10The report indicates that the reserves were estimates only and should not be
construed as being exact quantities.
In evaluating the information at their disposal concerning the report,
Huddleston & Co. excluded from consideration all matters as to which legal or
accounting interpretation may be controlling. As in all aspects of oil and gas
evaluation, there are uncertainties inherent in the interpretation of
engineering data and such conclusions necessarily represent only informed
professional judgments.
The data used in the Huddleston & Co. estimates were obtained from the Company
and were assumed to be accurate by Huddleston & Co.. Basic geologic, engineering
and field performance data are now maintained on file by MIP.Drilling
The Company sold all of it's oil and gas producing properties in February, 1997,
as previously discussed, and therefore had no exploration or development wells
during the current year. The following table sets forth the gross and net
exploratory and development wells which were completed, capped or abandoned in
which the Company participated during the years indicated.
1997 1996 1995
------------- -------------- --------------
Gross Net Gross Net Gross Net
----- --- ----- --- ----- ---
Exploratory Wells: South America
Oil - - 1.00 1.00 2.00 2.00
Gas - - - - - -
Dry - - - - 1.00 1.00
--- --- ---- ---- ---- ----
TOTAL - - 1.00 1.00 3.00 3.00
Development Wells: South America
Oil - - 1.00 .65 2.00 1.30
Gas - - - - - -
Dry - - - - - -
TOTAL - - 1.00 .65 2.00 1.30
--- --- ---- ---- ---- ----
TOTAL - - 2.00 1.65 5.00 4.30
=== === ==== ==== ==== ====
Item 3. LEGAL PROCEEDINGS
Except as described below, there is no material litigation pending to which the
Company is a party or to which any of its properties is subject. Further, except
as described below, there are no proceedings known to be contemplated by United
States or foreign persons or governmental authorities relating to either the
Company or its properties.
In May 1992, AIRI was advised by the Internal Revenue Service ("IRS") that the
IRS was considering an assessment of excise taxes, penalties and interest of
approximately $3,500,000 related to the sale of fuel products during 1989. The
IRS claims that AIRI failed to comply with an administrative procedure that
required sellers and buyers in tax-free transactions to obtain certification
from the IRS. The Company believes that AIRI complied with the substance of the
then existing requirements and that such sales were either tax-free or such
excise taxes were paid by the end-users of such products. AIRI offered to
negotiate a settlement of this matter with IRS Appeals since early 1993. Such
negotiations included face-to-face meetings, numerous phone calls and written
transmittals and several offers of settlement by both the Company and the IRS.
During these negotiations, the IRS Appeals officers offered to waive all of the
penalties and 75% of the amount of the proposed tax liability. However, AIRI
rejected this offer and requested the IRS' National Office to provide technical
advice to its Appeals officers. After numerous conferences and discussions with
the National Office in 1995, the National Office issued an adverse Technical
Advice Memorandum ("TAM") to its Appeals Office in Dallas, Texas, to the effect
that AIRI should be liable for the tax on the sale of diesel fuel for the first
three quarters of 1989. However, subsequent to the issuance of the TAM, the IRS
Appeals officer indicated to AIRI that the IRS still wanted to negotiate a
settlement. In November 1997, the Company reached an agreement (the "IRS
Agreement") with the IRS to settle this matter by agreeing to pay an aggregate
of $646,633 in tax, plus interest accrued for the applicable periods involved.
The method and timing of such payment is now being discussed with IRS
Collections in Houston, Texas. The Company's proposal calls for the payment of
the tax and interest over a period of approximately one year. In the IRS
Agreement, the IRS waived all 11
penalties and 75% of the amount of the originally proposed tax liability. The
Company continues to maintain that it is not liable for the excise taxes at
issue, but agreed to settle the dispute at a significantly lower amount of
liability in order to bring this long-running issue to conclusion.
In 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. The plaintiffs attorneys are
preparing the necessary release forms in order to disburse the funds, which
release is expected to be completed soon.
Neste Trifinery V. American International Refinery, Inc. Etc. Cause No.
98-11453; in the 269th Judicial District; in and For Harris County, Texas
Plaintiff, Neste Trifinery ("Neste"), has filed suit in a Harris County District
Court against the Company and its wholly-owned subsidiary, American
International Refinery, Inc. ("AIRI"). 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)
tortious interference with existing contractual relations. Generally, Neste has
alleged that in connection with the due diligence conducted by the Company and
AIRI of the business of Neste, 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 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 the Company and
AIRI form: (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. The Company and AIRI have asserted
to a general denial to the allegations asserted by Neste. 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 Neste in Texas will be decided by
a panel of three arbitration judges under the American Arbitration Association
rules for commercial disputes.
