feedstock. Crude oil and asphalt feedstocks are stated at the lower of cost or market value by using the first-in, first-out method. Property, plant and equipment Oil and gas properties The Company follows the full cost method of accounting for exploration and development of oil and gas reserves, whereby all costs incurred in acquiring, exploring and developing properties are capitalized, including estimates of abandonment costs, net of estimated equipment salvage costs. No costs related to production, general corporate overhead, or similar activities have been capitalized. Individual countries are designated as separate cost centers. All capitalized costs plus the undiscounted future development costs of proved reserves are depleted using the unit-of-production method based on total proved reserves applicable to each country. Under the full cost method of accounting, unevaluated property costs are not amortized. A gain or loss is recognized on sales of oil and gas properties only when the sale involves significant reserves. Costs related to acquisition, holding and initial exploration of concessions in countries with no proved reserves are initially capitalized and periodically evaluated for impairment. Costs not subject to amortization: The following table summarizes the categories of cost, which comprise the amount of unproved properties not subject to amortization. December 31, --------------------------------------------- 1999 1998 1997 ---- ---- ---- Kazakhstan: Acquisition Cost $11,724,477 $11,724,477 $11,724,477 Exploration Cost 19,072,440 10,748,427 -- Other Acquisition cost 759,459 965,982 -- ----------- ----------- ----------- $31,556,376 $23,438,886 $11,724,477 =========== =========== =========== Acquisition costs of unproved properties not subject to amortization at December 31, 1999 1998 and 1997, respectively, consists mainly of lease acquisition costs related to unproved areas. The period in which the amortization cost of the Kazakhstan properties will commence is subject to the results of the Company's exploration program, which began in 1999. Certain geological and general and administrative costs are capitalized into the cost pools of the country cost centers. Such costs include certain salaries and benefits, office facilities, equipment and insurance. Capitalized geological and general and administrative costs for Kazakhstan and the Other category totaled $8,117,490, $11,164,180 and $2,437,289 for 1999, 1998 and 1997, respectively. F-9 The net capitalized costs of oil and gas properties for each cost center, less related deferred income taxes, are expensed to the extent they exceed the sum of (i) the estimated future net revenues from the properties, discounted at 10%, (ii) unevaluated costs not being amortized; and (iii) the lower of cost or estimated fair value of unproved properties being amortized; less (iv) income tax effects related to differences between the financial statement basis and tax basis of oil and gas properties. The independent reservoir engineer's report of Estimated Future Reserves and Revenues is based on information available "as of" the date of such Report. Upward or downward revisions to the estimated value and volume of oil and gas reserves may occur based on circumstances occurring, and information obtained, subsequent to the date of the engineer's report. (See "Supplementary Oil and Gas Information for the Years Ended December 31, 1999, 1998 and 1997 - Oil and Gas Reserves. Property and equipment - other than oil and gas properties Property and equipment are carried at cost and included interest on funds borrowed to finance construction. Capitalized interest was $547,786, $7,055,340, and $341,000 in 1999, 1998 and 1997, respectively. Depreciation and amortization are calculated under the straight-line method over the anticipated useful lives of the assets, which range from 5 to 25 years. Major additions are capitalized. Expenditures for repairs and maintenance are charged against earnings. Depreciation, depletion and amortization expense on property and equipment were $1,730,710, $813,088, and $774,264 for the years ended December 31, 1999, 1998 and 1997, respectively. Revenue recognition Oil and gas production revenues are recognized at the time and point of sale after the product has been extracted from the ground. Pipeline fees are recognized at the time and point of expulsion of the product from the pipeline. Refinery revenues are recognized upon delivery. Discounts and premiums Discounts and premiums on accounts and notes receivables and notes payable are amortized as interest expense or income over the life of the instrument on the interest method. Earnings per share Earnings per share of common stock are based on the weighted-average number of shares outstanding. Basic and diluted earnings per share were the same for all years presented. Options to purchase 13,202,753 and 7,100,681 shares of common stock at various prices were outstanding during 1999 and 1998, respectively, but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares. For the Year Ended December 31, 1999 ------------------------------------ Net Income(Loss) Weighted Average Per Share (Numerator) Shares Amount ----------- ------ ------ Basic EPS: Loss available to $(14,917,868) 72,855,230 $(0.20) Common Shareholders Effect of Dilutive Securities Warrants and Options (1)(2) -- -- -- ------------ ------------ ------ Diluted EPS: Loss available to $(14,917,868) 72,855,230 $(0.20) Common Shareholders (1) The effect of these shares in the Dilutive EPS were not reflected on the face of the Statement of Operations as they were anti-dilutive in accordance with paragraph 13, of SFAS 128. (2) Options and warrants to purchase 13,202,753 shares of common stock at various prices were outstanding at December 31, 1999, but were not included in the computation of diluted EPS because the exercise price was greater than the average market price of the common shares or the options were not vested at December 31, 1999. F-10 Foreign currency Foreign currency transaction gains and losses are included in the consolidated statement of operations. The Company does not engage in hedging transactions to reduce the risk of foreign currency exchange rate fluctuations and has not experienced significant gains or losses related to such events. The functional currency of the AIPK subsidiary is U.S. dollars, as the Company negotiates all transactions based upon U.S. dollar-equivalents and the Company is providing all of the funding requirements of AIPK. The Company anticipates little, if any, currency and exchange risks during the initial three to five years of its operations in Kazakhstan due to the Company negotiating all transactions in U.S. dollars. Any revenues generated from Kazakhstan during this period are planned to be reinvested in the Company's projects in Kazakhstan. Subsequently, the Company will be exposed to the currency and exchange risks, which typically present themselves in the Confederate of Independent States ("CIS") countries. The Company collected sales of oil and gas in Colombia and Peru in local currency and utilized those receipts for local operations. Periodically, funds were transferred from U.S. accounts to Columbia or Peru and converted into pesos or soles, respectively, when local currency was insufficient to meet obligations payable in local currency. Foreign Exchange losses in 1997 were $75,878. Deferred charges The Company capitalizes certain costs, primarily commissions and legal fees, associated with the offering and sale of debentures. Such costs are amortized as interest expense over the life of the related debt instrument. Sales of debentures and notes at face value were $23,375,000, $12,000,000, and $20,537,000 in 1999, 1998, and 1997, respectively. Debenture costs of $1,618,415, $1,126,930, and $3,253,035 were amortized in the years 1999, 1998 and 1997, respectively. Stock-based compensation Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" defines a fair value based method of accounting for an employee stock option or similar equity instrument or plan. However, SFAS No. 123 allows an entity to continue to measure compensation costs for these plans under APB 25. The Company has elected to account for employee stock compensation plans as provided under APB 25 and to adopt the disclosure provisions of SFAS 123. Fair Value of Financial Instruments The fair value of financial instruments, primarily accounts receivable, accounts payable and notes payable and debentures, closely approximate the carrying values of the instruments due to the short-term maturities or recent issuance of such instruments. Comprehensive Income (Loss) Comprehensive income is defined as all changes in stockholders' equity, exclusive of transactions with owners, such as capital investments. Comprehensive income includes net income or loss, changes in certain assets and liabilities that are reported directly in equity such as translation adjustments on investments in foreign subsidiaries, and certain changes in minimum pension liabilities. The Company's comprehensive income (loss) was equal to its net income (loss) for all periods presented in these financial statements. Long Lived Assets The Company reviews for the impairment of long-lived assets and certain identifiable intangibles whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. The Company has not identified any impairment loss during 1999, 1998 and 1997. F-11 Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the related reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management believes that the estimates are reasonable. The Company's financial statements are based on a number of significant estimates including the valuation of unevaluated oil and gas properties which are the basis for the calculation of impairment of oil and gas properties. Because estimates of fair value of unevaluated oil and gas properties are inherently imprecise, it is reasonably probable that the estimates of fair value associated with the concession in Kazakhstan will materially change during the next year. Reclassifications Certain prior year amounts have been reclassified to conform to the current year presentation. Accounting for Income Taxes The Company uses the asset and liability approach for financial accounting and reporting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. NOTE 2 - MANAGEMENT PLANS The Company reported a net loss of approximately $14.9 million during 1999, of which approximately $6.3 million represented non-cash items, and has commitments to fund the operations of its Kazakhstan subsidiary (see Note 10), $4.2 million of non-convertible secured debt, and has convertible debentures totaling approximately $12.6 million (see Note 6 and 7), which may or may not be converted to common stock, that mature in 2004. As of December 31, 1999; the Company had 4.6 million of negative working capital. The Company intends to be very conservative with its spending overseas during 2000. As of March 2000, the Company's existing working capital was insufficient to provide all the funds it requires to complete its minimum work program in Kazakhstan during 2000. However, in the past, the Company has negotiated reductions and deferrals of its minimum requirements in Kazakhstan and believes that, if necessary, it can do so again. The Company's reservoir development studies, which have been verified by Ryder Scott Company L.P., a Houston-based petroleum consulting firm, indicate the presence of a significant amount of recoverable gas reserves at the Company's License 1551. The Company is currently negotiating with two separate large Russian/American oil and gas companies regarding a sale of up to 75% of its ownership interest in License 1551, and one of these companies has also expressed an interest in providing development financing to the Company in addition to a purchase of a partial interest. In addition, the Company expects to sign a gas sales agreement in the second quarter of 2000 with Gazprom, which will allow the Company to classify the gas reserves as proved reserves, thereby potentially providing it with a borrowing base (the "Borrowing Base") for development and working capital. The proceeds derived from the sale of a portion of License 1551 and/or the Borrowing Base should provide the Company with the necessary capital to fund its obligations during 2000 and beyond. The Company recently signed an agreement with Maretech Corporation to lease its crude unit at Lake Charles. The agreement is expected to provide the Company with sufficient working capital to fund most of its domestic operations overhead during the year 2000 and beyond. This agreement will also enable the Company to continue its asphalt operations. As of March 21, 2000, the Company has a backlog of asphalt sales of approximately $10.5 million, which are primarily higher-margin polymer-enhanced products. Management of the Company has also been seeking sources of capital to enable the Company to supplement its operating activities and to fulfill commitments which may arise in 2000 and beyond. Maretech may cancel the agreement should they be unable to operate profitably and in certain other circumstances provided in the lease agreement. As operations at the Refinery expand during 2000, the Company plans, to the extent possible, to prudently obtain bank or other conventional, non-equity financing to replace its existing convertible debt and provide the supplemental funds necessary to support its operations and minimum work program in Kazakhstan. If the Company is unable to derive the necessary working capital from the Refinery, St. Marks, AIM, the sale of a portion of its License 1551 properties, or from a joint venture partner in Kazakhstan to support its operations during 2000, or obtain the necessary financing to adequately supplement or provide all of its funding needs, its ability to continue operations could be materially and adversely effected. As a result, there is substantial doubt about the Company's ability to continue as a going concern. F-12 NOTE 3 - ACCOUNTS AND SHORT-TERM NOTES RECEIVABLE: Accounts and notes receivable are shown below: December 31, ---------------------------- 1999 1998 ---- ---- Accounts receivable - trade $ 377,125 $ 1,499,651 Note receivable - Gold Line (See Note 8) -- 900,732 Current portion - Note receivable - MIP 1,493,750 1,515,750 Other 120,428 46,936 ----------- ----------- 1,991,303 3,963,069 Less - allowance for doubtful accounts (1,493,950) (3,414,627) ----------- ----------- $ 497,553 $ 548,442 =========== =========== NOTE 4 - OTHER LONG-TERM ASSETS: Other long-term assets consist of the following: December 31, ----------------------- 1999 1998 ---- ---- Note receivable - MIP (See Note 1), net of discount of $18,651 and $69,255, respectively $1,252,696 $1,118,200 ========== ========== NOTE 5 - ACCRUED LIABILITIES: Accrued liabilities consist of the following: December 31, ------------------------------- 1999 1998 ---- ---- Accrued payroll $ 15,935 $ 35,756 Accrued interest 499,666 47,206 Corporate taxes 116,608 171,768 Excise taxes -- 1,246,684 Property taxes 176,591 175,000 Sales Taxes 56,913 107,135 Other 435,758 56,944 ---------- ---------- $1,301,472 $1,840,493 ========== ========== NOTE 6 - SHORT TERM DEBT
December 31, ---------------------------- 1999 1998 ---- ---- 13% - $2,500,000 secured Bridge Note, net of unamortized discount of $276,000 - due June 1, 2000, collateralized by the shares of the St. Marks subsidiary and certain St. Marks real estate, effective interest rate - 13% $2,223,500 $ -- 10% - $265,000 unsecured demand note due to officers - includes interest of $1,850 due at December 31, 1998 -- 266,850 Trade notes payable - various notes due from one month to twelve months - interest ranges from 8.5% to 14.5%, includes $106,851 of interest due at December 31, 1999 - collateralized by accounts receivable, inventory, and certain fixed assets 1,736,831 1,725,350 ---------- ---------- $3,960,331 $1,992,200 ========== ==========
F-13 NOTE 7 - LONG-TERM DEBT:
December 31, ------------------------------ 1999 1998 ---- ---- 14% - $12,000,000 unsecured convertible debenture, due April 21, 2000, net of unamortized financing cost of $362,659, Effective interest rate - 40% (1) $ -- $ 6,110,961 5% - $10,000,000 secured convertible debenture, due February 18, 2004, net of unamortized financing cost of $437,050, collateralized by the Lake Charles facility, effective interest rate - 28% (2) 8,734,200 -- 6% - $7,250,000 secured convertible debenture, due August 18, 2004, net of unamortized financing cost of $199,608, collateralized by the fixed assets at the St. Marks facility, effective interest rate - 26% (2) $ 3,250,392 -- ----------- ----------- $11,984,592 $ 6,110,961 =========== ===========
