As filed with the Securities and Exchange Commission on February __, 2001
Registration Nos. 333-______
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
American International Petroleum Corporation
(Exact name of Registrant as specified in its charter)
Nevada 6719 13-3130236
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Number) Identification Number)
2950 North Loop West, Suite 1000
Houston, Texas 77092
(713) 802-0087
(Address, including zip code and telephone number, including area code,
of registrant's principal executive offices)
---------------------------------
DENIS J. FITZPATRICK
Chief Financial Officer
AMERICAN INTERNATIONAL PETROLEUM CORPORATION
2950 North Loop West, Suite 1000
Houston, Texas 77092
Telephone: (713) 802-0087
Telecopier: (713) 681-5987
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-------------------------------
Copies to:
CHARLES SNOW, ESQ.
SNOW BECKER KRAUSS P.C.
605 Third Avenue
New York, New York 10158-0125
Telephone: (212) 687-3860
Fax: (212) 949-7052
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
1
CALCULATION OF REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------------------
Amount Proposed Maximum
Title of Each Class of Securities to to be Offering Price Proposed Maximum Amount of
Be Registered Registered Per Security (1) Offering Price (1) Registration Fee
- -----------------------------------------------------------------------------------------------------------------------------
Common Stock, $.08 par value 30,100,000 $ 0.375 $11,287,500 $3,386.25
- -----------------------------------------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 promulgated under the Securities Act of 1933.
(2) Represents shares to be sold by the selling securityholders named in this
registration statement. Also includes an indeterminate number of shares
that the selling securityholders may acquire as a result of a stock split,
stock dividend or similar transaction involving the common stock pursuant
to the antidilution provisions of our series A convertible preferred stock
and warrants. Does not include additional shares that may be acquired by
the selling securityholders upon conversion of the series A convertible
preferred stock attributable to the operation of the conversion price
formula set forth in the certificate of designations for that series of
convertible preferred stock due to a decline in the market price of our
common stock.
(3) Calculated solely for the purpose of determining the registration fee
pursuant to Rule 457(c) based upon the closing sale price of the common
stock as reported by Bloomberg LP on February 7, 2001.
--------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
--------------------------
Explanatory Note
In accordance with Rule 429, the prospectus included in this Registration
Statement relates to the offer and resale by the selling securityholders named
in the prospectus of 36,936,376 shares of common stock, of which
o 30,100,000 shares are included in this Registration Statement
o 6,836,376 shares are included in Registration Statement No. 333-43084,
declared effective by the SEC on August 4, 2000.
2
Preliminary Prospectus dated February __, 2001, subject to completion
Information contained in this Prospectus is subject to completion or amendment.
A registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any state.
AMERICAN INTERNATIONAL PETROLEUM CORPORATION
Common Stock
GCA Strategic Investment Fund Limited and the other selling securityholders
named in this prospectus are offering and selling up to 36,936,376 shares of our
common stock, including 32,536,376 shares that GCA Strategic Investment Fund
Limited may acquire upon conversion of our series A convertible preferred stock.
We will not receive any proceeds from these sales.
GCA Strategic Investment Fund Limited is an "underwriter" within the meaning of
the Securities Act of the shares of common stock it offers and sells under this
prospectus.
Our common stock is quoted on the OTC Bulletin Board under the symbol "AIPN".
The common stock is a speculative investment and involves a high degree of risk.
You should read the description of certain risks under the caption "Risk
Factors" commencing on page 5 before purchasing the common stock.
Our executive offices are at 2950 North Loop West, Suite 1000, Houston, Texas
77092 and our telephone number is 713-802-0087.
These securities have not been approved or disapproved by the SEC or any state
securities commission nor has the SEC or any state securities commission passed
upon the accuracy or adequacy of this Prospectus. Any representation to the
contrary is a criminal offense.
The date of this Prospectus is _______, 2001
3
Table of Contents
Page
Prospectus Summary...................................................... 3
Risk Factors............................................................ 4
Forward Looking Statements.............................................. 9
Market for Our Common Stock............................................. 9
Dividend Policy......................................................... 10
Selected Financial Data................................................. 10
Management's Discussion and Analysis of Financial Condition
And Results of Operations..................................... 11
Business................................................................ 15
Management.............................................................. 28
Security Ownership of Certain Beneficial Owners and Management.......... 33
Certain Transactions.................................................... 35
Selling Securityholders................................................. 35
Plan of Distribution.................................................... 37
Description of Securities............................................... 38
Where You Can Find More Information..................................... 42
Legal Matters........................................................... 42
Experts................................................................. 42
Index to Consolidated Financial Statements.............................. 43
----------------------
This prospectus is part of a registration statement we filed with the SEC. You
should rely only on the information or representations provided in this
prospectus. We have not authorized anyone to provide you with different
information. The common stock will not be offered in any state where an offer is
not permitted. You should not assume that the information in this prospectus is
accurate as of any date other than the date on the cover of this prospectus.
4
Prospectus Summary
Our Business
We are a holding company that through our wholly owned subsidiaries:
o Refine crude oil feedstocks to produce jet fuel, diesel, naphtha, gas oils
and fuel oil.
o Produce, process and market conventional and technologically advanced
polymerized asphalt, vacuum gas, oil and other products at our refinery in
Lake Charles, Louisiana utilizing low-cost, low-gravity, high sulfur
crudes.
o Engage in oil and gas exploration and development in western Kazakhstan,
where we own a 70% working interest in a 20,000 square kilometer
exploration block and a 100% working interest in a 200,000 acre gas field.
We also are seeking other oil and gas projects in the United States, Russia and
Central Asia.
Shares Offered
The selling securityholders named in the section of the Prospectus captioned
"Selling Securityholders" are offering and selling up to 36,936,371 shares of
common stock, including 32,536,376 shares that GCA Strategic Investment Fund
Limited may acquire upon conversion of our series A convertible preferred stock.
Summary of Consolidated Financial Data
The summary consolidated financial data presented below is qualified in its
entirety by, and should be read together with, our consolidated financial
statements and related notes included in this prospectus under the heading
"Consolidated Financial Statements" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
($000)
For the nine months ended
September 30 ($000)
(Unaudited) At December 31
----------------------- --------------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ----
Statement of operations data:
Revenues $ 2,828 $ 7,120 $ 8,352 $ 11,855 $ 828 $ 4,003 $ 2,811
Net loss(1) (9,854) (11,721) (14,918) (9,103) (17,954) (4,652) (4,338)
Net loss per
Share - basic
and diluted (0.09) (0.17) (0.20) (0.17) (0.43) (0.16) (0.20)
($000)
($000) At December 31
At September 30, 2000 --------------------------------------------------------------
(Unaudited) 1999 1998 1997 1996 1995
---------- ---- ---- ---- ---- ----
Balance sheet data:
Working capital (deficit) $ (8,646) $ (5,005) $ (4,596) $ (694) $ (9,823) $ (3,403)
Total assets 67,657 69,658 60,861 41,840 34,492 32,640
Total current liabilities 11,021(1) 8,904 7,914 9,335 13,165 11,350
Long-term debt 5,504 11,985 6,111 -0- 6,767 7,303
Accumulated deficit (113,232) (103,379) (88,461) (79,358) (61,404) (56,752)
Stockholders' equity 50,826 48,464 46,530 32,504 21,328 21,291
Cash dividends declared -0- -0- -0- -0- -0- -0-
(1) Includes $5.8 million under bridge notes payable to GCA Strategic Investment
Fund Limited payable on April 28, 2001
5
Risk Factors
Risks Related to Our Financial Condition
- ----------------------------------------
We have a history of operating losses which may continue and we may never become
profitable.
We have experienced significant losses since we began operations. We incurred a
net loss of approximately $9.9 million for the nine months ended September 30,
2000, compared to a net loss of approximately $11.7 million for the nine months
ended September 30, 1999, and net losses of approximately $14.9 million for the
year ended December 31, 1999, approximately $9.1 million for the year ended
December 31, 1998 and approximately $18 million for the year ended December 31,
1997. As a result of these losses, as of September 30, 2000, we had an
accumulated deficit of approximately $113 million. We will continue to incur
losses until our asphalt and/or refining operations or Kazakhstan projects
generate substantial revenues. We expect our expenses to increase as we expand
our business. If revenues grow more slowly than we anticipate, or if operating
expenses exceed our expectations, we may not become profitable. Even if we
become profitable, we may be unable to sustain our profitability.
Our auditors have included an explanatory paragraph in their report on our
financial statements concerning our ability to continue in business.
In connection with the audit of our financial statements for the year ended
December 31, 1999, Hein + Associates, LLP, our independent auditors, included an
explanatory paragraph in its report on our financial statements as to our
ability to continue in business as a result of
o a net loss of approximately $14.9 million during 1999, of which
approximately $6.4 million represented non-operating or non-cash items
o lack of resources to fulfill our operating and capital commitments as
of December 31, 1999
o a working capital deficit of approximately $5.0 million at December
31, 1999
o the suspension of our refinery operations until at least the second
quarter of 2000
We owe GCA $5.8 million under bridge notes due April 28, 2001 which we will not
be able to pay unless we refinance or extend the due date of this debt, or
receive funds from a financing or the sale of assets.
We have $5.8 million of debt due to GCA on April 28, 2001, which we may not be
able to pay. Payment of this debt is secured by our St. Marks refinery. If we
are not able to pay or extend the due date, or refinance this debt, the lender
has the right to foreclose on this collateral. If we are not able to obtain the
necessary financing or sell certain assets to meet these obligations, our
ability to continue operations will be materially and adversely effected.
Risks Related to Our Business
- -----------------------------
We do not have any proved reserves of gas or oil.
Although we have identified structures within both our concessions in Kazakhstan
which geological and engineering data demonstrate with reasonable certainty may
contain oil and gas reserves to be recoverable in future years from known
reservoirs under existing economic and operating conditions, we do not have a
contract in place to sell the resultant oil and/or gas that may be produced from
these structures. Under SEC accounting rules, we may not classify these reserves
as proven until we have entered into such a contract.
We are subject to losses from drilling and other hazards.
Unusual or unexpected formation pressures, down-hole fires or other hazardous
conditions may be encountered in drilling oil and gas wells and in the refining
of oil. If we encounter such hazards, completion of wells or production of
asphalt products may be substantially delayed and the costs significantly
increased, and in the case of asphalt products, may result in the cancellation
of customer contracts and adversely affect our ability to attract future
business. Even though a well is completed and is found to be productive, water
or other deleterious substances may be encountered, which may impair or prevent
production of oil or gas, and which may adversely affect our operations. Since
our refineries are located on inland waterways, floods and adverse weather
conditions can hinder or delay feedstock and transportation of products at our
refineries in Lake Charles, Louisiana and St. Marks, Florida. Labor disputes,
6
work stoppages, shortages of equipment and materials or the unavailability of
oil or asphalt barges and drilling rigs can also disrupt drilling and production
operations.
Our business is subject to environmental risks.
Extensive national and/or local environmental laws and regulations in both the
United States and Kazakhstan affect nearly all of our operations. 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. We may incur
substantial financial obligations in connection with environmental compliance.
We are occasionally subject to non-recurring environmental costs. The annual
cost incurred in connection with these assessments varies from year to year,
depending upon our activities in that year. The costs of such environmental
impact assessments were not material in 2000, but may be in the future. We are
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. Our operations require a comprehensive environmental permit for
all drilling and exploration activities.
Our operations are subject to all of the environmental risks normally incident
to oil and gas exploration, drilling, and refining activities, including
blowouts, pollution and fires. Any of these occurrences could result in
environmental damage or destruction, including the discharge of hazardous
materials into the environment. Although we maintain comprehensive and general
liability coverage as is customary in the oil and gas industry, and coverage
against certain risks, we are not fully covered for damages incurred as a
consequence of environmental mishaps. To the extent we are covered, the coverage
may not be adequate protection in the event of an environmental problem. We are
not aware of any pending or threatened reclamation issues in the United States
or abroad.
We may experience difficulties in marketing some of our products.
Our ability to market some of our products depends upon:
o our ability to obtain the financing necessary to develop our oil and
gas properties to the point where production is available for sale
o the proximity, capacity and cost of oil or gas pipelines and other
facilities for the transportation of oil or gas
o the quantity and quality of the oil or gas produced
o the availability of viable purchasers willing to buy our oil and gas
production
o our ability to provide asphalt products which satisfy state and
federal highway quality specifications
o the availability and cost of asphalt barges to transport asphalt
products
Government legislation in Kazakhstan and other foreign countries through which
our products may be transported may adversely affect our business.
Our exploration in western Kazakhstan is subject to regulations imposed by the
Kazakhstan government. The Kazakhstan government may limit oil and gas
production and impose taxes on oil and gas when sold. We cannot predict whether
such governmental actions may occur, or anticipate the ultimate effect of
governmental policies and contracts upon us. We also will be subject to the laws
of jurisdictions through which oil and gas pipelines traverse. We cannot predict
what policies these jurisdictions may follow, or the impact of local regulations
on our business.
Our business is subject to possible adverse political and economic conditions in
Kazakhstan.
A favorable political climate in Kazakhstan and the openness of its markets to
United States trade is essential to our success in Kazakhstan. Kazakhstan is a
former constituent republic of the Soviet Union, which declared its independence
from the Soviet Union in December 1991. At the time of its independence, it
became a member of the Commonwealth of Independent States, or CIS, the
7
association of former Soviet states which have entered into agreements of
cooperation and support for trade, border protection, immigration controls,
environmental matters and overall cooperation for the economic and political
stability and development of the member states. The CIS have embraced political
and economic reforms, but there remains political and economic instability the
result of which could be detrimental to our operations there.
Because the CIS countries are in the early stages of development of a market
economy, the commercial framework in still developing along with commercial
laws, their applications and the enforcement of these laws. Although
Kazakhstan's laws regarding foreign investment provide for protection against
nationalization and confiscation, there is little or no judicial precedent in
this area. Foreign firms operating in this region may be subject to numerous
other risks that are not present in domestic operations, including political
strife, the possibility of expropriation, inadequate distribution facilities,
inflation, fluctuations of foreign currencies, high and unpredictable levels of
taxation, requirements for governmental approvals for new ventures, local
participation in operations, and restrictions on royalties, dividends and
currency remittances. Currently, there are no restrictions on royalties,
dividends or currency remittances.
Our business is subject to foreign currency risks.
Since we have oil and gas operations outside the United States, our business is
subject to foreign currency risks. These risks include
o The value of the local currency in Kazakhstan relative to the U.S.
dollar may continue to decline and is subject to continued volatility
o We may encounter difficulties in converting local currencies to U.S.
dollars. Although Kazakhstan laws permit the conversion of local
currency into foreign currency, the local currency generally is not
convertible outside CIS countries. If we discover oil or gas in our
licensed area in Kazakhstan and sell the oil and gas in a CIS country,
currency liquidity and restrictions may adversely affect us.
o The market for conversion of local currency into other currencies may
deteriorate or cease to exist. Although a market exists within CIS
countries for the conversion of CIS currencies into other currencies,
it is limited in size and subject to rules limiting the purposes for
which conversion may be effected. In addition, the availability of
other currencies may inflate their values relative to CIS currencies.
We may encounter delays in transfer of funds in and out of Kazakhstan since its
banking system is not well developed.
Since the banking system in Kazakhstan is not yet as developed as its Western
counterparts, we may encounter considerable delays in the transfer of funds
within, and the remittance of funds out of Kazakhstan. Any delay in converting
Kazakhstan currency into a foreign currency in order to make a payment, or delay
in the transfer of such currency could have a material adverse effect on our
business.
We may experience difficulties in repatriating profits and capital.
While applicable legislation in the CIS currently permits the repatriation of
profits and capital and the making of other payments in hard currency, our
ability to repatriate such profits and capital and to make such other payments
is dependent upon the continuation of the existing legal regimes for currency
control and foreign investment, administrative policies and practices in the
enforcement of such legal regimes and the availability of foreign exchange in
sufficient quantities in those countries.
We may not generate significant revenue from our refining operations.
Since the first quarter of 1998, we have been engaged in the production and sale
of asphalt products at our refinery in Lake Charles, Louisiana. Our refinery
operation is subject to all of the risks and hazards associated with the
establishment of a new business. To date, we have encountered mechanical
problems with equipment, delays caused by unavailability of asphalt barges,
shortages of economically-priced feedstocks, and unanticipated expenses for
refinery repairs and transportation fees. Since we were blending asphalt and not
processing crude oil, our crude unit was idle for most of 1999 and 2000.
Consequently, we have had minimal revenues from light-end products.
In September 2000, we entered into a crude oil processing agreement with
Sargeant Bulktainers, Inc., a division of Sargeant Marine, Inc., an
international marketer and transporter of asphalt products, under which Sargeant
agreed to process a minimum of 300,000 barrels of crude oil per month through
our Lake Charles, Louisiana refinery. However, as of January 31, 2000, Sargeant
has provided
8
us with only 52,000 barrels for processing as a test run. Although Sargeant has
advised us that it plans to process larger quantities of crude under the
processing agreement beginning in late February 2001, Sargeant may not comply
with its obligations under the processing agreement. Although we are seeking
agreements to process crude oil feedstocks for others, we may not be successful
in obtaining them. Unless Sargeant complies with its obligations under our
processing agreement, or we agree to operate our refining unit for other
companies, we do not expect to operate the unit during 2001. As a result,
revenues from our refining operations may not be significant in 2001 .
Our success is dependent on our key personnel who we may not be able to retain
and we may not be able to hire additional qualified personnel to satisfy our
personnel needs.
Our success is dependent upon the efforts, abilities and expertise of certain
key management personnel. Our future success also is dependent, in part, on our
ability to attract and retain qualified personnel. We cannot give you any
assurance that we will be able to attract and retain qualified individuals. As
compared to other publicly traded oil and gas companies, we have fewer resources
to attract and/or retain key personnel, and we do not have the depth of
managerial employees to rely upon in the event of the loss of any single
employee. The loss of any key employee could have a material adverse affect on
the operations of our business.
Risks Related to Our Common Stock
- ---------------------------------
Since our common stock is subject to the sec's "penny stock" rules, investors
may find it more difficult to sell our common stock as compared to securities
traded on a national securities exchange or quoted on the Nasdaq stock market.
