================================================================================
As filed with the Securities and Exchange Commission on July 6, 2001
Registration No. 333-55484
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 2
TO 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. |_|
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.
1
================================================================================
Preliminary Prospectus dated July 6, 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 13,840,000 shares of our
common stock, including an aggregate of 12,890,000 shares that GCA Strategic
Investment Fund Limited may acquire upon conversion of our series A convertible
preferred stock and upon exercise of warrants. 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
2
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.
3
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 13,840,000 shares of
common stock, including an aggregate of 12,890,000 shares that GCA Strategic
Investment Fund Limited may acquire upon conversion of our series A convertible
preferred stock and upon exercise of warrants.
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 three months ended
March 31, 2001 ($000)
(unaudited) At December 31,
-------------------------- --------------
2001 2000 2000 1999 1998 1997 1996
---- ---- ---- ---- ---- ---- ----
Statement of operations data:
Revenues $ 2,264 $ 1,211 $ 3,274 $ 8,352 $ 11,855 $ 828 $ 4,003
Net loss applicable to
common shareholders (1)(2) (2,526) (3,483) (25,428) (14,918) (9,103) (17,954) (4,652)
Net loss per share -
basic and diluted (0.02) (0.04) (0.23) (0.20) (0.17) (0.43) (0.16)
- ----------------------------------
(1) Net loss in 2000 and 1996 included a provision for the impairment of the
costs of oil and gas properties of $12,546,000 and $200,000, respectfully.
(2) Net loss applicable to common shareholders in 2000 reflects imputed
dividend on preferred stock of $543,000.
($000)
For the three
months ended
March 31, 2001 ($000)
(unaudited) At December 31,
-------------- --------------
2001 2000 1999 1998 1997 1996
---- ---- ---- ---- ---- ----
Balance sheet data:
Working capital (deficit) $ (8,199) $ (8,222) $ (5,005) $ (4,596) $ (694) $ (9,823)
Total assets 56,279 54,998 69,658 60,861 41,840 34,492
Total current liabilities 11,226 10,073 8,904 7,914 9,335 13,165
Long-term debt 5,263 5,565 11,985 6,111 -0- 6,767
Accumulated deficit (131,332) (128,806) (103,379) (88,461) (79,358) (61,404)
Stockholder's equity 37,112 37,868 48,464 46,530 32,504 21,328
Cash dividends declared -0- -0- -0- -0- -0- -0-
4
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 $2.5 million for the three months ended March 31, 2001
compared to a net loss of approximately $3.5 million for the three months ended
March 31, 2000 and a net loss of approximately $24.9 million for the year ended
December 31, 2000, compared to a net loss of approximately $14.9 million for the
year ended December 31, 1999, and a net loss of approximately $9.1 million for
the year ended December 31, 1998. As a result of these losses, as of March 31,
2001, we had an accumulated deficit of approximately $131.1 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, 2000, 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 $24.9 million during 2000, and $14.9
million in 1999
o lack of resources to fulfill our operating and capital commitments as
of December 31, 2000
o a working capital deficit of approximately $8.2 million at December
31, 2000
We do not have sufficient cash flows from operations or available credit lines
necessary to fund all of our financial obligations.
We do not currently have sufficient credit facilities to supplement our cash
flows or to replace them as a source of funding to satisfy our needs. Although
we are currently having discussions with certain entities regarding (1) entering
into agreements at our Lake Charles, Louisiana refinery, and (2) obtaining
line(s) of credit to provide the necessary capital to support our operations,
there can be no assurance at this time that we will be successful with these
efforts. If we are not, we may need to sell assets to meet our obligations and
our ability to continue operations will be materially and adversely affected.
We owe GCA $9,276,128 million under 3% convertible secured debentures due in
April 2002 which we will not be able to pay unless GCA converts the associated
indebtedness into common stock, or we refinance or extend the due date of this
debt, or receive funds from a financing or the sale of assets.
We have $9,276,128 million of debt due to GCA in April 2002, which we may not be
able to pay. Payment of this debt is secured by our St. Marks refinery. GCA has
the right to convert these debentures into shares of our common stock at an
approximate 8% discount to the prevailing market price of our common stock. If
GCA does not convert all of these debentures prior to maturity, and we are not
able to pay or extend the due date, or refinance this debt, GCA 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
5
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, 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
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
6
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.
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
7
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 debentures and subsequent public sale of our
common stock while our market price is declining may result in further decreases
in the market price.
As of May 1, 2001, $14,574,500 principal amount of our convertible debentures
were outstanding. The debentures are convertible into shares of our common stock
at a conversion price equal to 85% to 92% 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. Since there is no minimum conversion price,
there is no limit on the number of shares of common stock that the holders of
the debentures may acquire upon conversion.
The holders of these debentures may sell at market price the shares of common
stock it has acquired upon conversion at an 8% to 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 holders of these debentures 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 an
8% to 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.
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 debentures 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 May 1, 2001, we had outstanding 152,371,308 shares of common stock.
In addition,
o An indeterminate number of shares may be acquired upon conversion of
the outstanding $5,447,000 principal amount of our 5% convertible
debenture due February 18, 2004, since there is no minimum conversion
price. At an assumed conversion price of $0.18 per share, the holder
of the debenture could acquire 33,287,222 shares of common stock upon
conversion of, and payment of 26 months accrued interest on, the
debenture, representing approximately 21.8% of the shares outstanding
as of May 1, 2001.
o An indeterminate number of shares may be acquired by GCA Strategic
Investment Fund Limited upon conversion of the outstanding 750 shares
of series A convertible preferred stock since there is no minimum
conversion price. If GCA converts all 750 shares of series A
convertible preferred stock at an assumed conversion price of $0.18
per share, we will issue 4,166,667 shares of common stock,
representing approximately 2.7% of the shares outstanding on May 1,
2001.
o An indeterminate number of shares may be acquired upon conversion of
the outstanding $9,276,128 million principal amount of our 3%
convertible secured debentures due April 28, 2002, since there is no
minimum conversion price. At an assumed conversion price of $0.18 per
share, the holder of the debentures could acquire 52,229,583 shares of
common stock upon
8
conversion of, and payment of 12 months interest on, the debentures,
representing 34.3% of the shares outstanding as of May 1, 2001.
o 13,830,926 shares may be acquired upon exercise of outstanding
warrants, representing approximately 9.1% of the shares outstanding as
of May 1, 2001.
o 6,821,933 shares may be acquired upon exercise of outstanding options,
representing approximately 4.5% of the shares outstanding as of May 1,
2001.
Existing stockholders will experience substantial dilution in their percentage
ownership of our common stock if the debentures and shares of Series A
convertible preferred stock are converted. If the entire outstanding $14,574,500
principal amount of our convertible debentures is converted at an assumed
conversion price of $0.18 per share, the 750 shares of series A convertible
preferred stock owned by GCA are converted at an assumed conversion price of
$0.18 per share, and all outstanding warrants and stock options are exercised,
the number of outstanding shares of common stock will increase by 110,336,331,
representing approximately 74% of the outstanding common stock as of May 1,
2001.
Future sales of our common stock may have an adverse effect on its market price.
As of May 1, 2001, we had outstanding 152,371,308 shares of common stock, of
which 149,184,095 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 $5,447,000 principal amount of our 5% convertible
debenture due February 18, 2004 since there is no minimum conversion
price. At an assumed conversion price of $0.18 per share, the holder
of the debenture could acquire 33,287,222 shares of common stock upon
conversion of, and in payment of 26 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 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 outstanding 750 shares of our series A convertible preferred stock
held by GCA since there is no minimum conversion price. If GCA
converts these remaining shares of series A convertible preferred
stock at an assumed conversion price of $0.18 per share, we will issue
4,166,667 shares of common stock.
o An indeterminate number of shares may be acquired upon conversion of
the outstanding $9,276,128 million principal amount of our 3%
convertible secured debentures due April 28, 2002, since there is no
minimum conversion price. At an assumed conversion price of $0.18 per
share, the holder of the debentures could acquire 52,229,583 shares of
common stock upon conversion of, and payment of 12 months interest on,
the debentures, representing 34.3% of the shares outstanding as of May
1, 2001.
o 13,830,926 shares may be acquired upon exercise of warrants having
exercise prices ranging from $0.13 to $3.00 per share.
o 6,821,933 shares may be acquired upon exercise of stock options
granted pursuant to our employee stock option plans at exercise prices
ranging from $0.13 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. As of May 1, 2001, we have issued an aggregate of
8,750 shares of series A convertible preferred stock. We have no intention of
issuing additional shares of series A convertible preferred stock. We could use
new classes of preferred stock
9
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.
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 .484 .109
Second Quarter (through June 1, 2001) .480 .110
At May 1, 2001, our common stock was owned by approximately 1,800 shareholders
of record and we estimate there were approximately 27,600 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, 2000 and for the three month periods ended
March 31, 2001 and 2000. The selected consolidated financial information for and
as of the years ended December 31, 1996 is 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, 2000, 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, 2000, 1999 and our consolidated
statements of operations for the years ended December 31, 2000, 1999 and 1998
and the accountants' report thereon are included in this prospectus under the
heading "Consolidated Financial Statements". The selected data for each of the
three-month
10
periods ended March 31, 2001 and 2000 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
three-month period ended March 31, 2001 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 three months ended
March 31, 2001 ($000)
(unaudited) At December 31,
-------------------------- --------------
2001 2000 2000 1999 1998 1997 1996
---- ---- ---- ---- ---- ---- ----
Statement of operations data:
Revenues $ 2,264 $ 1,211 $ 3,274 $ 8,352 $ 11,855 $ 828 $ 4,003
Net loss applicable to
common shareholders (1)(2) (2,526) (3,483) (25,428) (14,918) (9,103) (17,954) (4,652)
Net loss per share -
basic and diluted (0.02) (0.04) (0.23) (0.20) (0.17) (0.43) (0.16)
- -------------------
(1) Net loss in 2000 and 1996 included a provision for the impairment of the
costs of oil and gas properties of $12,546,000 and $200,000, respectfully.
(2) Net loss applicable to common shareholders in 2000 reflects imputed
dividend on preferred stock of $543,000.
($000)
For the three
months ended
March 31, 2001 ($000)
(unaudited) At December 31,
-------------- --------------
2001 2000 1999 1998 1997 1996
---- ---- ---- ---- ---- ----
Balance sheet data:
Working capital (deficit) $ (8,199) $ (8,222) $ (5,005) $ (4,596) $ (694) $(9,823)
Total assets 56,279 54,998 69,658 60,861 41,840 34,492
Total current liabilities 11,226 10,073 8,904 7,914 9,335 13,165
Long-term debt 5,263 5,565 11,985 6,111 -0- 6,767
Accumulated deficit (131,332) (128,806) (103,379) (88,461) (79,358) (61,404)
Stockholder's equity 37,112 37,868 48,464 46,530 32,504 21,328
Cash dividends declared -0- -0- -0- -0- -0- -0-
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. In September
2000 we entered into a processing agreement with Sargeant to process certain
crude oils through the refinery for a fee. For the year ended December 31, 2000,
our refining segment had sales of $3,109,000 excluding our joint venture
operations, and costs of goods sold and operating expenses of $4,243,000 and the
oil and gas segment had an impairment of oil and gas properties of $12,546,000.
Interest income and other corporate revenues totaled $165,000 with general
corporate expense, interest expense and depreciation, depletion and amortization
being $6,777,000, $3,290,000, and $1,845,000, respectively. Our identifiable
assets at December 31, 2000 total $31,106,000 of operating assets in the United
States, $21,138,000 in Kazakhstan, and $2,754,000 of corporate assets.
11
The following table highlights the results of operations for the three months
ended March 31, 2001 and March 31, 2000 and the years ended December 31, 2000,
1999 and 1998.
Three Months
Ended March 31, Years Ended December 31,
--------------- -----------------------
2001 2000 2000 1999 1998
---- ---- ---- ---- ----
Refinery Processing Operations:
Refinery operating revenues (000's) $2,217 $1,183 $3,109 $8,138 $11,394
Cost of goods sold (000's) $1,302 $ -0- $2,319 $5,944 $ 8,194
Operating Costs (000's) $1,174 $1,392 $1,924 $2,727 $ 3,087
Refinery Operations
For the Three Months Ended March 31, 2001 as compared to the Three Months Ended
March 31, 2000
During the first quarter of 2001, our refinery segment recorded revenues of
approximately $885,000 of which $780,000 was derived from processing activities.
We did not commence processing until the last week of February, but incurred the
costs until then to maintain the refining unit with no offsetting revenues.
These costs approximated $375,000 of the total $1,174,000 of operating costs for
the first quarter of 2001.