(1) Convertible into the Company's common stock at the average of the lowest five (5) consecutive daily weighted average sales prices of the common stock as reported by Bloomberg, LP for the forty (40) trading days ending on the day prior to the date of conversion. (2) Convertible into the Company's common stock at the average of the lowest five (3) consecutive daily weighted average sales prices of the common stock as reported by Bloomberg, LP for the forty (20) trading days ending on the day prior to the date of conversion. The effective interest rate as stated for debt instruments does not necessarily reflect the actual cash cost to the Company for that specific debt instrument. The effective interest rate reflects presumed incremental yield the holder of the debt instrument may derive from the discounted conversion rate of such instrument and the fair value of warrants issued to debt holders. During 1999, the Company sold convertible debentures totaling $17,250,000. During 1999, $7,602,373 of convertible debentures were converted into the Company's common stock at discounts to market of 15%. NOTE 8 - REFINERY LEASE: In October 1990, the Company leased its refinery to Gold Line. All amounts owed to AIRI by Gold Line on October 1, 1992 were restructured to a note totaling $1,244,192, due on September 30, 1995 bearing interest at prime plus 2%. The note was to be retired in monthly installments equal to 10% of Gold Line's monthly operating cash flow, if such operating cash flow was positive. No amounts were collected pursuant to the provision and the note was fully reserved for during 1992. No interest was accrued with respect to this note. On March 22, 1995, the term of the lease was extended through March 31, 1998. In consideration for extending the lease, Gold Line executed a $1,801,464 promissory note (which amount includes the $1,244,192 note referred to above and certain trade receivables owed the Company by Gold Line of $506,332 at December 31, 1994) payable in installments of principal and interest through June 15, 1997. The promissory note bears interest at prime plus 1%. The Company established a reserve for doubtful accounts of $1,921,518 at December 31, 1996. In February 1996, in order to enhance the business strength of the lessee of its Refinery and to assist it in securing a new government contract, the Company agreed to reduce the fully reserved principal balance of its note receivable from the lessee to $900,732 from $1,801,464. During the third and fourth quarters of 1996, Gold Line began to fall behind in their monthly lease fee payments to AIRI, even though it was processing an average in excess of 400,000 barrels of feedstock per month during these periods. On February 3, 1997, the Company delivered a Default Notice to Gold Line informing Gold Line of various items of default under the Lease Agreement, including non-payment of lease fees totaling approximately $567,000 and 1996 real estate taxes of approximately $208,000. Subsequent Notices of Default were also delivered to Gold Line covering additional items of default, including an additional $287,000 in unpaid lease fees and $29,000 of unpaid insurance premiums (which premiums were paid by AIRI). On February 18, 1997, the Company delivered a Termination Notice and Notice to Vacate, pursuant to the Lease Agreement, whereby the Company gave written notice to Gold Line to vacate the leased premises five days from the date the Notice was delivered. Gold Line did not comply with the Company's Notice to Vacate, so on February 26, 1997 the Company filed suit against Gold Line. On March 20, 1997, the court terminated the Lease Agreement and ordered Gold Line to vacate the refinery premises within 24 hours of the Order, with which Gold Line complied. F-14 In light of the events, which occurred after December 31, 1996, the Company reserved all lease fees due from Gold Line as of December 31, 1996 and did not record earned lease fees of $443,000 during 1997. See Note 10 - "Commitments and Contingent Liabilities - Gold Line Defaults". NOTE 9 - STOCK OPTIONS AND WARRANTS: Outstanding warrants and options At December 31, 1999, 1998 and 1997, the following warrants and options for the purchase of common stock of the Company were outstanding, which are exercisable upon demand any time prior to the expiration date. Number of Shares Underlying Options and Warrants at December 31, -------------------------------- Exercise Expiration 1999 1998 1997 Price Date ---- ---- ---- ----- ---- -- -- 5,957,207 $4.000 March 1, 1998 (3)(2) -- -- 100,000 $0.487 January 31, 1999(4)(2) -- 22,681 22,681 $2.131 July 22, 1999(4)(2) -- 864,000 960,000 $2.713 August 6, 1999(4)(2) -- 200,000 -- $2.000 August 24, 1999(4)(2) -- 1,500,000 -- $2.000 October 9, 1999(1)(2) -- -- 1,500,000 $6.250 October 9, 1999(4)(2) -- 1,781,000 1,852,500 $0.500 December 31, 1999(1)(2) -- 1,210,000 -- $2.000 December 31, 1999(1)(2) 1,358,000 -- -- $0.5000 July 31, 2000(1) 50,000 50,000 50,000 $0.5000 November 1, 2000(1) -- -- 61,547 $0.469 July 15, 2001(4)(2) -- -- 100,000 $1.000 July 15, 2001(4)(2) -- -- 10,500 $0.475 July 16, 2001(4)(2) -- -- 8,333 $0.415 August 19, 2001(4)(2) 16,667 16,667 16,667 $0.413 August 20, 2001(4) 8,420 8,420 18,519 $0.406 October 31, 2001(4) -- -- 10,000 $0.500 November 11, 2001(4)(2) -- -- 20,000 $0.500 November 12, 2001(4)(2) -- -- 30,000 $0.398 April 1, 2002(4)(2) -- 60,000 60,000 $0.398 June 6, 2002(4) 200,000 200,000 200,000 $2.000 July 30, 2002(4) 64,000 -- -- $1.200 October 6, 2002(4) 1,500,000 -- -- $2.000 October 9, 2002(1) -- 197,500 -- $3.000 October 14, 2002(4)(2) -- -- 197,500 $6.250 October 14, 2002(4)(2) -- -- 10,000 $0.500 November 5, 2002(4)(2) 100,000 100,000 -- $2.000 December 1, 2002(1) 1,400,000 1,500,000 1,518,750 $1.050 December 31, 2002(1)(2) -- -- 100,000 $4.280 December 31, 2002(1)(2) 1,400,000 1,400,000 -- $2.000 April 21, 2003(4) -- 118,500 -- $2.000 April 21, 2003(4)(2) -- 100,000 -- $2.600 April 21, 2003(4)(2) -- 25,000 -- $3.000 April 21, 2003(4)(2) 1,595,978 -- -- $2.000 April 22, 2003(4) 15,000 15,000 -- $1.375 June 29, 2003(1)(2) 782,000 782,000 -- $2.000 June 29, 2003(1) F-15 197,500 -- -- $1.200 October 14, 2003(4) 2,000,000 -- -- $2.562 February 18, 2004 (4) 1,342,275 -- -- $0.825 March 30, 2004(1) 118,500 -- -- $1.200 April 21, 2004(4) 200,000 -- -- $1.238 July 21, 2004 (1) 712,500 -- -- $1.450 August 18, 2004(4) 100,000 -- -- $1.000 September 30, 2004(4) 50,000 -- -- $1.500 September 30, 2004(4) 50,000 -- -- $0.750 October 19, 2004(4) 375,000 -- -- $0.800 November 2, 2004(4) 400,000 -- -- $0.900 December 1, 2004(4) 250,000 -- -- $0.500 December 31, 2004(1) 250,000 -- -- $1.000 December 31, 2004(1) 50,000 -- -- $0.800 July 14, 2005(4) 300,000 -- -- $0.800 August 18, 2005(4) - ---------- ---------- ---------- 14,885,840 10,150,768 12,804,204 ========== ========== ========== (1) Represents options held by employees and directors of the Company. The exercise price and expiration date of such options reflects the adjustments approved by the Company's Board of Directors. (2) These options and warrants were canceled or expired, as applicable, in 1997 or 1998 as indicated in the table. (3) Class A Warrants; (4) Other non-employee warrants. Stock option plans 1995 Plan The Company established a 1995 Stock Option Plan (the "1995 Plan"). The 1995 Plan was approved by the Board of Directors on November 8, 1995 and by the Company's shareholders on July 11, 1996. The 1995 Plan is administered by the Board of Directors of the Company or a Committee designated by them. Under the 1995 Plan employees, including officers and managerial or supervising personnel, are eligible to receive Incentive Stock Options ("ISO's") or ISO's in tandem with stock appreciation rights ("SAR's"), and employees, Directors, contractors and consultants are eligible to receive non-qualified stock options ("NQSO's") or NQSO's in tandemwith SAR's. Options may be granted under the 1995 Plan to purchase an aggregate of 3,500,000 shares of Common Stock. If an option granted under the 1995 Plan terminates or expires without having been exercised in full, the unexercised shares subject to that option will be available for a further grant of options under the 1995 Plan. Options may not be transferred other than by will or the laws of descent and distribution and, during the lifetime of the optionee, may be exercised only by the optionee. Options may not be granted under the 1995 Plan after November 7, 2005. The exercise price of the options granted under the 1995 Plan cannot be less than the fair market value of the shares of Common Stock on the date the option is granted. ISO's granted to shareholders owning 10% or more of the outstanding voting power of the Company must be exercised at a price equal to at least 110% of the fair market value of the shares of Common Stock on the date of grant. The aggregate fair market value of Common Stock, as determined at the time of the grant with respect to which ISO's are exercisable for the first time by any employee during any calendar year, shall not exceed $100,000. Any additional Common Stock as to which options become exercisable for the first time during any such year are treated as NQSO's. The total number of options granted under the 1995 Plan, as of December 31, 1999 was 3,333,750. F-16 1998 Plan Under the Company's 1998 Stock Option Plan (the "1998 Plan"), the Company's employees, Directors, independent contractors, and consultants are eligible to receive options to purchase shares of the Company's common stock. The Plan allows the Company to grant incentive stock options ("ISOs"), nonqualified stock options ("NQSOs"), and ISOs and NQSOs in tandem with stock appreciation rights ("SARs", collectively "Options"). A maximum of 5,000,000 shares may be issued and no options may be granted after ten years from the date the 1998 Plan is adopted, or the date the Plan is approved by the stockholders of the Company, whichever is earlier. The exercise price of the Options cannot be less than the fair market value of the shares of common stock on the date the Option is granted. Options granted to individuals owning 10% or more of the outstanding voting power of the Company must be exercisable at a price equal to 110% of the fair market value on the date of the grant. The 1998 Plan was submitted to and approved by the Company's stockholders at its annual meeting in 1998. Activity in the 1995 and 1998 Stock Option Plans for the years ended December 31, 1997, 1998 and 1999 was as follows: Weighted Average Number of Exercise Price Shares Per Share ------ --------- Outstanding, January 1, 1997 1,902,500 $0.50 Canceled (1,852,500) $0.50 Granted 3,471,250 $0.84 Expired -- -- --------- Outstanding, December 31, 1997 3,521,250 $0.83 Canceled (68,750) $.074 Granted 2,007,000 $2.00 Exercised (21,500) $.050 --------- Outstanding December 31, 1998 5,438,000 $1.23 Granted 2,242,275 $0.95 Exercised (523,000) $0.61 Expired (1,410,000) $2.00 --------- Outstanding December 31, 1999 5,747,275 $0.99 ========= As of December 31, 1999, options to acquire 4,093,850 shares of the Company's common stock with exercise prices ranging from $0.50 to $2.00, were fully vested and exercisable at a weighted average exercise price of $0.92 per share. The remaining 1,653,425 options, with exercise prices ranging from $0.825 to $2.00, having a weighted average exercise price of $1.15 per share, will vest through 2004. If not previously exercised, options outstanding at December 31, 1999, will expire as follows: 1,358,000 options expire on July 31,2000; 50,000 options expire on November 1, 2000; 100,000 expire on December 1, 2002; 1,400,000 options expire on December 31, 2002; 797,000 options expire on June 29, 2003; 1,342,275 options expire on March 30, 2004; 200,000 options expire on July 21, 2004; and 500,000 options expire on December 31, 2004. The weighted average grant date fair value of the options issued during 1997 and the weighted average exercise price of those options amounted to $0.75 and $0.85, respectively. The weighted average grant date fair value of the options issued during 1998 and the weighted average exercise price of those options amounted to $0.68 and $2.00, respectively. The weighted average grant date fair value of the options issued during 1999 and the weighted averaged exercise price of those options amounted to $0.75 and $0.95, respectively. The options to acquire 2,242,275 of common stock issued during 1999 were granted with exercise prices greater than the stock price on the grant date. During 1997, 1,852,500 options were granted whose exercise price was less than the stock price on grant date. These options were existing options issued in prior years and whose expiration date was extended in 1997 to December 31, 1999. The option exercise price was not changed during 1997. Under generally accepted accounting practices, the extension of these expiration dates constitutes a new issue of options. New issues in 1997 of 1,618,750 options were granted with exercise prices greater than the stock price on grant date. F-17 In October 1995, the Financial Accounting Standards Board issued a new statement titled "Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123 encourages, but does not require, companies to recognize compensation expense for grants of stock, stock options, and other equity instruments to employees based on fair value. Fair value is generally determined under an option pricing model using the criteria set forth in SFAS 123. The Company applies APB Opinion 25, Accounting of Stock Issued to Employees, and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed price stock option plans. Had compensation expense for the Company's stock based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS 123, the Company's net loss and loss per common share would have been increased to the pro forma amounts indicated below:
1999 1998 1997 ---- ---- ---- Net loss As reported $(14,917,868) $ (9,103,113) $(17,953,621) Pro forma (16,314,519) (10,545,636) (19,325,148) Net loss per common share As reported $ (0.20) $ (0.17) $ (0.43) Pro forma (0.22) (0.20) (0.47)
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: risk- free rates of 4.5% to 6.1%; volatility ranging from 96.01% to 105.51%, no assumed dividend yield; and expected lives of 1.5 months to 3 years. During 1997, the expiration date of certain options were extended from December 31, 1997 until December 31, 1999. In accordance with SFAS 123 the revaluation and/or the extension of the expiration dates of the options constitutes a new issuance of options. In 1997, $744,000 was charged to compensation expense and is reflected in the net loss as reported. NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES: IRS Excise Tax Claim In May 1992, AIRI was advised by the Internal Revenue Service ("IRS") that the IRS was considering an assessment of excise taxes, penalties and interest of approximately $3,500,000 related to the sale of fuel products during 1989. The IRS claimed that AIRI failed to comply with an administrative procedure that required sellers and buyers in tax-free transactions to obtain certification from the IRS. The Company believes that AIRI complied with the substance of the then existing requirements and that such sales were either tax-free or such excise taxes were paid by the end-users of such products. AIRI offered to negotiate a settlement of this matter with IRS Appeals since early 1993. Such negotiations included face-to-face meetings, numerous phone calls and written transmittals and several offers of settlement by both the Company and the IRS. During these negotiations, the IRS Appeals officers offered to waive all of the penalties and 75% of the amount of the proposed tax liability. However, AIRI rejected this offer and requested the IRS' National Office to provide technical advice to its Appeals officers. After numerous conferences and discussions with the National Office in 1995, the National Office issued an adverse Technical Advice Memorandum ("TAM") to its Appeals Office in Dallas, Texas, to the effect that AIRI should be liable for the tax on the sale of diesel fuel for the first three quarters of 1989. However, subsequent to the issuance of the TAM, the IRS Appeals officer indicated to AIRI that the IRS still wanted to negotiate a settlement. In 1998, the Company reached a final agreement (the "IRS Agreement") with the IRS to settle this matter by agreeing to pay an aggregate of $646,633 in tax, plus interest accrued for the applicable periods involved. In the IRS Agreement, the IRS waived all penalties and 75% of the amount of the originally proposed tax liability. The Company continues to maintain that it is not liable for the excise taxes at issue, but agreed to settle the dispute at a significantly lower amount of liability in order to bring this long-running issue to conclusion. In February 1999, the Company paid all amounts due to the IRS on this matter, which totaled approximately $1.3 million. Environmental Lawsuit In January 1994, a lawsuit captioned Paul R. Thibodeaux, et al. (the "Plaintiffs") v. Gold Line Refinery Ltd. (a limited partnership), Earl Thomas, individually and d/b/a Gold Line Refinery Ltd., American International Refinery, Inc., Joseph Chamberlain individually (collectively, the "Defendants") (Docket No. 94-396), was filed in the 14th Judicial District Court for the Parish of Calcasieu, State of Louisiana. Subsequently, several parties were joined as plaintiffs or defendants in the lawsuit. The lawsuit alleged, among other things, F-18 that the defendants, including AIRI, caused or permitted the discharge of hazardous and toxic substances from the Lake Charles Refinery into the Calcasieu River. The plaintiffs sought an unspecified amount of damages, including special and exemplary damages. In October 1997, the Plaintiffs and Defendants agreed upon a cash settlement, of which the Company's share of $45,000 was placed into escrow in October 1997 and paid in 1998. This matter was fully and finally settled during the first quarter of 1998 and all claims were dismissed with prejudice as to all defendants, which included the Company and AIRI. Employment agreements The Company has employment agreements with its Chairman and its Chief Executive Officer under which these officers receive an annual base salary of $250,000 and $350,000, respectively. Transfer of Funds - U.S. and Foreign The Company currently operates in the Republic of Kazakhstan and there are no restrictions on the transfer of funds into and out of the country between the Company's U.S. and foreign branch of its subsidiary, AIPK. Gold Line Defaults During the third and fourth quarters of 1996, Gold Line defaulted on their obligations to pay lease fees, insurance premiums, property taxes and other items to AIRI under the terms of the Lease Agreement totaling an aggregate of $567,000. In addition, Gold Line paid no lease fees to AIRI during the first quarter of 1997. On February 18, 1997, AIRI filed suit against Gold Line for termination of the Lease Agreement and damages including unpaid processing fees, real-estate taxes, insurance premium and other items which may be due under the terms of the Lease Agreement. Notice to vacate was also sent to Gold Line, and after the demand to vacate was not met, a pleading to evict Gold Line was filed as an incident to the original suit. After a hearing on March 20, 1997, the court granted the eviction and Gold Line vacated the Refinery premises. The Company filed suit for damages and received a judgment in its favor of $1.5 million. However, since Gold Line has filed for protection under Chapter 11 of the Bankruptcy Code, and there are certain secured creditors who have made significant claims against Gold Line, the total of which claims may exceed the total value of Gold Line's assets, the collectibility of this judgment by the Company is uncertain. The Company has provided an allowance during 1996 of $682,000, which fully reserves all amounts due AIRI from Gold Line. Lease commitments The Company leases office space under two operating leases which expire in 2003 and 2006. Future minimum annual payments under these operating leases are $459,000, $464,000, $474,000, $479,000 and $268,800 for 2000, 2001, 2002, 2003and 2004, respectively, and $268,800 thereafter. Minimum lease payments have not been reduced by minimum sublease rentals due in the future under noncancelable subleases. The composition of total rental expense for all operating leases was as follows: 1999 1998 1997 ---- ---- ---- Minimum rentals $ 431,242 $ 150,530 $ 158,313 Less - sublease rentals -- -- (21,740) --------- --------- --------- Total rent expense $ 431,242 $ 150,530 $ 136,573 ========= ========= ========= Other Contingencies In addition to certain matters described above, the Company and its subsidiaries are party to