SEC rules require brokers to provide information to purchasers of securities
traded at less than $5.00 and not traded on a national securities exchange or
quoted on the NASDAQ Stock Market. The rules require a broker-dealer to deliver
a standardized risk disclosure document prepared by the SEC that provides
information about penny stocks and the nature and level of risks in the penny
stock market. The broker must also give bid and offer quotations and broker and
salesperson compensation information to the customer orally or in writing before
or with his confirmation. The SEC rules also require a broker to make a special
written determination that the penny stock is a suitable investment for the
purchaser and receive the purchaser's written agreement to the transaction
before a transaction in a penny stock. These disclosure requirements may have
the effect of reducing trading activity in our common stock and make it more
difficult for investors to sell.
Conversion of our convertible debenture and subsequent public sale of our common
stock while its market price is declining may result in further decreases in the
market price.
As of December 31, 2000, $5,769,135 principal amount of our 5% convertible
debenture due February 18, 2004 was outstanding. The debenture is convertible
into shares of our common stock at a conversion price equal to 85% of the
average of the lowest 3 daily weighted average sale prices of a share of our
common stock for 20 trading days prior to the date of conversion, subject to a
maximum conversion price of $1.214 per share. Since there is no minimum
conversion price, there is no limit on the number of shares of common stock that
the holder of the debenture may acquire upon conversion.
The holder of our debenture may sell at market price the shares of common stock
it has acquired upon conversion at a 15% discount to prevailing market prices
concurrently with, or shortly after, conversion, realizing a profit equal to the
difference between the market price and the discounted conversion price. The
holder of the debenture also could engage in short sales of our common stock,
which could contribute to a decline in the market price of the common stock and
give it the opportunity to profit from that decrease by covering a short
position with shares acquired upon conversion at a 15% discount to the
prevailing market price. The conversion of the debenture and subsequent sale of
a large number of shares of common stock acquired upon conversion during periods
when the market price of the common stock declines, or the possibility of such
conversions and sales, may exacerbate the decline or impede increases in the
market price of the common stock.
Conversion of our shares of series a convertible preferred stock and subsequent
public sale of our common stock while its market price is declining may result
in further decreases in the market price.
Each share of our series A convertible preferred stock has a stated value of
$1,000 and is convertible into shares of our common stock at a conversion price
equal to 92% of the average of the lowest three daily weighted average sales
prices of our common stock during the 20 trading days prior to the date of
conversion. The number of shares of common stock that may be acquired upon
conversion is determined by dividing the stated value of the number of shares of
series A convertible preferred stock to be converted by the conversion price.
Since there is no minimum conversion price, there is no limit on the number of
shares of common stock that holders of the series A convertible preferred stock
may acquire upon conversion.
9
Holders of our series A convertible preferred stock may sell at market price the
shares of common stock they have acquired upon conversion at an 8% discount to
prevailing market prices concurrently with, or shortly after, conversion,
realizing a profit equal to the difference between the market price and the
discounted conversion price. The holders of the series A convertible preferred
stock could engage in short sales of our common stock, which could contribute to
a decline in the market price of the common stock and give them the opportunity
to profit from that decrease by covering their short position with shares
acquired upon conversion at an 8% discount to the prevailing market price. The
conversion of the series A convertible preferred stock and subsequent sale of a
large number of shares of common stock acquired upon conversion during periods
when the market price of the common stock declines, or the possibility of such
conversions and sales, may exacerbate the decline or impede increases in the
market price of the common stock.
Conversion of our outstanding debenture and series a convertible preferred
stock, and the exercise of our outstanding warrants and stock options and
subsequent public sale of our common stock, will result in substantial dilution
to existing stockholders.
As of December 31, 2000, we had outstanding 132,624,318 shares of common
stock. In addition,
o An indeterminate number of shares may be acquired upon conversion of
the outstanding $5,769,135 principal amount of our 5% convertible
debenture due February 18, 2004, since there is no minimum conversion
price. At an assumed conversion price of $0.34 per share, the holder
of the debenture could acquire 18,664,849 shares of common stock upon
conversion of, and payment of 24 months accrued interest on, the
debenture, representing approximately 18.9% of the shares outstanding
as of December 31, 2000.
o An indeterminate number of shares may be acquired by GCA Strategic
Investment Fund Limited upon conversion of our series A convertible
preferred stock available under our credit facility since there is no
minimum conversion price. Assuming we do not increase the amount of
our credit facility, we may sell an additional 3,750 shares of series
A convertible preferred stock to GCA. If GCA converts an additional
3,750 shares of series A convertible preferred stock at an assumed
conversion price of $0.34 per share, we will issue 11,029,412 shares
of common stock, representing approximately 12.3% of the shares
outstanding on December 31, 2000. We also will issue warrants to
purchase 75,000 shares of common stock to LKB Financial on each date
shares of series A convertible preferred stock are sold to GCA under
the purchase agreement.
o 11,180,926 shares may be acquired upon exercise of outstanding
warrants, representing approximately 8.4% of the shares outstanding as
of December 31, 2000.
o 3,622,415 shares may be acquired upon exercise of outstanding options,
representing approximately 2.7% of the shares outstanding as of
December 31, 2000.
Existing stockholders will experience substantial dilution in their percentage
ownership of our common stock if the debenture and shares of Series A
convertible preferred stock purchased by GCA are converted. If the entire
outstanding $5,769,135 principal amount of our 5% convertible debenture is
converted at an assumed conversion price of $0.34 per share, an additional 3,750
shares of series A convertible preferred stock is purchased by GCA and converted
at an assumed conversion price of $0.34 per share, and all outstanding warrants
and stock options are exercised, the number of outstanding shares of common
stock will increase by 44,497,602, representing approximately 33.6% of the
outstanding common stock as of December 31, 2000.
Future sales of our common stock may have an adverse effect on its market price.
As of December 31, 2000, we had outstanding 132,624,318 shares of common stock,
of which 129,437,105 shares are transferable without restriction under the
Securities Act. The remaining 3,187,213 shares are restricted securities which
may be publicly sold only if registered under the Securities Act or sold in
accordance with an applicable exemption from registration, such as Rule 144. In
addition,
o An indeterminate number of shares may be acquired upon conversion of
the outstanding $5,769,135 principal amount of our 5% convertible
debenture due February 18, 2004 since there is no minimum conversion
price. At an assumed conversion price of $0.34 per share, the holder
of the debenture could acquire 18,664,849 shares of common stock upon
conversion of, and in payment of 24 months accrued interest on, the
debenture. The actual conversion price is 85% of the average of the
lowest 3 daily weighted average sale prices for the 20 trading days
prior to the date of conversion. The maximum conversion
10
price is $1.214 per share. Since there is no minimum conversion price,
if the market price of the common stock declines below the assumed
conversion price, the number of shares that may be acquired upon
conversion will increase.
o An indeterminate number of shares may be acquired upon conversion of
the remaining 3,750 shares of our series A convertible preferred stock
available under our credit facility since there is no minimum
conversion price. Assuming we sell an additional 3,750 shares of
series A convertible preferred stock to GCA. If GCA converts an
additional 3,750 shares of series A convertible preferred stock at an
assumed conversion price of $0.34 per share, we will issue 11,029,412
shares of common stock. The number of shares that GCA may acquire upon
conversion of the series A convertible preferred stock will increase
if the market price of the common stock declines below the assumed
conversion price. We also will issue warrants to purchase 75,000
shares of common stock to LKB Financial on each date shares of series
A convertible preferred stock are sold to GCA under the purchase
agreement. The exercise price of the warrants issued to GCA and LKB is
$0.23 per share.
o 11,180,926 shares may be acquired upon exercise of warrants having
exercise prices ranging from $0.13 to $3.00 per share.
o 3,622,415 shares may be acquired upon exercise of stock options
granted pursuant to our employee stock option plans at exercise prices
ranging from $0.43 to $2.00 per share.
Substantially all of such shares, when issued, may be immediately resold in the
public market pursuant to effective registration statements under the Securities
Act. We cannot give you any assurance as to the effect, if any, that future
sales of common stock, or the availability of shares of common stock for future
sales, will have on the market price of the common stock from time to time.
Sales of substantial amounts of common stock, or the possibility of such sales,
could adversely affect the market price of the common stock and also impair our
ability to raise capital through an offering of equity securities in the future.
Other issuances of preferred stock could adversely affect existing holders of
our common stock.
Under our articles of incorporation, our Board of Directors may, without further
stockholder approval, issue up to 7,000,000 shares of preferred stock with
dividend, liquidation, conversion, voting or other rights that could adversely
affect the voting power or other rights of the holders of common stock. Our
Board of Directors has authorized the issuance of up to 18,000 shares of Series
A convertible preferred stock in connection with our credit facility with GCA
Strategic Investment Fund. We could use new classes of preferred stock as a
method of discouraging, delaying or preventing a change in persons that control
us. In particular, the terms of the preferred stock could effectively restrict
our ability to consummate a merger, reorganization, sale of all or substantially
all of our assets, liquidation or other extraordinary corporate transaction
without the approval of the holders of the common stock. We could also create a
class of preferred stock with rights and preferences similar to those of our
series A convertible preferred stock, which could result in substantial dilution
to holders of our common stock or adversely affect its market price.
Forward Looking Statements
Some of the information in this prospectus may contain forward-looking
statements within the meaning of the safe harbor provisions of Section 27A of
the Securities Act and Section 21E of the Securities Exchange Act of 1934. 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 our financial condition or state other
"forward-looking" information. When considering such forward-looking statements,
you should keep in mind the risks and uncertainties discussed under the captions
"Risk Factors", "Management Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity", and "Business", which could cause our actual
results to differ materially from those contained in any forward-looking
statement.
Market For Our Common Stock
Our common stock is traded in the over-the-counter market and quoted on the OTC
Bulletin Board under the symbol "AIPN". Prior to November 7, 2000, our common
stock was included in the Nasdaq National Market. Our common stock was delisted
from Nasdaq for failure to maintain a bid price of $1.00 per share as required
under Nasdaq's rules for continued listing. The following table sets forth, for
the periods indicated, the range of high and low sale prices of the common stock
as reported by Bloomberg LLP.
11
Common Stock
High Price Low Price
---------- ---------
1999 First Quarter $1.50 $0.5625
Second Quarter 1.375 0.71875
Third Quarter 1.34375 0.65625
Fourth Quarter 1.25625 0.375
2000 First Quarter $2.063 $ .500
Second Quarter 1.000 .500
Third Quarter .656 .406
Fourth Quarter .500 .100
2001 First Quarter (through January 30, 2001) .484 .109
At January 31, 2001, our common stock was owned by approximately 1,750
shareholders of record and we estimate there were approximately 32,500
beneficial owners of our common stock.
Dividend Policy
We have never paid cash dividends on our common stock, and do not contemplate
paying any cash dividends in the foreseeable future. Our Board of Directors
intends to retain earnings to finance the operations and development of our
business.
Selected Financial Data
The following table sets forth selected consolidated financial data for each of
the five years ended December 31, 1999 and for the nine-month periods ended
September 30, 2000 and 1999. The selected consolidated financial information for
and as of the years ended December 31, 1996 and 1995 are derived from our
consolidated financial statements, which have been audited by
PricewaterhouseCoopers, independent certified public accountants. The selected
financial information and as of the years ended December 31, 1999, 1998 and 1997
are derived from our consolidated financial statements, which financial
statements have been audited by Hein + Associates, LLC, independent certified
public accountants. Our consolidated balance sheets as of December 31, 1999,
1998 and our consolidated statements of operations for the years ended December
31, 1999, 1998 and 1997 and the accountants' report thereon are included in this
prospectus under the heading "Consolidated Financial Statements". The selected
data for each of the nine-month periods ended September 30, 2000 and 1999 are
derived from our unaudited interim consolidated financial statements. Our
interim consolidated financial statements include all adjustments, consisting
only of normal recurring adjustments, which we consider necessary for the fair
presentation of our financial position and results of operations for those
periods. The interim operating results for the nine-month period ended September
30, 2000 are not necessarily indicative of the results that we will experience
for the entire year. Historical results are not necessarily indicative of the
results to be expected in the future. The selected consolidated financial data
presented below is qualified in its entirety by, and should be read together
with, our consolidated financial statements and related notes included in this
prospectus under the heading "Consolidated Financial Statements".
($000)
For the nine months ended
September 30 ($000)
(Unaudited) At December 31
----------------------- --------------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ----
Statement of operations data:
Revenues $ 2,828 $ 7,120 $ 8,352 $ 11,855 $ 828 $ 4,003 $ 2,811
Net loss(1) (9,854) (11,721) (14,918) (9,103) (17,954) (4,652) (4,338)
Net loss per
Share - basic
and diluted (0.09) (0.17) (0.20) (0.17) (0.43) (0.16) (0.20)
12
($000)
($000) At December 31
At September 30, 2000 --------------------------------------------------------------
(Unaudited) 1999 1998 1997 1996 1995
---------- ---- ---- ---- ---- ----
Balance sheet data:
Working capital (deficit) $ (8,646) $ (5,005) $ (4,596) $ (694) $ (9,823) $ (3,403)
Total assets 67,657 69,658 60,861 41,840 34,492 32,640
Total current liabilities 11,021(1) 8,904 7,914 9,335 13,165 11,350
Long-term debt 5,504 11,985 6,111 -0- 6,767 7,303
Accumulated deficit (113,232) (103,379) (88,461) (79,358) (61,404) (56,752)
Stockholders' equity 50,826 48,464 46,530 32,504 21,328 21,291
Cash dividends declared -0- -0- -0- -0- -0- -0-
- -------------
(1) Includes $5.8 million under bridge notes payable to GCA Strategic Investment
Fund Limited payable on April 28, 2001
Management's Discussion And Analysis Of Financial Condition
And Results Of Operations
Results of Operations
We have two major segments of business - refining and oil and gas exploration
and development. We have had no oil and gas production operations since the
first quarter of 1997 when we sold our South American wholly-owned oil and gas
subsidiaries. Since this sale, our oil and gas activities have been limited to
geological and geophysical acquisition, reprocessing and/or analysis of data,
acquisition of additional licenses or projects, drilling, and market analysis
and negotiation in Kazakhstan where we have two gas and oil concessions. We have
yet to implement oil and/or gas production operations in Kazakhstan.
In July 2000 we entered into a joint venture agreement with Sargeant Bulktainers
Inc. under which Sargeant agreed to provide and finance certain wholesale
asphalt feedstocks to our Lake Charles refinery's asphalt division for
processing, blending and the marketing of the these feedstocks. For the nine
months ended September 30, 2000, our refining segment had sales of $2,708,000,
net of the joint venture income of $16,000 and costs of goods sold operating
expenses of $3,384,000. Interest income and other corporate revenues totaled
$119,000 with general corporate expense, interest expense and depreciation being
$4,994,000, $1,554,000 and $2,748,000, respectively. Our identifiable assets at
September 30, 2000 total $31,888,000 of operating assets in the United States,
$33,503,000 in Kazakhstan, and $2,266,000 of corporate assets.
The following table highlights the results of operations for the nine months
ended September 30, 2000 and for the years ended December 31, 1999, 1998 and
1997.
13
Nine Months Ended Years Ended December 31,
September 30, 2000 ---------------------------
(Unaudited) 1999 1998 1997
-------------------- ---- ---- ----
Refinery Processing Operations:
Refinery product revenues (000's) $ 2,577 $ 8,138 $11,394 --
Product Costs (000's) 2,280 $ 5,944 $ 8,194 --
Operating Costs (000's) 920 $ 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
Depletion, depreciation and amortization per Bbl -- -- -- $3.77
- --------------
(1) Reflects activity through the closing of the sale of our South American
assets.
Refinery Operations
Nine Months Ended September 30, 2000 compared to the Nine Months Ended September
30, 1999
- --------------------------------------------------------------------------------
During the first nine months of 2000, refinery asphalt revenues decreased
approximately $3,900,000 to $2,577,000, compared to $6,478,000 during the first
nine months of 1999. The decrease in refinery asphalt revenues is due to our
accounting for the joint venture with Sargeant on the equity method. Asphalt
revenues of the joint venture amounted to approximately $2,786,000, with related
costs of approximately $2,636,000 for the nine months ended September 30, 2000.
Costs of sales associated with our asphalt revenues were approximately
$3,200,000 and $6,905,000 for the first nine months of 2000 and 1999,
respectively. The increase in cost of sales relative to revenues during the nine
month period in 2000, compared to the same period in 1999, is due primarily to
our having to fulfill fixed price contracts entered into during 1999 with
asphalt acquired during 2000 at higher prevailing prices than during 1999.
During the first nine months of 2000, the refinery had no light-end product
sales compared to approximately $486,000 during the same period last year.
Our continuing effort to target the high margin polymerized asphalt market has
resulted in an 11% increase from 70% of sales volumes attributed to polymerized
asphalt for the same period in 1999 compared to 81% during the comparable nine
month period in 2000. We are continuing to direct our sales efforts to the high
margin polymerized asphalt markets.
We began operating our barge for outside third parties during 2000. Revenues
generated from the barge operations for the nine months ended September 30, 2000
were approximately $125,000 with operating costs of approximately $109,000.
Terminal operations in St. Marks Florida commenced in June 1998, but were not
operational during the first nine months of 2000 or in 1999 because we directed
our sales efforts into the Texas and Louisiana asphalt markets during those
periods. If we do not implement operations in 2001 at St. Marks, we may impair
its book value.
Year Ended December 31, 1999 compared to the Year Ended December 31, 1998
- -------------------------------------------------------------------------
During 1999, we generated revenues of approximately $7,621,000 in asphalt sales
from our 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 our asphalt volumes were
up only approximately 10% over 1998, revenues were up approximately 28%,
primarily due to a greater demand for the higher priced, higher grades of
polymer asphalt. However, polymerized asphalts only accounted for approximately
60% of our asphalt sales volumes in 1999. Most of our sales backlog was incurred
late in 1998 and in
14
early 1999 when crude oil and asphalt sales prices were much lower. As a result,
we were committed to selling low-priced conventional asphalts at a loss or at
break-even throughout most of 1999 and early 2000.
In 1999 we implemented the use of escalation provisions in our asphalt sales
contracts, which enable us to increase our contracted sales price by 5% per
quarter if our feedstock prices rise to certain levels. This mitigates the
problem we incurred in 1999 by committing to long-term supply contracts at fixed
prices. Our sales prices on our 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 us to purchase and process
crude oil through our crude unit to manufacture asphalt as we had done in 1998.
As a result, 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.
We purchased general grade asphalt on the spot market to blend and supply
various grades of asphalt to our 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 1999
were 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 we had to incur for our asphalt, and
to an increase in operating costs to maintain the refinery during this period.
Even though we have not operated the crude unit since January of 1999, we had to
maintain the unit in a state of readiness and thus incurred additional operating
overhead costs attributed to maintaining the unit.