During the first quarter of 2000, we recorded revenues of approximately
$1,183,000, related totally to its asphalt sales with costs of approximately
$1,184,000. Since the third quarter of 2000, we have been operating an asphalt
business within a joint venture structure and accounting for our interest using
the equity method. We had approximately $105,000 of net income from the joint
venture asphalt operations for the first quarter of 2001. Actual asphalt sales
volumes decreased slightly, 3%, from 7,600 tons in the first quarter of 2000
compared to 7,356 tons in the current quarter. The decrease and the lack of
additional sales during that period is primarily attributable to thirty-eight
days of rain we experienced during the first quarter of 2001. However, at June
1, 2001, we had a backlog of asphalt sales orders valued at approximately
$11,000,000, of which two-thirds is expected to be delivered this year. The
remainder should be delivered in the first half of 2001. This backlog represents
an approximate 30% increase over the backlog existing at June 1, 2000.
Our St. Marks, Florida refinery facility has not been in operation since the
last quarter of 1998. Because of the high cost of asphalt products since early
1999, the higher demand for the higher margin, PG-grade polymerized products in
the Louisiana and Texas markets, the lack thereof in the St. Marks markets, and
the additional cost which would be incurred to transport products to St. Marks
from Lake Charles, we have not operated in the St. Marks market during that
time. Since these conditions have continued, St Marks was not operated during
the first half of 2001.
Our Gulf Coast Petroleum Trading subsidiary had revenues of approximately
$1,332,000 with costs of products of approximately $1,302,000. This subsidiary
buys and sells refined crude oil products from and to third parties. It
commenced operations during the last few days of March 2001 and had sales of
over 55,000 barrels of various products during that period.
Year Ended December 31, 2000 compared to the Year Ended December 30, 1999
During 2000, the refinery had asphalt revenues of $2,586,000, exclusive of any
joint venture revenues, compared to revenues of approximately $7,621,000 during
1999. Costs of sales related to these revenues were approximately $3,000,000 and
$8,486,000, respectively. The decrease in refinery asphalt revenues is due to
our accounting for the joint venture on the equity method Joint venture asphalt
revenues were approximately $3,972,000 with related costs of $3,857,000. The
joint venture provided us with the financing and reliable source of feedstocks
to fulfill our backlog contractual obligations with a reasonably priced product.
During the first two quarters of 2000 we had been fulfilling certain of our 1999
asphalt contracts, with asphalt inventory that had been purchased at higher 2000
asphalt spot market prices than what asphalt market prices had been at the time
the contracts were entered into. As a result, we were committed to selling
low-priced conventional asphalt at a loss or at break-even throughout most of
1999 and early 2000. With the joint venture partner supplying asphalt through
its long term contracts we have been able to supply these 1999 contracts with
lower cost asphalt and mitigate some of the effects of the market variances. We
also mitigated some of the effects of market variances by 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.
The refinery had only $21,000 of light end sales in 2000 compared to
approximately $513,000 in 1999. Except for a 50,000 barrel test run in November
related to our processing agreement with Sargeant, the refinery did not process
any crude oil in 2000 due to the shortage of crude oil and our capital
constraints during the year. As a result of the processing agreement entered
into with Sargeant, the refinery processed a test batch of product for Sargeant
and recorded revenues of $149,500 related to the processing. Initial
12
processing was to commence in November but was delayed by Sargeant in procuring
its feedstock until February of 2001 at which time the refinery began processing
at initial rates of 10,500 to 12,000 barrels per day.
We have not operated our terminal in St. Marks Florida since 1998, but incurred
approximately $65,000 of maintenance and security costs during the year 2000
compared to $96,000 in 1999. 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, 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 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 were 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.
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.
Other Revenues
For the Three Months Ended March 31, 2001 compared to the Three Months Ended
March 31, 2000
Other revenues increased approximately $19,000 during the current quarter
compared to the same period last year. We had income from the sublease of
available space in our New York office of approximately $38,000 during the three
months ended March 31, 2001 that we did not have during the three months ended
March 31, 2000. Interest income decreased $20,000 during the three months ended
March 31, 2001 compared to the three months ended March 31, 2000, primarily due
to a lower amount of funds on deposit during the three months ended March 31,
2001 compared to the three months ended March 31, 2000.
13
Year Ended December 31, 2000 compared to the Year Ended December 30, 1999
Other revenues decreased in 2000 by approximately $49,000 compared to 1999. The
decrease is a result of less interest income derived from a lower amount of
funds on deposit during 2000 compared to 1999. During 2000 we entered into a
partial sub-lease of space at our New York office and recognized rental income
of $114,000 during the year which we did not have in 1999. A decrease in 2000 of
approximately $56,000 is attributable to our recognition of a forgiveness of
debt recorded in 1999 and none for 2000.
Year Ended December 31, 1999 compared to the Year Ended December 31, 1998.
Other revenues decreased during 1999 by approximately $246,000 to $215,000
compared to 1998, primarily from a $251,000 decrease in interest income due to a
decrease in funds on deposit in 1999 compared to those on deposit in 1998.
General and Administrative
For the Three Months Ended March 31, 2001 compared to the Three Months Ended
March 31, 2000
General and administrative expenses, decreased approximately $416,000 compared
to the three months ended March 31, 2000. Financing costs, included in general
and administrative expenses, decreased approximately $392,000 primarily because
our prepaid bond costs related to outstanding debt over the past year had been
materially written off during 2000. Certain other expenses fluctuated during the
three months ended March 31, 2001 compared to the three months ended March 31,
2000 as follows: payroll and employee related costs decreased approximately
$38,000; travel and public relations expenses decreased approximately $10,000
and $82,000, respectively; professional fees and corporate and property taxes
increased approximately $39,000 and $31,000, respectively; and insurance costs
increased approximately $18,000.
Year Ended December 31, 2000 compared to the Year Ended December 30, 1999
Total general and administrative expenses increased by approximately $409,000 or
6%, in 2000 compared to 1999. During 2000 we made a significant effort to
decrease our general and administrative expenses. Payroll and certain other
employee related expenses during 2000 have been reduced by $129,000 compared to
1999. Public relations costs, dues and subscriptions, sales commissions were
reduced, compared to 1999, by $234,000, $21,000, and $102,000, respectively.
Certain expenses have increased during 2000 compared to 1999 because of our
increased activities, such as travel expenses, and professional fees, having
increased $139,000 and $26,000, respectively. Certain other costs, which we have
limited control over have increased, such as corporate franchise and property
taxes, having increased $346,000 over the same costs in 1999.
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 the 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.
Depreciation, Depletion, Amortization and Provision for Impairment
For the Three Months Ended March 31, 2001 compared to the Three Months Ended
March 31, 2000
Depreciation, depletion and amortization expense decreased approximately $57,000
during the three months ended March 31, 2001 compared to the three months ended
March 31, 2000 due to an adjustment in depreciation expense.
Year Ended December 31, 2000 compared to the Year Ended December 30, 1999
Depreciation, depletion, amortization and provision for impairment increased
approximately $12,661,000 in 2000 compared to the three months ended March 31,
1998. Depreciation in 2000 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. An impairment provision
of $12,546,000 was recognized on our Kazakhstan oil and gas properties held on
License # 953. We evaluated the costs recorded on this License and calculated
that approximately 60% of the costs of the project had been impaired.
14
Year Ended December 31, 1999 compared to the Year Ended December 31, 1998
Depreciation, depletion, amortization and provision for impairment increased
approximately $918,000 in 1999 compared to 1998. Depreciation, depletion,
amortization and provision for impairment 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 this expense.
In addition, we commenced depreciating the St Marks facility and our marine
equipment during the first quarter of 1999.
Interest
Imputed interest of approximately $705,000 and $3,044,000 was incurred in the
years ended December 31, 2000 and 1999 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
For the Three Months Ended March 31, 2001 compared to the Three Months Ended
March 31, 2000
Interest expense decreased approximately $733,000 during the three months ended
March 31, 2001 compared to three months ended March 31, 2000. Outstanding
interest bearing debt instruments decreased to $7,000,000 in the three months
ended March 31, 2001 from $16,000,000 during the three months ended March 31,
2000 and accounts for approximately $391,000 of the decrease in interest expense
during the three months ended March 31, 2001 compared to the three months ended
March 31, 2000. Non-cash charges of approximately $257,000 were recorded during
the three months ended March 31, 2001 for financing costs related to our
outstanding convertible debentures and preferred stock sales compared to
$382,000 of non-cash charges recorded in the three months ended March 31, 2000,
a decrease of $125,000.
Year Ended December 31, 2000 compared to the Year Ended December 30, 1999
Interest expense for 2000 decreased by $3,211,000 to $3,290,000, compared to
$6,501,000 in 1999. During 2000 we incurred approximately $1,872,000 of interest
on debentures and short-term and trade notes outstanding during 2000. We
incurred $705,000 of non-cash imputed interest, and approximately $713,000 of
non-cash interest, both related to warrants and stock issued in connection with
debentures.
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.
Realized and Unrealized Loss on Marketable Securities
We neither held nor sold any marketable securities during the first quarter of
2001 or during 2000 or 1999.
As partial proceeds from the sale of our South American assets in February 1997,
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 1998 we
sold all of our remaining Mercantile shares for proceeds of approximately
$377,000 and recorded an aggregate net realized loss of approximately $359,000.
15
Liquidity and Capital Resources
During the three months ended March 31, 2001, we used a net amount of
approximately $1,721,000 for operations, which reflects approximately $718,000
in non-cash provisions, including $257,000 in loan costs, and depreciation and
amortization of $461,000. Approximately $59,000 was provided during the period
to decrease product and feedstock inventory and a net $28,000 was used to
increase accounts payable and accrued liabilities and prepaid and other assets
and to increase current assets other than cash. Additional uses of funds during
the quarter included additions to oil and gas properties of $1,194,000. Cash for
operations was provided, in part, by net proceeds from the sale of preferred
stock of approximately $2,372,000.
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
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
$2,887,000 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. During 2000, each payment was in the
amount of $70,000 and was generally 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. In March 2001 we received
notice from Mercantile that Ecopetrol, the Columbian government oil company that
purchases the majority of Mercantile's oil production in Columbia, was
withholding payment of the proceeds from the purchase of Mercantile's oil sales
to Ecopetrol in Columbia, pending resolution of a legal dispute between
Mercantile and another entity in Columbia. Mercantile informed us they expect
the payments to resume upon resolution of this dispute, which they estimate will
occur this July. The unpaid portion of the debt is convertible into Mercantile
common stock at our option, 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.
On April 28, 2001, we exchanged $5.9 million worth of outstanding bridge notes
due on that date for 3% convertible debentures due April 28, 2002. The
debentures are convertible at any time into shares of our common stock at a
conversion price equal to 90% of the average of the lowest three weighted
average sales prices of our common stock during the 20 trading days prior to the
date of conversion. Since there is no minimum conversion price, there is no
limitation on the number of shares of common stock that the holder may acquire
upon conversion of the debentures.
Since August 2000, we have sold a total of 8,750 shares of our series A
convertible preferred stock to GCA for a total purchase price of $8,750,000.
These proceeds were used primarily for our operations in Kazakhstan and to
supplement cash flows provided by the refining and asphalt operations. We are
attempting to sell a portion of our assets in Kazakhstan to raise capital and
reduce the level of risk associated with these projects. 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 minimum work program at our License 953, and
for general corporate uses.
In August 2000, our American International Petroleum Kazakhstan subsidiary sold
an aggregate of $450,000 principal amount of its 12% promissory notes, payable
upon demand, 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. As of May 1, 2001, we had an aggregate
outstanding principal balance remaining on these notes of $300,000.
In the fourth quarter of 2000, we initiated the reentry of the Begesh #1 oil
well on License 953 in Kazakhstan, which was drilled by the Russians in the
1960's, 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,
cost approximately $1 million and was funded from proceeds from the promissory
notes and the sale of our series A preferred stock. Although the reentry was
completed in 2001, it satisfied our minimum work requirement at License 953 for
the year 2000. During our initial testing, no economical quantities of
recoverable oil was discovered at the Begesh, but one of our partners has
indicated a desire to test deeper zones at the Begesh well on an exclusive
operations basis. However, we have no assurance at this time that this partner
will proceed with this operation. We have satisfied our minimum work and
monetary obligations on License 953 in Kazakhstan through 2000 and are planning
to negotiate an extension of the exploration contract and the remaining $4
million minimum work program with the Kazakhstan government.
We had originally planned to begin our Shagyrly-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 delay drilling at Shagyrly until 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)
16
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. We are also
currently engaged in negotiations with Gazprom, the Russian gas transport
company and with other potential purchasers and transporters, 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. However, there can be
no assurance at this time that such a gas contract will be signed.
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
our gas directly to the western end-users, significantly enhancing the value of
our gas reserves in Shagryly.