various legal proceedings. Although the ultimate disposition of these proceedings is not presently determinable, in the opinion of the Company, any liability that might ensue would not be material in relation to the consolidated financial position or results of operations of the Company. F-19 Trifinery V. American International Refinery, Inc. Etc. Cause No. 98-11453; in the 269th Judicial District; in and For Harris County, Texas Plaintiff, Trifinery, has filed suit in a Harris County District Court against the Company and its wholly-owned subsidiary, American International Refinery, Inc. ("AIRI"). Trifinery has asserted claims for recovery of compensatory and punitive damages based on the following theories of recovery; (1) breach of contract, (2) disclosure of confidential information; and (3) tortuous interference with existing contractual relations. Generally, Trifinery has alleged that in connection with the due diligence conducted by the Company and AIRI of the business of Trifinery, the Company and AIRI had access to confidential or trade secret information and that the Company and AIRI have exploited that information, in breach of an executed Confidentiality Agreement, to the detriment of Trifinery. Trifinery seeks the recovery of $20,000,000 in compensatory damages and an undisclosed sum in connection with its claim for the recovery of punitive damages. In addition to seeking the recovery of compensatory and punitive damages, Trifinery sought injunctive relief. Specifically, Trifinery sought to enjoin the Company and AIRI from: (1) offering employment positions to the key employees of Trifinery; (2) contacting the suppliers, joint venture partners and customers of Trifinery in the pursuit of business opportunities; (3) interfering with the contractual relationship existing between Trifinery and St. Marks Refinery, Inc.; and (4) disclosing or using any confidential information obtained during the due diligence process to the detriment of Trifinery. The Company and AIRI have asserted to a general denial to the allegations asserted by Trifinery. The Company and AIRI also moved the district court to refer the matter to arbitration, as provided for in the Confidentiality Agreement, and to stay the pending litigation. On March 27, 1999, the district court referred the matter to arbitration, as requested by the Company and AIRI, and stayed litigation. At present, the dispute existing between the Company, AIRI and Trifinery in Texas will be decided by a panel of three arbitration judges under the American Arbitration Association rules for commercial disputes. Two arbitrators have been identified by the parties and the third is in the process of being chosen. The Company and AIRI are vigorously defending this matter and the Company's counsel anticipates a favorable outcome, although a definitive outcome is not yet determinable. On February 26, 1998, the Company entered into a Letter Agreement with DSE, Inc., the parent corporation of St. Marks Refinery, Inc., whereby the Company agreed to purchase or lease the refinery and terminals facility located at St. Marks, Florida. Thereafter, St. Marks Refinery, Inc. elected to terminate its storage agreement with Trifinery. On March 10, 1998, Trifinery sued St. Marks Refinery, Inc. in the United states District Court for the Northern District of Florida, Case No. 4:98cv86-WS, and sought an injunction to prevent immediate termination of its storage agreement. Following an evidentiary hearing, the District Judge denied Trifinery's application for injunctive relief and adopted the recommendations of the Magistrate, who found in part that Trifinery had failed to prove a substantial likelihood of success on the merits. The District Court's order was appealed by Trifinery to the United States Court of Appeals for the Eleventh Circuit, but the Appellate Court denied Trifinery's motion for injunction pending appeal. On appeal, the federal court found in favor of Trifinery and issued a judgement related thereto for $175,000, which was paid by the Company on behalf of St. Marks in March 1999. However, DSE, Inc. has agreed to reimburse the Company $75,000 of the $175,000, pursuant to DSE, Inc.'s indemnification of the Company included in the Stock Purchase Agreement under which the Company purchased St. Marks. The remaining $100,000 was capitalized as acquisition cost of the St. Marks Refinery. Kazakhstan On May 12, 1997, the Company, through its wholly-owned subsidiary, American International Petroleum Kazakhstan ("AIPK"), entered into an agreement with Med Shipping and Trading S.A. ("MED"), a Liberian corporation to buy from MED, in exchange for a combination of cash and stock, a 70% working interest in a Kazakhstan concession. As part of the acquisition, the Company is required to perform certain minimum work programs over a five year period which consists of the acquisition and processing of 3,000 kilometers of new seismic data, reprocessing 500 kilometers of existing seismic data, and a minimum of 6,000 linear meters of exploratory drilling. In addition, the Company assumed an obligation to pay the Kazakhstan Government three annual payments of $200,000 each beginning July 1998 for the purchase of existing seismic and geological data on the Kazakhstan concession. The total cost remaining for this minimum program is $5.6 million before the end of 2001. The Company has also entered into a consulting agreement with certain MSUP joint venture partners. The consulting agreement requires monthly payments of $12,500 through July 31, 1998 and $23,000 monthly through April 22, 2000. F-20 Year 2000 Issues The Company evaluated the potential impact of the nearly universal practice in the computer industry of using two digits rather than four to designate the calendar year, leading to incorrect results when computer software performs arithmetic operations, comparisons or date field sorting involving years later than 1999. Management believes that in light of the limited nature of the computer software used by the Company and the limited scope of its electronic interaction with other entities, issues relating to modification or replacement of existing systems will not have a material effect on the operations or financial condition of the Company. Although the Company is not aware of any circumstances in which the failure of a supplier or customer to deal successfully with such issues would have a material impact, there can be no assurance that such will be the case. As of March 31, 2000, the Company had not encountered any negative effects relating to the Year 2000 issues, either internally or with any of its vendors or suppliers. NOTE 11 - INCOME TAXES: The Company reported a loss from operations during 1997, 1998, and 1999 and has a net operating loss carryforward from prior years' operations. Accordingly, no income tax provision has been provided in the accompanying statement of operations. The Company has available unused tax net operating loss carryforwards of approximately $52,000,000 which expire in years 2000 through 2019. Due to a change in control, as defined in Section 382 of the Internal Revenue Code ("382"), which occurred in 1994 and 1998, the Company's utilizable tax operating loss carryforwards to offset future income have been restricted. These restrictions will limit the Company's future use of its loss carryforwards. The components of the Company's deferred tax assets and liabilities are as follows:
December 31, ------------------------------ 1999 1998 ------------ ------------ Deferred taxes: Net operating loss carryforwards 19,745,000 $ 14,807,000 Allowance for doubtful accounts 1,300,000 1,300,000 Depreciation, depletion, amortization and impairment (1,951,000) (1,650,000) ------------ ------------ Net deferred tax asset 19,094,000 14,457,000 ------------ ------------ Valuation allowance $(19,094,000) $(14,457,000) ============ ============
The valuation allowance relates to the uncertainty as to the future utilization of net operating loss carryforwards. The increase in the valuation allowance during 1999 of approximately $4,637,000 primarily reflects the increase in the Company's net operating loss carryforwards during the year. A reconciliation of the provision for income taxes to the statutory United States tax rate is as follows (in thousands):
For the Year Ended December 31, ------------------------------------------------ 1999 1998 1999 ------------- ------------- ------------- Federal tax benefit computed at statutory rate $ (5,072,000) $ (3,095,000) $ (6,104,000) Other, net 435,000 (212,000) 1,633,000 Increase in valuation allowance $ (4,637,000) $ (3,307,000) $ (4,471,000) ------------ ------------ ------------ Actual provision $ -- $ -- $ -- ============ ============ ============
NOTE 12 - CONCENTRATIONS OF CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS: Financial instruments which potentially expose the Company to concentrations of credit risk consist primarily of trade accounts receivable and notes receivable and marketable securities. For investments, fair value equals quoted market price. Trade accounts receivable outstanding at December 31, 1999 have been collected in the normal course of business. An MIP note receivable of $1,493,750 received in the sale of the Colombia and Peru properties, as previously discussed, was due during 1998 and in default and has been fully reserved at December 31, 1999. An additional MIP note receivable of $1,252,696 also received in the sale mentioned above and due in 2000 is payable out of production from the Colombia properties. This note is carried at full value at December 31, 1999 and the Company has no reason to believe that it will not collect this receivable. Fair value of fixed-rate long-term debt and notes receivable are determined by F-21 reference to rates currently available for debt with similar terms and remaining maturities. The Company believes the carrying value of its short-term and long-term debt approximates fair value. The reported amounts of financial instruments such as cash equivalents, accounts receivable, accounts payable, short-term debt, and accrued liabilities approximate fair value because of their short-term maturities. The MIP notes receivable were recorded at a discount to yield a fair market interest rate. The Company believes the effective interest rate on the MIP notes approximates market rates at December 31, 1999. Four of the Company's asphalt customers account for an aggregate of 54% of the Company's sales in 1999. The Company has the ability to draw on it's customer's posted performance bonds and personal guarantees to collect any past due accounts. The estimated fair value of the Company's financial instruments is as follows:
1999 1998 --------------------------- --------------------------- Carrying Fair Carrying Fair value value value value ----- ----- ----- ----- MIP Notes Receivable $ 1,252,696 $ 1,252,696 $ 1,118,200 $ 1,118,200 Short-term debt $ 3,960,331 $ 3,960,331 $ 1,992,200 $ 1,992,200 Long-term debt $11,984,592 $11,984,592 $ 6,110,961 $ 6,110,961
NOTE 13 - GEOGRAPHICAL SEGMENT INFORMATION: The Company has had three reportable segments which are primarily in the business of oil and natural gas, exploration, development, and production and the refining and marketing of petroleum products. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performances based on profit and loss before income and expense items incidental to their respective operations. The Company's reportable segments are managed separately because of their geographic locations. Financial information by operating segment is presented below: F-22 Financial information, summarized by geographic area, is as follows:
Geographic Segment ---------------------------------- Consolidated 1999 United States Colombia Kazakhstan Total - ---- ------------- -------- ---------- ---------- Sales and other operating revenue $ 8,137,867 $ -- $ -- $ 8,137,867 Interest income and other corporate revenues 214,171 ------------ ------------- ------------- ------------ Total revenue $ 8,137,867 -- -- 8,352,038 ------------- Costs and operating expense 13,116,830 -- $ -- 13,116,830 ------------ ------------- ------------- ------------ Operating profit (loss) $ (4,978,963) $ -- $ -- $ (4,764,792) ============ ============= ============ General corporate expense 3,652,497 Interest expense 6,500,579 ------------ Net loss $(14,917,868) ============ Identifiable assets at December 31, 1999 $ 33,877,437 $ -- $ 32,162,385 $ 66,039,822 ============ ============= ============= ============ Corporate assets 3,618,447 ------------ Total assets at December 31, 1999 $ 69,658,269 ============ Depreciation, depletion and amortization $ 1,730,710 $ -- $ -- $ 1,730,710 ------------ ------------- ------------- ============ Capital Expenditures, net of cost recoveries $ 1,062,053 $ -- $ 8,498,390 $ 9,560,443 ============ ============= ============= ============
F-23
Geographic Segment ------------------ Consolidated 1998 United States Colombia Kazakhstan Total - ---- ------------- -------- ---------- ----- Sales and other Refinery operating revenue(1) $ 11,394,009 $ -- $ -- $ 11,394,009 Interest income and other corporate revenues 460,597 ------------ -------- ------------ ------------ Total revenue 11,394,009 -- -- 11,854,606 Refinery costs and operating expense 14,214,767 -- $ -- 14,214,767 ------------ ------- ------------ ------------ Operating profit (loss) $ (2,820,758) $ -- $ -- $ (2,360,061) ============ ======= ============ General corporate expense 4,830,003 Interest expense 1,912,949 ------------ Net loss $ (9,103,113) ============ Identifiable assets at December 31, 1998 $ 35,234,530 $ -- $ 22,677,073 $ 57,911,603 ============ ======= ============ ============ Corporate assets $ 2,949,731 ------------ Total assets at December 31, 1998 $ 60,861,334 ============ Depreciation, depletion and amortization $ 813,088 $ -- $ -- $ 813,088 ============ ======= ============ ============ Capital Expenditures, net of cost recoveries $ 15,494,897 $ -- $ 10,748,427 $ 26,243,324 ============ ======= ============ ============
(1) Refinery sales to Conoco accounted for 19% of the Company's sales during the year. F-24
Geographic Segment ------------------ Consolidated 1997 United States Columbia Kazakhstan Total - ---- ------------- -------- ---------- ------------ Sales and other operating revenue $ 23,298 $ 292,947 $ -- $ 316,245 Interest income and other corporate revenues 511,719 ------------ ------------ ------------ ------------ Total revenue 23,298 292,947 -- $ 827,964 Costs and operating expense 1,189,188 463,371 $ -- 1,652,559 ------------ ------------ ------------ ------------ Operating profit (loss) $ (1,165,890) $ (170,424) $ -- $ (824,595) ============ ============ ============ General corporate expense 10,465,064 Interest expense 6,663,992 ------------ Net loss $(17,953,651) ============ Identifiable assets at December 31, 1997 $ 21,159,627 $ -- $ 11,724,477 $ 32,884,104 ------------ ------------ ------------ Corporate assets 8,955,756 ------------ Total assets at December 31, 1997 $ 41,839.860 ============ Depreciation, depletion and amortization $ 704,048 $ 70,216 $ -- $ 774,264 ============ ============ ============ ============ Capital Expenditures, net of cost recoveries $ 5,606,031 $ -- $ 11,724,477 $ 17,330,508 ============ ============ ============ ============
F-25 NOTE 14 - SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES AND DISCLOSURES OF CASH FLOW INFORMATION: The Company has issued shares of common stock and common stock warrants in the acquisitions and conversions of the following noncash transactions:
1999 1998 1997 ---- ---- ---- Conversion of debentures $ 7,602,373 $15,526,380 $ 9,343,022 Stock issued in lieu of current liabilities 1,473,713 1,669,717 233,559 Issuance of warrants related to convertible debentures 1,584,106 936,459 6,264,411 Issuance of stock - unearned compensation -- 196,900 -- Issuance of stock - compensation -- -- 40,000 Issuance of stock - services 654,453 128,125 247,607 Issuance of stock and warrants - for oil and gas properties 1,852,366 -- 9,254,688 Issuance of stock- for refinery and equipment -- 1,687,500 -- Issuance of stock for collateral on debt $ 1,065,938 -- --
Cash paid for interest, net of amounts capitalized, was $1,943,124, $62,532, and $765,312, during 1999, 1998, and 1997, respectively. Cash paid for corporate franchise taxes was $94,506, $60,078, and $70,003, during 1999, 1998 and 1997, respectively. Interest capitalized was $547,786; $7,055,340; $340,966 during the years ended December 31, 1999, 1998, 1997, respectively. NOTE 15 - SUBSEQUENT EVENTS: Financing In February 2000, the Company sold a $2,500,000 Bridge Note in a private placement to a single investor. The note is a 13% six-month note due June 1, 2000. The proceeds of the sale were used for working capital. NOTE 16 - EMPLOYEE BENEFITS: During the fourth quarter of 1997 the Company established a defined contribution 401(k) Plan for its employees. The plan provides participants a mechanism for making contributions for retirement savings. Each employee may contribute certain amounts of eligible compensation. In July 1998, the Company amended the plan to include a Company matching contribution provision. The plan allows for the Company to match employee contributions into the plan at the rate of $0.50 for each $1.00 contributed by the employee, with a Company matching contribution limited to a maximum of 5% of the employee salary. To be eligible for the Company matching program, employees must be employed by the Company for 90 days. Employer contributions vest evenly over three years from the employee's anniversary date. The Company had contributions for the year ended December 31, 1999 totaling approximately $61,500. F-26 SUPPLEMENTARY OIL AND GAS INFORMATION FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 The accompanying unaudited oil and gas disclosures are presented as supplementary information in accordance with Statement No. 69 of the Financial Accounting Standards Board. F-27 AMERICAN INTERNATIONAL PETROLEUM AND SUBSIDIARIES SUPPLEMENTARY OIL AND GAS INFORMATION (UNAUDITED) Capitalized costs relating to oil and gas activities and costs incurred in oil and gas property acquisition, exploration and development activities for each year are shown below: CAPITALIZED COSTS