We did not operate our terminal in St. Marks Florida during 1999, but incurred
approximately $96,000 of maintenance and security costs during the year. We had
revenues of approximately $2,000,000 with 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, we determined
that it would be more economically feasible to direct our 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.
Year Ended December 31, 1998 compared to the Year Ended December 31, 1997
- -------------------------------------------------------------------------
During 1997, we commenced expansion of our Lake Charles refinery and conversion
of the crude unit to a heavy crude processing unit to enable the manufacture of
asphalt and other products. During 1998 we undertook extensive testing of our
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 requires to be used.
As a result of the refinery's testing activity in 1998, we manufactured products
that generated revenues of approximately $6 million dollars from asphalt
products and approximately $3.4 million dollars from certain light-end and other
products. Our sales prices on our retail asphalt ranged from $75 to $187 a ton.
We 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, our margins were severely distorted and were not indicative of
margins expected during normal operating conditions.
Our terminal operations in St. Marks, Florida, which commenced in June 1998,
generated revenues of approximately $2 million from sales of asphalt and costs
of sales of approximately $1.8 million related to those sales during 1998.
Oil and Gas Production Activity
We have had no oil and gas production activity since February 1997.
The oil and gas production revenues reflected in 1997 are the results of
operations for Colombia and Peru through February 25, 1997, the date of the sale
of our Colombia and Peru subsidiaries.
15
Other Income
Nine Months Ended September 30, 2000 compared to the Nine Months Ended September
30, 1999
- --------------------------------------------------------------------------------
Other revenues decreased approximately $52,000, to $119,000 during the first
nine months of 2000 compared to the same period in 1999. The decrease was
attributable to the following: (1) a decrease in interest income of
approximately $73,000 due to our having fewer funds on deposit during the
current period compared to the same period in 1999, (2) during the first nine
months of 1999 we recognized income of approximately $56,000 from the
forgiveness of debt, and (3) we recognized sub-leasing income of approximately
$76,000 for the period nine months ended September 30, 2000 and did not have any
rental income during the same period in 1999. The sub-leasing income is a result
of our efforts to reduce our general and administrative costs by entering into a
5-year partial sub-lease of office space in our New York office.
Year Ended December 31, 1999 compared to the Year Ended December 31, 1998.
- --------------------------------------------------------------------------
Other income decreased during 1999 by approximately $246,000 to $215,000
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.
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
Nine Months Ended September 30, 2000 compared to the Nine Months Ended September
30, 1999
-------------------------------------------------------------------------------
General and administrative expenses increased approximately $185,000 during the
first nine months of 2000 compared to the same period in 1999, due to increased
activity of our refinery operations and oil and gas activity. General insurance
costs increased by approximately $45,000 due to increased coverage of new asset
additions placed in service during 1999, rent expenses increased approximately
$61,000 due to built in escalation clauses, investor relations costs decreased
by approximately $160,000, bond costs increased approximately $422,000 due to
our financing activities, professional fees and telephone and utility expenses
decreased approximately $71,000 and $23,000, respectively; corporate, property
and other taxes increased approximately $27,000; dues and commissions decreased
approximately $23,000 and $79,000, respectively.
Year Ended December 31, 1999 compared to the Year Ended December 31, 1998
- -------------------------------------------------------------------------
Total general and administrative expenses 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 general
and administrative expenses 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 Lake Charles refinery at end of 1998. Rents
increased approximately $281,000 in 1999 compared to 1998. We have entered into
a agreement to sublease out part of our available office space which was
effective during the second quarter 2000, which effectively reduces our current
rent expense by approximately $161,000 a year.
Year Ended December 31, 1998 compared to the Year Ended December 31, 1997
- -------------------------------------------------------------------------
Total general and administrative expenses increased by approximately $469,870,
or 10%, in 1998 compared to 1997. We incurred approximately $1.4 million in
additional general and administrative expenses during 1998, principally due to
increased activity at the Lake Charles refinery, which were offset by an
aggregate of approximately $1.0 million in reduced general and administrative
expenses 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 an IRS excise tax dispute and an environmental lawsuit.
16
Due to the increased activity at the Lake Charles 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 Lake
Charles refinery equipment and liability. General office administrative expenses
increased by $80,000 due to the increased sales and operations at the Lake
Charles refinery. Additional costs of approximately $70,000 were incurred in
upgrading computers systems due in part to Year 2000 compliance considerations.
Investor relations costs increased in 1998 by approximately $111,000 compared to
1997 and professional consulting fees increased by approximately $500,000.
Depreciation, Depletion and Amortization
Nine Months Ended September 30, 2000 compared to the Nine Months Ended September
30, 1999
- --------------------------------------------------------------------------------
Depreciation, depletion and amortization increased approximately $304,000 during
the first nine months of 2000 compared to the same period in 1999, and is
primarily attributable to new additions at our Lake Charles refinery during
1999.
Year Ended December 31, 1999 compared to the Year Ended December 31, 1998
- -------------------------------------------------------------------------
Depreciation, depletion and amortization increased approximately $918,000 in
1999 compared to the same period in 1998. Depreciation, depletion and
amortization in 1999 reflects the increased depreciation of our $18.6 million
dollar asphalt and related equipment construction project at the Lake Charles
refinery that commenced in 1996 and was completed in December of 1998. This new
addition doubled the carrying value of the Lake Charles refinery and accounted
for the 100% increase in these expenditures. In addition, we commenced
depreciating the St Marks facility and our marine equipment during the first
quarter of 1999.
Year Ended December 31, 1998 compared to the Year Ended December 31, 1997
- -------------------------------------------------------------------------
Depreciation, depletion and amortization increased approximately $39,000 in 1998
compared to the same period in 1997. The 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 $326,087, $3,044,000, $6,042,000, and
$1,899,000 was incurred in the nine months ended September 30, 2000, 1999, 1998,
and 1997, respectively, and relates to the presumed incremental yield the
investor may derive from the discounted conversion rate of debt instruments
issued by us during these years. Management believes that the related amount of
interest recorded by us is not necessarily the true cost to us of the
instruments we 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 some cases was as long as six months, large block
factors, lack of a sufficiently-active market into which the stock can be
quickly sold, and time value). However, generally accepted accounting principles
require 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.
We expense and also capitalize 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
Nine Months Ended September 30, 2000 compared to the Nine Months Ended September
30, 1999
- --------------------------------------------------------------------------------
Interest expense decreased during the first nine months of 2000 compared to the
first nine months of 1999 by approximately $3,039,000 to approximately
$2,749,000, which reflects a $3,013,000 reduction in our non-cash expenses
related to costs associated with our financing activities. We incurred
$1,171,000 of non-cash interest during the first nine months of the current year
compared to $4,184,000 incurred during the same period in 1999.
17
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. During 1999 we incurred approximately $1,898,000
of interest on debentures and short-term notes outstanding and expensed non-cash
imputed interest, as discussed above, of approximately $2,882,000. We also
incurred interest on trade notes of approximately $638,000 and approximately
$1,619,000 of non-cash interest related to warrants issued in connection with
those agreements.
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. We incurred approximately $1,670,000 of interest
on debentures outstanding during the year. We 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. We capitalized interest expense of
$7,055,000 incurred in connection with our oil and gas and refinery projects
during 1998.
Realized and Unrealized Loss on Marketable Securities
We neither held nor sold any marketable securities during the first nine months
of 2000 or during 1999.
As partial proceeds from the sale of our South American assets, we received
approximately $4.4 million shares of Mercantile International Petroleum common
stock valued at $2.00 per share. However, during 1997 and 1998, the market value
of Mercantile's shares declined significantly. During 1997, we sold and disposed
of approximately 1,441,000 shares of the Mercantile 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 we sold all
of its remaining Mercantile shares for proceeds of approximately $377,000 and
recorded an aggregate net realized loss of approximately $359,000.
Loss on Sale of Assets
We recorded an aggregate $564,000 loss in 1997 on the sale of two of our
wholly-owned subsidiaries, which includes the current discount to fair value of
a $3 million exchangeable debenture and a $1.4 million deferred performance
earn-out payment, both received in the sale of our South American assets.
Liquidity and Capital Resources
During the nine months ended September 30, 2000, we used a net amount of
approximately $6,850,000 for operations, which reflects approximately $2,893,000
in non-cash provisions, including issuance of stock in lieu of cash payments of
$168,000 and depreciation and amortization of $2,725,000. Approximately $561,000
was provided during the period to decrease product and feedstock inventory and
$429,000 was used to decrease accounts payable and accrued liabilities and to
increase current assets other than cash. Additional uses of funds during the
quarter included additions to oil and gas properties and Refinery property
equipment of $1,647,000. Cash for operations was provided, in part, by proceeds
from short-term debt and bridge notes of an aggregate of $4,519,000 and proceeds
from notes issued to our officers and directors of $350,000, and cash used to
decrease notes payable of approximately $475,000.
During the year ended December 31, 1999, we 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 and accretion of
discount on notes 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 of $769,000, and from proceeds
from long and short-term debt of approximately $19,216,000. At December 31,
1999, we had negative working capital of approximately $5.0 million dollars.
In February 1999, Mercantile International Petroleum, Inc. failed to pay us the
$1.6 million outstanding balance of the 5% convertible debenture it issued to us
as partial payment for the purchase of our oil and gas properties in Columbia
and Peru, South America in February 1997. In January 2000, the parties reached
an agreement, under which Mercantile acknowledged its indebtedness to us in the
18
amount of $1,581,000 for the outstanding balance of the debenture and an
additional amount of $1,306,000 in connection with our earnout provision of the
original purchase agreement. Mercantile agreed to repay this aggregate debt of
$2,888,000 by issuing a new 11.5% convertible debenture to us. Beginning in
February 2000, Mercantile began to make the scheduled monthly payments to us
amounting to the greater of $70,000 or 80% of its Colombian subsidiary's net
income during the calendar year 2000. To date, each payment has been in the
amount of $70,000 and has generally been paid in a timely manner. Beginning in
January 2001, Mercantile began to 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 Mercantile common stock at the option of the Company,
at any time at $1.50 per share.
Mercantile also agreed to issue warrants, upon the signing of the definitive
agreement, entitling us to purchase an aggregate of 2,347,000 Mercantile common
shares at any time prior to December 31, 2002. The exercise price of the
warrants is $1.00 per share during 2001 and $1.50 during 2002.
Since December 1999, we have sold an aggregate of $7.35 million principal amount
of bridge notes to GCA Strategic Investment Fund Limited. Since then, we have
repaid $1.56 million of the bridge notes, leaving an outstanding principal
balance of approximately $5.8 million due and payable on April 28, 2001. In July
2000, we entered into a $10 million convertible preferred equity line of credit
with GCA which we have the right to increase by $8,000,000.
In August 2000, our American International Petroleum Kazakhstan subsidiary sold
an aggregate of $450,000 principal amount of its 12% promissory notes to certain
of our officers and directors and to an individual investor. Each investor was
given a warrant or option to purchase one share of our common stock for each
dollar invested, with an exercise price of 105% of the closing market price of
the common stock on the date preceding the closing of each transaction. We used
these proceeds to initiate the reentry work at our Begesh oil well in
Kazakhstan.
We met our minimum work and monetary obligations on its License 953 in
Kazakhstan during 1999 and have recently negotiated a revision of the minimum
work program with the Kazakhstan government. Due to recent interpretations of
electric well logs from the Begesh #1 oil well, we have decided to re-enter the
Begesh #1 to test a key upper Jurassic interval known to be productive in the
general locale of the well. The reentry, which was started in November 2000, is
estimated to cost approximately $1 million and, although the reentry is being
completed in 2001, it will satisfy our minimum work requirement at 953 for the
year 2000. The reentry is being funded from proceeds from the promissory notes
and the equity line. Two more wells are expected to be drilled at 953, at least
one at the Begesh location, before the end of next year, which will complete the
total minimum work required under the License. Because of the proximity of oil
pipelines, rail lines, and highways to the Begesh location, if the reentry is
successful, we could begin production and sale of oil shortly after the
completion of the reentry work at Begesh.
We had originally planned to begin our Shagryly-Shomyshty gas field development
in Kazakhstan in November 2000. However, because of the uncertainty of weather
conditions in western Kazakhstan at that time of year, we believed it was more
prudent to begin drilling at Shagryly in the second quarter of 2001. The initial
phase of the development has been reestimated to cost approximately $3.8 million
and is expected to be funded from (i) the proceeds derived from the sale of a
portion of Shagryly, (ii) financing to be provided by the purchaser (which
financing is expected to also be provided to fund our remaining interest in the
project subsequent to the sale) or (iii) by the GCA equity line. The total
development cost for the project is estimated at approximately $160 million to
$180 million. We are also having discussions with other financing entities,
suppliers and export credit agencies regarding project financing for the
development of Shagryly. However, our strategy is to sell a minimum of 50% of
Shagryly prior to commencing the main phase of development.
In October 2000, we signed a framework agreement with Zao Kaztransgaz, a
Kazakhstan government company involved in the transportation and marketing of
natural gas within Kazakhstan, whereby Kaztransgaz will purchase up to 200
million cubic feet of natural gas per day from our 100 percent owned License
1551 in western Kazakhstan, for an initial period of 15 years. The parties have
agreed to appoint key representatives to a joint committee charged to prepare
the definitive document for the sale and purchase of our gas at 1551.
We are also currently engaged in negotiations with Gazprom, the Russian gas
transport company, for the transportation and sale of our anticipated Shagryly
gas production, as well as third party gas which we may decide to purchase and
sell. Based upon our discussions with independent petroleum engineers, upon the
signing of a gas sales agreement, the related gas reserves would be classified
as "proved". This would result in a significant increase in our market value and
provide us with a borrowing base for conventional, non-convertible financing,
mitigating or negating the need for future draw downs on our equity line.
19
Alternatively, the Kazakhstan government is negotiating an agreement with
Gazprom in connection with the export of Kazakhstan gas to western markets. The
Kazakhstan government has informed us that it will furnish all necessary support
to us to have access to these gas markets. Such access would allow us to market
its gas directly to the western end-users, significantly enhancing the value of
its gas reserves in Shagryly. We have also been having discussions with the
drilling subsidiary of Gazprom and other drilling companies regarding a drilling
contract to develop the Shagryly field.
In September 2000, we entered into a processing agreement with a division of
Sargeant Marine, Inc., Sargeant Bulktainers, Inc., to process Sargeant's
condensate or other crude oils at our Lake Charles, Louisiana refinery for a
fee. Our Gulf Coast Petroleum Trading, Inc., subsidiary also has entered into an
agreement to purchase Sargeant's jet fuel, naphtha, kerosene, diesel oil, and
vacuum gas oil. We will then market these products throughout the country.
We also entered into a joint venture with Sargeant to service our existing
asphalt supply obligations and expand our asphalt business. The joint venture
agreement provides for Sargeant to provide and finance the feedstocks required.
We will receive 50% of the profits generated from the joint venture's asphalt
operations and Sargeant will reimburse us for all of our direct operating costs.
The joint venture plans to purchase asphaltic by-products produced from the
processing agreement, mentioned above, or purchase wholesale asphalt to utilize
as feedstock for blending and polymer enhancement. The joint venture's strategy
is to sell primarily higher-margin polymerized asphalt products, which asphalts
are expected to approximate 75-95% of its asphalt sales during 2001. Other than
providing the direct operating labor and other direct expenditures, for which we
are reimbursed, we do not anticipate any material capital requirements for the
joint venture asphalt operations in 2001. The joint venture has been profitable
since its inception in July 2000. As of December 31, 2000, the joint venture had
a backlog of approximately $6 million.
On July 17, 2000, we entered into a securities purchase agreement with GCA for
the sale of $10,000,000 of our series A convertible preferred stock. As of
January 31, 2000, we had sold a total of 6,250 shares of our series A
convertible preferred stock to GCA under the securities purchase agreement for a
total purchase price of $6,250,000. As of January 31, 2001 GCA had converted
5,353.7 shares of series A convertible preferred stock into 24,963,624 shares of
common stock. GCA has sold all of those shares of common stock.
Under the terms of the purchase agreement, we may sell 10,000 shares of series A
convertible preferred stock to GCA until August 21, 2002 for a total purchase
price of $10,000,000. The purchase price of a share of series A convertible
preferred stock under the purchase agreement is $1,000. We must give GCA at
least 20 business days prior written notice of our intention to sell shares of
series A convertible preferred stock under the purchase agreement. The maximum
amount of series A convertible preferred stock that we may sell to GCA on any
date is $1,250,000, or 1,250 shares. The minimum amount of series A convertible
preferred stock that we may sell to GCA on any date is equal to 2.5% of the
weighted average trading volume of our common stock for the number of trading
days elapsed since the last sale of shares of series A convertible preferred
stock under the purchase agreement times the weighted average sales price of our
common stock for that period. We have the right, upon written notice to GCA not
later than June 22, 2001, to sell an additional 8,000 shares of series A
convertible preferred shares for $8,000,000 prior to August 21, 2002.
The proceeds from the equity line have been used primarily to supplement cash
flows provided by the refining and asphalt operations. Any proceeds that may be
derived from the possible sale or farm-out of a portion of our oil and gas
concessions in Kazakhstan will be utilized to repay debt, fund the development
of our License 1551 gas field, the reentry and drilling work at our License 953,
and for general corporate uses. We plan to utilize any proceeds we may receive
from the sale of a portion of our Kazakhstan concessions to repay our
outstanding bridge notes and our outstanding convertible debt. If such a sale is
not consummated by the due date of the bridge notes and we are unable to
negotiate a further extension of their maturity dates or refinance the notes, we
will utilize funds available under the GCA equity line to pay a portion of the
notes, and seek additional financing to pay the balance. If we are unable to
obtain additional financing on terms acceptable to us, we may have to sell
assets to pay the balance of the note.
Market Risk
We are 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. We do not employ risk management strategies, such as derivatives
or various interest rate and currency swaps, to mitigate these risks.
20
Foreign Exchange Risk
We are 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. We have not experienced any
significant gains or losses from such events.
Interest Rate Risk
We are exposed to interest rate risk from its various financing activities. The
following table provides information, by maturity date, about our 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.
Total
Recorded Fair
2001 2004 Amount Value
---- ---- ------ -----
Debt: $6,725,000 $5,769,135 $12,494,135 $12,494,135
11.3% 27.5%
A 10% increase in interest rates would decrease our cash flow by approximately
$1,249,000 and would decrease the fair value of our debt instruments.
