UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1997
[ ] TRANSITION REPORT UNDER TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________________________ to
_______________________________
Commission file number 0-28184
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MASON OIL COMPANY, INC.
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(Exact name of small business issuer in its charter)
Utah 87-109974
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(State of incorporation) (I.R.S. Employer
Identification No.)
6337 Ravenwood Drive, Sarasota, FL 34243
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (941) 351-3102
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class Name of each exchange of which registered
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None None
Securities registered pursuant to Section 12(g) of the Exchange Act:
0.001 par value Common Stock
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(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No _____
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year consisted of
interest income in the amount of approximately $25,507.
The aggregate market value of the voting Common Stock held by
non-affiliates of the issuer (treating all executive officers and directors of
the issuer, for this purpose, as if they may be affiliates of the issuer) was
approximately $1,385,659 as of September 30, 1997 (based on the average bid
and asked price of such Common Stock).
Ten million eight hundred ninety thousand five hundred four (10,890,504)
shares of the issuer's Common Stock were outstanding as of September 30, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
The issuer's proxy statement for its 1997 Annual Meeting of Shareholders,
to be filed by the issuer with the Securities and Exchange Commission within
120 days following the end of the fiscal year ended June 30, 1997, is
incorporated by reference into Part III of this Annual Report on Form 10-KSB.
Transitional Small Business Disclosure Format (check one):
Yes _______ No ___X____
<PAGE>
MASON OIL COMPANY, INC.
FOR FISCAL YEAR ENDED JUNE 30, 1997
TABLE OF CONTENTS
Form 10-KSB
PART I
Item Page
1. Description of Business 1
2. Description of Property 3
3. Legal Proceedings 9
4. Submission of Matters to a Vote of Security Holders 9
PART II
5. Market for Common Equity and Related Stockholder Matters 9
6. Management's Discussion and Analysis or Plan of Operation 10
7. Financial Statements 11
8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
PART III
9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
10. Executive Compensation
11. Security Ownership of Certain Beneficial Owners and Management
12. Certain Relationships and Related Transactions
PART IV
13. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
PART I
This Form 10-KSB contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially
from those set forth in the forward-looking statements. The forward looking
statements include statements that reflect management's intentions, plans,
beliefs, expectations or predictions of future operations, conditions, and
potential future capitalization of the Company. These forward-looking
statements are based on current expectations that involve numerous risks and
uncertainties. Assumptions relating to such current expectations involve
judgments with respect to, among other things, future economic, competitive
and market conditions and future business decisions, all of which are
difficult or impossible to predict accurately and many of which are beyond the
control of the Company. Although the Company believes that the assumptions
underlying the forward-looking statements are reasonable, any of the
assumptions could be inaccurate and therefore there can be no assurance that
the forward-looking statements included in this Form 10-KSB will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation of the Company or any other person
that the objectives and plans of the Company will be achieved.
ITEM 1. DESCRIPTION OF BUSINESS.
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General. Mason Oil Company, Inc., a Utah corporation formed in 1980 (the
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"Company"), is positioning itself to participate in the acquisition,
development and operation of selected oil and gas properties, expected to be
located principally in Australia and Southeast Asia. From 1981 until 1996,
the Company was dormant, with no significant assets or liabilities.
Controlling interest in the Company was acquired in September, 1996 by Paul B.
Ingram and John L. Naylor, for the purpose of establishing a vehicle for the
identification, exploration, development and operation of promising oil and
gas properties. Since the date of such transaction, the Company has
investigated potential petroleum exploration and development prospects and
explored how it might participate in the development and operation of such
properties.
In October of 1996, Mr. Ingram and Mr. Naylor sold a 100% working
interest in two South Australian oil and gas exploration licenses, identified
as Petroleum Exploration Licenses 61 and 63 ("PELs 61 and 63", and
collectively the "PELs"), to the Company, subject to a 3% royalty interest
retained by Mr. Ingram and Mr. Naylor, in exchange for 6,000,000 shares of the
Company's stock. The PELs are held by Hemley Exploration Pty. Ltd., an
Australian corporation ("Hemley") which, as a result of the transaction with
Mr. Ingram and Mr. Naylor, became a wholly owned subsidiary of the Company.
At the time of the transaction, the PELs constituted the only significant
assets of Hemley, and Hemley had not conducted any significant operations with
respect to the PELs or otherwise.
In March of 1997, the Company raised gross proceeds of $2,065,000 through
the issuance of 1,475,050 shares of its Common Stock to an affiliate of FAI
Insurance, Ltd., one of Australia's largest insurance underwriting companies.
These funds were intended to finance initial exploration activities under the
PELs, and to permit the Company to pursue other petroleum exploration and
development opportunities in Australia and Southeast Asia.