In September 2000, we entered into a processing agreement with Sargeant
Bulktainers Inc., a division of Sargeant Marine, Inc., wherein Sargeant agreed
to process a minimum of 300,000 barrels of crude oil per month through our Lake
Charles, Louisiana refinery's atmospheric distillation unit. Our Gulf Coast
Petroleum Trading, Inc. subsidiary simultaneously entered into a separate
agreement, which runs concurrently with the processing agreement, to purchase
the resultant jet fuel, naphtha, kerosene, diesel oil, and vacuum gas oil from
Sargeant, which we then market for our own account throughout the country. When
combined with the fees derived from processing through the facility's vacuum
distillation unit, at these levels, the resultant cash flows derived from the
atmospheric distillation unit processing, coupled with the asphalt operation,
and our marketing and trading business mentioned below, would be sufficient to
adequately support our domestic operations.
However, Sargeant has notified us that they are terminating the agreement
effective July 31, 2001. We are therefore currently having discussions with
other entities who have expressed an interest in processing through our
facility, either by paying us a fee to process their crude or providing us with
the necessary capital to enable us to purchase and process our own crude oils,
either jointly or alone. If we are unable to find another party willing and able
to enter into similar or other agreements to process crude oil at our refinery,
we will require additional financing or may need to sell assets in order to
supplement our cash requirements. We also may be required to terminate the
processing segment of our business.
In July 2000, we entered into an annually renewable one-year 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. Sargeant has been complying with this
obligation. We generally receive 50% of the profits generated from the joint
venture's asphalt operations and Sargeant will reimburse us for our direct
operating costs up to $13 per ton sold. We plan 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.
Our strategy is to sell primarily higher-margin polymerized asphalt products,
which asphalts are expected to approximate at least 75% 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 and, as of April 30, 2001, it
had a backlog of approximately 70,000 tons of asphalt totaling approximately $11
million worth of contracts.
We have been negotiating a renewal of the joint venture with Sargeant on terms
more favorable to us, however a renewal is not likely at this time. If we are
unable to reach such an agreement, we intend to continue with our asphalt
business on our own. Doing so will require us to bear the entire risk of the
resultant profit or loss and to purchase and self-finance our feedstock supplies
which may result in higher cost of goods sold than we experienced in the joint
venture. However, if we do not renew, Sargeant is required to provide the
feedstock supplies necessary to supply the backlog existing on the termination
date of the joint venture at the lowest cost available.
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.
Foreign Exchange Risk
We are subject to risk from changes in foreign exchange rates for our
international operations which use 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.
17
Interest Rate Risk
We are exposed to interest rate risk from our 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:
Carrying Value $1,010,473 $5,262,882 $6,273,325 $6,273,325
Effective Interest Rate 11.3% 28.0%
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
30,000 barrel per day refinery in Lake Charles, Louisiana it acquired in July
1988, 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. 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 main unit of the
refinery is the crude distillation tower, or crude unit, which is capable of
producing light and heavy naphtha, kerosene for jet fuel, #2 diesel, vacuum 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. Total petroleum storage
capacity at the refinery is 750,000 barrels, which includes 275,000 barrels of
crude storage, 395,000 barrels of storage for finished product sales and 80,000
barrels of product rundown storage.
In 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 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.
In 1989, we also purchased a 16,500-barrel per day vacuum distillation unit that
was dismantled and moved to the refinery. Construction of the vacuum
distillation unit on the refinery site was completed in 1993. The vacuum
distillation unit was idle until mid-1998 when the expansion of, and certain
enhancements to, the crude unit, vacuum distillation 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 default by
Gold Line. Since the termination of the lease, our employees have staffed the
refinery and all operations have been conducted under the direct control of our
management.
In February 2001 we implemented 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.
18
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, we are considering reopening and utilizing 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, also known as License 1551, and a 70% working
interest in a 4.7 million acre exploration block in western Kazakhstan, known as
License 953.
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 and entered into a license agreement with the
Kazakhstan government for 100% ownership of the Shagyrly, a 30-year agreement
with effect from August 31, 1999. Fifty-eight of the sixty-nine gas wells
drilled by the Soviet Union in the 1960s to delineate the 264,000-acre gas field
were tested and found to have commercial gas by the regional development
authorities. In 1994, the field was declared to have commercial gas reserves by
the Kazakhstan Ministry of Oil and Gas Industry, who recommended the field for
development. Our drilling and production development plan involves developing
and maintaining daily gas production at 200 to 250 million cubic feet per day
from the most productive part of the field.
The development plan provides for the initial drilling of approximately 100
horizontal wells, each with a horizontal extension of 1500 feet. Analysis of
wells tested to date indicates 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 up to approximately 250 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 second half of 2001 to
verify the horizontal drilling application pending the consummation of a related
gas sales contract. We expected to conclude a gas sales contract with Gazprom
and/or other gas purchasers before the end of the first half of 2001 for the
sale of Shagyrly gas, as well as the sale or transport of other gas we may want
to market, however political and corporate reorganizations related to Gazprom
have delayed completion of a contract. There can be no assurances we will be
successful in this endeavor. Upon execution of this contract and successful
completion of the pilot program, we would expect to have a significant amount of
proved gas reserves.
Our strategy includes developing shallow gas reserves in Shagyrly, purchasing
and transporting third party natural gas pursuant to our gas sales contracts,
and diversified pursuit of field development opportunities in other selected
countries and basins where perceived geological and political risks are
acceptable.
19
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.
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, which was subsequently
amended, 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 program 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
currently intend to have the required minimum work program completed in
accordance with the contract.
In March 2001, we completed the re-entry and testing of the Begesh No. 1 oil
well on License 953 in Kazakhstan and concluded that the well's upper Jurassic
zones were not capable of producing economic quantities of crude oil. At this
time, we believe we have sufficiently tested the Jurassic and Eocene structures
present in License 953, which were the most likely candidates for recoverable
oil reserves from reasonably shallow levels. After extensive testing and
geological and geophysical research and study, we believe that any significant
volumes of economically recoverable oil and gas will be found in the deep,
untested, carboniferous structures, which are estimated to equate to
approximately 40% of the total unevaluated acreage remaining on License 953.
The total costs recorded for License 953 equal $26.9 million, including
identifiable seismic costs of approximately $6 million, which we believe has a
market value which exceeds its cost. Since we have evaluated 60% of the License
acreage without identifying any related proven oil and/or gas reserves, we
believe it is appropriate to impair 60% of the non-seismic property costs, or
$12,546,000, which impairment is reflected in our financial statements for the
year ended December 31, 2000.
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
owner did not pay the refund, 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.
20
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.
Last year, Exxon made the strategic decision 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.
However, 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 whose overall cost basis is higher than ours.
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 Shagyrly will have to be transferred to markets in
Western Europe via Kaztransgaz and Gazprom pipelines. Therefore the project
bears political risks of both Kazakhstan and Russia, 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.
Employees
As of May 1, 2001, 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
21
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.
Financial Information Relating to Foreign and Domestic Operations and Export
Sales
The table below sets forth, for the three months ended March 31, 2001 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.
2001 2000 1999 1998
---- ---- ---- ----
Sales to unaffiliated customers:
United States $ 2,217,000 $ 3,108,670 $ 8,137,867 $ 11,394,009
Kazakhstan -- -- -- --
Sales or transfers between geographic areas:
United States $ -- $ -- $ -- $ --
Kazakhstan -- -- -- --
Operating profit or (loss):
United States $ (259,000) $ (5,694,253) $ (4,978,963) $ (2,820,758)
Kazakhstan -- -- -- --
Identifiable assets:
United States $ 32,149,000 $ 31,105,826 $ 33,877,437 $ 35,234,530
Kazakhstan $ 23,008,000 $ 21,138,161 $ 32,162,385 $ 22,677,073
Export sales:
None
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 2000, 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.
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.
22
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 netback 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. 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.
We are currently engaged in negotiations and discussions with Gazprom, the
Russian gas transport company, and with other potential purchasers and
transporters, respectively, for the transportation and/or purchase of our
anticipated Shagryly gas production and other gas we may have available for
sale. We expected that a U.S. Dollar or Eurodollar backed contract would be
concluded before the end of the first half of 2001. However, political and
corporate reorganizations related to Gazprom have delayed the completion of a
contract.
Sources and Availability of Raw Materials
In July 2000, we formed a joint venture with Sargeant Bulktainers Inc., a
division of Sargeant Marine Inc., which owns and operates one of the largest
fleet of asphalt ships in the world today. 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. 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. Sargeant also has crude oil purchase agreements with
Pemex to supply it with
23
heavy crude oil feedstocks for processing through our refinery, which will
produce the asphalts necessary to service the joint venture's current backlog of
asphalt orders and its future requirements as well, although this is not a
certainty at this time.
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 offshore, Texas and Louisiana
sweet lights. Many crudes can be blended into the primary base crudes. However,
it is most likely that we will process crude oils for third parties and,
consequently, will not need to provide our own raw materials for processing.
Oil and Gas Acreage and Wells
Gross acreage presented below represents the total acreage in which we owned a
working interest on March 31, 2001 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
We have had no oil and gas production or oil and gas sales since February 1997
when we sold 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.
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 quarter and
years indicated.
24
Three months ended
March 31, 2001 2000 1999 1998
-------------- ---- ---- ----
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 -- --
====== ====== ====== ====== ====== ====== ====== ======
Facilities
We have leased approximately 10,500 square feet of office space in Houston,
Texas at a monthly rental of $17,929, which lease expires on December 12, 2003.
This space comprises our principal executive office. We also have a lease for
approximately 4,800 square feet of office space at 444 Madison Avenue, New York,
N.Y. 10022. The space was leased for a period of seven years at a monthly rental
rate of $19,600 and expires on December 31, 2005. Two-thirds of this space is
sublet for $152,472 per year through the end of our lease in New York.
In addition, we 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.
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.
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. However, the parties
have recently agreed to submit this matter to trial, which is now set for
November 26, 2001. We are vigorously defending this matter.
25
Management
The following table sets forth information concerning the Company's executive
officers and directors.
Year First Became a
Name Age Position(s) 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
- -----------------------
Dr. George N. Faris has served as Chairman of our Board of Directors 1981. He
has served as Acting Chief Executive Officer since July 7, 2000. 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. He has served as Acting President since July 7, 2000.
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.
26
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 degree in Accounting
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.
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) --
27
(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.
(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 $100,000.
Any additional common stock as to which options become exercisable for the first
time during any such year are treated as non qualified stock options. As of June
1, 2001 an aggregate of 1,500,000 contingent options had been granted under the
2000 Stock Option Plan.
Stock Award Plan
The American International Petroleum Corporation 2000 Stock Award Plan provides
for the granting of stock awards not to exceed an aggregate of 500,000 shares of
our common stock. The plan was approved by our Board of Directors and
Shareholders. Employees, officers, and consultants are eligible for awards under
the plan. Awards may be made under the plan until May 15, 2010. No recipient
shall be entitled to more than an aggregate of 50,000 shares of common stock
under the plan. The plan is administered our Board of Directors.
28
Option Grants In Last Fiscal Year
The table below includes the number of stock options granted to the executive
officers named in the Summary Compensation Table as of December 31, 2000,
exercise information and potential realizable value.
Individual Grants
----------------- Potential Realizable
Number of Percent of Value at Assumed
Securities Total Options Annual Rates of Stock
Underlying Granted to Price Appreciation
Options Employees in Exercise Expiration for Option Term
Name Granted(#) Fiscal Year Price($/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-
William L. Tracy -- -- -- -- $-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.
Number of
Shares Unexercised Options Value of Unexercised
------ at December 31, 2000 In-the-money Options
Acquired on Value -------------------- --------------------
Name Exercise Realized 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 Management And Principal Shareholders
The following table sets forth certain information, as May 8, 2001, regarding
the beneficial ownership of the Company's 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.
29
Name and Address Amount and Nature of Percent
of Beneficial Holder (1) Beneficial Ownership of Class
- ------------------------ -------------------- --------
The Palladin Group, L.P. (2) 15,168,729 (3) 9.9%
195 Maplewood Avenue
Maplewood, NJ 07040
GCA Strategic Investment Fund Limited (4) 15,168,729 (5) 9.9%
106 Colony Drive, Suite 900
Cumming, GA 30040
George N. Faris 4,276,120 (4) 2.7%
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) 4.0%
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 the Company's 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 related
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 the Company's common stock.
(3) Represents shares which may be acquired upon conversion of our 5%
convertible secured debenture and related warrants held by The Palladin
Group, L.P., limited by the terms of the debenture and warrants referred to
in Note 2 above.
(4) 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, the related warrants, and our 3% convertible
debentures 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
the Company's common stock.
(5) Represents shares which may be acquired upon conversion of our outstanding
series A convertible preferred stock, 3% convertible debentures and various
warrants held by GCA, limited by the terms of these instruments referred to
in Note 4 above.
30
(6) Includes 1,680,000 shares that he may acquire upon the exercise of stock
options exercisable within 60 days. Excludes 105,000 shares that he may
acquire upon exercise of options commencing January 1, 2002.
(7) Includes 303,119 shares that he may acquire upon the exercise of stock
options exercisable within 60 days.