Business
We are a holding company that through our wholly owned subsidiaries:
o Refine crude oil feedstocks to produce jet fuel, diesel, naphtha, gas
oils and fuel oil.
o Produce, process and market conventional and technologically advanced
polymerized asphalt, vacuum gas, oil and other products at our
refinery in Lake Charles, Louisiana utilizing low-cost, low-gravity,
high sulfur crudes.
o Engage in oil and gas exploration and development in western
Kazakhstan, where we own a 70% working interest in a 4.7 million acre
exploration block and a 100% working interest in a 264,000 acre gas
field.
We also are seeking other domestic and international oil and gas projects.
We were organized on April 1, 1929 under the laws of the State of Nevada under
the name Pioneer Mines Operating Company. Our name was changed to American
International Petroleum Corporation in 1982.
American International Refinery, Inc.
- -------------------------------------
We own 100% of our American International Refinery Inc. subsidiary, which owns a
refinery in Lake Charles, Louisiana Charles it, acquired in July 1988. The
refinery is located on 30 acres of land bordering the Calcasieu River, which
connects with the Port of Lake Charles, the Lake Charles Ship Channel and the
Intercoastal Waterway.
The production of asphalt, vacuum gas oil and other products at the refinery was
implemented in the first quarter of 1998 utilizing low-cost, low-gravity,
high-sulfur crudes from Mexico and Venezuela.
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.
Our American International Refinery, Inc. subsidiary 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. Most of the refinery's
feedstock and refined products are handled through the refinery's barge dock at
the river.
From February to July of 1989, we recommissioned and tested the operations of
the refinery, which during that period processed up to 24,000 barrels of oil per
day. Numerous modifications intended to achieve compliance with environmental
regulations and to facilitate
21
production of higher value products were then initiated. Most environmental
compliance projects and a military specification jet fuel upgrade project at the
refinery were completed in 1990.
The main unit of the refinery is the crude distillation tower, or 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 also is suitable for adaptation
to process sour crude oil.
In 1989, we purchased a 16,500 barrel per day vacuum distillation unit that was
dismantled and moved to the refinery. Construction of the vacuum distribution
unit on the refinery site was completed in 1993. The vacuum distribution unit
was idle until mid-1998 when the expansion of, and certain enhancements to, the
crude unit, vacuum distribution unit, and other components of the refinery were
completed to enable the refinery to produce conventional and polymerized
asphalt, vacuum gas oil, diesel, and other products. We leased our crude unit to
Gold Line Refining Ltd., an independent refiner, from 1990 to March 20, 1997 and
terminated the lease in March 1997 as a result of a default by Gold Line. Since
the termination of the lease, the refinery has been staffed by our employees and
all operations have been conducted under the direct control of our management.
In September 2000, we entered into a processing agreement with Sargeant
Bulktainers Inc. to process various types of crude oil feedstocks through the
Lake Charles refinery facilities for a fee. We also have an asphalt operation,
which we operate in a joint venture with Sargeant.
Gulf Coast Petroleum Trading Inc.
- ---------------------------------
We own 100% of our Gulf Coast Petroleum Trading Inc. subsidiary, which we formed
in 2000 to purchase and market refined crude oil products throughout the U.S. In
September 2000, we signed an agreement with Sargeant to purchase and market
products derived from their processing agreement with our American International
Petroleum subsidiary.
St. Marks Refinery
- ------------------
We own 100% of our St. Marks Refinery subsidiary, which owns a refinery in St.
Marks, Florida that we acquired in November 1998 for 1,500,000 shares of our
common stock. The refinery is located on the St. Marks River near Tallahassee,
Florida and has an operating capacity of 20,000 barrels per day. We have
utilized the refinery only as a distribution center for asphalt products, but
did not conduct operations at the refinery in 1999 and 2000 due to the high cost
of crude oil feedstock. However, our asphalt joint venture plans to reopen and
utilize St. Marks in 2001 and beyond.
American International Marine, Inc.
- -----------------------------------
We own 100% of our American International Marine, Inc. subsidiary, which was
formed in July 1998 to acquire a 1,750 ton asphalt barge. The barge has a
capacity of 27,000 barrels and has been used to transport asphalt between the
Lake Charles refinery and the asphalt terminal at St. Marks and to transport
refined products for third parties.
American International Petroleum Kazakhstan
- -------------------------------------------
We own 100% of our American International Petroleum Kazakhstan subsidiary, which
owns a 100% working interest in a 264,000 acre gas concession in Kazakhstan
called Shagryly-Shomyshty and known as License 953, and a 70% working interest
in a 4.7 million acre exploration block in western Kazakhstan known as License
1551.
License 953
-----------
In May 1997, our American International Petroleum Kazakhstan subsidiary entered
into an agreement with MED Shipping and Trading S.A., a Liberian corporation
with offices in Frankfurt, Germany, to acquire 70% of the stock of MED Shipping
Usturt Petroleum Ltd., a Kazakhstan corporation which owns 100% of the working
interest in a Kazakhstan oil and gas concession called License 953. The
concession is located approximately 125 kilometers from the Chevron
Corporation's multi-billion-barrel Tengiz Oil field near the Caspian Sea in the
North Usturt Basin.
22
The definitive agreement under which we 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 us 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 called for us 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. We have completed the 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. We 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 prior assessment of reserve
potential of the evaluated structures was significantly reduced. However, we
believe it continues to be a viable prospect because License 953 is known to
contain other geological structures with unevaluated geological potential, we
fully intend to have the required minimum work program completed in accordance
with the contract. As mentioned above, we are currently in the process of
reentering a well previously drilled by the Russians approximately 25 years ago.
We are also evaluating various available options with regard to completing the
License obligations under reduced-exposure arrangements.
License 1551
------------
In February 1999, we were officially notified by the Kazakhstan government's
State Investment Committee that we had won the tender for the Shagyrly-Shomyshty
gas field in western Kazakhstan. Fifty-eight of the sixty-nine gas wells drilled
to delineate the 264,000 acre gas field were tested to have commercial gas by
the regional development authorities. We 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. Our drilling and production
development plan involves developing and maintaining daily gas production at 200
million cubic feet per day from 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 million cubic feet per day. The
ultimate field development proposal involves use of modular, movable production
process/compression centers designed to filter, dehydrate, compress, and deliver
a total of approximately 200 million cubic feet of gas per day.
Ryder Scott Company, L.P., a Houston-based petroleum consulting firm, reviewed
our 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
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, originally scheduled for the
second half of 2000, is tentatively scheduled for the summer of 2001 to verify
the horizontal drilling application pending the consummation of a related gas
sales contract. These reserves would have been classified as proved undeveloped
had a gas sales contract been in place. We expect to sign a gas sales contract
with Gazprom in the first quarter of 2001 for the sale of Shagyrly gas, as well
as the sale or transport of other gas we may want to market. Upon execution of
this contract, we expect to have a significant amount of proved gas reserves and
then add more upon the successful completion, if any, of the horizontal pilot
program.
23
Our 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 are
acceptable.
American International Petroleum Corporation Holding, Inc.
- ----------------------------------------------------------
Our American International Petroleum Corporation Holding, Inc. subsidiary was
formed in August 1998 to hold 25% of the outstanding shares of Zao Nafta, a
Russian closed-stock company, which we received as a default payment in 1999. 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. In March 1998, we signed
an agreement with Zao Nafta that granted us a 90-day option to acquire a 75%
working interest in a joint venture for the development of 17 oil and gas
licenses in the Samara and Saratov regions of European Russia, covering
approximately 877,000 acres. During the course of our due diligence
investigation, we were unable to reach an agreement with the owner of Zao Nafta
over who would control and manage development of the acquired fields. As a
result, we informed the owner that we would not pursue the purchase and
requested a refund of the $300,000 deposit called for in the option. When the
refund was not paid by the owner, we exercised our right under the option to
demand 25% of the outstanding shares of Zao Nafta from the owner. The Zao Nafta
shares may be sold or traded in private commercial transactions, as they are not
listed or traded on any organized exchange. The shares have been delivered to us
and we will hold them until a decision is made on how or if to proceed. We
continue to consider various alternatives including the sale or barter of the
Zao Nafta shares to acquire petroleum interests in the Samara region of Russia.
Competition
Refining and Asphalt
- --------------------
The extensive development of the United States Gulf Coast Offshore deep water
drilling program has created an abundance of natural gas liquids. Condensate is
an ideal feedstock for our atmospheric distillation unit. It is transported by
barge, thereby placing us in a competitive position with all refineries,
including major integrated oil companies. Condensate, with very minor amounts of
indigenous contaminates such as sulfur, produces finished products because
downstream de-sulfurization is not required. The condensate refining and the
asphalt refining facilities, the atmospheric distillation unit and vacuum
distillation unit, respectively, are currently being split into two separate and
distinct refining operations that will allow us to develop divergent profitable
businesses. The resultant product line will include high and low sulfur naphtha,
kerosene, diesel and gas oil. In addition, the refinery will produce finished
jet fuel, pipeline grade #2 diesel fuel and multi-grades of finished polymer
modified, performance grade asphalts.
During 1999 and continuing into 2000, most State Departments of Transportation
converted to Strategic Highway Research Program performance grade asphalt
specifications. As a result, 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 our business. As a result
of these consolidations, the number of major oil company asphalt
refiner/suppliers has been reduced by almost 70% over the past three years.
The geographic location of our refinery in Lake Charles, Louisiana gives us a
distinct freight advantage over other asphalt suppliers in the area. Most of our
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 our refinery to
the nearest competing truck rack asphalt producing refinery is over 150 miles
away. One major market currently under development by our American International
Refinery, Inc. subsidiary is the greater East Texas asphalt area. We have
transportation advantages over all competitors in the gulf coast area except one
who's overall cost basis is higher than ours.
Exxon made the strategic decision in 2000 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 our 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 recently upgraded their Garyville, Louisiana asphalt rack at great
expense and has subsequently become very competitive in eastern Louisiana and
western Mississippi.
24
Oil and Gas
- -----------
The oil and gas industry, including oil refining, is highly competitive. We are
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
do we. Revenues generated by our oil and gas operations and the carrying value
of our oil and gas properties are highly dependent on the prices of oil and
natural gas. The price that we receive for the oil or natural gas we may produce
is dependent upon numerous factors beyond our control, the exact effect of which
cannot be predicted. These factors include (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 our ability or inability to engage in
effective marketing strategies, may affect the supply or demand for our oil, gas
and other products and, thus, the price attainable for those products.
The Shagyrly 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 pipeline. 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 activities escalate.
Financial Information Relating to Foreign and Domestic Operations and Export
Sales
The table below sets forth, for the three quarters ended September 30, 2000 and
for each of the previous three fiscal years, the amounts of revenue, operating
profit or loss and assets attributable to each of our geographical areas, and
the amount of our export sales.
25
Sales to unaffiliated customers: 2000 1999 1998 1997
---- ---- ---- ----
United States $ 2,708,374 $ 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 $ (4,036,779) $ (4,978,963) $ (2,820,758) $ (1,165,890)
Colombia(1) -- -- -- (170,424)
Peru(1) -- -- -- *
Kazakhstan -- -- -- --
Identifiable assets:
United States $ 34,157,801 $ 33,877,437 $ 35,234,530 $ 21,159,627
Colombia(1) -- -- -- --
Peru(1) -- -- -- --
Kazakhstan $ 33,503,686 $ 32,162,385 $ 22,677,073 $ 11,724,477
Export sales:
(1) These properties were sold in February 1997.
*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
Our 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. We maintain
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
our interest in specific property. We are not fully covered for damages incurred
as a consequence of environmental mishaps. We believe it is presently in
compliance with government regulations and follows safety procedures that 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 our operations. 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 we will not incur substantial financial obligations in
connection with environmental compliance.
We are occasionally subject to nonrecurring environmental costs. The annual cost
incurred in connection with these assessments varies from year to year,
depending upon our 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. We are not aware of any other anticipated nonrecurring
environmental costs.
26
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. Our operations require a comprehensive environmental permit for
all drilling and exploration activities.
We have no currently outstanding or anticipated reclamation issues in the United
State or abroad.
Marketing
After satisfactorily completing the qualification requirements and asphalt
facility inspection in 1999, our American International Refinery, Inc.
subsidiary received approval from the Louisiana Department of Transportation
Materials Inspection Division to have its paving asphalt products placed on the
Division's list of eligible suppliers. This enabled us to bid on state and
federal highway projects in the State of Louisiana and provided an asphalt
quality assurance endorsement for non-state and federal projects as well. We
have maintained an aggressive posture in our efforts to secure asphalt sales
agreements with Louisiana and Texas highway construction companies, both at
highway bid lettings and through private conventional paving projects.
In July of 1999, our Lake Charles refinery received full accreditation
certification for its asphalt quality control and testing program from the
American Association of State Highway and Transportation officials. This was
followed in November, 1999, by the awarding of the Louisiana approved supplier
certification by the Louisiana Department of Transportation and Development, for
us to self-certify our own asphalt products.
The rapid escalation of crude oil prices, combined with a very slow reacting
asphalt retail rack market across the country during 2000, created an
unprofitable economic scenario for sales in 2000. As a result, we temporarily
suspended operations at our St. Marks refinery to control overhead and
manufacturing costs. We have mitigated this problem in the future by including
escalation clauses in all of the new asphalt sales agreements which allows the
us to increase our contract sales price by 5% per quarter if feedstock prices
increase to certain levels. We continually monitor the market conditions in the
region and should general industry conditions change in future months, we will
reconsider asphalt operations at St. Marks. In addition, we continue 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 our expansion into new
profitable retail sales outlets at greater net-back margins than can be achieved
in the wholesale barge markets. The Transportation and Equity Act for the 21st
Century authorizes $173 billion over six years (1998-2003) for construction and
maintenance of federal highways. The six-state Gulf Coast market where we sell
our conventional and polymerized asphalt products has been allocated more than
$32 billion in federal funding under this Act, a 61% increase over the previous
highway spending program. This Act is expected to provide a significant increase
in the overall demand for asphalt in our markets. In addition, matching state
Department of Transportation highway funds could increase the total spending for
highway construction by another 10% - 50%. We are committed to continue an
aggressive, expanding, retail market growth program across the Gulf Coast and
into other various profitable geographic areas.
R. E. Heidt Construction, Diamond B Construction, Davison Petroleum, and
Gilchrist Construction accounted for 25%, 16%, 16% and 13% of our sales during
2000, respectively, and James Corporation, Davison Petroleum, R. E. Heidt
Construction and O.S. Johnson accounted for 16%, 15%, 13% and 10% of our sales
during 1999, respectively.
Oil and Gas
We have had no oil and gas sales since we sold our South American assets in
February 1997 to Mercantile. Prior to the sale, we had 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, our 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 us 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 us of approximately $10.75 per barrel of
oil. Sales of our crude oil to Carbopetrol S.A. in Colombia accounted for 29% of
our 1997 revenues. Sales to Ecopetrol accounted for approximately 11% of our
1997 revenues.
27
We are currently engaged in negotiations with Gazprom, the Russian gas transport
company, for the transportation and sale of our anticipated Shagryly gas
production. We anticipate that a U.S. Dollar or Eurodollar backed contract will
be concluded during the first quarter of 2001.
Sources and Availability of Raw Materials
Our Lake Charles refinery requires sour asphaltic crudes as a feedstock for its
vacuum distillation unit to produce performance grade asphalts, which are
generally in available supply within the western hemisphere. Primary sources of
feedstock include Mexico, Venezuela, Colombia, Ecuador, Canada, and the
wholesale asphalt markets in the U.S. Crude oil feedstocks for roofing asphalt
can be obtained from Saudi Arabia, Oman, U.S. Gulf off-shore, Texas and
Louisiana sweet lights. Many crudes can be blended into the primary base crudes.
In July 2000, we formed a joint venture with Sargeant Bulktainers Inc., a
division of Sargeant Marine Inc., which owns and operates the largest fleet of
asphalt ships in the world today. Sargeant has term contracts to ship asphalt
products for Pemex (Mexico) and P.D.V.S.A. (Venezuela). Sargeant processes
asphaltic crude oil in various locations in the U.S. gulf coast, including our
Lake Charles refinery, and transports and trades asphalt around the world. Their
role in the joint venture is to provide it with asphaltic crude oil feedstocks
and bulk asphalt supply. Our role in the joint venture is to provide asphalt
storage, blending and retail rack facilities, and marketing services to the
joint venture.
Oil and Gas Acreage and Wells
Gross acreage presented below represents the total acreage in which we owned a
working interest on December 31, 2000 and net acreage represents the sum of the
fractional working interests we owned in such acreage.
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 our gross and net oil and gas wells as of December 31,
2000. Gross wells represents the total wells in which we owned a working
interest, and net wells represents the sum of the fractional working interests
we own in such wells.
Productive Wells
----------------
Total Oil Gas
----- --- ---
Gross Net Gross Net Gross Net
Kazakhstan -- -- -- -- -- --
Oil and Gas Production
The table below indicates our net oil and gas production, by country, for the
nine months ended September 30, 2000 and 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.
28
Production
Oil (in Average Net Sales Gas Sales Price
Barrels) Price (per Barrel) (in mcf) (per mcf)
-------- ------------------ -------- ---------
2000 -Kazakhstan -- $ -- -- $ --
-Columbia -- -- -- --
-Peru -- -- -- --
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. We incurred no lifting costs in 1998, 1999, and 2000 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 sale of our South American subsidiaries.
Reserves
We have had no proved reserves and future net revenues from oil and gas
interests we owned since February 1997, when we sold these assets. Consequently,
we have not filed any reports of estimated total proved net oil or gas reserves
since the beginning of our last fiscal year.
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 our Columbian subsidiary as of January 1, 1997. As of January
1, 1997, all of our 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 our 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
=========== ======== =========== ===========
29
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 us as of December 31, 1996 for oil produced from our 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 our South American subsidiary 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 us.
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 us and were
assumed to be accurate by Huddleston & Co.. Basic geologic, engineering and
field performance data are now maintained on file by Mercantile, who purchased
these properties from the Company in February 1997.
Drilling Activity
We sold all of our oil and gas producing properties in February 1997 and have
not yet implemented production operations in Kazakhstan,. The following table
sets forth the gross and net exploratory and development wells that were
completed, capped or abandoned in which we participated during the years
indicated.