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 Neste. On March 10, 1998, Neste 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 Neste's application for injunctive relief and adopted the recommendations
of the Magistrate, who found in part that Neste had failed to prove a
substantial likelihood of success on the merits. The District Court's order was
appealed by Neste to the United States Court of Appeals for the Eleventh
Circuit, but the Appellate Court denied Neste's motion for injunction pending
appeal. The federal court action remains pending, but Neste has agreed to remove
its product from the St. Marks facility by April 25, 1998. The Company presently
plans to deliver product to the St. Marks, Florida facility and begin marketing
operations during the last week of April 1998.
The Company and AIRI are vigorously defending the Texas matter, and the
Company's counsel does not anticipate an unfavorable outcome, although a
definitive outcome is not yet determinable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None 12
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock and its Class A Warrants are traded on NASDAQ/NMS
under the symbols "AIPN" and "AIPNW", respectively (the Class A Warrants expired
on April 9, 1998). The following table sets forth, for the periods indicated,
the range of closing high and low bid prices of the Common Stock and the Class A
Warrants as reported by NASDAQ. These quotations represent prices between
dealers, do not include retail markups, markdowns or commissions and do not
necessarily represent actual transactions.
Common Stock Class A Warrants
-------------------- ----------------------
High Bid Low Bid High Bid Low Bid
-------- ------- -------- -------
1998 First Quarter $4.91 $3.19 $2.19 $0.75
1997 First Quarter $0.73 $0.31 $0.22 $0.06
Second Quarter 0.69 0.41 0.66 0.06
Third Quarter 7.13 0.44 4.00 0.13
Fourth Quarter 6.50 3.19 3.75 1.31
1996 First Quarter $0.88 $0.50 $0.19 $0.13
Second Quarter 0.69 0.44 0.16 0.06
Third Quarter 0.59 0.38 0.16 0.06
Fourth Quarter 0.73 0.31 0.12 0.06
At April 6, 1998, the Company had approximately 1,633 shareholders of record of
its Common Stock. The Company estimates that an additional 12,000 shareholders
hold Common Stock in street name.Dividend Policy
The policy of the Board of Directors is to retain earnings to finance the
operations and development of the Company's business. Accordingly, the Company
has never paid cash dividends on its Common Stock, and no cash dividends are
contemplated to be paid in the foreseeable future.
Item 6. SELECTED FINANCIAL INFORMATION
The following selected financial data for each of the five years in the period
ended December 31, 1997 have been derived from the audited consolidated
financial statements for those respective years. The selected financial data
should be read in conjunction with the consolidated financial statements of the
Company and the related notes included elsewhere herein:
For the Years Ended December 31,
------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Condensed consolidated statement of operations:
Revenues $ 827,964 $ 4,003,006 $ 2,811,308 $ 3,508,514 $ 3,990,156
Net loss(1) 17,953,621 (4,652,207) (4,338,322) (10,966,914) (14,139,737)
Net loss per share(2) (0.43) (0.16) (0.20) (0.65) (2.23)
At December 31,
------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Condensed consolidated balance sheet:
Working capital $ (693,676) $(9,823,229) $ (3,402,543) $ (28,462) $ (7,507,056)
Total assets 41,839,860 34,492,431 32,640,362 32,229,713 34,996,925
Total liabilities 9,335,479 13,164,713 11,349,670 10,255,687 18,878,148
Long-term debt -0- 6,766,592 7,302,671 7,770,171 12,034,691
Stockholders' equity 32,504,381 21,327,718 21,290,692 21,974,626 16,118,777
Cash Dividends declared -0- -0- -0- -0- -0-
-----------------------
1) Net loss in 1996, 1994 and 1993 included a provision for the write down of
the carrying costs of oil and gas properties of $200,000, $6,904,000 and
$9,975,000, respectively.
2) Adjusted, as applicable, to give effect to the one-for-10 reverse stock split
effectuated by the Company on October 28, 1993.