(8) Includes 197,619 shares that he may acquire upon the exercise of stock
options exercisable within 60 days.
(9) Includes 222,619 shares that he may acquire upon the exercise of stock
options exercisable within 60 days.
(10) Includes 150,000 shares that he may acquire upon the exercise of stock
options exercisable within 60 days. Excludes 25,000 shares that he may
acquire upon exercise of options commencing July 22, 2001.
(11) Includes 152,500 shares that he may acquire upon the exercise of stock
options exercisable within 60 days. Excludes 17,500 shares that he may
acquire upon exercise of options commencing January 1, 2002
(12) Includes 67,000 shares that he may acquire upon the exercise of stock
options exercisable within 60 days. Excludes 14,000 shares that he may
acquire upon exercise of options commencing January 1, 2002.
(13) 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.
(14) Mr. McKinney resigned on July 7, 2000.
Certain Transactions
During 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, all of the original
principal amount of these notes was outstanding. As of May 1, 2001, $200,000 and
$100,000 principal amount of the loans to Messrs. Faris and Rynne, respectively,
remained outstanding.
During 1999 and 1998, the Company's Chairman and CEO, Dr. George N. Faris,
loaned the Company an aggregate of $500,000 and $365,000, respectively, at an
interest rate of 10% per annum. These loans were repaid in full within one year
after closing.
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 May 1, 2001, 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 13,840,000 shares of common stock
by this prospectus.
GCA Strategic Investment Fund is offering 12,890,000 shares it may acquire upon
conversion of 750 of our series A convertible preferred stock and upon the
exercise of warrants issued in connection with the securities purchase agreement
for the 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 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 upon conversion of the 750 shares of
series A convertible preferred stock it now holds 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. GCA has sold
48,367,933 shares of common stock that it had acquired upon conversion of 8,000
shares of series A convertible preferred stock.
31
LKB Financial is offering 525,000 shares it may acquire upon exercise of
warrants issued in connection with our series A convertible preferred stock.
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 , which limits
the number of shares of common stock that GCA may acquire upon conversion, 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 May 1, 2001, we had 152,371,308 shares of common stock outstanding. For
purposes of computing the number and percentage of shares beneficially owned by
each selling securityholder as of May 1, 2001, 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.
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) 66,812,214(2) 30.4% 12,890,000 53,922,214 26.1%
c/o Prime Management Ltd.
12 Church Street
Hamilton, Bermuda HM11
LKB Financial LLC (3) 1,330,050 * 525,000 805,050 *
106 Colony Park Drive
Suite 900
Cumming, Ga. 30040
Actrade Capital Inc. 1,300,000 * 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
32
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) Includes shares which GCA may acquire upon conversion of 750 shares of
series A convertible preferred stock and $9,226,128 principal amount of 3%
convertible debentures at an assumed conversion price of $0.18 per share,
and from exercise of 1,892,631 warrants it currently holds.
(3) 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.
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.
33
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.
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 300,000,000 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 May 1, 2001, 152,371,308 shares of
common stock were outstanding and 750 shares of series A preferred stock were
outstanding.
The following are brief descriptions of our securities as of May 1, 2001. 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 6,821,933
shares of common stock, at exercise prices ranging from $0.13 to $2.00, which
expire at various dates from 2005 to 2010.
Warrants. We have outstanding warrants to purchase an aggregate of 13,830,926
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
34
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.
Our Board of Directors has authorized the issuance of up to 18,000 shares of
series A convertible preferred stock. 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.
Since August 2000 we have sold a total of 8,750 shares of our series A
convertible preferred stock to GCA for a total purchase price of $8,750,000. 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 do not intend to sell additional shares of series A preferred
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
$0.19 per share and expire on August 21, 2005.
We must redeem any 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 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 paid LKB Financial, LLC, an affiliate of GCA, $437,500 or 5% of the aggregate
proceeds from the sale of shares of series A convertible preferred stock, and
issued to LKB warrants to purchase 525,000 shares of common stock for financial
advisory services performed in connection with the series A convertible
preferred stock financing. The warrants issued to LKB have a term of five years
and an exercise price of $0.19 per share.
35
Shares Eligible for Future Sale
As of May 1, 2001, we had 152,371,308 shares of common stock outstanding, of
which only 149,184,095 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 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 $5,447,000 principal amount of our 5% convertible
debenture due February 18, 2004, since there is no minimum conversion
price. At an assumed conversion price of $0.18 per share, the holder
of the 5% debenture could acquire 33,287,222 shares of common stock
upon conversion of, and payment of 26 months accrued interest on, the
5% debenture, representing approximately 21.8% of the shares
outstanding as of May 1, 2001.
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. If GCA converts the remaining 750 shares of
series A convertible preferred stock it now holds at an assumed
conversion price of $0.18 per share, we will issue 4,166,667 shares of
common stock, representing approximately 2.7% of the shares
outstanding on May 1, 2001.
o An indeterminate number of shares may be acquired upon conversion of
the outstanding $9,276,128 million principal amount of our 3%
convertible secured debentures due April 28,2002, since there is no
minimum conversion price. At an assumed conversion price of $0.18 per
share, the holder of the debentures could acquire 52,229,583 shares of
common stock upon conversion of, and payment of 12 months interest on,
the debentures, representing 34.3% of the shares outstanding as of May
1, 2001.
o 13,830,926 shares may be acquired upon exercise of outstanding
warrants, representing approximately 9.1% of the shares outstanding as
of May 1, 2001.
o 6,821,933 shares may be acquired upon exercise of outstanding options,
representing approximately 4.5% of the shares outstanding as of May 1,
2001.
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
36
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 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, 1999 and 2000 and for
each of the three years in the period ended December 31, 2000 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.
37
Index to Consolidated Financial Statements
(a) Documents Filed as Part of the Report
(1) Financial Statements Page No.
Audited Financial Statements:
Reports of Independent Accountants F-1
Consolidated Balance Sheet
December 31, 2000 and 1999 F-2
Consolidated Statement of Operations
Years Ended December 31, 2000, 1999, and 1998 F-3
Consolidated Statement of Cash Flows
Years Ended December 31, 2000, 1999, and 1998 F-4
Consolidated Statement of Changes in Stockholder's Equity
Year Ended December 31, 2000 F-5
Year Ended December 31, 1999 F-6
Year Ended December 31, 1998 F-7
Notes to Consolidated Financial Statements F-8
Supplementary Oil and Gas Information F-25
Unaudited Consolidated Financial Statements:
Consolidated Balance Sheet
at March 31, 2001 and March 31, 2000 F-27
Consolidated Statements of Operations
Three Months Ended March 31, 2001 and March 31, 2000 F-28
Consolidated Statements of Cash Flow
Three Months Ended March 31, 2001 and March 31, 2000 F-29
Consolidated Statements of Changes in Stockholder's Equity
Three Months Ended March 31, 2001 F-30
Three Months Ended March 31, 2000 F-31
Notes to Condensed Consolidated Financial Statements
March 31, 2001 F-32
(7) Financial Statement Schedules
Independent Auditor's Report on Schedule F-33
Valuation and Qualifying Accounts F-34
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, 2000 and
1999, and related consolidated statements of operations, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
2000. 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,
2000 and 1999, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2000, in conformity with
generally accepted accounting principles.
The Company reported a net loss of approximately $24.9 million in 2000 and $14.9
million during 1999, has commitments to fund the operations of its Kazakhstan
subsidiary (see Note 10) and has a working capital deficit of approximately $8.2
million at December 31, 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, 2000, the Company has costs capitalized in the accompanying
balance sheet of approximately $21,700,000 relating to unevaluated oil and
properties in Kazakhstan and approximately $31,000,000 relating to its
refineries. 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 and does not have the financial resources to develop these
properties. Should the Company be unable to obtain the capital necessary to
develop the Kazakhstan properties or be unable to develop a commercially
feasible means of transporting the oil and gas production the Company may
develop, the carrying value of these properties will likely become impaired.
Should the Company be unable to initiate profitable operations at the refinery,
the carrying value of the refinery properties will also likely become impaired.
HEIN + ASSOCIATES, LLP
Houston, Texas
March 23, 2001
F-1
AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2000 1999
------------- -------------
Assets
Current assets:
Cash and cash equivalents $ 684,603 $ 1,753,707
Accounts and notes receivable, net 392,741 497,553
Inventory 156,110 723,088
Deferred financing costs 2,211 130,727
Prepaid expenses 614,958 793,956
------------- -------------
Total current assets 1,850,623 3,899,031
------------- -------------
Property, plant and equipment:
Unevaluated oil and gas properties 21,681,343 31,556,376
Evaluated oil and gas properties 12,546,295 --
Refinery property and equipment 38,001,917 37,999,682
Other 1,081,974 1,005,886
------------- -------------
73,311,529 70,561,944
Less - accumulated depreciation, depletion,
amortization and provision for impairment (20,906,133) (6,470,672)
------------- -------------
Net property, plant and equipment 52,405,396 64,091,272
Notes receivable, less current portion 575,112 1,252,696
Other long-term assets, net 167,291 415,270
------------- -------------
Total assets $ 54,998,422 $ 69,658,269
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Short-term debentures $ 5,787,500 $ 2,223,500
Notes payable - officers and directors 350,000 --
Notes payable - trade 940,673 1,736,831
Accounts payable 1,469,498 3,641,886
Accrued liabilities 1,525,098 1,301,472
------------- -------------
Total current liabilities 10,072,769 8,903,689
Long-term debt 5,565,395 11,984,592
------------- -------------
Total liabilities 15,638,164 20,888,281
------------- -------------
Commitments and contingent liabilities (Notes 10 and 16) -- --
Minority Interest Liability 305,956 305,956
Redeemable preferred stock, par value $0.01, 7,000,000
shares authorized, 1,250 and 0 shares issue and
outstanding at December 31, 2000 and December 31, 1999,
respectively 1,186,751 --
Stockholders' Equity:
Common stock, par value $.08, 200,000,000 shares
authorized, 132,524,318 and 91,282,773 shares issued
and outstanding at December 31, 2000 and December
31, 1999, respectively 10,601,945 7,302,621
Additional paid-in capital, common stock 156,234,428 145,605,966
Common stock issued as collateral, held in escrow (162,500) (1,065,938)
Accumulated deficit (128,806,322) (103,378,617)
------------- -------------
Total stockholders' equity 37,867,551 48,464,032
------------- -------------
Total liabilities and stockholders' equity $ 54,998,422 $ 69,658,269
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31,
---------------------------------------------------
2000 1999 1998
------------- ------------ ------------
Revenues:
Refinery operating revenues $ 3,108,670 $ 8,137,867 $ 11,394,009
Other 165,350 214,171 460,597
------------- ------------ ------------
Total revenues 3,274,020 8,352,038 11,854,606
Expenses:
Costs of goods sold - refinery 4,243,468 8,670,760 11,281,139
General and administrative 6,777,249 6,367,857 5,097,468
Depreciation, depletion and
amortization 1,844,942 1,730,710 813,088
Interest 2,746,293 6,500,579 1,912,949
Realized and unrealized loss on marketable securities -- -- 359,325
Provision for impairment of oil and gas properties 12,546,295 -- --
Provision for bad debts -- -- 1,493,750
------------- ------------ ------------
Total expenses 28,158,247 23,269,906 20,957,719
------------- ------------ ------------
Net loss (24,884,227) (14,917,868) (9,103,113)
Incremental yield on preferred stock 543,478 -- --
------------- ------------ ------------
Net loss applicable to common stockholders $ (25,427,705) $(14,917,868) $ (9,103,113)
============= ============ ============
Net loss per share applicable to common stockholders
- basic and diluted $ (0.23) $ (0.20) $ (0.17)
============= ============ ============
Weighted-average number of shares
of common stock outstanding 109,386,878 72,855,230 53,741,498
============= ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
--------------------------------------------------
2000 1999 1998
------------ ------------ ------------
Cash flows from operating activities:
Net loss $(24,884,227) $(14,917,868) $ (9,103,113)
Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
Incremental yield on preferred stock (543,478)
Depreciation, depletion, amortization, accretion of
discount on debt and provision for impairment 16,225,969 5,716,550 2,472,751
Accretion of premium on notes receivable (22,416) (50,604) (208,886)
Provision for bad debts -- -- 1,493,750
Realized and unrealized loss on marketable securities -- -- 359,325
Non-cash provision for services 20,000 468,220 255,814
Issuance of stock for compensation expense 306,790 186,233 196,900
Changes in assets and liabilities:
Accounts and notes receivable 104,812 50,889 1,313,816
Inventory 566,978 831,606 (798,974)
Prepaid and other 178,998 (86,466) 426,060
Accounts payable and accrued liabilities (22,638) 495,021 2,968,458
------------ ------------ ------------
Net cash used in operating activities (8,069,212) (7,306,419) (624,099)
------------ ------------ ------------
Cash flows from investing activities:
Additions to oil and gas properties (2,627,038) (5,980,341) (8,512,328)
Additions to refinery property and equipment (2,235) (800,974) (8,578,049)
Proceeds from sales of marketable securities -- -- 376,633
(Increase) decrease to other long term assets 557,914 (752,988) (592,444)
------------ ------------ ------------
Net cash used in investing activities (2,071,359) (7,534,303) (17,306,188)
------------ ------------ ------------
Cash flows from financing activities:
Net increase in short-term debt 3,402,236 2,500,000 --
Net increase (decrease) in notes payable (796,158) 11,481 1,725,350
Net increase (decrease) in notes payable - officers 350,000 (266,850) 266,850
Repayments of long-term debt -- (3,500,000) --
Proceeds from exercise of stock options and warrants, net 189,138 768,877 738,482
Proceeds from sale of preferred stock 5,926,251 -- --
Proceeds from sale of common stock -- -- --
Proceeds from issuance of debentures, net -- 16,704,176 11,855,000
------------ ------------ ------------
Net cash provided by financing activities 9,071,467 16,217,684 14,585,682
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (1,069,104) 1,376,962 (3,344,605)
Cash and cash equivalents at beginning of year 1,753,707 376,745 3,721,350
------------ ------------ ------------
Cash and cash equivalents at end of year $ 684,603 $ 1,753,707 $ 376,745
============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Common
Common stock Additional Stock
------------ paid-in Held In Accumulated
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 2,402,253 192,180 1,225,663 508,282 -- 1,926,125
Issuance of stock for compensation
and services 536,013 42,881 283,909 -- -- 326,790
Issuance of stock options and warrants -- -- 254,077 -- -- 254,077
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 (419,156) 395,156 -- --
Preferred stock converted into
common stock 21,503,866 1,720,310 3,562,669 -- -- 5,282,979
Imputed dividend on convertible
preferred stock -- -- -- -- (543,478) (543,478)
Net loss for the period -- -- -- -- (24,884,227) (24,884,227)
----------- ------------ ------------- ----------- ------------- ------------
Balance, December 31, 2000 132,524,318 $ 10,601,945 $ 156,234,428 $ (162,500) $(128,806,322) $ 37,867,551
=========== ============ ============= =========== ============= ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Common stock Additional 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 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 -- -- 768,877
Imputed interest on debentures
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
========== ========== ============ ========== ============= ============
The accompanying notes are an integral part of these
consolidated financial statements
F-6
AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
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
========== ========== ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements
F-7
AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL, ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
American International Petroleum Corporation (the "Company") was incorporated in
the State of Nevada and, through its wholly-owned subsidiaries, is the owner of
a refinery in Lake Charles, Louisiana, which processes and sells asphalt into
the Gulf Coast asphalt market and has capability to refine other crude oil
products, such as vacuum gas oil, naphtha 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, respectively. 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.