Colombia Kazakhstan --------------------------------------- --------------------------------------- 1999 1998 1997 1999(1) 1998(1) 1997(2) ----------- ----------- ----------- ----------- ----------- ----------- Unevaluated property not subject to amortization $ -- $ -- $ -- $31,556,376 $23,438,886 $11,724,477 Proved and unproved properties -- -- -- -- -- -- Accumulated deprecia- tion, depletion and amortization -- -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- Net Capitalized costs $ -- $ -- $ -- $31,556,376 $23,438,886 $11,724,477 =========== =========== =========== =========== =========== =========== Costs incurred in oil and gas property acquisition, exploration and development activities Property acquisition $ -- $ -- $ -- $31,556,376 $23,438,886 $11,724,477 costs - proved and unproved properties Exploration Costs -- -- -- -- -- -- Development costs -- -- -- -- -- -- Results of operations for oil and gas producing activities Oil and gas sales $ -- $ -- $ 292,947 $ -- $ -- $ -- ----------- ----------- ----------- ----------- ----------- ----------- Lease operating costs -- -- 98,766 -- -- -- Depreciation, depletion and amortization -- -- 70,216 -- -- -- Provision for reduction of oil and gas properties -- -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- -- -- 168,982 -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- Income (loss) before tax provision -- -- 123,965 -- -- -- Provision (benefit) for income tax -- -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- Results of operations $ -- $ -- $ 123,965 -- -- -- =========== =========== =========== =========== =========== ===========
Total --------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Unevaluated property not subject to amortization $31,556,376 $23,438,886 $11,724,477 Proved and unproved properties -- -- -- Accumulated deprecia- tion, depletion and amortization -- -- -- ----------- ----------- ----------- Net Capitalized costs $31,556,376 $23,438,886 $11,724,477 =========== =========== =========== Costs incurred in oil and gas property acquisition, exploration and development activities Property acquisition $31,556,376 $23,438,886 $11,724,477 costs - proved and unproved properties Exploration Costs -- -- -- Development costs -- -- -- Results of operations for oil and gas producing activities Oil and gas sales $ -- $ -- $ 292,947 ----------- ----------- ----------- Lease operating costs -- -- 98,766 Depreciation, depletion and amortization -- -- 70,216 Provision for reduction of oil and gas properties -- -- -- ----------- ----------- ----------- -- -- 168,982 ----------- ----------- ----------- Income (loss) before tax provision -- -- 123,965 Provision (benefit) for income tax -- -- -- ----------- ----------- ----------- Results of operations -- -- $ 123,965 =========== =========== ===========
(1) Unevaluated property not subject to amortization reflected in 1999 and 1998 includes Kazakhstan properties and non-Kazakhstan oil and gas properties. (2) Unevaluated property not subject to amortization reflected in 1997 includes Kazakhstan properties only. F-28 OIL AND GAS RESERVES: Oil and gas proved reserves cannot be measured exactly. Reserve estimates are based on many factors related to reservoir performance which require evaluation by the engineers interpreting the available data, as well as price and other economic factors. The reliability of these estimates at any point in time depends on both the quality and quantity of the technical and economic data, the production performance of the reservoirs as well as extensive engineering judgment. Consequently, reserve estimates are subject to revision as additional data become available during the producing life of a reservoir. When a commercial reservoir is discovered, proved reserves are initially determined based on limited data from the first well or wells. Subsequent data may better define the extent of the reservoir and additional production performance, well tests and engineering studies will likely improve the reliability of the reserve estimate. The evolution of technology may also result in the application of improved recovery techniques such as supplemental or enhanced recovery projects, or both, which have the potential to increase reserves beyond those envisioned during the early years of a reservoir's producing life. The following table represents the Company's net interest in estimated quantities of proved developed and undeveloped reserves of crude oil, condensate, natural gas liquids and natural gas and changes in such quantities at December 31, 1999, 1998 and 1997. Net proved reserves are the estimated quantities of crude oil and natural gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are proved reserve volumes that can be expected to be recovered through existing wells with existing equipment and operating methods. Proved undeveloped reserves are proved reserve volumes that are expected to be recovered from new wells on undrilled acreage or from existing wells where a significant expenditure is required for recompletion.
United States Colombia Total ------------------------- ----------------------------- ----------------------------- Oil Gas Oil Gas Oil Gas BBLS MCF BBLS MCF BBLS MCF ----------- ----------- ----------- ----------- ----------- ----------- January 1, 1997 -- -- 4,010,419 14,679,400 4,010,419 14,679,400 Revisions of previous estimates -- -- -- -- -- -- Extensions, discoveries and other additions -- -- -- -- -- -- Sales of reserves -- -- (3,892,146) (14,679,400) (3,892,146) (14,679,400) Production -- -- (118,273) -- (118,273) -- ----------- ----------- ----------- ----------- ----------- ----------- December 31, 1997 -- -- -- -- -- -- Revisions of previous estimates -- -- -- -- -- -- Extensions, discoveries and other additions -- -- -- -- -- -- Sales of reserves -- -- -- -- -- -- Production -- -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- December 31, 1998 -- -- -- -- -- -- Revisions of previous estimates -- -- -- -- -- -- Extensions, discoveries and other additions -- -- -- -- -- -- Sales of reserves -- -- -- -- -- -- Production -- -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- December 31, 1999 -- -- -- -- -- -- =========== =========== =========== =========== =========== ===========
United States Colombia Total ---------------- -------- ----- Oil Gas Oil Gas Oil Gas BBLS MCF BBLS MCF BBLS MCF ---- --- ---- --- ---- --- Net proved developed reserves January 1, 1997 -- -- 948,721 6,321,100 948,721 6,321,000 December 31, 1997 -- -- -- -- -- -- December 31, 1998 -- -- -- -- -- -- December 31, 1999 -- -- -- -- -- --
Changes to reserves in 1997 reflect the sale of the Colombia subsidiary as of February 25, 1997. F-29 CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS: The aggregate change in the standardized measure of discounted future net cash flows was $0 in 1999 and 1998 and a decrease of $21,902,016 in 1997. The principal sources of change were as follows:
For the years ended December 31, -------------------------------------------------------- 1999 1998 1997 ------------- ------------- ------------ Beginning of year $ -- $ -- $ 21,902,016 Sales and transfer of oil and gas produced, net of production costs -- -- (161,813) Net changes in prices and production costs -- -- -- Extensions, discoveries, additions and improved recovery, less related costs -- -- -- Net change due to sales of minerals in place -- -- (21,740,203) Previously estimated development costs incurred during the year -- -- -- Changes in estimated future development costs -- -- -- Revisions of previous reserve quantity estimates -- -- -- Changes in timing and other -- -- -- Accretion of discount -- -- -- ------------- ------------- ------------ End of year $ -- $ -- $ -- ============= ============= ============
F-30 INDEPENDENT AUDITOR'S REPORT ON SCHEDULE Stockholders and Board of Directors American International Petroleum Corporation New York, New York We have audited the consolidated financial statements of American International Petroleum Corporation and its subsidiaries as of December 31, 1999 and 1998, and for each of the years in the three-year period ended December 31, 1999. Our audits for such years also included the financial statement schedule of American International Petroleum Corporation and its subsidiaries, listed in Item 14-2, for each of the years in the three-year period ended December 31, 1999. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to report on this schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. HEIN + ASSOCIATES Houston, Texas March 30, 2000 F-31 AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES SCHEDULE I - VALUATION AND QUALIFYING ACCOUNTS (in thousands)
Balance at Additions Charged Deductions: Beginning of to Costs and Accounts Written off Description Year Expenses Against Allowance Balance at End of Year December 31, 1997 Allowance for Doubtful Accounts $1,921 $ -- $ -- $1,921 December 31, 1998 Allowance for Doubtful Accounts $1,921 $1,494 $ -- $3,415 December 31, 1999 Allowance for Doubtful Accounts $3,415 $ -- $1,921 $1,494
F-32 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this amendment to the report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICAN INTERNATIONAL PETROLEUM CORPORATION Dated: April 14, 2000 By: /s/ Denis J. Fitzpatrick ----------------------------------- Denis J. Fitzpatrick Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this amendment to the report has been signed below by the following persons in the capacities and on the dates indicated: By: /s/ George N. Faris Date: April 14, 2000 George N. Faris, Chairman of the Board of Directors By: /s/ Joe Michael McKinney Date: April 14, 2000 Chief Executive Officer By: /s/ Denis J. Fitzpatrick Date: April 14, 2000 Denis J. Fitzpatrick Vice President, Secretary, Principal Financial and Accounting Officer By: /s/ Donald G. Rynne Date: April 14, 2000 Donald G. Rynne, Director By: /s/ Daniel Y. Kim Date: April 14, 2000 Daniel Y. Kim, Director By: /s/ William R. Smart Date: April 14, 2000 William R. Smart, Director By: /s/ John H. Kelly Date: April 14, 2000 John H. Kelly, Director F-33 Exhibit Index Exhibit Number Description - ------ ----------- 21.1 Subsidiaries of the Registrant 27.1 Financial Data Schedule F-34 EX-4.34 2 SECURITY AGREEMENT SECURITY AGREEMENT THIS SECURITY AGREEMENT (this "Agreement") is made as of December 1, 1999, by and between American International Petroleum Corporation., a Nevada corporation ("AIPC") and St. Marks Refinery, Inc., a Florida corporation ("St. Marks") (AIPC and St. Marks are collectively referred to as the "Debtors"), and __________________________ ("Secured Party"). 1. Definitions. (a) Certain Defined Terms. The following terms, as used herein, have the meanings set forth below: "Accounts" means all of the following: (a) accounts receivable, contract rights, book debts, notes, drafts and other obligations and indebtedness arising from the sale, lease or exchange of goods or other property and/or the performance of services; (b) rights in, to and under all purchase orders for goods, services or other property; (c) rights to any goods, services or other property represented by any of the foregoing (including returned or repossessed goods and unpaid sellers' rights of rescission, replevin, reclamation and rights to stoppage in transit); (d) monies due to or to become due under all contracts for the sale, lease or exchange of goods or other property and/or the performance of services (whether or not yet earned by performance); and (e) Proceeds of any of the foregoing and all collateral security and guaranties of any kind given by any Person with respect to any of the foregoing. "Collateral" has the meaning assigned to that term in Section 3. "Documents" means all "documents" (as defined in the UCC) or other receipts covering, evidencing or representing goods. "Equipment" means all "equipment" (as defined in the UCC), including, without limitation, all machinery, motor vehicles, trucks, trailers, vessels, aircraft and rolling stock and all parts thereof and all additions and accessions thereto and replacements therefor. "Event of Default" has the meaning assigned to that term in Section 9. "Fixtures" means all plant fixtures, business fixtures, other fixtures and storage office facilities and all additions and accessions thereto and replacements therefor. "General Intangibles" means all "general intangibles" (as defined in the UCC), including, without limitation: (a) all agreements, leases, licenses and contracts to which Debtor is or may become a party; (b) all obligations or indebtedness owing to Debtor (other than Accounts) from whatever source arising; (c) all tax refunds; (d) all intellectual property; (e) all choses in action and causes of action; and (f) all trade secrets and other confidential information relating to the business of Debtor. "Instruments" means all "instruments," "chattel paper" or "letters of credit" (each as defined in the UCC) including, but not limited to, promissory notes, drafts, bills of exchange and trade acceptances. "Inventory" means all "inventory" (as defined in the UCC), including, without limitation, finished goods, raw materials, work in process and other materials and supplies (including packaging and shipping materials) used or consumed in the manufacture or production thereof and returned and repossessed goods. "Investment Property" means all "investment property" (as defined in the UCC), including certificated and uncertificated securities, security entitlements, securities accounts, commodity contracts and commodity accounts (each as defined in the UCC). Note - means that certain Bridge Note of even date herewith, in the original principal amount of $2,500,000, made and executed by AIPC and issued to Secured Party, and all amendments and supplements thereto, restatements thereof and renewals, extensions, restructuring and refinancings thereof. Person - means and includes natural persons, corporations, limited partnerships, general partnerships, joint stock companies, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts or other organizations, whether or not legal entities, and governments and agencies and political subdivisions thereof. Proceeds - means all proceeds of, and all other profits, rentals or receipts, in whatever form, arising from the collection, sale, lease, exchange, assignment, licensing or other disposition of, or realization upon, any Collateral including, without limitation, all claims against third parties for loss of, damage to or destruction of, or for proceeds payable under, or unearned premiums with respect to, policies of insurance with respect to any Collateral, and any condemnation or requisition payments with respect to any Collateral, in each case whether now existing or hereafter arising. Secured Obligations - has the meaning assigned to that term in Section 4. Security Interests - means the security interests granted pursuant to Section 3, as well as all other security interests created or assigned as additional security for the Secured Obligations pursuant to the provisions of this Agreement. Securities Purchase Agreement - means that certain Securities Purchase Agreement of even date herewith, by and between Debtors and Secured Party. UCC - means the Uniform Commercial Code as in effect on the date hereof in the State of New York, provided that if by reason of mandatory provisions of law, the perfection or the effect of perfection or non-perfection of the Security Interest in any Collateral or the availability of any remedy hereunder is governed by the Uniform Commercial Code as in effect on or after the date hereof in any other jurisdiction, "UCC" means the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such perfection or effect of perfection or non-perfection or availability of such remedy. 2. Other Definition Provisions. References to "Sections", "subsections", "Exhibits" and "Schedules" shall be to Sections, subsections, Exhibits and Schedules, respectively, of this Agreement unless otherwise specifically provided. Any of the terms defined in Section 1(a) may, unless the context otherwise requires, be used in the singular or the plural depending on the reference. All references to statutes and related regulations shall include (unless otherwise specifically provided herein) any amendments of same and any successor statutes and regulations. 3. Grant of Security Interests In order to secure the payment and performance of the Secured Obligations in accordance with the terms thereof, Debtors hereby grant to Secured Party a continuing security interest in and to all right, title and interest of Debtors in the collateral (and any Proceeds therefrom) described on Exhibit A hereto, whether now owned or existing or hereafter acquired or arising (all being collectively referred to as the "Collateral"). 4. Security for Obligations This Agreement secures the payment and performance of the Securities Purchase Agreement and the Note, and all renewals, extensions, restructuring and refinancings thereof (the "Secured Obligations"). 5. Representations and Warranties. Debtors represent and warrant as follows: (a) Binding Obligation. This Agreement is the legally valid and binding obligation of Debtors, enforceable against Debtors in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium, or similar laws or equitable principles relating to or limiting creditor's rights generally. 2 (b) Ownership of Collateral. Debtors own the Collateral free and clear of any lien, security interest or encumbrance. No effective financing statement or other form of lien notice covering all or any part of the Collateral is on file in any recording office. (c) Office Locations; Debtors Names. (i) As of the date hereof, the chief place of business, the chief executive office and the office where each of the Debtors keeps its books and records is located at the place specified on Schedule 5(d)(i) hereto. Except as set forth on Schedule 5(d)(i), Debtors have not maintained any other address at any time during the five years preceding the date hereof. (ii) Debtors do not do business nor, as of the date hereof, has it done business during the past five years under any corporate name, trade name or fictitious business name except for Debtors' corporate name set forth above and except as disclosed on Schedule 5(d)(ii) hereto. (d) Perfection. This Agreement, together with the UCC filings referenced herein, and delivery of the Collateral to Secured Party as of the Closing (as such term is defined in the Securities Purchase Agreement) create to secure the Secured Obligations a valid, perfected and first priority security interest in the Collateral, and all filings and other actions necessary or desirable to perfect and protect such security interest have been duly taken. Debtors hereby agree to deliver the Collateral to Secured Party as of the Closing. (e) Governmental Authorizations; Consents. No authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body or consent of any other Person is required either (i) for the grant by Debtors of the Security Interests granted hereby or for the execution, delivery or performance of this Agreement by Debtors or (ii) for the perfection of or the exercise by Secured Party of its rights and remedies hereunder (except as may have been taken by or at the direction of Debtors or Secured Party) other than the filing of financing statements in connection with the perfection of the Security Interests. (f) Value of Collateral. The aggregate value of the collateral as of the date hereof is equal to not less than $2,500,000 and the value of the Debenture described in Exhibit A has an outstanding principal amount as of the date hereof of $1,500,000.00. (g) Accurate Information. All information heretofore, herein or hereafter supplied to Secured Party by or on behalf of Debtors with respect to the Collateral is and will be accurate and complete in all material respects. 