2000 1999 1998 1997
Gross Net Gross Net Gross Net Gross Net
Exploratory Wells:
Kazakhstan
Oil 1 .7 -- -- -- -- -- --
Gas -- -- -- -- -- -- -- --
Dry -- -- 2 1.4 -- -- -- --
---- ---- ---- ---- ---- ---- ---- ----
Total 1 .7 2 1.4 -- -- -- --
Development Wells:
Kazakhstan -- -- -- --- -- -- -- --
South America -- -- -- --- -- -- -- --
---- ---- ---- ---- ---- ---- ---- ----
Total -- -- -- --- -- -- -- --
---- ---- ---- ---- ---- ---- ---- ----
Total 1 .7 2 1.4 -- -- -- --
==== ==== ==== ==== ==== ==== ==== ====
Legal Proceedings
In 1998, Neste Trifinery filed suit in a Harris County District Court against us
and our wholly-owned subsidiary, American International Refinery, Inc. (Neste
Trifinery v. American International Refinery, Inc., et al, Case No. 98-11453; in
the 269th Judicial District; in and For Harris County, Texas). Neste has
asserted claims for recovery of compensatory and punitive damages based on the
following theories of recovery; (1) breach of contract, (2) disclosure of
confidential information; and (3) tortuous interference with existing
contractual relations. Generally, Neste has alleged that in connection with the
due diligence we conducted of the business of Neste, we had access to
confidential or trade secret information and that we have exploited that
information, in breach of an executed confidentiality agreement, to the
detriment of Neste. Neste seeks the recovery of $20,000,000 in compensatory
damages and an undisclosed sum in connection with its claim for the recovery of
punitive damages.
30
In addition to seeking the recovery of compensatory and punitive damages, Neste
sought injunctive relief. Specifically, Neste sought to enjoin us from: (1)
offering employment positions to the key employees of Neste; (2) contacting the
suppliers, joint venture partners and customers of Neste in the pursuit of
business opportunities; (3) interfering with the contractual relationship
existing between Neste and St. Marks Refinery, Inc.; and (4) disclosing or using
any confidential information obtained during the due diligence process to the
detriment of Neste. We have asserted to a general denial to the allegations
asserted by Neste. We 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 us, and stayed litigation. At present, the dispute
existing between the us and Neste 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. We are vigorously defending this
matter.
Facilities
We have a lease for approximately 4,800 square feet of office space at 444
Madison Avenue, New York, N.Y. 10022. This space comprises the our 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. We have recently agreed
to sublet 2/3 of our space for $152,472 per year through the end of its lease in
New York. In addition, we have leased 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.
We also own 100 acres of land in Lake Charles, Louisiana where our refinery is
located. In addition to the structures and equipment comprising our refining
facility, our refinery assets include an approximately a 4,400 square foot
office building, a new 2,200 square foot asphalt plant office, a 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.
We also own approximately 68 acres of vacant land adjacent to the St. Marks
Refinery in Florida.
Employees
As of December 31, 2000, we, together with our subsidiaries, employed 51 persons
on a full-time basis, including 13 persons who are engaged in management,
accounting and administrative functions for American International Petroleum
Corporation and 33 who are employed by American International Refinery, Inc. on
a full-time basis, including 14 persons who are engaged in management and
administrative functions, and 5 persons who are employed by American
International Petroleum Kazakhstan in management and administrative positions.
Two persons are employed by St. Marks Refinery, Inc., none of which are in
management and administration. We frequently engage 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. We have no
collective bargaining agreements and believe that relations with our employees
are satisfactory.
Management
Year First
Name Age Position(s) Became a Director or Officer
- --------------- --- ----------- ----------------------------
George N. Faris 60 Chairman of the Board and 1981
Acting Chief Executive Officer
William R. Smart 80 Director 1987
Daniel Y. Kim 76 Director 1987
Donald G. Rynne 78 Director 1992
John H. Kelly 61 Director 1999
Denis J. Fitzpatrick 56 Acting President, Secretary and 1994
Chief Financial Officer
William L. Tracy 53 Treasurer and Controller 1992
- ------------------------------------
31
Dr. George N. Faris has served as Chairman of our Board of Directors 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.
William R. Smart has served as a member of our 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 our Board of Directors since July
1987. Dr. Kim is a Registered Professional Geophysicist in California and
Colorado. From 1981 until 1984, Dr. Kim was President and Chief Executive
Officer of Kim Tech, Inc., a research and development company. In 1984, Kim
Tech, Inc. was merged into Bolt Industries, a public company engaged in the
manufacture of air guns and auxiliary equipment used to generate shock waves in
seismic exploration for oil, gas and minerals. Dr. Kim has been a director of
Bolt Industries since 1984. From 1977 to 1980, Dr. Kim was Chief Consulting
Geophysicist for Standard Oil Company of Indiana. Dr. Kim received a B.S. degree
in Geophysics and a Ph.D. degree in Geophysics from the University of Utah in
1951 and 1955, respectively.
Donald G. Rynne has served as a member of our 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 our 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.
Denis J. Fitzpatrick has served as Vice President, Secretary and Chief Financial
Officer since August 1994. 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.
William L. Tracy has served as our Treasurer and Controller 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.
Our executive officers are appointed annually by the Board to serve until their
successors are duly elected and qualified.
Committees of the Board of Directors
Our Board of Directors has three standing committees: an Executive Committee, a
Compensation Committee, and an Audit Committee.
32
The Executive committee is composed Dr. Faris (Chairman), Messrs. Rynne and
Smart.
The Compensation committee is composed of Dr.. Kim (Chairman), Dr. Faris,
Messrs. Rynne and Kelly.
The Audit Committee is composed of Messrs. Smart (Chairman), Rynne and Dr. Kim.
Compensation Committee Interlocks
No member of the Compensation Committee was an officer or employee of our
company or of any of our subsidiaries during the prior year or was formerly an
officer of our company or any of our subsidiaries. During the last fiscal year,
none of our executive officers has served on our Board of Directors or
Compensation Committee of any other entity whose officers served either on our
Board of Directors or on our Compensation Committee.
Director Compensation
During 2000, we reimbursed outside Directors for their actual company-related
expenses, including the costs of attending Directors' meetings. We accrued, for
each outside Director, $1,000 per month for serving in such capacity; $500 for
participation in each Committee meeting, if such Director served on a Standing
Committee of the Board of Directors; and $500 for each Board meeting attended.
Summary Compensation Table
The following table discloses compensation for services rendered by our Chief
Executive Officer and all of our other executive officers whose compensation
exceeded $100,000 in 2000, 1999, and 1998.
Annual Compensation Long Term Compensation
- --------------------------------------------------------- ---------------------------------------------------
Name and Principal Other Annual All Other
Position Year Salary Bonus Compensation 0ptions(#) Compensation
- ----------- ---- ------ ----- ------------ ---------- ------------
George N. Faris 2000 $ 298,077 $ 17,757(1) $ -- 250,000 $ --
Chairman of the 1999 335,769 41,250 -- 500,000 --
Board and Acting 1998 330,000 120,000 -- 1,000,000(2) --
Chief Executive
Officer
Denis J. Fitzpatrick 2000 $ 175,500 $ 7,103(1) $ 16,976(3) 50,000 $ --
Secretary, Acting 1999 135,769 15,000 -- 100,000 --
President and Chief 1998 140,000 31,250 -- 170,000(4) --
Financial Officer
Joe M. McKinney (6) 2000 $ 187,019 $ 18,860(1) $ 5,500(5) 200,000 $ --
Chief Executive 1999 118,461 $ 5,625 2,500(5) 700,000 --
Officer and Chief 1998 -- -- -- --
Operating Officer
William L. Tracy 2000 $ 100,000 $ 5,000 $ -- $ --
Treasurer and 1999 100,000 10,006 -- 75,000 --
Controller 1998 100,000 13,500 -- 106,000(7) --
(1) Incentive bonus paid in shares of our common stock.
(2) Includes 580,000 contingent options that were terminated since our common
stock did not trade at $5.00 per share for 15 consecutive days at any time
before December 31, 1999.
(3) Includes $11,976 moving allowance and $5,000 car allowance.
33
(4) Includes 100,000 contingent options that were terminated since our common
stock did not trade at $5.00 per share for 15 consecutive days at any time
before December 31, 1999.
(5) Vehicle allowance.
(6) Mr. McKinney resigned July 7, 2000.
(7) Includes 50,000 contingent options that were terminated since our common
stock did not trade at $5.00 per share for 15 consecutive days at any time
before December 31, 1999.
Stock Option Plans
We have a 2000 Stock Option Plan and a 1998 Stock Option Plan. Both plans have
been approved by our Board of Directors and by our shareholders. Each plan is
administered by our Board of Directors or a committee designated by them. Under
each plan employees, including officers and managerial or supervising personnel,
are eligible to receive incentive stock options in tandem with stock
appreciation rights and employees, Directors, contractors and consultants are
eligible to receive non-qualified stock options in tandem with stock
appreciation rights. Options may be granted to purchase an aggregate of
5,000,000 shares of our common stock under each plan. If an option granted under
either 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 applicable 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 2000 Stock Option Plan after July 10, 2010
or under the 1998 Stock Option Plan after May 29, 2008. The exercise price of
the options granted under either plan cannot be less than the fair market value
of the shares of common stock on the date the option is granted. Incentive stock
options granted to shareholders owning 10% or more of the outstanding voting
power of our 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 incentive stock options are exercisable for the
first time by any employee during any calendar year, may not exceed $100,000.
Any additional common stock as to which options become exercisable for the first
time during any such year are treated as non qualified stock options. As of
December 31, 2000 no options had been granted under the 2000 Stock Option Plan.
Stock Award Plan
The American International Petroleum Corporation 2000 Stock Award Plan provides
for the granting of stock awards not to exceed an aggregate of 500,000 shares of
our common stock. The plan was approved by our Board of Directors and
Shareholders. Employees, officers, and consultants are eligible for awards under
the plan. Awards may be made under the plan until May 15, 2010. No recipient
shall be entitled to more than an aggregate of 50,000 shares of common stock
under the plan. The plan is administered our Board of Directors.
Option Grants In Last Fiscal Year
The table below includes the number of stock options granted to the executive
officers named in the Summary Compensation Table as of December 31, 2000,
exercise information and potential realizable value.
34
Individual Grants Potential Realizable
Number of Percent of Value at Assumed
Securities Total Options Annual Rates of Stock
Underlying Granted to Price Appreciation
Options Employees in Exercise Expiration for Option Term
Name Granted(#) Fiscal Year Price($/sh) Date 5%($) 10%($)
---- ---------- ----------- ----------- ---------- ----- ------
George Faris 200,000 40% $0.58 04/26/10 $-0- $-0-
50,000 10% 0.55 07/10/10 $-0- $-0-
Joe Michael McKinney 200,000 (1) 40% $0.58 07/07/00 $-0- $-0-
Denis Fitzpatrick 50,000 10% $0.55 07/10/10 $-0- $ -0-
(1) These options terminated following the resignation of Mr. McKinney on July
7, 2000
Aggregate Option Exercises In 2000 And Option Values At December 31, 2000
The table below includes the number of shares covered by both exercisable and
non-exercisable stock options owned by the executive officers named in the
Summary Compensation Table as of December 31, 2000. Also reported are the values
for "in-the-money" options that represent the positive spread between exercise
price of any such existing stock options and the year-end price.
Shares Number of
Acquired on Value Unexercised Options Value of Unexercised
Name Exercise Realized at December 31, 2000 In-the-money Options
- ----- -------- --------- ---------------------------- --------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
George N. Faris 1,537,500 $2,005,185 1,089,169 695,833 $ -- $ --
Joe Mike McKinney 62,500 $ 85,935 -- -- $ -- $ --
Denis J. Fitzpatrick 192,000 $ 173,438 135,000 68,000 $ -- $ --
William L. Tracy 125,000 $ 114,375 28,000 53,000 $ -- $ --
Employment Contracts
Dr. George N. Faris is employed as Chairman of the Board until December 31, 2002
at an annual salary of $250,000. The agreement provides that if the initial term
is not extended, we will 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. Following the resignation of Joe Michael McKinney
on July 7, 2000, Dr. Faris assumed the title and responsibilities of Acting
Chief Executive Officer and his salary was increased to $350,000 per year until
such time as a permanent Chief Executive Officer is hired.
Securities Ownership Of Certain Beneficial Owners And Management
The following table sets forth certain information, as of December 31, 2000,
regarding the beneficial ownership of our common stock by (i) each person known
by us 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;
and (iv) all Directors and executive officers as a group.
35
Name and Address Amount and Nature of Percent
of Beneficial Holder(1) Beneficial Ownership of Class
The Palladin Group, L.P. 13,129,807 (2) 9.9%
195 Maplewood Avenue
Maplewood, NJ 07040
GCA Strategic Investment Fund Limited 13,129,807 (3) 9.9%
106 Colony Drive, Suite 900
Cumming, GA 30040
George N. Faris 4,276,120 (4) 3.1%
Daniel Y. Kim 372,997 (5) *
Donald G. Rynne 926,711 (6) *
William R. Smart 472,631 (7) *
John Kelly 152,000 (8) *
Denis J. Fitzpatrick 169,731 (9) *
William L. Tracy 67,000 (10) *
All officers and Directors
as a group (consisting of
8 persons) 6,437,190 (11) 4.6%
Joe Michael McKinney(12) 0 -
- ---------------------
*Less than 1% of class
(1) All officers and Directors have an address c/o American International
Petroleum Corporation at 2950 North Loop West, Houston, Texas, 77092.
(2) The Palladin Group, L.P. serves as investment advisor to Halifax Fund,
L.P., the registered owners of our 5% convertible secured debenture and
warrants to purchase common stock, and has been granted investment
discretion over our securities 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 Halifax Fund, L.P.
the beneficial owner of more than 9.99% of the then outstanding shares of
our common stock.
(3) GCA is the ultimate beneficial owner of the shares owned by GCA and,
through its board of directors, has the sole voting power to vote the
shares. Prime Management Limited, a Bermuda corporation located in Bermuda
has sole voting power with respect to the shares owned by GCA. Joe Kelly, a
Bermuda resident, has the sole voting power over Prime Management. Global
Capital Advisors Ltd., GCA's investment advisor located in Georgia,
together with GCA's board of directors, has the sole investment decision
authority over the shares owned by GCA. The terms of the series A
convertible preferred stock and related warrants provide that the number of
shares that GCA may acquire upon conversions or exercise may not exceed
that number that would render GCA the beneficial owner of more than 9.99%
of the then outstanding shares of our common stock.
(4) Includes 1,680,000 shares that he may acquire upon the exercise of stock
options. Excludes 105,000 shares that he may acquire upon exercise of
options commencing January 1, 2002.
36
(5) Includes 303,119 shares that he may acquire upon the exercise of stock
options.
(6) Includes 197,619 shares that he may acquire upon the exercise of stock
options.
(7) Includes 222,619 shares that he may acquire upon the exercise of stock
options.
(8) Includes 150,000 shares that he may acquire upon the exercise of stock
options. Excludes 25,000 shares that he may acquire upon exercise of
options commencing July 22, 2001.
(9) Includes 152,500 shares that he may acquire upon the exercise of stock
options. Excludes 17,500 shares that he may acquire upon exercise of
options commencing January 1, 2002
(10) Includes 67,000 shares that he may acquire upon the exercise of stock
options. Excludes 14,000 shares that he may acquire upon exercise of
options commencing January 1, 2002.
(11) Includes all of the shares that may be acquired upon the exercise of stock
options included in the table for the named individuals described in Notes
(4) through (10) above.
(12) Mr. McKinney resigned on July 7, 2000.
Certain Transactions
On August 24, 2000, we borrowed $200,000, $100,000, and $50,000 from George N.
Faris, our Chairman of the Board, Donald Rynne, one of our directors, and Denis
J. Fitzpatrick, our Chief Financial Officer, respectively. These loans are
repayable on demand and bear interest at 12% per annum.
We issued to each of these individuals options to purchase one share of common
stock for each dollar borrowed. The options may be exercised prior to August 23,
2010 and have an exercise price of $0.43 per share, representing 105% of the
market price of a share of our common stock on the date immediately preceding
the loan.
We believe that the terms of these loans were as favorable to us as we could
have obtained from an unaffiliated party. As of December 31, 2000, the entire
amount of these loans remained outstanding.
Selling Securityholders
The following table sets forth the names of the selling securityholders, the
number of shares of common stock beneficially owned by each selling
securityholder as of December 31, 2000, the number of shares that each selling
securityholder may offer, and the number of shares of common stock beneficially
owned by each selling securityholder upon completion of the offering, assuming
all of the shares are sold. None of the selling securityholders has, or within
the past three years has had, any position, office or other material
relationship with American International Petroleum Corporation or any of its
predecessors or affiliates.
The selling securityholders are offering up to 36,936,376 shares of common stock
by this prospectus.
GCA Strategic Investment Fund is offering:
o 32,536,376 shares it may acquire upon conversion of our series A
convertible preferred stock. The number of shares that GCA acquires
and may resell under this prospectus depends upon the actual
conversion price at the time of conversion. The actual conversion
price is 92% of the average of the lowest three daily weighted average
sales prices of a share of common stock for the 20 trading days prior
to the date of conversion. The number of shares of common stock that
GCA may acquire
37
upon conversion is equal to the number of shares of series A
convertible preferred stock to be converted times $1,000, the stated
value of each share of series A convertible preferred stock, divided
by the conversion price. Since there is no minimum conversion price,
if the market price of the common stock declines below the assumed
conversion price, the number of shares that GCA may acquire upon
conversion will increase. The number of shares that GCA may acquire
will decrease following a sustained increase in the market price of
the common stock sufficient to offset the 8% discount used in
computing the conversion price that results in a conversion price that
is higher than the assumed conversion price.
o As of January 31, 2001, GCA had sold 24,963,624 shares of common stock
upon conversion of 5,353.7 shares of series A convertible preferred
stock purchased under the securities purchase agreement. On February
2, 2001, we sold 660 shares of series A convertible preferred stock to
GCA and we may sell another 3,750 shares of series A convertible
preferred stock to GCA prior to August 21, 2001. We may sell an
additional 8,000 shares of series A convertible preferred stock to GCA
during a period of 12 months commencing August 22, 2001 upon written
notice to GCA prior to June 22, 2001.
o 2,300,000 shares it may acquire upon exercise of warrants issued in
connection with their purchase of various bridge notes.
LKB Financial is offering:
o 1,675,000 shares it may acquire upon exercise of warrants issued in
connection with various bridge notes. LKB will also receive warrants
to purchase 75,000 shares of common stock on each date that GCA
purchases shares of series A convertible preferred stock under the
related agreement.