Joint Venture
In July 2000, the refinery formed a joint venture with Sargeant Bulktainers,
Inc. Their role in the joint venture is to provide it with asphaltic crude oil
feedstocks and bulk asphalt supply. The refinery's role is to provide asphalt
blending, storage, marketing services and retail rack facilities. After product
and operating costs the joint venture partners generally share profits on a
50-50 basis. The refinery accounts for the joint venture on the equity method of
accounting.
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, PAIPC, and Gulf Coast Petroleum Trading,
Inc. ("GCPT"). American International Petroleum Kazakhstan owns 70% of the stock
of MED Shipping Usturt Petroleum Ltd. ("MSUP"), a Kazakhstan corporation and
includes MSUP in its consolidated financial statements.
Intercompany balances and transactions are eliminated in consolidation.
F-8
Cash and cash equivalents
All liquid short-term instruments purchased with original maturities of three
months or less are considered cash equivalents
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 properties, 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. We identified an impairment of oil and
gas properties of $12,546,295 during 2000.
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,
-----------------------------------------
2000 1999 1998
---- ---- ----
Kazakhstan:
Acquisition Cost $ 11,724,477 $11,724,477 $11,724,477
Exploration Cost 21,722,622 19,072,440 10,748,427
Less impairment (12,546,295) -- --
Other
Acquisition cost 780,539 759,459 965,982
------------ ----------- -----------
$ 21,681,343 $31,556,376 $23,438,886
============ =========== ===========
Acquisition costs of unproved properties not subject to amortization at December
31, 2000, 1999 and 1998, 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 $2,671,262,
$8,117,490, and $11,164,180 for 2000, 1999 and 1998, respectively.
The net capitalized costs of oil and gas properties for each cost center, less
related deferred income taxes, are expensed to the extent they exceed the sum of
(i) the estimated future net revenues from the properties, discounted at 10%,
(ii) unevaluated costs not being amortized; and (iii) the lower of cost or
estimated fair value of unproved properties being amortized; less (iv) income
tax effects related to differences between the financial statement basis and tax
basis of oil and gas properties.
Property and equipment - other than oil and gas properties
Property and equipment are carried at cost and include interest on funds
borrowed to finance construction. Capitalized interest was $547,786 and
$7,055,340 in 1999 and 1998, respectively. No interest was capitalized in 2000.
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 $1,844,942, $1,730,710, and $813,088 for the years
ended December 31, 2000, 1999 and 1998, respectively.
F-9
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 and warrants to purchase 14,541,161, 13,202,753 and
7,100,681 shares of common stock at various prices were outstanding at December
31, 2000, 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, 2000
------------------------------------
Net Income(Loss) Weighted Average Per Share
(Numerator) Shares Amount
------------ ----------- --------
Basic EPS:
Loss available to $(25,427,705) 109,386,878 $ (0.23)
Common Shareholders
Effect of Dilutive Securities
Warrants and Options (1)(2) -- -- --
------------ ----------- --------
Diluted EPS:
Loss available to
Common Shareholders $(25,427,705) 109,386,878 $ (0.23)
============ =========== ========
(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.
(8) Options and warrants to purchase 14,541,161 shares of common stock at
various prices were outstanding at December 31, 2000, 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.
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.
New Accounting Pronouncements
The FASB issued Statement of Financial Accounting Standards (SFAS) No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." The statement provides guidance for determining whether a
transfer of financial assets should be accounted for as a sale or a secured
borrowing, and whether a liability has been extinguished. The Statement is
effective for recognition and reclassification of collateral and for disclosures
which relate to securitization transactions and collateral for fiscal years
ending December 15, 2000. The Statement will be come effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
March 31, 2001. The initial application of SFAS No. 140 will not have a material
impact to the Company's results of operations and financial position.
F-10
The FASB issued Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation." This interpretation modified the practice of
accounting for certain stock award agreements and was generally effective
beginning July 1, 2000. The initial impact of this interpretation on the
Company's results of operations and financial position was not material.
The FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This was followed in June 2000 by the issuance of SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities,"
which amends SFAS No. 133. SFAS No. 133 and 138 establish accounting and
reporting standards for derivative financial instruments. The standards will be
recorded each period in earnings if the derivative is not a hedge. If a
derivative is a hedge, changes in the fair value of the derivative will either
be recognized in earnings along with the change in the fair value of the hedged
asset, liability or firm commitment also recognized in earnings, or recognized
in other comprehensive income until the hedged item is recognized in earnings.
For a derivative recognized in other comprehensive income, the ineffective
portion of the derivative's change in fair value will be recognized immediately
in earnings. The initial application of SFAS No. 133 and 138 will not have a
material impact on the Company.
The Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin
(SAB) No. 101, "Revenue Recognition in Financial Statements", to provide
guidance for revenue recognition issues and disclosure requirements.
Subsequently the SEC issued SAB No. 101A, "Amendment: Revenue Recognition in
Financial Statements:, SAB No. 101B, "Second Amendment: Revenue Recognition in
Financial Statements; which ultimately delayed implementation to the fourth
quarter of fiscal years beginning after December 15, 1999. SAB No. 101 covers a
wide range of revenue recognition topics and summarizes the staff's
interpretations on the application of generally accepted accounting principles
to revenue recognition. The Company does not believe this standard will have a
material impact on the company's consolidated financial position, results of
operations or cash flows.
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. Debenture costs
of $1,998,732, $1,618,415, and $1,126,930 were amortized in the years 2000,
1999, and 1998, 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, debentures, and preferred stock, closely approximate
the carrying values of the instruments due to the short-term maturities or
recent issuance of such instruments.
Comprehensive Income (Loss)
Comprehensive income is defined as all changes in stockholders' equity,
exclusive of transactions with owners, such as capital investments.
Comprehensive income includes net income or loss, changes in certain assets and
liabilities that are reported directly in equity such as translation adjustments
on investments in foreign subsidiaries, and certain changes in minimum pension
liabilities. The Company's comprehensive income (loss) was equal to its net
income (loss) for all periods presented in these financial statements.
Long Lived Assets
The Company reviews for the impairment of long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. An impairment loss
would be recognized when estimated future cash flows expected to result from the
use of the asset and its eventual disposition is less than its carrying amount.
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
F-11
basis for the calculation of impairment of oil and gas properties. Because
estimates of fair value of unproven reserves are inherently imprecise, it is
reasonably probable that the estimates of fair value associated with the
concessions 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 $24.9 million during 2000, of
which approximately $16.6 million represented non-cash items, and has
commitments to fund the operations of its Kazakhstan subsidiary (see Note 10),
$7.1 million of non-convertible secured debt, and has convertible debentures
totaling approximately $6.7 million (see Note 6 and 7), which may or may not be
converted to common stock, that mature in 2004. As of December 31, 2000, the
Company had $8.2 million of negative working capital including, as of March 23,
2001, approximately $5.8 million in bridge notes due on April 28, 2001. However,
the lender has offered to renegotiate these notes if the Company is unable to
repay them when due. The Company intends to be very conservative with its
spending overseas during 2001. As of March 2001, the Company's existing working
capital was insufficient to provide all the funds it requires to complete its
minimum work program in Kazakhstan during 2001. 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
plans to negotiate a two-year extension of the Exploration Contract which is due
to expire in November 2001. 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 has been negotiating
with several foreign and domestic oil and gas companies regarding a sale of up
to 75% of its ownership interest in License 1551. All have indicated an interest
in pursuing a purchase if the Company can conclude a gas sales agreement. The
Company hopes to sign a gas sales and/or transportation agreement in 2001, which
will enhance the Company's ability to classify its gas reserves as "proved"
reserves, thereby providing it with a 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 existing obligations during 2001 and beyond in Kazakhstan.
During 2001 the Company initiated an agreement with Sargeant Bulktainers to
process crude oil through the Company's 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 2001 and beyond.
This operation will also enable the Company to continue its asphalt operations.
Management has also been seeking sources of capital to enable the Company to
supplement its operating activities and to fulfill commitments which may arise
in 2001 and beyond.
If the processing agreement with Sargeant continues to be implemented at the
rate levels anticipated by the Parties, the resultant cash flows, when combined
with those derived from the asphalt joint venture, would be sufficient to
provide the Company with the necessary capital to support all of its domestic
and foreign overhead. In addition, management believes the Company has several
alternatives for its processing/refining operations in the event Sargeant does
not continue beyond the initial one-year term of the agreement, however, there
can be no assurance at this time that a replacement or alternative to Sargeant
can be obtained.
As operations at the Refinery expand during 2001, 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, a joint venture partner in Kazakhstan to support its operations
during 2001, or if it is unable to renegotiate the due dates of its bridge
notes, 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 would be 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,
--------------------------
2000 1999
---- ----
Accounts receivable - trade and joint venture $ 392,741 $ 377,125
Current portion - Note receivable 1,493,750 1,493,750
Other -- 120,428
----------- -----------
1,886,491 1,991,303
Less - allowance for doubtful accounts (1,493,750) (1,493,750)
----------- -----------
$ 392,741 $ 497,553
=========== ===========
NOTE 4 - OTHER LONG-TERM ASSETS:
Other long-term assets consist of the following:
December 31,
--------------------------
2000 1999
---- ----
Note receivable - MIP (See Note 1),
net of discount of $18,651 and
$69,255, respectively $ 575,112 $1,252,696
NOTE 5 - ACCRUED LIABILITIES:
Accrued liabilities consist of the following:
December 31,
--------------------------
2000 1999
---- ----
Accrued payroll $ -- $ 15,935
Accrued interest 623,435 499,666
Corporate taxes 104,000 116,608
Property taxes 300,000 176,591
Sales Taxes 178,266 56,913
Other 319,397 435,759
---------- ----------
$1,525,098 $1,301,472
========== ==========
NOTE 6 - SHORT TERM DEBT
December 31,
--------------------------
2000 1999
---- ----
13% - $2,500,000 secured Bridge Note -
due April 28, 2001, collateralized by the
shares of the St. Marks subsidiary and
certain St. Marks real estate, effective
interest rate - 13% $2,500,000 $2,223,500
12% - $350,000 unsecured demand notes
due to officers 350,000 --
Trade notes payable - various notes due
from one month to twelve months - interest
ranges from 6.5% to 14.5%, includes $150,059
and $106,851 of interest at December 31, 2000
and 1999, respectively - collateralized by
accounts receivable, inventory, and
certain fixed assets. 940,673 1,736,831
10% - $3,000,000 secured Bridge Note, due
April 28, 2001, collateralized by shares
of the St. Marks subsidiary and certain
St. Marks real estate, effective
interest rate 13% 1,437,500 --
13% - $1,850,000 secured Bridge Note, due
April 28, 2001, collateralized by shares of
the St. Marks subsidiary and certain St.