6. Further Assurances; Covenants (a) Other Documents and Actions. Debtors will, from time to time, at their expense, promptly execute and deliver all further instruments and documents and take all further action that may be necessary or desirable, or that Secured Party may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Secured Party to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, Debtors will: (i) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or desirable, or as Secured Party may reasonably request, in order to perfect and preserve the security interests granted or purported to be granted hereby; (ii) at any reasonable time, upon demand by Secured Party exhibit the Collateral to allow inspection of the Collateral by Secured Party or persons designated by Secured Party; and (iii) upon Secured Party's request, appear in and defend any action or proceeding that may affect Debtors' title to or Secured Party's security interest in the Collateral. (b) Secured Party Authorized. Debtors hereby authorize Secured Party to file one or more financing or continuation statements, and amendments thereto, relating to all or any part of the Collateral without the signatures of Debtors where permitted by law. 3 (c) Corporate or Name Change. Debtors will notify Secured Party promptly in writing at least 30 days prior to (a) any change in Debtors' name and (b) Debtors' commencing the use of any trade name, assumed name or fictitious name. (d) Business Locations. Debtors shall give Secured Party thirty (30) days' prior written notice of any change in its chief place of business or of any new location of business or any new location for any of the Collateral. With respect to any new location (which in any event shall be within the continental United States), Debtors shall execute such documents and take such actions as Secured Party reasonably deems necessary to perfect and protect the Security Interests. (e) Bailees. No Collateral shall at any time be in the possession or control of any warehouseman, bailee or Debtors' agents or processors without Secured Party's prior written consent and unless Secured Party, if Secured Party has so requested, has received warehouse receipts or bailee letters reasonably satisfactory to Secured Party prior to the commencement of such storage. Debtors shall, upon the request of Secured Party, notify any such warehouseman, bailee, agent or processor of the Security Interests. (f) Insurance. Debtors shall maintain insurance with respect to the Collateral of types and in amounts that are customary for similarly situated businesses. Debtors hereby direct all insurers under such policies of insurance with respect to its assets to pay all material proceeds of such insurance policies to Secured Party. (g) Taxes and Claims. Debtors will pay (i) all taxes, assessments and other governmental charges imposed upon the Collateral before any penalty accrues thereon and (ii) all claims (including claims for labor, services, materials and supplies) for sums that have become due and payable and that by law have or may become a lien upon any of the Collateral before any penalty or fine is incurred with respect thereto; provided that no such tax, charge or claim need be paid if a Debtors are contesting same in good faith by appropriate proceedings promptly instituted and diligently conducted and if Debtors have established such reserve or other appropriate provision, if any, as shall be required in conformity with generally accepted accounting principles consistently applied. (h) Collateral Description. Debtors will furnish to Secured Party, from time to time, statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as Secured Party may reasonably request, all in reasonable detail. (i) Use of Collateral; Renegotiation of Terms of Debenture. Debtors will not use or permit any Collateral to be used unlawfully or in violation of any provision of this Agreement or any applicable statue, regulation or ordinance or any policy of insurance covering any of the Collateral. Notwithstanding the foregoing, Secured Party hereby agrees to permit Debtors to renegotiate the terms or form of the $3,000,000 Principal Amount 5% Exchangeable Subordinated Debenture described on Exhibit A hereto, which Debenture constitutes a portion of the Collateral; provided, however, the Debenture as so amended shall not have a value of less than $1.5 million principal amount and shall have terms and conditions no less favorable than those presently existing. (j) Records of Collateral. Debtors shall keep full and accurate books and records relating to the Collateral and shall stamp or otherwise mark such books and records in such manner as Secured Party may reasonably request indicating that the Collateral is subject to the Security Interests. (k) Other Information. Debtors will, promptly upon request, provide to Secured Party all information and evidence it may reasonably request concerning the Collateral to enable Secured Party to enforce the provisions of this Agreement. 7. Secured Party Appointed Attorney-in-Fact. Debtors hereby irrevocably appoint Secured Party as its attorney-in-fact, with full authority in the place and stead of Debtors and in the name of Debtors, Secured Party or otherwise, from time to time in Secured Party's discretion to take any action and to execute any instrument that Secured Party may deem necessary or advisable after the occurrence and during the continuation of an Event of Default to accomplish the purposes of this Agreement, including, without limitation: 4 (a) to obtain and adjust insurance required to be paid to Secured Party; (b) to ask, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for monies due and to become due under or in respect of any of the Collateral; (c) to file any claims or take any action or institute any proceedings that Secured Party may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of Secured Party with respect to any of the Collateral; (d) to pay or discharge taxes or liens, levied or placed upon or threatened against the Collateral, the legality or validity thereof and the amounts necessary to discharge the same to be determined by Secured Party in its sole discretion, and such payments made by Secured Party to become obligations of Debtors, due and payable immediately without demand and secured by the Security Interests; and (e) generally to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though Secured Party were the absolute owner thereof for all purposes, and to do, at Secured Party's option and Debtors' expense, at any time or from time to time, all acts and things that Secured Party deems necessary to protect, preserve or realize upon the Collateral. Neither Secured Party nor any Person designated by Secured Party shall be liable for any acts or omissions or for any error of judgment or mistake of fact or law other than as a result of Secured Party's or such Person's gross negligence or wilful misconduct. This power, being coupled with an interest, is irrevocable so long as this Agreement shall remain in force. 8. Transfers and Other Liens Debtors shall not without Secured Party's prior written consent: (a) Sell, assign (by operation of law or otherwise) or otherwise dispose of, or grant any option with respect to, any of the Collateral. (b) Create or suffer to exist any lien, security interest or other charge or encumbrance upon or with respect to any of the Collateral to secure indebtedness of any Person except for the security interest created by this Agreement. 9. Events of Default. The occurrence of any one or more of the following events shall constitute an Event of Default by Debtors under this Agreement: (a) General Default. AIPC shall fail to observe or perform any covenant, obligation, term or condition contained in the Securities Purchase Agreement, the Note, the Mortgage and Security Agreement by and between St. Marks and Secured Party of even date herewith (the "Mortgage") or this Agreement. (b) Nonpayment. AIPC shall fail to pay any principal, interest or other amount owing under the Note or Securities Purchase Agreement when and as the same shall be due and payable. (c) Material Misrepresentations. Any representation or warranty set forth herein shall prove to be false in any material respect. (d) Going Concern. Debtors shall terminate their corporate existence or shall cease to operate as a going concern. (e) Judgments. A judgment shall be entered against either Debtor or a warrant of execution or similar process shall be issued or levied against its property and within thirty (30) days after such judgment, warrant or process shall not have been paid in full or proper appeal of the same made. 5 (f) Debtors Relief - Voluntary. Debtors shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing. (g) Debtors Relief - Involuntary. Any involuntary case or other proceeding shall be commenced against Debtors seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of thirty (30) days; or an order for relief shall be entered against Debtors under the federal bankruptcy laws as now or hereafter in effect. (h) Other. The occurrence any "Event of Default" as that term is defined in Securities Purchase Agreement or Mortgage. 10. Remedies (a) If any Event of Default shall have occurred and be continuing, Secured Party may declare the entire outstanding principal amount of the Note immediately due and payable, provided that upon the occurrence of any Event of Default set forth in Section 9(f) or 9(g), the outstanding principal amount of the Note shall become automatically due and payable, without any notice, demand or other action on the part of Secured Party. (b) If any Event of Default shall have occurred and be continuing, Secured Party may exercise in respect of the Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the UCC (whether or not the UCC applies to the affected Collateral) and also may: (i) require Debtors to, and Debtors hereby agree that it will, at its expense and upon request of Secured Party forthwith, assemble all or part of the Collateral as directed by Secured Party and make it available to Secured Party at a place to be designated by Secured Party which is reasonably convenient to both parties; (ii) without notice or demand or legal process, enter upon any premises of Debtors and take possession of the Collateral; (iii) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of Secured Party's offices or elsewhere, at such time or times, for cash, on credit or for future delivery, and at such price or prices and upon such other terms as Secured Party may deem commercially reasonable; (iv) notify the obligors on any Accounts or Instruments to make payments thereunder directly to Secured Party; and (v) without notice to Debtors, renew, modify or extend any of the Accounts and Instruments or grant waivers or indulgences with respect thereto or accept partial payment thereof, or substitute any obligor thereon, in any manner as Secured Party may deem advisable, without affecting or diminishing Debtors' continuing obligations hereunder. Debtors agree that, to the extent notice of sale shall be required by law, at least ten days' notice to Debtors of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. At any sale of the Collateral, if permitted by law, Secured Party may bid (which bid may be, in whole or in part, in the form of cancellation of indebtedness) for the purchase of the Collateral or any portion thereof for the account of Secured Party. Secured Party shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Secured Party may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. To the extent permitted by law, Debtors hereby specifically waive all rights of redemption, stay or appraisal which it has or may have under any law now existing or hereafter enacted. (c) Upon the occurrence of an Event of Default hereunder, Secured Party shall have the right to enter upon the premises of Debtors where the Collateral is located (or is believed to be located) without any obligation to pay rent to Debtors, or any other place or places where the Collateral is believed to be located and kept, to render the Collateral useable or saleable, to remove the Collateral therefrom to the premises of Secured Party or any agent of Secured Party for such time as Secured Party may desire in order to effectively collect or liquidate the 6 Collateral, and/or to require Debtors to assemble the Collateral and make it available to Secured Party at a place or places to be designated by Secured Party. Upon the occurrence of an Event of Default hereunder, Secured Party shall have the right to take possession of Debtors' original books and records, to obtain access to Debtors' data processing equipment, computer hardware and software relating to the Collateral and to use all of the foregoing and the information contained therein in any manner Secured Party deems appropriate; and Secured Party shall have the right to notify postal authorities to change the address for delivery of Debtors' mail to an address designated by Secured Party and to receive, open and dispose of all mail addressed to Debtors. 11. Limitation on Duty of Secured Party with Respect to Collateral. Beyond the safe custody thereof, Secured Party shall have no duty with respect to any Collateral in its possession or control (or in the possession or control of any agent or bailee) or with respect to any income thereon or the preservation of rights against prior parties or any other rights pertaining thereto. Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which it accords its own property. Secured Party shall not be liable or responsible for any loss or damage to any of the Collateral, or for any diminution in the value thereof, by reason of the act or omission of any warehouseman, carrier, forwarding agency, consignee or other agent or bailee selected by Secured Party in good faith. 12. Application of Proceeds. Upon the occurrence and during the continuance of an Event of Default, the proceeds of any sale of, or other realization upon, all or any part of the Collateral shall be applied: first, to all fees, costs and expenses incurred by Secured Party with respect to the Collateral; and second, to the Secured Obligations. Secured Party shall pay over to Debtors any surplus and Debtors shall remain liable for any deficiency. 13. Expenses. Debtors agree to pay all insurance expenses and all expenses of protecting, storing, warehousing, appraising, insuring, handling, maintaining and shipping the Collateral, all costs, fees and expenses of perfecting and maintaining the Security Interests, and any and all excise, property, sales and use taxes imposed by any state, federal or local authority on any of the Collateral, or with respect to periodic appraisals and inspections of the Collateral, or with respect to the sale or other disposition thereof. If Debtors fail promptly to pay any portion of the above expenses when due or to perform any other obligation of Debtors under this Agreement, Secured Party may, at its option, but shall not be required to, pay or perform the same, and Debtors agree to reimburse Secured Party therefor on demand. All sums so paid or incurred by Secured Party for any of the foregoing, any and all other sums for which Debtors may become liable hereunder and all costs and expenses (including attorneys' fees, legal expenses and court costs) incurred by Secured Party in enforcing or protecting the Security Interests or any of their rights or remedies under this Agreement shall be payable on demand, shall constitute Secured Obligations, shall bear interest until paid at the rate provided in the Note and shall be secured by the Collateral. 14. Termination of Security Interests; Release of Collateral. Upon payment in full of all Secured Obligations, the Security Interests shall terminate and all rights to the Collateral shall revert to Debtors. Upon such termination of the Security Interests or release of any Collateral, Secured Party will, at the expense of Debtors, execute and deliver to Debtors such documents as Debtors shall reasonably request to evidence the termination of the Security Interests or the release of such Collateral, as the case may be. 15. Notices. Each notice, communication and delivery under this Agreement: (a) shall be made in writing signed by the party giving it; (b) shall specify the section of this Agreement pursuant to which given; (c) shall either be delivered in person or by telecopier, a nationally recognized next business day courier service or Express Mail; (d) unless delivered in person, shall be given to the address specified below; (e) shall be deemed to be given (i) if delivered in person, on the date delivered, (ii) if sent by telecopier, on the date of telephonic confirmation of receipt, (iii) if sent by a nationally recognized next business day courier service with all costs paid, on the next business day after it is delivered to such courier, or (iv) if sent by Express Mail (with postage and other fees paid), on the next business day after it is mailed. Such notice shall not be effective unless copies are provided contemporaneously as specified below, but neither the manner nor the time of giving notice to those to whom copies are to be given (which need not be the same as the addressee) shall control the date notice is given or received. The addresses and requirements for copies are as follows: 7 If to AIPC: American International Petroleum Corporation 444 Madison Avenue New York, New York 10022 Telecopier No. (212)688-6657 Confirmation No. (212)688-3333 Attention: Denis Fitzpatrick, Chief Financial Officer 8 If to St. Marks: St. Marks Refinery, Inc. 5201 Westshore Boulevard Tampa, Florida 33611-5699 Telecopier No. ________________ Confirmation No. _______________ Attention: Denis Fitzpatrick If to Secured Party: with a copy to: 16. Waivers, Non-Exclusive Remedies, Severability. Except as otherwise expressly set forth in any particular provision of this Agreement, any consent or approval required or permitted by this Agreement to be given by Secured Party may be given, and any term of this Agreement or of any other instrument related hereto or mentioned herein may be amended, and the performance or observance by Debtors of any term of this Agreement, the Securities Purchase Agreement or the Note may be waived (either generally or in a particular instance and either retroactively or prospectively) with, but only with, the written specific consent of Secured Party. No waiver shall extend to or affect any obligation not expressly waived or impair any right consequent thereon. No course of dealing or delay or omission on the part of Secured Party in exercising any right shall operate as a waiver thereof or otherwise be prejudicial thereto. No notice to or demand upon Debtors shall entitle Debtors to other or further notice or demand in similar or other circumstances. The rights in this Agreement, the Securities Purchase Agreement and the Note are cumulative and are not exclusive of any other remedies provided by law. The invalidity, illegality or unenforceability of any provision in or obligation under this Agreement shall not affect or impair the validity, legality or enforceability of the remaining provisions or obligations under this Agreement. 