Actrade Capital Inc. is offering 300,000 shares it acquired as collateral for a
loan.
Trinity Capital Advisors, Inc. is offering 25,000 shares it may acquire upon
exercise of a warrant it received for financial advisory services.
Harry Sargeant Jr. is offering 100,000 shares he may acquire upon exercise of a
warrant received in connection with a loan.
The selling securityholders acquired, or will acquire, the securities described
above in transactions exempt from the registration requirements of the
Securities Act under Section 4(2) of the Securities Act and Rule 506 of
Regulation D, or in the case of shares acquired by GCA upon conversion of our
series A convertible preferred stock, under Section 3(a)(9) of the Securities
Act. All of the selling securityholders are "accredited investors", as defined
in Rule 501(a) of Regulation D.
The number of shares listed below as beneficially owned before the offering by
GCA has been computed without giving effect to the terms of the certificate of
designations creating the series A convertible preferred stock that limits the
number of shares of common stock that the holder may acquire upon conversion of
the series A convertible preferred stock to the extent the issuance of such
shares of common stock would cause the holder to become the beneficial owner of
more than 9.99% of the then total outstanding shares of common stock.
As of December 31, 2000, we had 132,624,318 shares of common stock outstanding.
For purposes of computing the number and percentage of shares beneficially owned
by each selling securityholder as of December 31, 2000, any shares which such
person has the right to acquire within 60 days after such date are deemed to be
outstanding, but are not deemed to be outstanding for the purpose of computing
the percentage ownership of any other selling securityholder.
38
Beneficial Ownership Beneficial Ownership
Of Common Stock Before of Common Stock
Offering Shares of Common After Offering
Number Percent Stock Offered Number Percent
----------------- ----- ----------- ------ ------
GCA Strategic Investment
Fund Limited (1) 36,179,007 21.4% 34,836,376 1,342,631 --
c/o Prime Management Ltd.
12 Church Street
Hamilton, Bermuda HM11
LKB Financial LLC (2) 2,405,050 1.8% 1,675,000 730,050 --
106 Colony Park Drive
Suite 900
Cumming, Ga. 30040
Actrade Capital Inc. 1,300,000 1.0% 300,000 1,000,000 *
7 Penn Plaza
New York, NY 10001
Trinity Capital Advisory, Inc. 25,000 * 25,000 0 --
2115 Sutter Street, 2nd Floor
San Francisco, CA 94108
Harry Sargeant, Jr. 100,000 * 100,000 0 --
3020 Military Trial, Suite 100
Boca Raton, FL 33431
- ----------
* Less than one percent (1%).
(1) GCA is the ultimate beneficial owner of the shares owned by GCA and,
through its board of directors, has the sole voting power to vote the
shares. Prime Management Limited, a Bermuda corporation located in Bermuda
has sole voting power with respect to the shares owned by GCA. Joe Kelly, a
Bermuda resident, has the sole voting power over Prime Management. Global
Capital Advisors Ltd., GCA's investment advisor located in Georgia,
together with GCA's board of directors, has the sole investment decision
authority over the shares owned by GCA. GCA is an affiliate of LKB
Financial.
(2) Lewis Lester and Michael Brown have shared voting and dispositive power
with respect to the shares owned by LKB Financial. LKB Financial is an
affiliate of GCA.
The shares of common stock offered by GCA and LKB under this prospectus have
been registered in accordance with registration rights that we have granted to
them. We have agreed to pay all registration and filing fees, printing expenses,
blue sky fees, if any, and fees and disbursements of our counsel. The selling
securityholders have agreed to pay any underwriting discounts and selling
commissions. In addition, we have agreed to indemnify GCA and LKB Financial and
underwriters who may be selected by them and certain affiliated parties, against
certain liabilities, including liabilities under the Securities Act, in
connection with the offering. Although GCA and LKB Financial also have agreed to
indemnify our officers and directors and persons controlling us against such
liabilities, we have been informed that in the opinion of the SEC
indemnification of those persons of liabilities under Securities Act is against
public policy as expressed in the Securities Act and is therefore not
enforceable.
39
Plan of Distribution
The selling securityholders may sell shares from time to time in public
transactions, in the over-the-counter market, or private transactions, at
prevailing market prices or at privately negotiated prices. They may sell their
shares in the following types of transactions:
o ordinary brokerage transactions and transactions in which the broker
solicits purchasers
o a block trade in which the broker-dealer so engaged will attempt to
sell the shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction
o purchases by a broker or dealer as principal and resale by such broker
or dealer for its account under this prospectus
o face-to-face transactions between sellers and purchasers without a
broker-dealer
The selling securityholders also may sell shares that qualify under Section 4(1)
of the Securities Act or Rule 144. As used in this prospectus, selling
securityholder includes donees, pledges, distributees, transferees and other
successors in interest of the selling securityholders named in this prospectus.
In effecting sales, brokers or dealers engaged by the selling securityholders
may arrange for other brokers or dealers to participate in the resales. The
selling securityholders may enter into hedging transactions with broker-dealers,
and in connection with those transactions, broker-dealers may engage in short
sales of the shares. The selling securityholders also may sell shares short and
deliver the shares to close out such short positions. The selling
securityholders also may enter into option or other transactions with
broker-dealers that require the delivery to the broker-dealer of the shares,
which the broker-dealer may resell under this prospectus. The selling
securityholders also may pledge the shares to a broker or dealer and upon a
default, the broker or dealer may effect sales of the pledged shares under this
prospectus.
Brokers, dealers or agents may receive compensation in the form of commissions,
discounts or concessions from selling securityholders in amounts to be
negotiated in connection with the sale. Any broker-dealer that acts as an agent
for the purchaser may receive compensation from the purchaser.
Broker-dealers may agree with a selling securityholder to sell a specified
number of shares of common stock at a stipulated price per share, and, to the
extent such broker-dealer is unable to do so acting as agent for such selling
securityholder, to purchase as principal any unsold shares at the price required
to fulfill the broker-dealer commitment to the selling securityholder.
Broker-dealers who acquire shares of common stock as principal may then resell
such shares from time to time in transactions in the over-the-counter market or
otherwise at prices and on terms then prevailing at the time of sale, at prices
then related to the then current market price or in negotiated transactions and,
in connection with such resales, may pay or receive from the purchasers of such
shares commissions as described above.
GCA Strategic Investment Fund Limited is an "underwriter" within the meaning of
the Securities Act of shares of common stock it offers and sells under this
prospectus, and any commissions, discounts or concessions it receives in
connection with the sale of shares under this prospectus will be underwriting
compensation. The other selling securityholders and any brokers or dealers
participating in the distribution of shares under this prospectus may be deemed
to be "underwriters" within the meaning of the Securities Act in connection with
such sales and any commissions, discounts or concessions they receive may be
deemed to be underwriting compensation.
Information as to whether underwriters who may be selected by the selling
securityholders, or any other broker-dealer, is acting as principal or agent for
the selling securityholders, the compensation to be received by them, and the
compensation to be received by other broker-dealers, in the event such
compensation is in excess of usual and customary commissions, will, to the
extent required, be set forth in a supplement to this prospectus. Any dealer or
broker participating in any distribution of the shares may be required to
deliver a copy of this prospectus, including a prospectus supplement, if any, to
any person who purchases any of the shares from or through such dealer or
broker.
40
We have advised the selling securityholders that during such time as they may be
engaged in a distribution of the shares they are required to comply with
Regulation M under the Securities Exchange Act. With certain exceptions,
Regulation M precludes any selling securityholders, any affiliated purchasers
and any broker-dealer or other person who participates in such distribution from
bidding for or purchasing, or attempting to induce any person to bid for or
purchase any security which is the subject of the distribution until the entire
distribution is complete. Regulation M also prohibits any bids or Purchases made
in order to stabilize the price of a security in connection with the
distribution of that security.
Description Of Securities
Our authorized capital stock consists of 200,000,000 shares of common stock,
$0.08 par value per share, and 7,000,000 shares of "blank check" preferred
stock, par value $0.01 per share. As of December 31, 2000, 132,624,318 shares of
common stock were outstanding and 1,250 shares of series A preferred stock were
outstanding.
The following are brief descriptions of our securities as of December 31, 2000.
The rights of the holders of shares of capital stock are established by our
articles of incorporation, as amended, our by-laws and Nevada law. The following
statements do not purport to be complete or give full effect to statutory or
common law, and are subject in all respects to the applicable provisions of the
articles of incorporation, by-laws and state law.
Common Stock
Holders of our common stock are entitled to one vote per share, and subject to
the rights of holders of preferred stock, to receive dividends when, as and if
declared by our Board of Directors and to share ratably in our assets legally
available for distribution to holders of common stock in the event of the
liquidation, dissolution or winding up of our company. Holders of the common
stock do not have subscription, redemption, conversion or preemptive rights.
Each share of common stock is entitled to one vote on any matter submitted to
shareholders, including the election of directors. The Board is empowered to
fill any vacancies on the Board created by the resignation of Directors. Except
as otherwise required by the Nevada law, all shareholder action (other than the
election of the Directors, who are elected by a plurality vote) is subject to
approval by a majority of the shares of common stock present at a shareholders'
meeting at which a quorum (a majority of the issued and outstanding shares of
the common stock) is present in person or by proxy, or by written consent
pursuant to Nevada law. All shares of common stock outstanding are fully paid
and non-assessable.
Options and Warrants
Options. We have outstanding options to purchase an aggregate of 3,622,415
shares of common stock, at exercise prices ranging from $0.43 to $2.00, which
expire at various dates from 2005 to 2010.
Warrants. We have outstanding warrants to purchase an aggregate of 11,180,926
shares of common stock, at exercise prices ranging from $0.13 to $3.00, which
expire at various dates through 2005.
Preferred Stock
We are authorized to issue up to 7,000,000 shares of preferred stock with such
designation, rights and preferences as may be determined from time to time by
our Board of Directors. Accordingly, the Board of Directors is empowered,
without further shareholder approval, to issue preferred stock with dividend,
liquidation, conversion, voting or other rights that could decrease the amount
of earnings and assets available for distribution to holders of common stock or
adversely affect the voting power or other rights of the holders of our common
stock. In the event of issuance, the preferred stock could be utilized, under
certain circumstances, as a method of discouraging, delaying or preventing a
change in control of our company.
41
Our Board of Directors authorized the issuance of up to 18,000 shares of series
A convertible preferred stock in connection with our securities purchase
agreement with GCA Strategic Investment Fund Limited. Each share of our series A
convertible preferred stock has a stated value of $1,000 and is convertible into
shares of our common stock at a conversion price equal to 92% of the average of
the lowest three daily weighted average sales prices of our common stock during
the 20 trading days prior to the date of conversion. The number of shares of
common stock that may be acquired upon conversion is determined by dividing the
stated value of the number of shares of series A convertible preferred stock to
be converted by the conversion price. Since there is no minimum conversion
price, there is no limitation on the number of shares of common stock that
holders of series A convertible preferred stock may acquire upon conversion.
On July 17, 2000, we entered into a securities purchase agreement with GCA for
the sale of $10,000,000 of our series A convertible preferred stock. As of
January 31, 2000, we had sold a total of 6,250 shares of our series A
convertible preferred stock to GCA under the securities purchase agreement for a
total purchase price of $6,250,000. As of January 31, 2001 GCA had converted
5,353.7 shares of series A convertible preferred stock into 24,963,624 shares of
common stock. GCA has sold all of those shares of common stock.
Under the terms of the purchase agreement, we may sell 10,000 shares of series A
convertible preferred stock to GCA until August 21, 2002 for a total purchase
price of $10,000,000. The purchase price of a share of series A convertible
preferred stock under the purchase agreement is $1,000. We must give GCA at
least 20 business days prior written notice of our intention to sell shares of
series A convertible preferred stock under the purchase agreement. The maximum
amount of series A convertible preferred stock that we may sell to GCA on any
date is $1,250,000, or 1,250 shares. The minimum amount of series A convertible
preferred stock that we may sell to GCA on any date is equal to 2.5% of the
weighted average trading volume of our common stock for the number of trading
days elapsed since the last sale of shares of series A convertible preferred
stock under the purchase agreement times the weighted average sales price of our
common stock for that period. We have the right, upon written notice to GCA not
later than June 22, 2001, to sell an additional 8,000 shares of series A
convertible preferred shares for $8,000,000 prior to August 21, 2002.
We may not sell shares of series A convertible preferred stock to GCA under the
purchase agreement
o if the number of shares of common stock acquired and to be acquired
upon conversion of series A convertible preferred stock exceeds an
aggregate of 21,478,012 shares, representing 19.9% of the number of
shares of common stock outstanding on the date of the agreement,
without stockholder approval. This limitation, which was required
under the corporate governance rules of The Nasdaq Stock Market, Inc.
while our common stock was quoted on the Nasdaq Stock National Market,
no longer applies since our common stock does not qualify for
inclusion on the Nasdaq Stock Market.
o to the extent the issuance of shares of series A convertible preferred
stock would render GCA the beneficial owner of more than 4.99% of the
then outstanding common stock. GCA has waived this provision of the
purchase agreement.
The certificate of designations creating the series A convertible preferred
stock limits the number of shares of common stock that may be acquired upon
conversion of the series A convertible preferred stock to the extent the
issuance of such shares of common stock would cause the holder requesting
conversion to become the beneficial owner of more than 9.99% of the then total
outstanding shares of common stock.
We also issued to GCA warrants to purchase 200,000 shares of common stock in
connection with the purchase agreement. These warrants have an exercise price of
$0.23 per share and expire on August 21, 2005.
If we do not sell shares of series A convertible preferred stock under the
purchase agreement within 33 days after the last sale under the purchase
agreement, we must pay GCA a fee equal to 2% of the maximum dollar amount of
shares we are allowed to sell under the purchase agreement, or $25,000. For each
additional 30 days we fail to sell shares of series A convertible preferred
stock under the purchase agreement, we must pay GCA an additional $30,000.
We have the right to terminate the purchase agreement at any time. If we
terminate the purchase agreement, we must issue to GCA warrants to purchase that
number of shares of common stock that could be acquired with 1-1/2% of the
unused portion of the commitment at a purchase price of $1.00 per share. These
warrants will have a term of five years and an exercise price equal to 105% of
the bid price on the date of termination.
42
We must redeem the outstanding shares of series A convertible preferred stock
for cash within 10 business days after the occurrence of one or more of the
following events:
o August 21, 2002, the second anniversary of the date upon which shares
of series A convertible preferred stock were first sold under the
purchase agreement.
o A "change in control" of our company.
o A consolidation, merger or amalgamation of our company.
o Our failure to have the registration statement for the resale of the
shares of common stock that may be acquired upon conversion of the
series A convertible preferred stock declared effective, or our
failure to maintain the effectiveness of that registration statement,
after specified periods of time, or our failure to register a
sufficient number of shares for conversion of the series A convertible
preferred stock.
o Our failure to obtain stockholder approval in accordance with the
corporate governance rules of the Nasdaq Stock Market for the issuance
upon conversion of shares of series A convertible preferred stock and
exercise of warrants issued under the purchase agreement of more than
19.99% of the outstanding shares of common stock on the date of the
purchase agreement within 40 days after the date upon which we have
issued the maximum number of shares that may be issued without
obtaining such stockholder approval. Since our common stock does not
qualify for inclusion on the Nasdaq Stock Market, this limitation no
longer applies.
o Our failure to pay, when due, the principal amount or accrued interest
on our outstanding bridge notes held by GCA.
o The suspension or delisting of trading in our common stock, unless
within 10 trading days of such suspension or delisting the common
stock is listed and approved for trading on the New York Stock
Exchange, the American Stock Exchange, the Nasdaq SmallCap Market or
the OTC Bulletin Board.
The redemption price is an amount equal to the number of shares of common stock
that could be acquired upon conversion of the outstanding shares of series A
convertible preferred stock times the average closing bid price of our common
stock for the five trading days preceding the event causing the redemption.
We must pay GCA 25% of the gross proceeds from the sale of shares of series A
convertible preferred stock under the purchase agreement, which payments will be
applied to amounts outstanding under our 7% secured bridge note in the principal
amount of $3,000,000 until the principal and accrued interest on that bridge
note have been paid in full. As of December 31, 2000, we had repaid $1,562,500
of the 7% secured bridge note, leaving a balance due of $1,437,500. GCA has
extended the maturity date of this bridge note from November 28, 2000 to April
28, 2001. GCA also has extended the maturity date of our other outstanding
bridge notes in the principal amounts of $2,500,000 and $1,850,000 from August
28, 2000 to April 28, 2001. In consideration for this extension, we reduced the
exercise price of warrants issued in connection with the bridge note financings
and the equity line financings to $0.23 per share.
We are required to pay LKB Financial, LLC, an affiliate of GCA, 5% of the
aggregate proceeds from the sale of shares of series A convertible preferred
stock under the purchase agreement for financial advisory services performed in
connection with the purchase agreement. We also are required to issue to LKB
warrants to purchase 75,000 shares of common stock on each date upon which GCA
purchases shares of series A convertible preferred stock under the purchase
agreement. The warrants issued to LKB have a term of five years and an exercise
price of $0.23 per share.
Shares Eligible for Future Sale
As of December 31, 2000, we had 132,624,318 shares of common stock
outstanding, of which only 129,437,105 shares of common stock are transferable
without restriction under the Securities Act. The remaining 3,187,213 shares,
issued in private transactions, are "restricted securities", as that term is
defined in Rule 144 promulgated under the Securities Act, which may be publicly
43
sold only if registered under the Securities Act or if sold in accordance with
an applicable exemption from registration, such as Rule 144. In general, under
Rule 144 as currently in effect, subject to the satisfaction of certain other
conditions, a person, including an affiliate of our company, who has
beneficially owned restricted securities for at least one year, is entitled to
sell (together with any person with whom such individual is required to
aggregate sales), within any three-month period, a number of shares that does
not exceed the greater of 1% of the total number of outstanding shares of the
same class, or, if the common stock is quoted on Nasdaq or a national securities
exchange, the average weekly trading volume during the four calendar weeks
preceding the sale. A person who has not been an affiliate of our company for at
least three months, and who has beneficially owned restricted securities for at
least two years is entitled to sell such restricted securities under Rule 144
without regard to any of the limitations described above. . In addition,
o An indeterminate number of shares may be acquired upon conversion of
the outstanding $5,769,135 principal amount of our 5% convertible
debenture due February 18, 2004, since there is no minimum conversion
price. At an assumed conversion price of $0.34 per share, the holder
of the debenture could acquire 18,664,849 shares of common stock upon
conversion of, and payment of 24 months accrued interest on, the
debenture, representing approximately 18.9% of the shares outstanding
as of December 31, 2000.
o An indeterminate number of shares may be acquired by GCA Strategic
Investment Fund Limited upon conversion of our series A convertible
preferred stock available under our credit facility since there is no
minimum conversion price. Assuming we do not increase the amount of
our credit facility, we may sell an additional 3,750 shares of series
A convertible preferred stock to GCA. If GCA converts an additional
3,750 shares of series A convertible preferred stock at an assumed
conversion price of $0.34 per share, we will issue 11,029,412 shares
of common stock, representing approximately 12.3% of the shares
outstanding on December 31, 2000. We also will issue warrants to
purchase 75,000 shares of common stock to LKB Financial on each date
shares of series A convertible preferred stock are sold to GCA under
the purchase agreement.
o 11,180,926 shares may be acquired upon exercise of outstanding
warrants, representing approximately 8.4% of the shares outstanding as
of December 31, 2000.
o 3,622,415 shares may be acquired upon exercise of outstanding options,
representing approximately 2.7% of the shares outstanding as of
December 31, 2000.