Marks real estate, effective interest
rate 13% 1,850,000 --
---------- ----------
$7,078,173 $3,960,331
========== ==========
F-13
NOTE 7 - LONG-TERM DEBT:
December 31,
--------------------------
2000 1999
---- ----
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 - 2% (2) $ 3,250,392
5% - $10,000,000 secured convertible
debenture, due February 18, 2004, net of
unamortized financing cost of $437,050
at December 31, 2000, collateralized by
the Lake Charles facility, effective
interest rate - 28% (2) 5,565,395 8,734,200
----------- -----------
$ 5,565,395 $11,984,592
=========== ===========
(1) Convertible into the Company's common stock at the average of the lowest
three (3) consecutive daily weighted average sales prices of the common stock as
reported by Bloomberg, LP for the twenty (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.
NOTE 8 - REDEEMABLE PREFERRED STOCK
December 31,
--------------------------
2000 1999
---- ----
$1,250,000 of the Company's preferred
stock redeemable into shares of the
Company's common stock, upon notice of
redemption, at 92% of the average of the
three lowest weighted average sales price
of the common stock for the twenty (20)
trading days immediately preceding the
date of the related notice of redemption,
net of costs. $1,186,751 $ --
========== ==========
NOTE 9 - STOCK OPTIONS AND WARRANTS:
Outstanding warrants and options
At December 31, 2000, 1999, and 1998, 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
2000 1999 1998 Price Date
---- ---- ---- ----- ----
-- -- 22,681 $2.13 July 22, 1999(3)(2)
-- -- 864,000 $2.71 August 6, 1999(3)(2)
-- -- 200,000 $2.00 August 24, 1999(3)(2)
-- -- 1,500,000 $2.00 October 9, 1999(1)(2)
-- -- 1,781,000 $0.50 December 31, 1999(1)(2)
-- -- 1,210,000 $2.00 December 31, 1999(1)(2)
-- 1,358,000 -- $0.50 July 31, 2000(1)
105,500 -- -- $0.50 July 31, 2005(1)
50,000 50,000 50,000 $0.50 November 1, 2005(1)
16,667 16,667 16,667 $0.41 August 20, 2001(3)
8,420 8,420 8,420 $0.40 October 31, 2001(3)
-- -- 60,000 $0.39 June 6, 2002(3)
200,000 200,000 200,000 $2.00 July 30, 2002(3)
-- 64,000 -- $1.20 October 6, 2002(3)
1,500,000 1,500,000 -- $2.00 October 9, 2002(3)
-- -- 197,500 $3.00 October 14, 2002(3)(2)
100,000 100,000 100,000 $2.00 December 1, 2007(1)
862,500 1,400,000 1,500,000 $1.05 December 31, 2007(1)
1,400,000 1,400,000 1,400,000 $2.00 April 21, 2003(3)
-- -- 118,500 $2.00 April 21, 2003(3)(2)
-- -- 100,000 $2.60 April 21, 2003(3)(2)
-- -- 25,000 $3.00 April 21, 2003(3)(2)
1,595,978 1,595,978 -- $2.00 April 22, 2003(3)
-- 15,000 15,000 $1.37 June 29, 2003(1)(2)
684,000 782,000 782,000 $2.00 June 29, 2008(1)
-- 197,500 -- $1.20 October 14, 2003(3)
2,000,000 2,000,000 -- $2.56 February 18, 2004 (3)
540,058 1,342,275 -- $0.82 March 30, 2009(1)
-- 118,500 -- $1.20 April 21, 2004(3)
-- 200,000 -- $1.23 July 21, 2004 (1)
712,500 712,500 -- $1.45 August 18, 2004(3)
100,000 100,000 -- $1.00 September 30, 2004(3)
50,000 50,000 -- $1.50 September 30, 2004(3)
50,000 50,000 -- $0.75 October 19, 2004(3)
375,000 375,000 -- $0.80 November 2, 2004(3)
-- 400,000 -- $0.90 December 1, 2004(3)
-- 250,000 -- $0.50 December 31, 2004(1)
-- 250,000 -- $1.00 December 31, 2004(1)
-- 50,000 -- $0.80 July 14, 2005(3)
-- 300,000 -- $0.80 August 18, 2005(3)
2,997,681 -- -- $0.23 November 9, 2005 (3)
75,000 -- -- $0.12 December 27, 2005 (3)
100,000 -- -- $0.43 August 27, 2003 (3)
100,000 -- -- $0.90 December 14, 2010 (1)
350,000 -- -- $0.43 August 24, 2010 (1)
300,000 -- -- $0.55 July 10, 2010 (1)
200,000 -- -- $0.69 April 27, 2010 (1)
142,857 -- -- $1.20 July 11, 2010 (1)
- ---------- ---------- ----------
14,616,161 14,885,840 10,150,768
========== ========== ==========
(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
1998, 1999 or 2000 as indicated in the table.
(3) Other non-employee warrants.
F-14
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 tandem with 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, 2000 was 3,190,000.
1998 Plan
Under the Company's 1998 Stock Option Plan (the "1998 Plan"), the Company's
employees, Directors, independent contractors, and consultants are eligible to
receive options to purchase shares of the Company's common stock. The Plan
allows the Company to grant incentive stock options ("ISOs"), nonqualified stock
options ("NQSOs"), and ISOs and NQSOs in tandem with stock appreciation
rights("SARs", collectively "Options"). A maximum of 5,000,000 shares may be
issued and no options may be granted after ten years from the date the 1998 Plan
is adopted, or the date the Plan is approved by the stockholders of the Company,
whichever is earlier. The exercise price of the Options cannot be less than the
fair market value of the shares of common stock on the date the Option is
granted. Options granted to individuals owning 10% or more of the outstanding
voting power of the Company must be exercisable at a price equal to 110% of the
fair market value on the date of the grant. The 1998 Plan was submitted to and
approved by the Company's stockholders at its annual meeting in 1998. The total
number of shares granted under the 1998 Plan, as of December 31, 2000, was
3,056,965.
F-15
2000 Plan
Under the Company's 2000 Stock Option Plan (the "2000 Plan"), the Company's
employees, Directors, independent contractors, and consultants are eligible to
receive options to purchase shares of the Company's common stock. The Plan
allows the Company to grant incentive stock options ("ISOs"), nonqualified stock
options ("NQSOs"), and ISOs and NQSOs in tandem with stock appreciation
rights("SARs", collectively "Options"). A maximum of 5,000,000 shares may be
issued and no options may be granted after ten years from the date the 2000 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 2000 Plan was submitted to and
approved by the Company's stockholders at its annual meeting in 2000. There were
no shares granted under the 2000 Plan, as of December 31, 2000.
Activity in the 1995 and 1998 Stock Option Plans for the years ended December
31, 1998, 1999 and 2000 was as follows:
Weighted Average
Number of Exercise Price
Shares Per Share
------ ---------
Outstanding, December 31, 1997 3,521,250 $0.83
Granted 2,007,000 $2.00
Exercised (21,500) $.050
Expired (68,750) $.074
-----------
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
Granted 1,092,857 $0.65
Exercised (2,267,550) $0.64
Expired (1,137,667) $1.04
-----------
Outstanding December 31, 2000 3,434,915 $1.08
===========
As of December 31, 2000, options to acquire 3,194,249 shares of the Company's
common stock with exercise prices ranging from $0.43 to $2.00, were fully vested
and exercisable at a weighted average exercise price of $1.05 per share. The
remaining 240,666 options, with exercise prices ranging from $0.69 to $2.00,
having a weighted average exercise price of $0.66 per share, will vest through
2010.
If not previously exercised, options outstanding at December 31, 2000, will
expire as follows: 105,500 options expire on July 31,2005; 50,000 options expire
on November 1, 2005; 100,000 expire on December 1, 2007; 862,000 options expire
on December 31, 2007; 684,000 options expire on June 29, 2008; 540,058 options
expire on March 30, 2009; 200,000 options expire on April 27, 2010;
F-16
300,000 options expire on July 10, 2010; 142,857 options expire on July 11,
2010; 350,000 options expire on August 24, 2010; and 100,000 options expire on
December 14, 2010. 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 weighted average
grant date fair value of the options issued during 2000 and the weighted
averaged exercise price of those options amounted to $0.22 and $0.62
respectively.
In October 1995, the Financial Accounting Standards Board issued a new statement
titled "Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123
encourages, but does not require, companies to recognize compensation expense
for grants of stock, stock options, and other equity instruments to employees
based on fair value. Fair value is generally determined under an option pricing
model using the criteria set forth in SFAS 123.
The Company applies APB Opinion 25, Accounting of Stock Issued to Employees, and
related Interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its fixed price stock option plans.
Had compensation expense for the Company's stock based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS 123, the Company's net loss and loss
per common share would have been increased to the pro forma amounts indicated
below:
2000 1999 1998
---- ---- ----
Net loss applicable to As reported $(25,427,705) $(14,917,868) $ (9,103,113)
common stockholders Pro forma (25,797,194) (16,314,519) (10,545,636)
Net loss per common share As reported $ (0.23) $ (0.20) $ (0.17)
Pro forma $ (0.24) (0.22) (0.20)
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.
NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES:
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. 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 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.
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.
F-17
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
$464,000, $474,000, $479,000, $268,800 and $268,800 for 2001, 2002, 2003, 2004,
and 2005, respectively, and $268,800 thereafter. Non-cancellable subleases total
$152,400, $152,448, $158,500, $161,728, and $165,000 for 2001, 2002, 2003, 2004,
and 2005, respectively.
Minimum lease payments have not been reduced by minimum sublease rentals due in
the future under non-cancelable subleases. The composition of total rental
expense for all operating leases was as follows:
2000 1999 1998
---- ---- ----
Minimum rentals $ 496,870 $431,242 $150,530
Less - sublease rentals (113,879) -- --
--------- -------- --------
Total rent expense $ 382,991 $431,242 $150,530
========= ======== ========
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 V. American International Refinery, Inc. Etc. Cause No. 98-11453; in
the 269th Judicial District; in and For Harris County, Texas Plaintiff,
Trifinery, has filed suit in a Harris County District Court against the Company
and its wholly-owned subsidiary, American International Refinery, Inc. ("AIRI").
Trifinery has asserted claims for recovery of compensatory and punitive damages
based on the following theories of recovery; (1) breach of contract, (2)
disclosure of confidential information; and (3) tortuous interference with
existing contractual relations. Generally, Trifinery has alleged that in
connection with the due diligence conducted by the Company and AIRI of the
business of Trifinery, the Company and AIRI had access to confidential or trade
secret information and that the Company and AIRI have exploited that
information, in breach of an executed Confidentiality Agreement, to the
detriment of Trifinery. Trifinery seeks the recovery of $20,000,000 in
compensatory damages and an undisclosed sum in connection with its claim for the
recovery of punitive damages.
In addition to seeking the recovery of compensatory and punitive damages,
Trifinery sought injunctive relief. Specifically, Trifinery sought to enjoin the
Company and AIRI from: (1) offering employment positions to the key employees of
Trifinery; (2) contacting the suppliers, joint venture partners and customers of
Trifinery in the pursuit of business opportunities; (3) interfering with the
contractual relationship existing between Trifinery and St. Marks Refinery,
Inc.; and (4) disclosing or using any confidential information obtained during
the due diligence process to the detriment of Trifinery. The Company and AIRI
have asserted to a general denial to the allegations asserted by Trifinery. The
Company and AIRI also moved the district court to refer the matter to
arbitration, as provided for in the Confidentiality Agreement, and to stay the
pending litigation. On March 27, 1998, the district court referred the matter to
arbitration, as requested by the Company and AIRI, and stayed litigation. At
present, the dispute existing between the Company, AIRI and Trifinery in Texas
will be decided by a panel of three arbitration judges under the American
Arbitration Association rules for commercial disputes. Two arbitrators 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
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.
F-18
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 the next five years 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.