17. Successors and Assigns. This Agreement is for the benefit of Secured Party and its successors and assigns, and in the event of an assignment of all or any of the Secured Obligations, the rights hereunder, to the extent applicable to the Secured Obligations so assigned, may be transferred with such Secured Obligations. This Agreement shall be binding on Debtors and their successors and assigns, provided that Debtors shall not assign this Agreement without Secured Party's prior written consent. 18. Changes in Writing. No amendment, modification, termination or waiver of any provision of this Agreement or consent to any departure by Debtors therefrom, shall in any event be effective without the written concurrence of Secured Party and Debtors. 19. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to the conflicts of law principles thereof. 20. Headings. Cross reference pages and headings contained herein are for convenience of reference only, do not constitute a part of this Agreement, and shall not be deemed to limit or affect any of the provisions hereof. 21. Counterparts. This Agreement may be executed by each party upon a separate copy, and in such case one counterpart of this Agreement shall consist of enough of such copies to reflect the signatures of all of the parties. This Agreement may be executed in two or more counterparts, each of which shall be an original, and each of which shall constitute one and the same agreement. Any party may deliver an executed copy of this Agreement and of any documents contemplated hereby by facsimile transmission to another party and such delivery shall have the same force and effect as any other delivery of a manually signed copy of this Agreement or of such other documents. 9 DULY EXECUTED and delivered by the parties on the date first written above. AMERICAN INTERNATIONAL PETROLEUM CORPORATION By: ________________________________________ Name: ______________________________________ Title: _____________________________________ ST. MARKS REFINERY, INC. By: ________________________________________ Name: ______________________________________ Title: _____________________________________ By: ________________________________________ Name: ______________________________________ Title: _____________________________________ 10 EXHIBIT A COLLATERAL 1. Two thousand five hundred shares of St. Marks Refinery, Inc., a Florida corporation ("St. Marks") evidenced by Stock Certificate No. 2, such shares being the only outstanding shares of St. Marks. 2. The $_________________ Principal Amount 5% Exchangeable Subordinated Debenture made by American International Petroleum Corporation of Columbia payable to AIPC and dated February 25, 1997. 11 SCHEDULE 5(d)(i) 12 SCHEDULE 5.2(d)(ii) 13 EX-4.35 3 FORM OF COMMON STOCK PURCHASE WARRANT Exhibit 4.35 EXHIBIT B FORM OF COMMON STOCK PURCHASE WARRANT THIS COMMON STOCK PURCHASE WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING THIS COMMON STOCK PURCHASE WARRANT, AGREES FOR THE BENEFIT OF THE COMPANY THAT SUCH SECURITIES MAY BE OFFERED, SOLD OR OTHERWISE TRANSFERRED ONLY (A) TO THE COMPANY, (B) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT, OR (C) IF REGISTERED UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS. IN ADDITION, A SECURITIES PURCHASE AGREEMENT ("PURCHASE AGREEMENT"), DATED THE DATE HEREOF, A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY AT ITS PRINCIPAL EXECUTIVE OFFICE, CONTAINS CERTAIN ADDITIONAL AGREEMENTS AMONG THE PARTIES, INCLUDING, WITHOUT LIMITATION, PROVISIONS WHICH LIMIT THE EXERCISE RIGHTS OF THE HOLDER AND SPECIFY MANDATORY REDEMPTION OBLIGATIONS OF THE COMPANY. --------------------------------------- COMMON STOCK PURCHASE WARRANT - -------------------------------------------------------------------------------- Number of shares: Holder: Strike Price: US$ Expiration: December 1, 2004 For identification only. The governing terms of this Warrant are set forth below. - -------------------------------------------------------------------------------- American International Petroleum Corporation, a Nevada corporation (the "Company"), hereby certifies that, for value received, ________________________ or assigns, is entitled, subject to the terms set forth below, to purchase from the Company at any time or from time to time after the date hereof and prior to the fifth anniversary hereof (the "Exercise Period"), at the Purchase Price hereinafter set forth, _______________ (_________) shares of the fully paid and nonassessable shares of Common Stock of the Company. The number and character of such shares of Common Stock and the Purchase Price are subject to adjustment as provided herein. The purchase price per share of Common Stock issuable upon exercise of this Warrant (the "Purchase Price") shall initially be equal to USD$0.________; provided, however, that the Purchase Price shall be adjusted from time to time as provided herein. Capitalized terms used herein not otherwise defined shall have the meanings ascribed thereto in the Purchase Agreement. As used herein the following terms, unless the context otherwise requires, have the following respective meanings: (a) The term "Company" shall include American International Petroleum Corporation and any corporation that shall succeed or assume the obligations of such corporation hereunder. (b) The term "Common Stock" includes (a) the Company's common stock, par value $0.08 per share, (b) any other capital stock of any class or classes (however designated) of the Company, authorized on or after such date, the Holders of which shall have the right, without limitation as to amount, either to all or to a share of the balance of current dividends and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference, and the Holders of which shall ordinarily, in the absence of contingencies, be entitled to vote for the election of a majority of directors of the Company (even though the right so to vote has been suspended by the happening of such a contingency) and (c) any other securities into which or for which any of the securities described in (a) or (b) may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise. (c) The term "Other Securities" refers to any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) that the Holder of this warrant at any time shall be entitled to receive, or shall have received, on the exercise of this Warrant, in lieu of or in addition to Common Stock, or that at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to Section 4 or otherwise. 1. Exercise of Warrant. 1.1 Method of Exercise. (a) This warrant may be exercised in whole or in part (but not as to a fractional share of Common Stock), at any time and from time to time during the Exercise Period by the Holder hereof by delivery of a notice of exercise (a "Notice of Exercise") substantially in the form attached hereto as Exhibit A via facsimile to the Company. Promptly thereafter the Holder shall surrender this Warrant to the Company at its principal office, accompanied by payment of the Purchase Price multiplied by the number of shares of Common Stock for which this Warrant is being exercised (the "Exercise Price"). Payment of the Exercise Price shall be made, at the option of the Holder, (i) by check or bank draft payable to the order of the Company, (ii) by wire transfer to the account of the Company, (iii) in shares of Common Stock having a Market Value on the Exercise Date (as hereinafter defined) equal to the aggregate Exercise Price or (iv) by presentation and surrender of this Warrant to the Company for cashless exercise (a "Cashless Exercise"), which such surrender being deemed a waiver of the Holder's obligation to pay all or any portion of the Exercise Price. In the event the Holder elects a Cashless Exercise (which such election shall be irrevocable) the Holder shall exchange this Warrant for that number of shares of Common Stock determined by multiplying the number of shares of Common Stock being exercised by a fraction, the numerator of which shall be the difference between the then current Market Value of the Common Stock and the Purchase Price, and the denominator of which shall be the then current Market Value of the Common Stock. If the amount of the payment received by the Company is less than the Exercise Price, the Holder will be notified of the deficiency and shall make payment in that amount within five (5) business days. In the event the payment exceeds the Exercise Price, the Company will promptly refund the excess to the Holder. Upon exercise, the Holder shall be entitled to receive, promptly refund the excess to the Holder. Upon exercise, the Holder shall be entitled to receive, promptly after payment in full, one or more certificates, issued in the Holder's name or in such name or names as the Holder may direct, subject to the limitations on transfer contained herein, for the number of shares of Common Stock so purchased. The shares of Common Stock so purchased shall be deemed to be issued as of the close of business on the date on which the Company shall have received from the Holder payment in full of the Exercise Price (the "Exercise Date"). (b) Notwithstanding anything to the contrary set forth herein, upon exercise of all or a portion of this Warrant in accordance with the terms hereof, the Holder shall not be required to physically surrender this Warrant to the Company. Rather, records showing the amount so exercised and the date of exercise shall be maintained on a ledger substantially in the form of Annex B attached hereto (a copy of which shall be delivered to the Company or transfer agent with each Notice of Exercise). It is specifically contemplated that the Holder hereof shall act as the calculation agent for all exercises of this Warrant. In the event of any dispute or discrepancies, such records maintained by the Holders shall be controlling and determinative in the absence of manifest error. The Holder and any assignee, by acceptance of this Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following an exercise of a portion of this Warrant, the number of shares of Common Stock represented by this Warrant will be the amount indicated on Annex B attached hereto (which may be less than the amount stated on the face hereof). 1.2 Regulation D Restrictions. The Holder hereof represents and warrants to the Company that it has acquired this Warrant and anticipates acquiring the shares of Common Stock issuable upon exercise of the Warrant solely for its own account for investment purposes and not with a view to or for resale of such securities unless such resale has been registered with the Commission or an applicable exemption is available therefor. At the time this Warrant is exercised, the Company may require the Holder to state in the Notice of Exercise such representations concerning the Holder as are necessary or appropriate to assure compliance by the Holder with the Securities Act. 1.3 Company Acknowledgment. The Company will, at the time of the exercise of this Warrant, upon request of the Holder hereof, acknowledge in writing its continuing obligation to afford to such Holder the registration rights to which such Holder shall continue to be entitled after such exercise in accordance with the provisions of a Registration Rights Agreement dated the date hereof (the "Registration Rights Agreement"). If the Holder shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford such Holder any such rights. 1.4 Limitation on Exercise. Notwithstanding the rights of the Holder to exercise all or a portion of this Warrant as described herein, such exercise rights shall be limited, solely to the extent set forth in the Purchase Agreement as if such provisions were specifically set forth herein. In addition, the number of shares of Common Stock issuable upon exercise of this Warrant is subject to reduction as specified in Section 10.3 of the Purchase Agreement. 2. Delivery of Stock Certificates, etc., on Exercise. As soon as practicable after the exercise of this Warrant, and in any event within five (5) business days thereafter, the Company at its expense (including the payment by it of any applicable issue, stamp or transfer taxes) will cause to be issued in the name of and delivered to the Holder thereof, or, to the extent permissible hereunder, to such other person as such Holder may direct, a certificate or certificates for the number of fully paid and nonassessable shares of Common Stock (or Other Securities) to which such Holder shall be entitled on such exercise, plus, in lieu of any fractional share to which such Holder would otherwise be entitled, cash equal to such fraction multiplied by the then applicable Purchase Price, together with any other stock or other securities and property (including cash, where applicable) to which such Holder is entitled upon such exercise pursuant to Section 1 or otherwise. 3. Adjustment for Extraordinary Events. The Purchase Price to be paid by the Holder upon exercise of this Warrant, and the consideration to be received upon exercise of this Warrant, shall be adjusted in case at any time or from time to time pursuant to Article XI of the Purchase Agreement as if such provisions were specifically set forth herein. 4. No Impairment. The Company will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder of this warrant against impairment. Without limiting the generality of the foregoing, the Company (a) will not increase the par value of any shares of stock receivable on the exercise of this Warrant above the amount payable therefor on such exercise, (b) will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and unassessable shares of stock on the exercise of this Warrant, and (c) will not transfer all or substantially all of its properties and assets to any other person (corporate or otherwise), or consolidate with or merge into any other person or permit any such person to consolidate with or merge into the Company (if the Company is not the surviving person), unless such other person shall expressly assume in writing and will be bound by all the terms of this Warrant. 5. Accountant's Certificate as to Adjustments. In each case of any adjustment or readjustment in the shares of Common Stock (or Other Securities) issuable on the exercise of this Warrant, the Company at its expense will promptly cause independent certified public accountants of national standing selected by the Company to compute such adjustment or readjustment in accordance with the terms of this Warrant and prepare a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based, including a statement of (a) the consideration received or receivable by the Company for any additional shares of Common Stock (or Other Securities) issued or sold or deemed to have been issued or sold, (b) the number of shares of Common Stock (or Other Securities) outstanding or deemed to be outstanding, and (c) the Purchase Price and the number of shares of Common Stock to be received upon exercise of this Warrant, in effect immediately prior to such issue or sale and as adjusted and readjusted as provided in this Warrant. The Company will forthwith mail a copy of each such certificate to the Holder of this Warrant, and will, on the written request at any time of the Holder of this Warrant, furnish to such Holder a like certificate setting forth the Purchase Price at the time in effect and showing how it was calculated. 6. Notices of Record Date, etc. In the event of (a) any taking by the Company of a record of the Holders of any class or securities for the purpose of determining the Holders thereof who are entitled to receive any dividend or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or (b) any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any transfer of all or substantially all the assets of the Company to or consolidation or merger of the Company with or into any other person, or (c) any voluntary or involuntary dissolution, liquidation or winding- up of the Company, then and in each such event the Company will mail or cause to be mailed to the Holder of this Warrant a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, and (ii) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up is to take place, and the time, if any, as of which the Holders of record of Common Stock (or Other Securities) shall be entitled to exchange their shares of Common Stock (or Other Securities) for then and in each such event the Company will mail or cause to be mailed to the Holder of this Warrant a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount of character of such dividend, distribution or right, and (ii) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up is to take place, and the time, if any, as of which the Holders of record of Common Stock (or Other Securities) shall be entitled to exchange their shares of Common Stock (or Other Securities) for securities or other property deliverable on such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up. Such notice shall be mailed at least 20 days prior to the date specified in such notice on which any action is to be taken. 7. Reservation of Stock, etc. Issuable on Exercise of Warrant. The Company will at all times reserve and keep available, solely for issuance and delivery on the exercise of this Warrant, all shares of Common Stock (or Other Securities) from time to time issuable on the exercise of this Warrant. 