Dividend Policy
Since we have never paid any dividends on our common stock and we do not
anticipate paying such dividends in the foreseeable future. We intend to retain
earnings, if any, to finance our operations.
Reports to Shareholders
We distribute to our shareholders annual reports containing financial statements
audited and reported upon by our independent certified public accountants after
the end of each fiscal year, and makes available such other periodic reports as
we deem to be appropriate or as may be required by law or by the rules or
regulations of any stock exchange on which our common stock is listed. Our
fiscal year end is December 31.
Transfer Agent and Warrant Agent
Transfer Online, Portland, Oregon, is the transfer agent for our common stock.
Where You Can Find More Information
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the common stock to be sold under this
prospectus. This prospectus, which constitutes part of the registration
statement, does not contain all of the information set forth in the registration
statement. For further information about us and the common stock to be sold in
this offering, we refer you to the registration statement and the exhibits and
schedules filed as a part of the registration statement. Statements contained in
this prospectus as to the contents of any contract or other document filed as an
exhibit to the registration statement are not necessarily
44
complete. If a contract or document has been filed as an exhibit to the
registration statement, we refer you to the copy of the contract or document we
have filed. You may inspect the registration statement, including exhibits,
without charge at the principal office of the SEC in Washington, D.C. You may
inspect and copy the registration statement at the public reference facilities
maintained by the SEC at 450 Fifth Street, N.W., Judiciary Plaza, Room 1024,
Washington, D.C. 20549, or at the SEC's regional offices located at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and 7
World Trade Center, Suite 1300, New York, New York 10048. You can also obtain
copies of this material at prescribed rates by mail from the Public Reference
Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. In
addition, the SEC maintains a website at that contains reports, proxy and
information statements and other information regarding companies that file
electronically with the SEC.
Legal Matters
The validity of the shares of common stock offered by the prospectus has been
passed upon by Snow Becker Krauss P.C., 605 Third Avenue, New York, New York
10158. Members of Snow Becker Krauss P.C. own 144,518 shares of common stock,
all of which were issued for legal fees and disbursements.
Experts
The consolidated financial statements as of December 31, 1997, 1998 and 1999 and
for each of the three years in the period ended December 31, 1999 included in
this prospectus have been so included in reliance on the report of Hein +
Associates LLP, independent accountants, given on the authority of said firm as
experts in auditing and accounting. The report of Hein + Associates LLP contains
an explanatory paragraph describing conditions that raise substantial doubt
about our ability to continue as a going concern as set forth in note 2 to our
consolidated financial statements.
46
Index to Consolidated Financial Statements
(a) Documents Filed as Part of the Report
(1) Financial Statements Page No.
Reports of Independent Accountants F-1
Consolidated Balance Sheet
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 Stockholder's Equity
Year Ended December 31, 1999 F-5
Year Ended December 31, 1998 F-6
Year Ended December 31, 1997 F-7
Notes to Consolidated Financial Statements F-8
Supplementary Oil and Gas Information F-25
Unaudited Consolidated Financial Statements
Consolidated Balance Sheet
at September 30, 2000 and September 30, 1999 F-28
Consolidated Statements of Operations for the
Nine Months Ended September 30, 2000 and September 30, 1999 F-30
Consolidated Statements of Cash Flow
Nine Months Ended September 30, 2000 and September 30, 1999 F-31
Consolidated Statement of Changes in Stockholder's Equity
Nine Months Ended September 30, 2000 F-32
Nine Months Ended September 30, 1999 F-33
(2) Financial Statement Schedules
Independent Auditor's Report on Schedule F-34
Valuation and Qualifying Accounts F-35
47
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 545,997 8,563
Prepaid expenses 793,956 829,654
Total current assets 4,314,301 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 receivable, less current portion 1,252,696 1,118,200
Other long-term assets, net -- 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, 100,000,000
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 issued as collateral,
held in escrow (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
============ ============
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
============ ============ ============
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 provided (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 (507,224) 426,060 (1,387,484)
Accounts payable and accrued liabilities 495,021 2,968,458 (16,688)
------------ ------------ ------------
Net cash provided by (used in) operating activities (7,727,177) (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 (332,230) (592,444) (94,191)
------------ ------------ ------------
Net cash used in investing activities (7,113,545) (17,306,188) (4,595,557)
------------ ------------ ------------
Cash flows from financing activities:
Net increase (decrease) in short-term debt 2,500,000 -- --
Net increase (decrease) in notes payable 11,481 1,725,350 (237,162)
Increase 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
============ ============ ============
F-4
AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Common stock Additional Common
------------ paid-in Stock Held Accumulated
Shares Amount capital In Escrow deficit Total
---------- ---------- ------------ ------------ ------------- ------------
Balance, January 1, 1999 65,992,328 $5,279,385 $129,711,531 -- (88,460,749) $ 46,530,167
Conversions of debentures 17,574,305 1,405,944 6,196,429 -- -- 7,602,373
Issuance of stock in lieu of current
liabilities 1,798,968 143,917 1,329,796 -- -- 1,473,713
Issuance of stock for compensation 223,919 17,914 168,319 -- -- 186,233
Issuance of stock and options for
services 425,000 34,000 434,220 -- -- 468,220
Issuance of stock for property and
equipment 2,090,000 167,200 1,685,166 -- -- 1,852,366
Issuance of stock options and warrants -- -- 1,455,835 -- -- 1,455,835
Options and warrants exercised 1,283,253 102,661 666,216 -- --
Imputed interest on debentures 768,877
convertible at a discount to
market -- -- 3,044,116 -- -- 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) (14,917,868
------------ ---------- ------------ ----------- ------------- ------------
Balance, December 31, 1999 $ 91,282,773 $7,302,621 $145,605,966 (1,065,938) $(103,378,617) $ 48,464,032
============ ========== ============ =========== ============= ============
F-5
AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Common stock Additional
------------ paid-in Accumulated
Shares Amount capital deficit Total
---------- ------------ ------------- --------------- ------------
Balance, January 1, 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
=========== =========== ============= ============= ============
F-6
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Common stock Additional Stock
------------ paid-in purchase Accumulated
Shares Amount capital warrants deficit Total
------------ ---------- ------------ ----------- ------------ ------------
Balance, January 1, 1997 34,458,921 $2,756,714 $ 78,677,265 $1,297,754 $(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
Otions 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 $106,689,337 $1,297,754 $(79,357,636) $ 32,504,381
========== ========== ============ ========== ============ ============
F-7
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.
F-10
(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.
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 maturates 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.
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
F-11
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:
December 31,
------------------------------------
1999 1998
----------- -----------
Other long-term assets consist of the following:
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 $276,500 - 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
F-14
terminated the Lease Agreement and ordered Gold Line to vacate the refinery
premises within 24 hours of the Order, with which Gold Line complied.
In light of the events, which occurred after December 31, 1996, the Company
reserved all lease fees due from Gold Line as of December 31, 1996 and did not
record earned lease fees of $443,000 during 1997. See Note 10 - "Commitments and
Contingent Liabilities - Gold Line Defaults".
NOTE 9 - STOCK OPTIONS AND WARRANTS:
Outstanding warrants and options
At December 31, 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.
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
F-16
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.
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
F-17
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, 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.
F-18
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.
Trifinery Litigation
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
F-19
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.
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.
F-20
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 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:
F-21
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:
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 $ 8,137,86 -- -- 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-22
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.
Geographic Segment
------------------
Consolidated
1997 United States Colombia 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)
============
F-23
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
============ ============ ============ ============
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, and 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-24
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.
AMERICAN INTERNATIONAL PETROLEUM AND SUBSIDIARIES
SUPPLEMENTARY OIL AND GAS INFORMATION
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.
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.
F-25
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-26
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-27
AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, September 30,
2000 1999
Assets (Unaudited) (Unaudited)
--------------- --------------
Current assets:
Cash and cash equivalents $ 748,158 $ 1,175,590
Accounts and notes receivable, net 677,694 1,142,143
Inventory 161,787 845,807
Deferred financing costs 92,567 572,139
Prepaid expenses 694,885 1,145,405
Total current assets 2,375,091 4,881,354
Property, plant and equipment:
Unevaluated oil and gas property 33,176,504 28,812,748
Refinery property and equipment 38,026,963 37,992,214
Other 1,038,335 811,006
72,241,802 67,615,968
Less - accumulated depreciation, depletion, and amortization (8,025,168) (5,957,877)
Net property, plant and equipment 64,216,634 61,658,091
Notes receiviable, less current portion 785,112 1,219,072
Other long-term assets, net 280,449 26,250
------------- -------------
Total assets $ 67,657,286 $ 67,784,767
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Short-term debentures $ 6,581,447 $ --
Notes payable - officers and directors 450,000 240,000
Notes payable - trade 1,262,035 1,946,245
Other short term debt and current portion of long term debt -- 1,233,604
Accounts payable 1,331,840 2,898,378
Accrued liabilities 1,396,061 1,070,704
Total current liabilities 11,021,383 7,388,931
Long-term debt 5,503,765 13,435,859
Total liabilities 16,525,148 20,824,790
Commitments and contingent liabilities -- --
Minority Interest Liability 305,956 --
Stockholders' equity:
Preferred stock, par value $0.01, 7,000,000 shares
authorized, 1,250 and no shares issued and outstanding at
September 30, 2000 and September 30, 1999, respectively 13 --
Additional paid-in capital, preferred stock 1,186,738 --
Common stock, par value $.08, 200,000,000 shares
authorized, 114,192,964 and 76,535,262 shares issued
outstanding at September 30, 2000 and September 30, 1999,
respectively 9,135,436 6,122,821
Additional paid-in capital, common stock 154,467,480 142,952,863
Common stock issued as collateral, held in escrow (731,250) (1,932,863)
Accumulated deficit (113,232,235) (100,182,173)
Total stockholders' equity 50,826,182 46,959,977
------------- -------------
Total liabilities and stockholders' equity $ 67,657,286 $ 67,784,767
============= =============
F-28
AMERICAN INTERNATIONAL PETROLEUM CORPORATION
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
1. Statement of Information Furnished
The accompanying unaudited condensed consolidated financial statements of
American International Petroleum Corporation and Subsidiaries (the "Company")
have been prepared in accordance with Form 10-Q instructions and in the opinion
of management contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position as of September 30,
2000, the results of operations and cash flows for the three and six month
periods ended September 30, 2000 and 1999. These results have been determined on
the basis of generally accepted accounting principles and practices applied
consistently with those used in the preparation of the Company's 1999 Annual
Report on Form 10-K.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that the accompanying unaudited
condensed consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto included in the
Company's 1999 Annual Report on Form 10-K.
The Company utilizes the Equity Method to account for its asphalt joint venture
operations. The profits from the joint venture, after all costs have been
recovered, are to be split on a fifty fifty basis. Because the Company is an
equal share participant in the joint venture, the sales of asphalt for the joint
venture are not reported in the Company's consolidated financials; its
investment in the joint venture is initially recorded at cost, then is reduced
by dividends and increased or decreased by the Company's proportionate share in
the net earnings or loss of the joint venture.
AMERICAN INTERNATIONAL PETROLEUM CORPORATION
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
1. Statement of Information Furnished
The accompanying unaudited condensed consolidated financial statements of
American International Petroleum Corporation and Subsidiaries (the "Company")
have been prepared in accordance with Form 10-Q instructions and in the opinion
of management contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position as of September 30,
1999, the results of operations and cash flows for the three and nine month
periods ended September 30, 1999 and 1998. These results have been determined on
the basis of generally accepted accounting principles and practices applied
consistently with those used in the preparation of the Company's 1998 Annual
Report on Form 10-K.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that the accompanying unaudited
condensed consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto included in the
Company's 1998 Annual Report on Form 10-K.
F-29
AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
2000 1999
------------- -------------
Revenues:
Refinery operating revenues $ 2,708,374 $ 6,948,853
Other 119,386 171,275
Total revenues 2,827,760 7,120,128
Expenses:
Costs of goods sold - refinery 3,383,644 6,993,606
General and administrative 4,994,368 4,809,263
Depreciation, depletion and
amortization 1,554,494 1,250,773
Interest 2,748,872 5,787,910
------------- -------------
Total expenses 12,681,378 18,841,552
------------- -------------
Net loss $ (9,853,618) $ (11,721,424)
============= =============
Net loss per share of common stock - basic and diluted $ (0.09) $ (0.17)
============= =============
Weighted-average number of shares
of common stock outstanding 105,258,877 69,675,997
============= =============
F-30
AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
2000 1999
------------ ------------
Cash flows from operating activities:
Net loss $ (9,853,618) $(11,721,424)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation, depletion, amortization and accretion of
discount on debt 2,725,413 4,886,549
Accretion of premium on notes receivable (22,416) (37,953)
Non-cash provision for services 20,000 742,488
Issuance of stock for compensation expense 147,790 --
Changes in assets and liabilities:
Accounts and notes receivable (180,141) (593,971)
Inventory 561,301 708,887
Prepaid and other 95,633 (906,222)
Accounts payable and accrued liabilities (344,171) (726,160)
------------ ------------
Net cash used in operating activities (6,850,209) (7,647,806)
Cash flows from investing activities:
Additions to oil and gas properties (1,620,128) (3,827,413)
Additions to refinery property and equipment (27,281) (793,506)
(Increase) decrease to other long term assets 540,263 (224,507)
------------ ------------
Net cash used in investing activities (1,107,146) (4,845,426)
Cash flows from financing activities:
Net increase in short-term debt 4,419,163 1,075,000
Net decrease in notes payable (474,796) (45,955)
Net increase in notes payable - officers 450,000 240,000
Repayments of long-term debt -- (3,500,000)
Proceeds from exercise of stock warrants
and options 191,438 773,032
Proceeds from sale of preferred stock 2,366,001 --
Proceeds from issuance of debentures, net -- 14,750,000
------------ ------------
Net cash provided by financing activities 6,951,806 13,292,077
------------ ------------
Net increase (decrease) in cash and
cash equivalents (1,005,549) 798,845
Cash and cash equivalents at beginning of period 1,753,707 376,745
------------ ------------
Cash and cash equivalents at end of period $ 748,158 $ 1,175,590
============ ============
Supplemental cash flow information:
Preferred stock converted in common stock $ 1,179,250 $ --
F-31
AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Common
Additional Stock
Preferred stock Common stock paid-in Held In Accumulated
Shares Amount Shares Amount capital Escrow deficit Total
----------------------- ------------------------ -------------- ----------- ------------- -----------
Balance, January 1, 2000 -- $ -- 91,282,773 $ 7,302,621 $ 145,605,966 $(1,065,938) $(103,378,617) $48,464,032
Conversions of debentures 14,941,073 1,195,286 5,656,829 -- -- 6,852,115
Issuance of stock in lieu
of current liabilities 2,595,349 207,628 1,346,518 -- -- 1,554,146
Issuance of stock for
compensation 262,762 21,021 126,769 -- -- 147,790
Issuance of stock options
and warrants -- -- 385,746 -- -- 385,746
Options and warrants
exercised 1,558,340 124,667 64,471 -- -- 189,138
Stock issued and adjustment
to value of stock
previously issued for
collateral on debt 300,000 24,000 144,752 334,688 -- 503,440
Sale of Convertible
Preferred Stock 1,250 $ 13 -- -- 1,186,738 -- -- 1,186,751
Preferred stock converted
into common stock 3,252,667 260,213 919,037 -- -- 1,179,250
Imputed interest
convertible preferred stock -- -- 217,392 -- -- 217,392
Net loss for the period -- -- -- (9,853,618) (9,853,618)
-------- ------- ----------- ----------- ------------ ----------- ------------- -----------
Balance, September 30, 2000 1,250 $ 13 114,192,964 $ 9,135,436 $ 155,654,218 $ (731,250) $(113,232,235) 50,826,182
======== ======= =========== =========== ============= =========== ============= ==========
F-32
AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Common
Additional Stock
Common stock paid-in Held In Accumulated
Shares Amount capital Escrow deficit Total
---------- ----------- ------------- ----------- ------------- ------------
Balance, January 1, 1999 65,992,328 $ 5,279,385 $ 129,711,531 -- $ (88,460,749) $ 46,530,167
Conversions of debentures 4,053,020 324,242 2,471,004 -- -- 2,795,246
Issuance of stock in lieu of current
liabilities 1,553,926 124,315 1,429,720 -- -- 1,554,035
Issuance of stock and options for
services 648,919 51,914 690,574 -- -- 742,488
Issuance of stock for property and
equipment 1,090,000 87,200 1,174,466 -- -- 1,261,666
Issuance of stock options and warrants -- -- 2,421,827 -- -- 2,421,827
Imputed interest on debentures
convertible at a discount to market -- -- 2,602,940 -- -- 2,602,940
Options and warrants exercised 1,302,069 104,166 668,866 -- -- 773,032
Issuance of stock for collateral on debt 1,895,000 151,600 1,781,263 -- -- --
Net loss
-- -- -- (1,932,863) (11,721,424) (11,721,424)
---------- ----------- ------------- ----------- ------------- ------------
Balance, September 30, 1999 76,535,262 $ 6,122,821 $ 142,952,192 $(1,932,863) $(100,182,173) $ 46,959,977
========== =========== ============= =========== ============= ============
F-33
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-34
AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES
SCHEDULE I - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance at Additions Charged Deductions: Balance at End of Year
Beginning of Year to Costs and Accounts Written off
Expenses Against Allowance
Description
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-35
Part II - Information not Required in Prospectus
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses that will be paid by us in
connection with the distribution of the shares of common stock being registered
under this registration statement:
Securities and Exchange Commission registration fee........ $ 3,386.25
Legal fees and expenses.................................... 15,000.00
Accounting fees............................................ 5,000.00
Miscellaneous.............................................. 613.75
-----------
Total............................................. $ 24,000.00
===========
Item 14. Indemnification of Directors and Officers
Under Section 78.751 of the Revised Nevada Statutes, directors and officers may
be indemnified against judgments, fines and amounts paid in settlement and
reasonable expenses, including attorneys' fees, actually and reasonably incurred
as a result of specified actions or proceedings, including appeals, whether
civil or criminal, other than an action by or in the right of the corporation -
a derivative action if they acted in good faith and for a purpose which they
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. A similar standard of
care is applicable in the case of derivative actions, except that
indemnification only extends to amounts paid in settlement and reasonable
expenses, including attorneys' fees, actually and reasonably incurred by them in
connection with the defense or settlement of such an action, including appeals,
except in respect of a claim, issue or matter as to which such person shall have
been finally adjudged to be liable to the corporation, unless and only to the
extent a court of competent jurisdiction deems proper.