13
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONSLiquidity and Capital Resources
At December 31, 1997, the Company had unrestricted cash of $3,721,000 and
$735,000 worth of marketable securities. During the year ended December 31,
1997, approximately $7,441,000 was used in operations. Net loss for the period
totaled $17,954,000 (including $12,775,000 in non-cash elements, primarily:
$774,000 in depletion and depreciation costs, $2,568,000 in certain bond and
loan costs, loss on marketable securities of $6,053,000, adjustment of restated
stock options of $745,000, adjusted loss on the sale of subsidiaries of
$564,000, and inputed interest expenses of $1,899,000 related to the discount of
certain convertible debentures. (See "Results of Operations - Interest Expense"
below). Approximately $2,028,000 was used during the period to increase current
assets other than cash, mostly for oil feedstock inventory, and approximately
$17,000 was used to decrease accounts payable and accrued liabilities.
Additional uses of funds during 1997 included additions to oil and gas
properties of $2,664,000 and additions to refinery property and equipment of
$5,582,000. Cash for operations during 1997 was provided, in part, by the
issuance of Common Stock and convertible debentures in an aggregate amount of
approximately $20,503,000, and from proceeds derived from the exercise of
warrants and options of $1,272,000.
In addition, since Gold Line has filed for protection under Chapter 11 of the
Bankruptcy Code (see Item 1. "Business - Domestic Operations - Refinery"), and
there are certain secured creditors who have made significant claims against
Gold Line, the total of which claims may exceed the total value of Gold Line's
assets, the collectibility of this judgement by the Company is uncertain.
Therefore, the company has provided an aggregate allowance for doubtful accounts
of $1,920,877 which fully reserves all amounts due AIRI from Gold Line as of
December 31, 1997.
During the years ended December 31, 1996 and December 31, 1995, the Company
generated net losses of $4,652,000 and $4,338,000, respectively. Cash flow
provided by and used in operations in 1996 and 1995, totaled $551,000 and
$274,000, respectively. Cash flow from operations was adjusted for depreciation,
depletion and amortization of $2,552,000 and $1,502,000 in 1996 and 1995,
respectively, and non-cash provisions for bad debts in 1996 and 1995 of $682,000
and $711,000, respectively. Additionally, $1,007,000 and $189,000 in 1996 and
1995, respectively, were invested in current assets other than cash. Accounts
payable increased by $2,352,000 and $1,985,000 in 1996 and 1995, respectively.
Additional uses of funds included investments in oil and gas properties during
1996 and 1995 of $1,590,000 and $3,194,000, respectively, net of certain
recoverable costs, and additions to refinery property and equipment of
$1,713,000 in 1996. Total cash used in operations and investment activity during
the years ended December 31, 1996 and 1995 was $2,763,000 and $3,481,000,
respectively. Cash was provided primarily from outside sources, including
$3,810,000 and $3,112,000 from the issuance of Common Stock and/or convertible
debentures during 1996 and 1995, respectively.
On February 25, 1997, the Company sold all of the issued and outstanding shares
of common stock of its wholly-owned subsidiaries, American International
Petroleum Corporation of Colombia ("AIPCC") and Pan American International
Petroleum Corporation ("PAIPC") (the "Purchased Shares") in an arms length
transaction (the "MIP Transaction") to Mercantile International Petroleum Inc.
("MIP"). The assets of AIPCC and PAIPC consisted of oil and gas properties and
equipment in South America with an aggregate net book value of approximately
$17.9 million. The total aggregate purchase price payable by MIP for the
Purchased Shares was valued, giving account to the contingent portion thereof,
which was not recorded by the Company pursuant to GAAP, at up to approximately
$20.2 million, determined as follows:
(a) Cash payments of approximately $3.9 million, of which approximately $2.2
million was paid simultaneously with the closing to retire the Company's
12% Secured Debentures due December 31, 1997, which were secured by the
Company's shares of AIPCC.
(b) Assumption of AIPCC and PAIPC debt of an aggregate amount of $634,000.
(c) 4,384,375 shares of MIP common stock (the "MIP Shares").
(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 the Company may demand payment on that
date of $1.5 million of the principal balance thereof.
(e) A $1.4 million "performance earn-out" from future production in Colombia,
plus interest at 8% per annum.
(f) Up to $2.5 million (reduced proportionately to the extent the Net Operating
Loss and Deferred Cost Deductions accrued by AIPCC through December 31,
1996 ("Accrued Tax Benefit Deductions") is less than $50 million but more
than $20 million) payable from 25% of AIPCC's future tax savings related to
Accrued Tax Benefit Deductions available to AIPCC on future tax filings in
Colombia. |