8. Exchange of Warrant. (a) On surrender for exchange of this Warrant, properly endorsed and in compliance with the restrictions on transfer set forth in the legend on the face of this Warrant, to the Company, the Company at its expense will issue and deliver to or on the order of the Holder thereof a new Warrant of like tenor, in the name of such Holder or as such Holder (on payment by such Holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face of the Warrant so surrendered. (b) Upon written notice from the Purchasers pursuant to Section 2.5(b)(iii) of the Purchase Agreement that the Purchasers have elected to transfer amongst each other a portion of this Warrant, and on surrender for amendment and restatement of this Warrant, the Company at its expense will issue and deliver to or on the order of the Holder thereof a new Warrant of like tenor, in the name of such Holder as the Purchasers (on payment by such Holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock as set forth in such notice reflecting such transfer. 9. Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of this Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 10. Remedies. The Company stipulates that the remedies at law of the Holder of this Warrant in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate, and that such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise. 11. Negotiability, etc.. This Warrant is issued upon the following terms, to all of which each Holder or owner hereof by the taking hereof consents and agrees: (a) title to this Warrant may be transferred by endorsement and delivery in the same manner as in the case of a negotiable instrument transferable by endorsement and delivery. (b) any person in possession of this Warrant properly endorsed is authorized to represent himself as absolute owner hereof and is empowered to transfer absolute title hereto by endorsement and delivery hereof to a bona fide purchaser hereof for value; each prior taker or owner waives and renounces all of his equities or rights in this Warrant in favor of such bona fide purchaser, and each such bona fide purchaser shall acquire absolute title hereto and to all rights represented hereby; (c) until this Warrant is transferred on the books of the Company, the Company may treat the registered Holder hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary; and (d) notwithstanding the foregoing, this Warrant may be sold, transferred or assigned except pursuant to an effective registration statement under the Securities Act or pursuant to an applicable exemption therefrom. 12. Registration Rights. The Company is obligated to register the shares of Common Stock issuable upon exercise of this Warrant in accordance with the terms of the Registration Rights Agreement. 13. Notices, etc.. All notices and other communications from the Company to the Holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company in writing by such Holder or, until any such Holder furnishes to the Company any address, then to, and at the address of, the last Holder of this Warrant who has so furnished an address to the Company. 14. Miscellaneous. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant shall be construed and enforced in accordance with and governed by the internal laws of the State of New York. The headings in this Warrant are for the purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. [Signature Page Follows] DATED as of December 1, 1999. AMERICAN INTERNATIONAL PETROLEUM CORPORATION By: _____________________________________ Name: ___________________________________ Title: __________________________________ [Corporate Seal] Attest: By: ______________________________ Secretary EXHIBIT A FORM OF NOTICE EXERCISE - WARRANT (To be executed only upon exercise of the Warrant in whole or in part) To ____________________________________________ The undersigned registered Holder of the accompanying Warrant, hereby exercises such Warrant or portion thereof for, and purchases thereunder, __________(1) shares of Common Stock (as defined in such Warrant) and herewith makes payment therefor in the amount and manner set forth below, as of the date written below. The undersigned requests that the certificates for such shares of Common Stock be issued in the name of, and delivered to, whose address is . The Exercise Price is paid as follows: |_| Bank draft payable to the Company in the amount of $_____________. |_| Wire transfer to the account of the Company in the amount of $___________. |_| Delivery of __________________ previously held shares of Common Stock having an aggregate Market Price of $_____________. |_| Cashless exercise. Surrender of ___________ shares purchasable under this Warrant for such shares of Common Stock issuable in exchange therefor pursuant to the Cashless Exercise provisions of the Warrant, as provided in Section 1.1(iv) thereto. Upon exercise pursuant to this Notice of Exercise, the Holder will be in compliance with the Limitation on Exercise (as defined in the Securities Purchase Agreement pursuant to which this Warrant was issued). Date: ___________________ ____________________________________________ (Name must conform to name of Holder as specified on the face of the Warrant) By: ________________________________________ Name: ______________________________________ Title: _____________________________________ Address of Holder: _________________________ _________________________ Date of exercise: ________________________ - ---------- (1)Insert the number of shares of Common Stock as to which the accompanying Warrant is being exercised. In the case of a partial exercise, a new Warrant or Warrants will be issued and delivered, representing the unexercised portion of the accompanying Warrant, to the Holder surrendering the same.
ANNEX B WARRANT EXERCISE LEDGER - ------------------------------------------------------------------------------------------------------------------------------------ Original Number of Warrants Exercise Price New Balance Issuer Holder Date Warrants Exercised Paid of Warrants Initials Initials - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ----------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------
EX-10.8 4 AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT (FARIS) Exhibit 10.8 AMENDMENT NO. 2 TO AMERICAN INTERNATIONAL PETROLEUM CORPORATION EMPLOYMENT AGREEMENT WITH GEORGE N. FARIS DATED MAY 1, 1989 Amendment dated as of the ____ day of November 1999, between AMERICAN INTERNATIONAL PETROLEUM CORPORATION, a Nevada corporation with executive offices located at 444 Madison Avenue, New York, NY 10022 (the "Company"), and GEORGE N. FARIS, residing at 33 Twin Lakes Lane, Riverside, Connecticut 06878 (the "Employee"). W I T N E S S E T H WHEREAS, the Employee is currently the Chief Executive Officer and Chairman of the Board of Directors of the Company and has served the Company pursuant to an Employment Agreement dated May 1, 1989, as amended by Amendment No. 1 dated October 13, 1995 (collectively the "Agreement"); and WHEREAS, the Company desires to retain the Employee, and the Employee is willing to continue to serve, as Chairman of the Board of the Company, on the terms and subject to the conditions, set forth below: NOW THEREFORE, in consideration of the premises and for other good and valuable consideration, the adequacy and receipt of which are hereby acknowledged, the Company and the Employee do hereby agree to amend the Agreement (hereinafter referred to as the "New Amendment") as follows: 1. Section 1 of the Agreement is amended and restated in its entirety as at the date set forth above to read as follows: "1. Employment. The Company shall employ the Employee, and the Employee shall serve, as Chairman of the Board of Directors of the Company. In addition, the Company shall use its best efforts to cause the Board of Directors (the "Board") to nominate the Employee as a Director until December 31, 2004. 2. Section 2 of the Agreement is amended so as to extend the term of the Agreement through December 31, 2002 (the "Initial Term"). Any further extension thereof shall be in writing signed by the parties. Notwithstanding the above and in no manner limiting any of the rights and privileges of Employee hereunder, if the Initial Term is not extended beyond December 31, 2002, the Company agrees to retain the Employee as a consultant for a period of two calendar years ending December 31, 2004 (the "Consulting Term"), provided the Employee is then willing to serve as a consultant. During the Consulting Term, the Company shall pay the Employee fifty percent (50%) of his annual base salary as at December 31, 2002, together with the benefits set forth in Section 3(c) of the Agreement. Employee agrees to devote up to 50% of the time he devotes to the business and affairs of the Company under the terms of this New Amendment during the Consulting Term. 3. Section 3(a) of the Agreement is amended to reduce the fixed compensation of the Employee from $350,000 to $250,000 per year effective January 1, 2000. 1 4. Section 3(b) of the Agreement is amended and restated in its entirety as at the date set forth above to read as follows: "(b) Incentive Compensation. Employee shall be eligible to receive an annual performance bonus up to a maximum of fifty percent (50%) of Employee's then annual base salary. The performance criteria, the measurement of performance, the mode of payment of any such performance bonus (cash or otherwise) and the amount of such performance bonus shall be as determined at the sole and absolute discretion of the Company's Board of Directors. Employee shall be eligible to receive other bonuses, if any, approved by the Board in accordance with the standard policies of Company for compensation of senior executives or as the Parties may agree upon from time to time." 5. Section 3(c)(iv) of the Agreement is amended and restated as at the date set forth above to read as follows: "3(c)(iv) Club Memberships. The Company will reimburse Employee for the cost of membership in two New York City Clubs. The parties acknowledge that such clubs are currently the Metropolitan and the University Clubs." 6. Section 3(v) of the Agreement is amended and restated as at the date set forth above to read as follows: "3(v). Medical Benefits. The Company shall provide Employee (and if Employee shall predecease his spouse, his spouse) during the Initial Term, and thereafter, unless Employee's employment is terminated by the Company for cause or by Employee voluntarily prior to the end of the Initial Term, with such medical and health insurance benefits as the Company normally accords its executive officers. Such insurance shall cover the Employee and his dependents (wife). To the extent Employee and his spouse cannot be directly covered by the Company's insurance, the Company shall pay Employee an equivalent amount in cash for the period he is not so covered." 7. Section 4 of the Agreement is amended and restated in its entirety as at the date set forth above to read as follows: "4. Duties; Time and Effort (a) During the term of his employment hereunder, Employee shall serve as Chairman of the Board. In that capacity, he shall preside at meetings of the Board of Directors and have primary responsibility for coordinating activities of the Board, as well as supervising investor relations, corporate communications, regulatory compliance and other legal matters and will report directly to the Board for such activities. (b) Employee shall devote only such time as he deems necessary to perform the services described in Section 4(a). The Employee may engage in other employment or activities during the term of this New Amendment that do not conflict with the terms of Section (8) herein below. (c) The Employee's principal place of employment during the term of this New Amendment will be at the Company's offices in New York, New York." 2 8. Section 5(a) of the Agreement is amended by adding at the end thereof, the following language: "Notwithstanding anything contained in this Section 5(a) to the contrary, in the event Employee remains employed by the Company through the end of the Initial Term, the restrictions set forth in this Section 5(a) shall lapse and in its place for a period of 12 months after the termination of his employment hereunder, Employee agrees not to directly, or indirectly, (i) own any interest in (except for the permitted maximum ownership interest permitted in Section 5(a) of the Agreement prior to the execution of this New Amendment) any company or entity engaged in oil and gas exploration or development activities within the same geological basin as the Company has been so engaged within the preceding 12 month period, or (ii) participate or engage in, assist, render any services (including, without limitation, acting as an employee, consultant, advisor, agent, independent contractor, officer or director) on behalf of any such company or entity with respect to such oil and gas exploration or development activities, unless approved by the Board." 9. Section 8(d) of the Agreement is amended and restated in its entirety as at the date set forth above by adding a new subparagraph (d) to read as follows: "(d) If Employee's employment is not renewed at the end of the Initial Term or the Employee does not elect to serve as a consultant as contemplated by Paragraph 2 of this New Amendment, or if the Employee voluntarily terminates his employment or consulting services at any time during the Initial Term or the Consulting Term, the Company shall be obligated to pay the Employee, and the Employee shall be entitled to receive from the Company, a severance payment in an amount equal to one month's salary for each full year of employment beginning January 1, 1995. The Employee's monthly base salary at December 31, 1999 shall be used in calculating the amount of the severance payment payable hereunder. The severance payment shall be due and payable within 30 days after written notice from the Employee. Anything to the contrary in the foregoing notwithstanding, except as provided in Paragraph 10 of this New Amendment, if at any time prior to December 31, 2004, the Board of Directors fails to nominate the Employee as a Director, the Company shall be obligated to pay the Employee, and the Employee shall be entitled to receive from the Company, in addition to any severance payment to which he may be entitled under this section, all compensation to which he is entitled under the terms of the Agreement and this New Amendment through and including December 31, 2004 whether or not the Employee serves as a consultant to the Company as contemplated by Paragraph 2 of this New Amendment. Fifty percent of these amounts shall be due and payable to the Employee within 30 days after the date upon which the Board nominates directors for election with the balance due within 90 days of such date. 10. Section 9 of the Agreement shall be amended and reinstated, as at the date set forth above to read as follows: 3 "9. Change in Control. If, within three (3) months following the occurrence of a Change in Control, Employee elects to terminate his employment with the Company and/or is no longer Chairman of the Board of the Company or its successor, then, in lieu of any severance payments hereunder, the Company shall (1) pay the Employee, within 10 days after Employee's election, a lump sum cash payment in an amount equal to the Change in Control Payment and (2) provide Employee with Change in Control Benefits. If Employee's employment is terminated prior to the date the Employee elects to terminate but it is reasonably demonstrated that such termination (a) was at the request of a third party who has taken steps reasonably calculated to effect a Change in Control or (b) otherwise arose in connection with or in anticipation of a Change in Control, then, for all purposes of this paragraph, such termination shall be considered to have occurred immediately following the Change in Control and Employee's election to so terminate. As used herein, the following terms shall mean: A "Change in Control" shall be deemed to have occurred if (i) there shall be consummated (A) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of the Company's common stock would be converted in whole or in part into cash, securities or other property, other than a merger of the Company in which the holders of the Company's common stock immediately prior to the merger own immediately after the merger a majority of the voting stock of the surviving corporation, or (B) any sale, lease, exchange or transfer (in one transaction or a series of related transactions) of all or substantially all the assets of the Company, or (ii) the stockholders of the Company shall approve any plan or proposal for the liquidation or dissolution of the Company, or (iii) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), other than the Company or a subsidiary thereof or any employee benefit plan sponsored by the Company or a subsidiary thereof, shall become the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities ordinarily (and apart from rights accruing in special circumstances) having the right to vote in the election of directors, as a result of a tender or exchange offer, open market purchases, privately negotiated purchases or otherwise, or (iv) at any time during a period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors of the Company shall cease to constitute at least a majority thereof as a result of the election of individuals who were not the nominees of the Board of Directors or (v) any other event shall occur that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act; provided, however, that the term "Change in Control" shall not include (x) any of the foregoing events if approved by Employee or a majority of the Board (for this purpose, consisting only of (1) the individuals serving on the date of this Amendment, excluding individuals who resign or do not stand for re-election after the Effective Date, or (2) individuals as to whom Employee has signified his acceptance in writing, or (y) any bona fide financing transaction approved by the Board. "Change in Control Benefits" shall mean continued coverage under the 4 Company's medical, dental, and group life insurance plans for Employee and those of Employee's dependents (including Employee's spouse) who were covered under such plans on the day prior to Employee's termination of employment with the Company for one year from the date of such termination at no cost to Employee and Employee's dependents (provided, however, that in the event that continued participation in any such Company plan is for whatever reason impossible, Company shall arrange upon comparable terms benefits substantially equivalent to those that were provided under such Company plan). "Change in Control Payment" shall mean an amount equal to 2.99 times the greater of (i) $350,000 or (ii) Employee's annual base salary as in effect on the date of termination. All other terms of the Agreement remain in full force and effect. IN WITNESS WHEREOF, the Company has caused this New Amendment to be executed by a duly authorized officer and the Employee has signed this New Amendment as of the day and year written below his signature hereto. AMERICAN INTERNATIONAL PETROLEUM CORPORATION By: _____________________________ Daniel Kim Chairman of the Compensation Committee and on behalf of The Board of Directors EMPLOYEE: _________________________________ George N. Faris Date: ___________________________ Last printed 11/18/99 12:55 PM 5 EX-10.9 5 EMPLOYMENT AGREEMENT (MCKINNEY) Exhibit 10.9 July 21, 1999 Mr. J.M. McKinney 3605 Ella Lee Lane Houston, Texas 77027 Dear Joe Mike: This letter will evidence our agreement in connection with your employment as President of American International Petroleum Corporation ("AIPC"). The terms and conditions of your employment with AIPC are outlined below: 1. Position: You will be employed as President and Chief Operating Officer of AIPC. As President of AIPC you will report directly to the chief executive officer of AIPC. Additionally, you will be elected to and become Chairman of the Board of Directors of all AIPC subsidiaries. Further, you will be appointed as President of the Operating Committee of AIPC which operating committee is comprised of certain of the senior executives of AIPC and/or its affiliated companies. 