NOTE 11 - INCOME TAXES:
The Company reported a loss from operations during 1998, 1999, and 2000 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 $67,500,000 which expire in years 2001 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,
----------------------------
2000 1999
---- ----
Deferred taxes:
Net operating loss carryforwards $ 24,415,000 $ 19,745,000
Allowance for doubtful accounts 1,300,000 1,300,000
Depreciation, depletion, amortization and impairment 2,796,000 (1,951,000)
------------ ------------
Net deferred tax asset 28,511,000 19,094,000
------------ ------------
Valuation allowance $(28,511,000) $(19,094,000)
============ ============
The valuation allowance relates to the uncertainty as to the future utilization
of net operating loss carryforwards. The increase in the valuation allowance
during 2000 of approximately $9,417,000 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,
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
Federal tax benefit computed at statutory rate $(8,645,000) $(5,072,000) $(3,095,000)
Other, net (772,000) 435,000 (212,000)
Increase in valuation allowance (9,417,000) $(4,637,000) $(3,307,000)
----------- ----------- -----------
Actual provision $ -- $ -- $ --
=========== =========== ===========
F-19
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.
Trade accounts receivable outstanding at December 31, 2000 have been collected
in the normal course of business. A note receivable of $1,493,750 received in
the sale of the Colombia and Peru properties, was due during 1998 and in default
and has been fully reserved at December 31, 2000. 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, 2000 and the Company has been receiving
monthly payments on this note and has no reason to believe that it will not
collect this receivable (See Note 15). At December 31, 2000, the note had been
reduced to $575,112 (see Note 4). 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. As of December 31, 2000, 100%
of the Company's long-term debt which was issued during 1999, matures during
2004. As a result, the Company believes the carrying value of its receivables
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, 2000.
The estimated fair value of the Company's financial instruments is as follows:
2000 1999
----------------------- -------------------------
Carrying Fair Carrying Fair
value value value value
----- ----- ----- -----
MIP Notes Receivable $ 575,112 $ 575,112 $ 1,252,696 $ 1,252,696
Short-term debt $7,078,173 $7,078,173 $ 3,960,331 $ 3,960,331
Long-term debt $5,565,395 $5,565,395 $11,984,592 $11,984,592
Redeemable preferred stock $1,186,751 $1,186,751 $ -- $ --
Four of the Company's asphalt customers account for an aggregate of 71% of the
Company's sales in 2000. The Company has the ability to draw on it's customer's
posted performance bonds and personal guarantees to collect any past due
accounts.
NOTE 13 - GEOGRAPHICAL SEGMENT INFORMATION:
The Company has two reportable segments which are primarily in the business of
exploration, development and production of oil and natural gas 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
expenses items incidental to their respective operations. The Company's
reportable statements are managed separately because of their geographic
locations. Financial information by operating segment is presented below:
F-20
Geographic Segment
--------------------------------------------
Consolidated
2000 United States Kazakhstan Total
- ---- ------------- ---------- -----
Sales and other operating revenue $ 3,108,670 $ -- $ 3,108,670
Interest income and other corporate revenues $ -- $ -- 165,350
------------ ------------ ------------
Total revenue $ 3,108,670 -- 3,274,020
Costs and operating expense 8,802,976 12,546,295 21,349,271
------------ ------------ ------------
Operating profit (loss) $ (5,694,253) $(12,546,295) $(18,075,251)
============ ============
General corporate expense 4,062,683
Interest expense and incremental yield on
preferred stock 3,289,771
------------
Net loss applicable to common stockholders $(25,427,705)
============
Identifiable assets at December 31, 2000 $ 31,105,826 $ 21,138,161 $ 52,243,987
============ ============
Corporate assets 2,754,435
------------
Total assets at December 31, 2000 $ 54,998,422
============
Depreciation, depletion, amortization
and provision for impairment $ 1,844,942 $ 12,546,295 $ 14,391,237
------------ ------------ ============
Capital Expenditures, net of cost recoveries $ 71,728 $ 2,677,857 $ 2,749,585
============ ============ ============
F-21
Geographic Segment
------------------------------------------
Consolidated
1999 United States Kazakhstan Total
- ---- ------------- ---------- -----
Sales and other operating revenue $ 8,137,867 $ -- $ 8,137,867
Interest income and other corporate revenues -- -- 214,171
------------ ----------- ------------
Total revenue $ 8,137,867 -- 8,352,038
Costs and operating expense 13,116,830 -- 13,116,830
------------ ----------- ------------
Operating profit (loss) $ (4,978,963) $ -- $ (4,764,792)
============ ===========
General corporate expense 3,652,497
Interest expense 6,500,579
------------
Net loss $(14,917,868)
============
Identifiable assets at December 31, 1999 $ 33,877,437 $32,162,385 $ 66,039,822
============ ===========
Corporate assets 3,618,447
------------
Total assets at December 31, 1999 $ 69,658,269
============
Depreciation, depletion and amortization $ 1,730,710 $ -- $ 1,730,710
------------ ----------- ============
Capital Expenditures, net of cost recoveries $ 1,062,053 $ 8,498,390 $ 9,560,443
============ =========== ============
F-22
Geographic Segment
------------------------------------------
Consolidated
1998 United States 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
Costs and operating expense 14,214,767 -- 14,214,767
------------ ----------- ------------
Operating profit (loss) $ (2,820,758) $ -- $ (2,360,061)
============ ===========
General corporate expense 4,830,003
Interest expense (1,912,949)
------------
Net loss $ (9,103,113)
============
Identifiable assets at December 31, 1998 $ 35,234,530 $22,677,073 $ 57,911,603
============ ===========
Corporate assets 2,949,731
------------
Total assets at December 31, 1998 $ 60,861,334
============
Depreciation, depletion and amortization $ 813,088 $ -- $ 813,088
------------ ----------- ============
Capital Expenditures, net of cost recoveries $ 15,494,897 $10,748,427 $ 26,243,324
============ =========== ============
(1) Refinery sales to Conoco accounted for 19% of the Company's sales during
the year.
F-23
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 non-cash transactions:
2000 1999 1998
---- ---- ----
Conversion of debentures $6,852,115 $7,602,373 $15,526,380
Stock issued in lieu of current liabilities 1,926,125 1,473,713 1,669,717
Issuance of warrants related to convertible debentures 254,077 1,584,106 936,459
Issuance of stock - unearned compensation -- -- 196,900
Issuance of stock - compensation 20,000 -- --
Issuance of stock - services 306,790 654,453 128,125
Issuance of stock and warrants - for oil and gas properties -- 1,852,366 --
Issuance of stock- for refinery and equipment -- -- 1,687,500
Issuance of stock for collateral on debt 24,000 1,065,938 --
Preferred stock converted into common stock $5,282,978 $ -- $ --
Cash paid for interest, net of amounts capitalized, was $799,051, $1,943,124,
and $62,532, during 2000, 1999, and 1998, respectively. Cash paid for corporate
franchise taxes was $111,577, $94,506, and $60,078, during 2000, 1999, and 1998,
respectively.
Interest capitalized was $547,786 and $7,055,340 during the years 1999 and 1998,
respectively. No interest was capitalized during 2000.
NOTE 15 - SUBSEQUENT EVENTS:
Mercantile International Petroleum Notes
In February 1999, Mercantile International Petroleum, Inc. failed to pay the
Company the $1.6 million outstanding balance of the 5% convertible debenture it
issued to us as partial payment for the purchase of its oil and gas properties
in Columbia and Peru, South America in February 1997. In January 2000, the
parties signed a letter agreement, under which Mercantile acknowledged its
indebtedness to the Company in the amount of $1,581,000 for the outstanding
balance of the debenture and an additional amount of $1,306,000 in connection
with the 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 the Company. Beginning in February 2000, Mercantile began to make
the scheduled monthly payments to the Company amounting to the greater of
$70,000 or 80% of its Colombian subsidiary's net income during the calendar year
2000. During 2000, each payment was in the amount of $70,000 and was generally
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.
MIP issued to AIPC (i) a Corporate Continuing Guaranty whereby MIP guarantees
the obligations of MCOG under the Exchangeable Subordinated Debenture in favor
of AIPC, (ii) an Exchange Rights Agreement pursuant to which MIP agrees to issue
up to 1,933,160 common shares of the MIP on conversion of the Debenture and
(iii) a Warrant Certificate evidencing warranty for the purchase of up to
$2,347,000 common shares of MIP. During 2000, MIP made monthly payments totaling
$700,000 toward the note.
All formal documents related to the January 2000 agreement, including the 11.5%
convertible debenture, were finalized on February 5, 2001.
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,
2000, 1999 and 1998 totaling approximately $43,300, $61,500, and $48,600,
respectively.
F-24
NOTE 17 - UNAUDITED SELECTED QUARTERLY RESULTS OF OPERATIONS:
Unaudited Selected Quarterly Results of Operations
(in thousands, except per share data)
Quarters Ended
-----------------------------------------------------
12/31/00 9/30/00 6/30/00 3/31/00
--------- --------- --------- --------
Revenues $ 446 $ 345 $ 1,272 $ 1,211
Net loss $ (15,030) $ (3,107) $ (3,264) $ (3,483)
Net loss applicable to common stockholders $ (15,574) $ (3,107) $ (3,264) $ (3,483)
Earnings Per Share - Basic and Diluted
Net loss $ (0.13) $ (0.03) $ (0.03) $ (0.04)
Weighted average shares 121,479 109,855 107,044 97,670
Quarters Ended
-----------------------------------------------------
12/31/99 9/30/99 6/30/99 3/31/99
-------- -------- -------- --------
Revenues $ 3,908 $ 345 $ 2,193 $ 1,905
Net loss $ (3,197) $ (4,654) $ (4,030) $ (3,037)
Net loss applicable to common stockholder $ (3,197) $ (4,654) $ (4,030) $ (3,037)
Earnings Per Share - Basic and Diluted
Net loss $ (0.04) $ (0.06) $ (0.06) $ (0.04)
Weighted average shares 82,293 73,998 69,612 66,060
SUPPLEMENTARY OIL AND GAS INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
The accompanying unaudited oil and gas disclosures are presented as
supplementary information in accordance with Statement No. 69 of the Financial
Accounting Standards Board.
F-25
AMERICAN INTERNATIONAL PETROLEUM AND SUBSIDIARIES
SUPPLEMENTARY OIL AND GAS INFORMATION
(UNAUDITED)
Capitalized costs relating to oil and gas activities and costs incurred in oil
and gas property acquisition, exploration and development activities for each
year are shown below:
CAPITALIZED COSTS
Kazakhstan Total
----------------------------------------- ------------------------------------------
2000(1) 1999(1) 1998(1) 2000(1) 1999(1) 1998(1)
------- ------- ------- ------- ------- -------
Unevaluated property not
subject to amortization $ 21,681,343 $31,556,376 $23,438,886 $ 21,681,343 $31,556,376 $23,438,886
Evaluated properties 12,546,295 -- -- 12,546,295 -- --
Accumulated deprecia-
tion, depletion and
amortization and
provision for impairment (12,546,295) -- -- (12,546,295) -- --
------------ ----------- ----------- ------------ ----------- -----------
Net Capitalized costs $ 21,681,343 $31,556,376 $23,438,886 $ 21,681,343 $31,556,376 $23,438,886
============ =========== =========== ============ =========== ===========
Costs incurred in oil and gas
property acquisition,
exploration and
development activities $ -- $ -- $ -- $ -- $ -- $ --
------------ ----------- ----------- ------------ ----------- -----------
Property acquisition
costs - proved and
unproved properties $ -- $ 2,724,166 $11,724,477 $ -- $ 2,724,166 $11,724,477
Exploration Costs 2,671,262 5,393,324 11,714,409 2,671,262 5,393,324 11,714,409
Development costs -- -- -- -- -- --
Results of operations for oil
and gas producing activities -- -- -- -- -- --
Oil and gas sales $ -- $ -- $ -- $ -- $ -- $ --
------------ ----------- ----------- ------------ ----------- -----------
Lease operating costs -- -- -- -- -- --
Depreciation, depletion
and amortization -- -- -- -- -- --
Provision for impairment
of oil and gas properties 12,546,295 -- -- 12,546,295 -- --
------------ ----------- ----------- ------------ ----------- -----------
12,546,295 -- -- 12,546,295 -- --
------------ ----------- ----------- ------------ ----------- -----------
Income (loss) before
tax provision (12,546,295) -- -- (12,546,295) -- --
------------ ----------- ----------- ------------ ----------- -----------
Provision (benefit) for
income tax -- -- -- -- -- --
Results of operations $(12,546,295) $ -- $ -- $(12,546,295) $ -- $ --
============ =========== =========== ============ =========== ===========
(1) Unevaluated property not subject to amortization includes Kazakhstan
properties and non-Kazakhstan oil and gas properties.