In accordance with Section 78.037(1) of the Revised Nevada Statutes, Article
VIII of the our Articles of Incorporation, as amended, eliminates the personal
liability of our directors to our company or our shareholders for monetary
damages for breach of their fiduciary duties as directors, with certain limited
exceptions set forth in said Article VIII and Section 78.037(1).
Article VII of our Bylaws provides for indemnification of directors, officers
and others as follows:
"On the terms, to the extent, and subject to the condition prescribed by statute
and by such rules and regulations, not inconsistent with statute, as the Board
of Directors may in its discretion impose in general or particular cases or
classes of cases, (a) the Corporation shall indemnify any person made, or
threatened to be made, a party to an action or proceeding, civil or criminal,
including an action by or in the right of any other corporation of any type or
kind, domestic or foreign, or any partnership, joint venture, trust, employee
benefit plan or other enterprise which any director or officer of the
Corporation served in any capacity at the request of the Corporation, by reason
of the fact that he, his testator or intestate, was a director or officer of the
joint venture, trust, employee benefit plan or other enterprise in any capacity,
against judgments, fines, amounts paid in settlement and reasonable expenses,
including attorneys' fees of any such action or proceeding, or any appeal
therein, and (b) the Corporation may pay, in advance of final disposition of any
such action or proceeding, expenses incurred by such person in defending such
action or proceeding. On the terms, to the extent, and subject to the conditions
prescribed by statute and by such rules and regulations, not inconsistent with
statute, as the Board of Directors may in its discretion impose in general or
particular cases or classes of cases, (a) the Corporation shall indemnify any
person made a party to an action by or in the right of the Corporation to
procure a judgment in its favor, by reason of the fact that he, his testator or
intestate, is or was a director or officer of the Corporation, against the
reasonable expenses, including attorneys' fees, actually and necessarily
incurred by him in connection with the defense of such action, or in connection
with an appeal therein, and (b) the Corporation may pay, in advance of final
disposition of any such action, expenses incurred by such person in defending
such action or proceeding."
We maintain insurance, at our expense, to reimburse our company and directors
and officers of the company and of direct and indirect subsidiaries against any
expense, liability or loss arising out of indemnification claims against
directors and officers and to the extent otherwise permitted under the Revised
Nevada Statutes.
II - 1
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers or persons controlling us pursuant
to the foregoing provisions, we have been informed that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is therefore unenforceable.
Item 15. Recent Sales of Unregistered Securities
During the past three years, we have sold securities to a limited number of
persons, as described below. Except as indicated, there were no underwriters
involved in the transactions and there were no underwriting discounts or
commissions paid in connection therewith. The purchasers of securities in each
such transaction represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the certificates
for the securities issued in such transactions. All purchasers of securities in
each such transaction had adequate access to information about us, and in the
case of transactions exempt from registration under Section 4(2) of the
Securities Act, were sophisticated investors.
1. On April 21, 1998, we issued and sold $12,000,000 principal amount of
our 14% convertible notes due 2002, together with warrants to purchase
an aggregate of 1,400,000 shares of common stock, to four accredited
investors for a total purchase price of $11,880,000. The issuance and
sale of these securities was exempt from the registration requirement
of the Securities Act under Section 4(2) and Rule 506 of Regulation D.
During 1998 and 1999, we issued a total of 12,110,632 shares of our
common stock to the investors upon conversion of $5,000,000 principal
amount of the notes and in payment of $2,388,619 accrued interest on
the notes. The issuance of these shares was exempt from the
registration requirements of the Securities Act under Section 3(a)(9).
2. On April 21, 1999, we entered into an equity line of credit agreement
with four accredited investors for the sale of up to $40,000,000 of
our common stock. We issued warrants to purchase 3,595,978 shares of
common stock to these investors in connection with the equity line of
credit agreement. This transaction and the issuance of the warrants
was exempt from the registration requirements of the Securities Act
under Section 4(2) and Rule 506 of Regulation D.
3. On January 22, 1999, we issued and sold $1,800,000 principal amount of
bridge notes, together with warrants to purchase 200,000 shares of our
common stock, to an accredited investor. The issuance and sale of
these securities was exempt from the registration requirements of the
Securities Act under Section 4(2) and Rule 506 of Regulation D.
4. On February 9, 1999, we issued and sold $10,000,000 principal amount
of our 5% convertible secured debenture due 2004, together with
warrants to purchase 2,000,000 shares of common stock, to an
accredited investor for a purchase price of $10,000,000. The issuance
and sale of these securities was exempt from the registration
requirements of the Securities Act under Section 4(2) and Rule 506 of
Regulation D. We have issued a total of 12,169,453 shares of our
common stock upon conversion of $4,359,865 principal amount of the
debenture and in payment of $244,856 accrued interest on the
debenture. The issuance of these shares was exempt from the
registration requirements of the Securities Act under Section 3(a)(9).
5. On March 15, 1999, we issued 40,000 shares of common stock to a
consultant as partial consideration for services rendered on our
behalf. This issuance and sale of these shares was exempt from the
registration requirements of the Securities Act under Section 4(2) of
the Securities Act.
6. On April 12, 1999, we issued and sold $1,825,000 principal amount of
bridge notes, together with warrants to purchase 500,000 shares of
common stock, to an accredited investor for a total purchase price of
$1,825,000. The issuance and sale of these securities was exempt from
the registration requirements of the Securities Act under Section 4(2)
and Rule 506 of Regulation D.
7. From March 30, 1999 to June 17, 1999, we issued an aggregate of
1,952,113 shares of common stock to fourteen business entities as
consideration for services rendered on our behalf. The issuance of
these shares were exempt from the registration requirements of the
Securities Act under Section 4(2).
8. On August 19, 1999, we issued and sold $7,250,000 principal amount of
our 6% convertible debentures due 2004, together with warrants to
purchase 1,087,500 shares of common stock, to two accredited investors
for a total purchase price of $7,250,000. We paid a commission of
$145,000 and issued a warrant to purchase 200,000 shares of common
stock to J. W.
II - 2
Genesis Financial Corporation in connection with this transaction. The
issuance and sale of these securities was exempt from the registration
requirements of the Securities Act under Section 4(2) and Rule 506 of
Regulation D.
During 1999 and 2000, we issued a total of 17,174,285 shares of common
stock to the investors upon conversion of $7,250,000 principal amount
of the debentures and in payment of $170,033 accrued interest on the
debentures. The issuance of these shares was exempt from the
registration requirements of the Securities Act under Section 3(a)(9).
9. From July 9, 1999 to September 30, 1999, we issued an aggregate of
1,508,968 shares to six business entities as consideration for
services rendered on our behalf. The issuance of these shares was
exempt from the registration requirements of the Securities Act under
Section 4(2).
10. From July 1, 1989 to September 29, 1999, we issued an aggregate of
810,000 shares of common stock to J. W. Genesis Securities, Inc., GCA,
Ms. Caroline Mia Reed, and H. Glenn Bagwell upon exercise of warrants.
The issuance of these shares was exempt from the registration
requirement of the Securities Act under Section 4(2).
11. On September 2, 1999, we issued an aggregate of 25,000 shares of our
common stock to Lockwood Resources Ltd. and Mr. Chaim Klapholtz in
settlement of a litigation. The issuance of these shares was exempt
from the registration requirements of the Securities act under Section
4(2).
12. On August 6, 1999 we issued 5,000 shares of common stock to Mr. Joe
Michael McKinney as a signing bonus. The issuance of these shares was
exempt from the registration requirements of the Securities Act under
Section 4(2).
13. On February 28, 2000, we issued and sold $1,850,000 principal amount
of bridge notes, together with warrants to purchase 500,000 shares of
common stock, to an accredited investor for a total purchase price of
$1,609,500. The issuance and sale of these securities was exempt from
the registration requirements of the Securities Act under Section 4(2)
and Rule 506 of Regulation D.
14. On May 8, 2000, we issued $3,000,000 principal amount of bridge notes,
together with 250,000 shares of our common stock and warrants to
purchase an additional 350,0000 shares of common stock, to an
accredited investor for a purchase price of $2,700,000. The issuance
and sale of these securities was exempt from registration requirements
of the Securities Act under Section 4(2) and Rule 506 of Regulation D.
15. On July 18, 2000, we entered into a securities purchase agreement to
sell up to $10,000,000 of our series A convertible preferred stock to
an accredited investor. We issued warrants to purchase 200,000 shares
of our common stock to the investor in connection with this
transaction. We have issued and sold 6,250 shares of series A
convertible preferred stock to the investor under this agreement for a
total purchase price of $6,250,000. We have paid commissions of
$312,500 and issued warrants to purchase 375,000 shares of common
stock to LKB Financial LLC in connection with this transaction. The
issuance and sale of these securities was exempt from the registration
requirements of the Securities Act under Section 4(2) and Rule 506 of
Regulation D.
We have issued 24,963,624 shares of common stock to the investor upon
conversion of the series A convertible preferred stock. The issuance
of these shares was exempt from the registration requirements of the
Securities Act under Section 3(a)(9).
Exhibits and Financial Statement Schedules.
(a) Exhibits
2.1 Share Purchase Agreement dated February 25, 1997, among AIPC and AIPCC,
PAIPC and Mercantile. (8)
3.1 Our Restated Articles of Incorporation. (6)
3.2 Our By-laws, as amended. (11)
4.1 Form of Securities Purchase Agreement dated February 28, 2000. (17)
II - 3
4.2 Form of Bridge Note issued in connection with Exhibit 4.1. (17)
4.3 Form of Warrant issued in connection with Exhibit 4.1. (17)
4.4 Form of Security Agreement issued in connection with Exhibit 4.1. (17)
4.5 Form of Registration Rights issued in connection with Exhibit 4.1. (17)
4.6 Form of Promissory Note (17)
4.7 Form of Warrant issued in connection with Exhibit 4.6 (17)
4.8 Form of 8% Convertible Subordinated Debentures due August 1, 1999. (9)
4.9 Form of Subscription Agreement used in connection with the offering of the
Registrants' debentures referenced in Exhibit 4.8. (9)
4.10 Form of Warrant to purchase shares of the Registrants' Common Stock issued
in connection with the offering of the Registrants' debentures referenced
in Exhibit 4.8. (9)
4.11 Form of Registration Agreement used in connection with the offering of the
Registrants' debentures referenced in Exhibit 4.8.(9)
4.12 Form of 14% Convertible Notes due October 15, 1999. (10)
4.13 Form of Subscription Agreement used in connection with the offering of the
Registrants' debentures referenced in Exhibit 4.12. (10)
4.14 Form of Warrant to purchase shares of the Registrants' common Stock issued
in connection with the offering of the Registrants' debentures referenced
in Exhibit 4.12. (10)
4.15 Form of Registration Rights Agreement used in connection with the offering
of the Registrants' debentures referenced in Exhibit 4.12. (10)
4.16 Form of Subscription Agreement used in connection with the repayment of
debt to a foreign individual. (10)
4.17 Form of Subscription Agreement used in connection with the Registrant's
purchase of a 70% interest of MED Shipping Usturt Petroleum Company
Ltd.(10)
4.18 Form of Warrant to purchase shares of the Registrant's common Stock issued
in connection with the purchase referenced in Exhibit 4.17. (10)
4.19 Our 1998 Stock Option Plan.(14)
4.20 Our 1998 Stock Award Plan.(14)
4.21 14% Convertible Note due April 21, 2000 (12)
4.22 Securities Purchase Agreement dated April 21, 2000 (12)
4.23 Agreement and First Amendment dated April 21, 1998 to the Securities
Purchase Agreement dated October 9, 1997. (12)
4.24 Form of Warrant issued pursuant to the Securities Purchase and Equity
Agreements associated with Exhibits 4.22 and 4.23 (12)
II - 4
4.25 Equity Financing Agreement dated April 21, 1998. (12)
4.26 Registration Rights Agreement dated April 21, 1998. (12)
4.27 Letter Agreement dated June 26, 1998 between the Registrant and certain
investors. (13)
4.28 Convertible Debenture Purchase Agreement dated February 18, 1999. (2)
4.29 Form of 5% Convertible Secured Debenture dated February 18, 1999. (2)
4.30 Form of Warrant issued pursuant to Convertible Secured Debenture dated
February 11, 1999. (2)
4.31 Form of Registration Rights Agreement dated February 18, 1999. (2)
4.32 Form of Mortgage and Security Agreement issued pursuant to the Convertible
Secured Debentures dated February 11, 1999. (2)
4.33 Form of 6% Convertible Debenture Purchase Agreement dated August 19, 1999.
(15)
4.34 Form of 6% Convertible Secured Debenture issued in connection with the 6%
Convertible Debentures referenced in Exhibit 4.33 (15)
4.35 Form of Warrant issued in connection with the 6% Convertible Debentures
referenced in Exhibit 4.33. (15)
4.36 Form of Registration Rights Agreement issued in connection with the 6%
Convertible Debentures in Exhibit 4.33. (15)
4.37 Form of Security Agreement issued in connection with the 6% Convertible
Debentures in Exhibit 4.33. (15)
4.38 Form of Securities Purchase Agreement dated December 1, 1999 by and among
the Registrant and GCA Investment Fund Limited. (16)
4.39 Form of Mortgage and Security Agreement between St. Marks Refinery, Inc.
and GCA Strategic Investment Fund. (16)
4.40 Form of Warrant issued in connection with the Securities Purchase Agreement
referenced in Exhibit 4.38. (16)
4.41 Our 2000 Stock Option Plan. (18)
4.42 Our 2000 Stock Award Plan. (18)
5.1 Consent of Snow Becker Krauss P.C.
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 Our Agreement dated April 22, 1997 with 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)
II - 5
10.8 Amendment #2 to our Employment Agreement dated May 1, 1989 with George N.
Faris. (16)
21.1 Our Subsidiaries.
23.1 Consent of Snow Becker Krauss P.C. (included in Exhibit 5.1)
23.2 Consent of Independent Auditors
- -------------
(1) Incorporated herein by reference to our Registration Statement on Form S-1
declared effective on February 13, 1990.
(2) Incorporated herein by reference to our form 8-K, dated March 1, 1999, as
amended April 26, 1999.
(3) Incorporated herein by reference to our 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 our Annual Report on Form 10-K for the
fiscal year ended December 31, 1995.
(6) Incorporated herein by reference to our Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996
(7) Incorporated herein by reference to our Form 8-K dated August 19, 1996.
(8) Incorporated herein by reference to our Form 8-K dated March 12, 1997.
(9) Incorporated herein by reference to our Quarterly Report on Form 10-QA for
the quarter ended June 30, 1997.
(10) Incorporated herein by reference to our Quarterly Report on Form 10-QA for
the quarter ended September 30, 1997.
(11) Incorporated herein by reference to our Annual Report on Form 10-KA for the
year ended December 31, 1997.
(12) Incorporated by reference to our Quarterly Report on Form 10-Q-A for the
quarter ended March 31, 1998
(13) Incorporated by reference to our Quarterly Report on Form 10-Q-A for the
quarter ended June 30, 1998
(14) Incorporated by reference to our Report on Form S-8 dated January 4, 1999.
(15) Incorporated by reference to our Report on Form 8-K dated September 9,
1999.
(16) Incorporated by reference to our Annual Report Form 10-K for the fiscal
year ended December 31, 1999.
(17)Incorporated by reference to our Quarterly Report on Form 10Q for the
quarter ended March 31, 2000.
(18) Incorporated by reference to our Report on Form S-8 dated August 15, 2000.
(b) Financial Statement Schedules
None.
II - 6
Item 17. Undertakings.
The undersigned Registrant hereby undertakes that it will:
(a)(l) File, during any period in which it offers or sells the securities
offered hereby, a post-effective amendment to this registration
statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act.
(ii) Reflect in the prospectus any facts or events which, individually
or in the aggregate, represents a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement.
(iii)Include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) For determining any liability under the Securities Act, each such
post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) Remove from registration by means of a post-effective amendment any of
the securities being registered that remain unsold at the termination
of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or controlling persons of
the Registrant pursuant to any arrangement, provision or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the
event that claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II - 7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, State of Texas,
on February ___, 2001.
AMERICAN INTERNATIONAL PETROLEUM CORPORATION
By: /s/ George N. Faris By: /s/ Denis J. Fitzpatrick
---------------------------- --------------------------
George N. Faris Denis J. Fitzpatrick
Chairman of the Board of Vice President, Chief Financial Officer
Directors (principal executive and Secretary (principal financial
officer) and accounting officer)
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints George
N. Faris and/or Denis J. Fitzpatrick, his true and lawful attorney-in-fact and
agent, with power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this registration statement, and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying all
that said attorney-in-fact and agent or his substitute or substitutes, or any of
them, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities indicated
on February ___, 2001.
Signature
/s/ George N. Faris
- ------------------------
George N. Faris
Chairman of the Board of
Directors (principal
executive officer)
/s/ Denis J. Fitzpatrick
Denis J. Fitzpatrick
Vice President, Chief
Financial Officer and
Secretary(principal
financial and accounting officer)
/s/ William R. Smart
William R. Smart
Director
/s/ John H. Kelly
- ------------------
John H. Kelly
Director
/s/Donald G. Rynne
- ------------------
Donald G. Rynne
Director
/s/Daniel Y. Kim
- ------------------
Daniel Y. Kim
Director
II - 8