2. Effective Date: Your employment will be effective July 21, 1999 but will not commence until such time as your requested to do so by AIPC. 3. Location: Your office shall be in AIPC's corporate office in Houston, Texas. However, the nature of your position will require extensive travel overseas. 4. Responsibilities: As the President of AIPC, you will be its chief operating officer with responsibility for the general supervision, management, direction and control of the business and officers of AIPC and its subsidiaries including supervision and management of AIPC's daily operations and responsibility for developing and carrying out AIPC's business plan and budget as approved by the board of directors. 5. Salary: Your salary will be $300,000.00 per year, subject, however, to such merit increases which shall be determined by the AIPC Board of Directors and the CEO of AIPC based upon your performance and the performance of AIPC. During your first year of employment, your base salary shall be $275,000 in cash plus 25,000 AIPC shares to be vested as follows: a. 5,000 shares upon effect date of your employment. b. 10,000 shares on December 31, 1999. c. 10,000 shares on July 20, 2000 6. Option: You will be entitled to receive stock options to purchase shares of AIPC common stock on the same basis as other senior executives of AIPC and its affiliated companies; provided, however, upon commencement of your employment with AIPC you will receive an option, exercisable at any time within five (5) years from the date of your employment to purchase 200,000 shares of AIPC common stock at a 10% premium of the closing bid price on the day immediately prior to the date of your acceptance of this offer, , subject, however, to the following vesting schedule: 1 a. 70,000 shares will vest after one (1) full year of employment. b. 70,000 shares will vest after two (2) full years of employment. c. 60,000 shares will vest after three (3) full years of employment. In addition you will be entitled to participate in the "1999 Challenge Option Plan" and will receive an option to purchase 100,000 shares of AIPC stock @ $2.00/share provided AIPC stock trades at or above $5.00/share for 15 consecutive days before December 31, 1999. The standard AIPC option agreement enumerating the preceding will be prepared and sent to you by August 30, 1999. 7. Annual Bonus: You will be entitled an annual bonus based upon your performance and AIPC's overall achievement of its corporate goals. The amount of such bonus shall be determined at the discretion of the AIPC Board and the CEO of AIPC and may be up to 50% of your base salary at that time.. 8. Benefits: AIPC will include you and your direct eligible family members within its medical and dental coverage subject to any applicable waiting period and provisions concerning pre-existing medical conditions. Additionally, you will be entitled to all other benefits that are made available to senior executive of AIPC, including the right to participate in AIPC's 401(K) Retirement savings Plan but subject to any applicable eligibility requirements. You will be entitled to three (3) weeks of vacation for each year of your employment. The company will provide you with a full-size leased automobile, or at your option, you may elect an equivalent amount as a car allowance up to $500/month. Business Class travel will be allowed for all international flights and for all domestic flights over four (4) hours in length. You will be reimbursed promptly for all reasonable expenses which you incur in connection with your employment. 9. Executive Medical Evacuation Program: You will be included in the Executive Medical Evacuation Program. 10. Term of Employment: Your employment shall be for a period of one (1) year from the date of commencement and your term of employment shall be renewed automatically for successive periods of one (1) year each unless either party gives the other notice of termination at least ninety (90) days prior to any anniversary date of your employment. In such event, your employment will terminate on the anniversary date immediately following the date of notice. Should the Company terminate your employment for cause, no notice will required and all non-vested portion of your options will terminate immediately. However, should the Company terminate your employment after one full year of employment for no cause, then all your regular options will vest immediately 11. Severance Pay: You shall be entitled to one month of salary as a severance payment for each full year of employment. 12. Ownership of Information: All documents, drawings, memoranda, notes, records, files correspondence, manuals, models, specifications, computer programs, E-mail, voice mail, electronic databases, maps, and all other writings or materials of any type embodying any of information pertaining to the business of AIPC which you have developed, utilized or had access to are and shall be the sole and exclusive property of AIPC. Upon termination of your employment by AIPC, for any reason, you shall promptly deliver the same, and all copies thereof, to AIPC. 13. Non-Solicitation: During the term of your employment and for a period of two (2) years thereafter, you will not, directly or indirectly, solicit or contact any employee of AIPC, with a view to inducing or encouraging such employee to leave the employ of AIPC for the purpose of being hired by you, an employer affiliated with you or any competitor of AIPC, or during the term of this agreement and for a period of one year thereafter engage in or 2 be interested in (as an owner, partner, 2% shareholder in a publicly traded company, employee, officer, director, agent, consultant or otherwise), solicit any business from, or contact any person or entity engaged in oil and gas exploration or development activities within the same geological basin as the Company has been operating or has been actively seeking to be so engaged. 14. Applicable Law: This Agreement is entered into under, and shall be governed for all purposes by, the laws of the State of Texas. If the foregoing is acceptable to you, please sign below. Very truly yours, _______________________________ George N. Faris, Chairman & CEO AMERICAN INTERNATIONAL PETROLEUM CORPORATION ACCEPTED AND AGREED this ______ day of _____________, 1999 _________________________________ J. M. MCKINNEY EX-10.10 6 EMPLOYMENT AGREEMENT (MCKINNEY) Exhibit 10.10 November 18, 1999 Mr. J.M. McKinney 3605 Ella Lee Lane Houston, Texas 77027 Dear Joe Mike: This letter, when countersigned by you, amends and supersedes the letter dated July 21, 1999 (the "July 1999 Agreement") concerning the terms of your employment with American International Petroleum Corporation ("AIPC or the "Company"). 1. Position: You will be employed as Chief Executive Officer and President of AIPC. In addition, AIPC agrees to use its best efforts to cause your election to its Board of Directors and as chairman of the Board of Directors of all its subsidiaries. Further, AIPC will use its best efforts to cause your appointment as President and Chief Executive Officer of the Operating Committee of AIPC, which is comprised of certain of the senior executives of AIPC and/or its affiliated companies. 2. Effective Date: This Agreement shall become effective as of December 1, 1999 and shall supersede the terms set forth in the 1999 Agreement. 3. Location: Your office shall be in AIPC's corporate office in Houston, Texas. However, the nature of your position will require extensive travel overseas. 4. Responsibilities: As President and Chief Executive Officer of AIPC, you will be responsible for directing the policies and management of AIPC and its subsidiaries, as well as the general supervision and management of AIPC's daily operations and for developing and implementing AIPC's business plan and budget as approved by the Board of Directors. You shall report to the Company's Board of Directors on all matters except with respect to investor relations, corporate communications, regulatory compliance and legal matters you shall report to the Chairman of the Board. 5. Compensation: Your base salary, $275,000 per year, will be increased to $350,000 per year commencing January 1, 2000. In addition, you will be entitled to bonuses (not to exceed 50% of your base compensation) and such other incentive compensation as the Board of Directors in its sole and absolute discretion may determine based upon your individual and AIPC's performance. 3 6. Shares: The 25,000 AIPC shares previously issued to you under the terms of the July 1999 Agreement will become fully vested as of December 31, 1999. 7. Option: You will be eligible to participate in AIPC's stock option plans on the same basis as other senior executives of AIPC and its affiliated companies. In addition to the option to purchase 200,000 AIPC shares previously granted to you in accordance with the terms of the July 1999 Agreement, you will be granted options to purchase an additional 500,000 AIPC shares, 250,000 shares at an exercise price of $1.00 per share and 250,000 shares of $0.50 per share. Options to purchase 62,500 shares of each option will become exercisable on December 31, 1999, options to purchase a cumulative total of 125,000 shares of each option will become exercisable on December 31, 2000, options to purchase a cumulative total of 187,500 shares of each option will become exercisable on December 31, 2001 and options to purchase a cumulative total of 500,000 shares of each option will become exercisable on December 31, 2002. Both options will expire on December 31, 2004, or earlier upon your termination of employment in accordance with the terms of the stock option plan. 8. Benefits: AIPC will include you and your direct eligible family members within its medical and dental coverage subject to any applicable waiting period and provisions concerning pre-existing medical conditions. Additionally, you will be entitled to all other benefits that are made available to senior executive of AIPC, including the right to participate in AIPC's 401(k) Retirement Savings Plan but subject to any applicable eligibility requirements. You will be entitled to an annual vacation of three (3) weeks. The company will provide you with a full-size leased automobile, or at your option, you may elect an equivalent amount as a car allowance up to $500/month. Business Class travel will be allowed for all international flights and for all domestic flights over four (4) hours in length. You will be reimbursed promptly for all reasonable expenses which you incur in connection with your employment. 9. Executive Medical Evacuation Program. You will be included in the Executive Medical Evacuation Program. 10. Term of Employment. This agreement shall have an initial term of three (3) years commencing December 1, 1999 and ending November 30, 2003 and shall be renewed automatically for successive periods of one (1) year each unless either party gives the other notice of termination at least six months prior to the end of the initial term or any renewal term. In such event, your employment will terminate on the last day of the initial term or the renewal term, as the case may be. Should the Company terminate your employment for cause, no notice will be required and your employment and all of your options will terminate immediately. However, should the Company terminate your employment without cause, then all your options will vest immediately, except for options the vesting of which are related to the attainment of specified objectives by you, the Company or AIPC shares, which objectives have not been satisfied by the date your employment is terminated. 11. Severance Pay. You shall be entitled to one month of salary as a severance payment for each full year of employment with the Company, unless your employment is terminated for cause. The severance payment shall be due and payable within thirty (30) days. 2 12. Change in Control. If, within three (3) months following the occurrence of a Change in Control (as defined below), you elect to terminate your employment with the Company and/or are no longer the President and Chief Executive Officer of the Company or its successor, then, in lieu of any severance payments hereunder, the Company shall (1) pay you, within 10 days after your election, a lump sum cash payment in an amount equal to the Change in Control Payment (as defined below) and (2) provide you with Change in Control Benefits (as defined below). If your employment is terminated prior to the date you elect to terminate but it is reasonably demonstrated that such termination (a) was at the request of a third party who has taken steps reasonably calculated to effect a Change in Control or (b) otherwise arose in connection with or in anticipation of a Change in Control, then, for all purposes of this paragraph, such termination shall be considered to have occurred immediately following the Change in Control and your election to so terminate. As used herein, the following terms shall mean: A "Change in Control" shall be deemed to have occurred if (i) there shall be consummated (A) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of the Company's common stock would be converted in whole or in part into cash, securities or other property, other than a merger of the Company in which the holders of the Company's common stock immediately prior to the merger own immediately after the merger a majority of the voting stock of the surviving corporation, or (B) any sale, lease, exchange or transfer (in one transaction or a series of related transactions) of all or substantially all the assets of the Company, or (ii) the stockholders of the Company shall approve any plan or proposal for the liquidation or dissolution of the Company, or (iii) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), other than the Company or a subsidiary thereof or any employee benefit plan sponsored by the Company or a subsidiary thereof, shall become the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities ordinarily (and apart from rights accruing in special circumstances) having the right to vote in the election of directors, as a result of a tender or exchange offer, open market purchases, privately negotiated purchases or otherwise, or (iv) any other event shall occur that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act; provided, however, that the term "Change in Control" shall not include (x) any of the foregoing events if approved a majority of the Board or (y) any bona fide financing transaction approved by the Board. "Change in Control Benefits" shall mean continued coverage under the Company's medical, dental, and group life insurance plans for you and those of your dependents (including your spouse) who were covered under such plans on the day prior to your termination of employment with the Company for one year from the date of such termination at no cost to you and your dependents (provided, however, that in the event that continued participation in any such Company plan is for whatever reason impossible, the Company shall arrange 3 upon comparable terms benefits substantially equivalent to those that were provided under such Company plan). "Change in Control Payment" shall mean an amount equal to 2.99 times your annual base salary as in effect pursuant to paragraph 5 immediately prior to your termination of employment with the Company. 13. Ownership of Information. All documents, drawings, memoranda, notes, records, files correspondence, manuals, models, specifications, computer programs, E-mail, voice mail, electronic databases, maps and all other writings or materials of any type embodying any of information pertaining to the business of AIPC which you have developed, utilized or had access to are and shall be the sole and exclusive property of AIPC. Upon termination of your employment by AIPC, for any reason, you shall promptly deliver the same, and all copies thereof, to AIPC. 14. Non-Solicitation. During the term of your employment and for a period of two (2) years thereafter, you will not, directly or indirectly, solicit or contact any employee of AIPC, with a view to inducing or encouraging such employee to leave the employ of AIPC for the purpose of being hired by you, an employer affiliated with you or any competitor of AIPC, or during the term of this agreement and for a period of one year thereafter engage in or be interested in (as an owner, partner, 2% shareholder in a publicly traded company, employee, officer, director, agent, consultant or otherwise), solicit any business from, or contact any person or entity engaged in oil and gas exploration or development activities within the same geological basin as the Company has been operating or has been actively seeking to be so engaged. 15. Applicable Law. This Agreement is entered into under, and shall be governed for all purposes by, the laws of the State of Texas. If the foregoing sets forth the agreement between us, please countersign a copy of this letter and return the same to me. Very truly yours, ---------------------------------- George N. Faris, Chairman AMERICAN INTERNATIONAL PETROLEUM CORPORATION ACCEPTED AND AGREED this ____ day of November, 1999 - ----------------------------- J. M. MCKINNEY 4 EX-27 7 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 1,753,707 0 497,553 0 723,088 3,899,031 70,561,944 (6,470,672) 69,658,269 8,903,689 11,984,592 0 0 7,302,621 41,161,411 69,658,269 8,137,867 8,352,038 8,670,760 8,670,760 8,098,567 0 6,500,579 (14,917,868) 0 0 0 0 0 (14,917,868) (0.20) 0
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