F-26
AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, March 31,
2001 2000
------------- -------------
Assets
Current assets:
Cash and cash equivalents $ 159,391 $ 336,033
Accounts and notes receivable, net 2,320,281 713,216
Inventory 97,527 300,049
Deferred financing costs -- 103,700
Prepaid expenses 450,135 1,071,418
------------- -------------
Total current assets 3,027,334 2,524,416
------------- -------------
Property, plant and equipment:
Unevaluated oil and gas properties 22,886,921 32,407,559
Evaluated oil and gas properties 12,546,295 --
Refinery property and equipment 38,001,917 38,016,375
Other 1,088,522 1,020,319
------------- -------------
74,523,655 71,444,253
Less - accumulated depreciation, depletion, and amortization (21,378,359) (6,988,836)
------------- -------------
Net property, plant and equipment 53,145,296 64,455,417
Notes receiviable, less current portion -- 1,205,112
Other long-term assets, net 105,923 128,258
------------- -------------
Total assets $ 56,278,553 $ 68,313,203
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Short-term debentures $ 5,787,500 $ 3,953,933
Notes payable - officers and directors 200,000 --
Notes payable - trade 810,473 1,903,297
Accounts payable 3,203,780 1,896,425
Accrued liabilities 1,224,399 1,017,582
------------- -------------
Total current liabilities 11,226,152 8,771,237
Long-term debt 5,262,852 6,501,448
------------- -------------
Total liabilities 16,489,004 15,272,685
------------- -------------
Commitments and contingent liabilities (Note 10) -- --
Minority Interest Liability 305,956 305,956
Redeemable preferred stock, par value $0.01,
7,000,000 shares authorized, 2,500 shares issued
and outstanding at March 31, 2001 2,372,013 --
Stockholders' equity:
Common stock, par value $.08, 200,000,000 shares
authorized, 147,672,812 and 132,524,318 shares
issued and outstanding at March 31, 2001 and
December 31, 2000, respectively 11,813,825 8,539,688
Additional paid-in capital, common stock 156,873,473 152,056,546
Common stock issued as collateral, held in escrow (243,750) (1,000,000)
Accumulated deficit (131,331,968) (106,861,672)
------------- -------------
Total stockholders' equity 37,111,580 52,734,562
------------- -------------
Total liabilities and stockholders' equity $ 56,278,553 $ 68,313,203
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-27
AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,
(Unaudited)
2001 2000
------------- ------------
Revenues:
Product revenues $ 1,331,645 $ --
Refinery operating revenues 885,329 1,182,957
Other 46,956 27,873
------------- ------------
Total revenues 2,263,930 1,210,830
------------- ------------
Expenses:
Costs of goods sold - refinery 1,302,259 --
Operating costs - refinery 1,174,381 1,391,929
General and administrative 1,475,119 1,891,355
Depreciation, depletion and
amortization 461,137 518,164
Interest 159,289 892,437
------------- ------------
Total expenses 4,572,185 4,693,885
------------- ------------
Net loss (2,308,255) (3,483,055)
Incremental yield on preferred stock 217,391 --
------------- ------------
Net loss applicable to common stockholders $ (2,525,646) $ (3,483,055)
============= ============
Net loss per share of common stock - basic and diluted $ (0.02) $ (0.04)
============= ============
Weighted-average number of shares
of common stock outstanding 143,183,665 97,670,153
============= ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-28
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE MONTHS ENDED MARCH 31,
(Unaudited)
2001 2000
----------- ------------
Cash flows from operating activities:
Net loss $(2,308,255) $(3,483,055)
Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
Incremental yield on preferred stock (217,391) --
Depreciation, depletion, amortization and accretion of
discount on debt 718,185 1,096,891
Accretion of premium on notes receivable -- (22,416)
Non-cash provision for services -- --
Issuance of stock for compensation expense -- 11,250
Changes in assets and liabilities:
Accounts and notes receivable (1,592,428) (215,663)
Inventory 58,583 423,039
Increase (decrease) in prepaid and other 167,034 (474,343)
(Increase) decrease in accounts payable and accrued
liabilities 1,453,102 (398,067)
----------- -----------
Net cash provided by (used in) operating activities (1,721,170) (3,062,364)
----------- -----------
Cash flows from investing activities:
Additions to oil and gas properties (1,194,489) (851,183)
Additions to refinery property and equipment -- (16,693)
Proceeds from sales of marketable securities -- --
(Increase) decrease to other long term assets 294,820 342,579
----------- -----------
Net cash used in investing activities (899,669) (525,297)
----------- -----------
Cash flows from financing activities:
Net increase in short-term debt -- 1,812,083
Net increase (decrease) in notes payable (130,200) 166,466
Net increase (decrease) in notes payable - officers (150,000) --
Repayments of long-term debt -- --
Proceeds from exercise of stock options and warrants 3,819 191,438
Proceeds from sale of preferred stock 2,372,000 --
----------- -----------
Proceeds from sale of common stock 8 --
Proceeds from issuance of debentures, net -- --
Net cash provided by financing activities 2,095,627 2,169,987
----------- -----------
Net increase (decrease) in cash and
cash equivalents (525,212) (1,417,674)
Cash and cash equivalents at beginning of period 684,603 1,753,707
----------- -----------
Cash and cash equivalents at end of period $ 159,391 $ 336,033
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-29
AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Common
Common stock Additional Stock
------------------------- Paid in Held In Accumulated
Shares Amount capital Escrow deficit Total
----------- ----------- ------------ ----------- ------------- ------------
Balance, January 1, 2001 132,524,318 $10,601,945 $156,234,428 $ (162,500) $(128,806,322) $ 37,867,551
Conversions of debentures 2,740,812 219,265 102,935 -- -- 322,200
Issuance of stock in lieu of current
liabilities 267,005 21,360 10,149 -- -- 31,509
Issuance of stock options and
warrants -- -- 8,018 -- -- 8,018
Options and warrants exercised 29,375 2,350 1,469 -- -- 3,819
Stock issued and adjustment to
value of stock previously
issued for collateral
on debt -- -- 81,250 (81,250) -- --
Preferred stock converted into
common stock 12,111,302 968,904 217,834 -- -- 1,186,738
Imputed interest convertible
preferred stock -- -- 217,391 -- -- 217,391
Net loss for the period
-- -- -- -- (2,525,646) (2,525,646)
----------- ----------- ------------ ----------- ------------- ------------
Balance, March 31, 2001 147,672,812 $11,813,825 $156,873,473 $ (243,750) $(131,331,968) $ 37,111,580
----------- ----------- ------------ ----------- ------------- ------------
The accompanying notes are an integral part of these
consolidated financial statements.
F-30
AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Common
Common stock Additional Stock
------------------------- Paid in Held In Accumulated
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 12,091,697 967,336 4,847,779 -- -- 5,815,115
Issuance of stock in lieu of current
liabilities 1,793,303 143,464 1,050,322 -- -- 1,193,786
Issuance of stock for compensation 20,000 1,600 9,650 -- -- 11,250
Issuance of stock options and
warrants -- -- 104,496 -- -- 104,496
Options and warrants exercised 1,558,341 124,667 66,771 -- -- 191,438
Adjustment to value of stock
previously issued -- -- 371,562 65,938 -- 437,500
Net loss for the period -- -- -- -- (3,483,055) (3,483,055)
----------- ---------- ------------ ----------- ------------- ------------
Balance, March 31, 2000 106,746,114 $8,539,688 $152,056,546 (1,000,000) $(106,861,672) $ 52,734,562
----------- ---------- ------------ ----------- ------------- ------------
The accompanying notes are an integral part of these
consolidated financial statements.
F-31
AMERICAN INTERNATIONAL PETROLEUM CORPORATION
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
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 March 31,
2001, the results of operations for the three month period ended March 31, 2001
and 2000 and cash flows for the three months ended March 31, 2001 and 2000.
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 2000 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
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Company's
2000 Annual Report on Form 10-K.
2. Segment Information
We have three major segments of business - refining, petroleum product sales and
oil and gas exploration and development. In late February 2001, the refinery
commenced processing crude oil for a third party on a fixed throughput fee
basis, plus adjustments for fluctuating energy costs associated with the
processing. Also during this quarter, we commenced buying and selling petroleum
products through our petroleum products trading segment. 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 principally included geological and geophysical acquisition,
reprocessing and/or analysis of data, acquisition of additional licenses or
projects, drilling, and marketing analysis and negotiation. We have yet to
implement oil and/or gas production operations in Kazakhstan. For the three
months ending March 31, 2001, the Company's refining segment, located in the
Gulf Coast area of the United States, had operating revenues of $885,000 and
costs and operating expenses of $1,174,000. The petroleum product sales segment
had revenues of $1,332,000 and costs of $1,302,000 for the three months ended
March 31, 2001. Interest income and other corporate revenues totaled $47,000
with general corporate expense, interest expense and depreciation being
$1,475,000, $159,000, and $461,000, respectively. The Company's identifiable
assets at March 31, 2001 totaled $32,149,000 operating assets in the United
States, $23,008,000 for Kazakhstan, and $1,122,000 of corporate assets.
F-32
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, 2000 and 1999, and
for each of the years in the three-year period ended December 31, 2000. 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, 2000. 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 23, 2000
F-32
AMERICAN INTERNATIONAL PETROLEUM CORPORATION AND SUBSIDIARIES
SCHEDULE I - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Deductions:
Additions Accounts
Balance at Charged Written off Balance
Beginning to Costs Against at End
Description of Year and Expenses Allowance of Year
- ----------- ---------- ------------ ----------- -------
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
December 31, 2000
Allowance for Doubtful Accounts $1,494 $ -- $ -- $1,494
F-34
Part II - Information not Required in Prospectus
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.
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.
II-1
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. 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).
II-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 8,750 shares of series A convertible preferred stock to the
investor under this agreement for a total purchase price of $8,750,000. We
have paid commissions of $437,500 and issued warrants to purchase 525,000
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 48,367,933 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).
16. During the three months ended March 31, 2001, we issued an aggregate of
3,007,817 shares of Common Stock to the Halifax Fund pursuant to aggregate
conversions of $322,200 of the outstanding principal balance of our 5%
Secured Convertible Debentures (the "Debentures") and in payment of related
interest totaling $31,509. As of March 31, 2001, the outstanding principal
balance of the Debentures was $5,446,935. The issuance of the shares of
Common Stock upon conversion of the Debentures was exempt from the
registration requirements of the Securities Act under Section 3(a)(9).
17. On April 24, 2001, we issued $3,340,000 principal amount of 3% convertible
debentures and a warrant to purchase an additional 1,500,000 shares of our
common stock to an accredited investor for a purchase price of $3,000,000.
We also issued a warrant to purchase 1,000,000 shares of our common stock
as a commission in connection with this transaction to LKB Financial LLC.
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.
18. On April 28, 2001, we issued $5,936,128 principal amount of 3% convertible
debentures to an accredited investor in exchange for the total aggregate
outstanding indebtedness due under certain bridge notes we issued to that
investor. No commissions were paid in connection with this transaction. The
issuance and sale of these securities was exempt from the registration
requirements of the Securities Act under Section 3(a)(9) and Rule 506 of
Regulation D.
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 Restated Articles of Incorporation, as amended.
3.2 Our By-laws, as amended. (11)
4.1 Form of Securities Purchase Agreement dated February 28, 2000. (17)
4.2 Form of Bridge Note issued in connection with Exhibit 4.1. (17)
II-3
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)
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)
II-4
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)
4.43 Form of Securities Purchase Agreement dated April 24, 2001 by and among the
Registrant and GCA Investment Fund Limited. (18)
4.44 Form of 3% Convertible Debenture issued in connection with Exhibit 4.43.
(18)
4.45 Form of Registration Rights Agreement issued in connection with the 3%
Convertible Debenture referenced in Exhibit 4.44.(18)
4.46 Form of Warrant issued in connection with the 3% Convertible Debenture
referenced in Exhibit 4.44.(18)
4.47 Form of Pledge and Security Agreement issued in connection with the 3%
Convertible Debenture referenced in Exhibit 4.44.(18)
4.48 Form of Mortgage and Security Agreement issued in connection with the 3%
Convertible Debenture referenced in Exhibit 4.44.(18)
4.49 Form of Exchange Agreement dated April 28, 2001.
5.1 Opinion of Snow Becker Krauss P.C. (19)
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)
II-5
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)
10.8 Amendment #2 to our Employment Agreement dated May 1, 1989 with George N.
Faris. (16)
21.1 Our Subsidiaries.(19)
23.1 Consent of Snow Becker Krauss P.C. (included in Exhibit 5.1)(19)
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.
(19) Previously filed.
(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 post-effective amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Houston, State of Texas, on June 20, 2001.
AMERICAN INTERNATIONAL PETROLEUM CORPORATION
By: By:
------------------------------- -------------------------------------
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)
Pursuant to the requirements of the Securities Act of 1933, this post-effective
amendment to the Registration Statement has been signed by the following persons
in the capacities indicated on June 20, 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)
*
- -----------------------------------
William R. Smart
Director
*
- -----------------------------------
John H. Kelly
Director
*
- -----------------------------------
Donald G. Rynne
Director
*
- -----------------------------------
Daniel Y. Kim
Director
*By: /s/ Denis J. Fitzpatrick
------------------------------
Denis J. Fitzpatrick
Attorney in Fact
II-8