The initiation of exploration activities under the PELs has been delayed
pending completion of negotiations with the aboriginal tribes claiming
interests in the geographic areas covered by the PELs. A native group has
asserted rights to title of the land subject to PEL 63. The Company is
currently in the process of resolving such claims. Aeromagnetic surveys in
the northeast portion of the Officer Basin of South Australia, being the
geographic area covered by the PELs, have been recently completed, and the
data is in the process of interpreted. A report on such data is expected in
the near future. Additional seismic studies on the areas covered by the PELS
are expected to be conducted over the course of the next year.
In July of 1997 the Company entered into a Joint Venture Agreement with
PT. Putra Bakti Mahkota, an Indonesian corporation ("Putra") regarding
participation in the development of the Sambidoyong Oil Field in Indonesia,
pursuant to the terms of a Technical Assistance Contract (the "TAC") with
Perusahaan Pertambangan Minyak Dan Gas Bumi Negara ("Pertamina"), an
Indonesian State Enterprise controlling the development of the field. In
September of 1997 the Company's joint venture with Putra terminated due to
Pertamina's failure to provide, within the time frame provided in the Joint
Venture Agreement, its approval of modifications to the TAC to permit the
joint development effort to take place. The Company is investigating the
reasons for Pertamina's failure to approve the joint venture activities and
may approach Pertamina to pursue in another manner the possibility of
participating in the development of the Sambidoyong Oil Field or other
properties within the control of Pertamina. The Company continues to
investigate other development prospects in Indonesia and elsewhere.
General Risks and Uncertainties
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Currently the Company has not identified any proven reserves, and is not
involved in any oil and gas production activities. There can be no assurance
that in the future the Company will locate proved reserves, whether associated
with the PELs or otherwise. Exploration and development activities undertaken
may not result in the establishment of producing wells. In the event proved
reserves are identified, the feasibility of recovery is strongly dependent
upon world market prices for oil and gas. There can be no assurance that
amounts capitalized as acquisition, exploration and development costs will be
recoverable through future operations.
Operating Hazards and Insurance. The oil and gas business involves a
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variety of operating risks, including the risks of fire, explosions, blow
outs, pipe failures, abnormally pressured formations and environmental hazards
such as oil spills, gas leaks, ruptures or discharges of toxic gases, the
occurrence of any of which could result in substantial losses due to injury or
loss of life, severe damage to or destruction of property, natural resources
and equipment, pollution or other environmental damage, clean up
responsibilities, regulatory investigations and penalties and suspension of
operations. Upon the initiation of development activities, the Company will
seek to obtain a gas and oil lease operator policy that would insure the
Company against certain risks associated with drilling, completing and
operating any wells. There can be no assurance that such insurance would be
available to the Company or, if it is obtained, that it would be adequate to
cover any losses or exposure to liability. Once the Company commences
exploration and development activities, even if it obtains insurance as
customary in the industry, such insurance coverage would not provide complete
coverage against all operating risks. An uninsured or partially insured
claim, if successful and of sufficient magnitude, could have a material
adverse effect on the Company and its financial condition. Any difficulty in
obtaining or maintaining insurance coverage may impair the Company's ability
to engage in its proposed business activities.
Regulation. The oil and gas industry is extensively regulated by
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national, regional and local authorities in each jurisdiction in which the
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Company may be involved in exploration, development and production activities.
In particular, oil and gas production operations and economics are affected by
price controls, environmental protection statutes, governmental control of
extraction activities, tax statutes and other laws and regulations relating to
the petroleum industry, as well as by changes in such laws, changing
administrative regulations and the interpretations and application of such
laws, rules and regulations. Oil and gas industry legislation and agency
regulation are under constant review for amendment and expansion for a variety
of political, economic and other reasons. Numerous governmental and
regulatory authorities, national, regional and local, are empowered to issue
rules and regulations impacting the oil and gas industry, some of which carry
substantial penalties for failure to comply. The legal and regulatory
framework for conducting petroleum exploration, development and production
activities in foreign countries is also subject to change due to changes in
the parties in power. The Company's proposed activities would be subject to
the risks associated with political instabilities. The regulatory burdens and
political risks associated with the oil and gas industry increase the cost of
doing business and, consequently, affect a participant's ability to achieve
profitability.
Competition. The oil and gas industry is highly competitive in all of
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its phases. The Company will encounter competition from other oil and gas
companies in all areas of its operations, including the acquisition of
interests in exploration and development properties, the marketing of oil and
gas that may be produced, and the availability of drilling rigs. Many of
these competitors possess greater financial, technical and other resources
than the Company. Competition for acquisition of rights to exploration and
development of properties is affected by the amount of funds available to the
Company and information about producing properties available to the Company.
Competition may also be presented by alternative fuel sources, including
heating oil and other fossil fuels. There has been increased competition for
lower risk development opportunities and available sources of financing.
Environmental Regulation. Various national, regional and local laws and
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regulations covering the discharge of materials into the environment or
otherwise relating to the protection of the public health and the environment
may affect the Company's operations, expenses and costs. The Company does not
believe that its environmental risks will be materially different from those
of comparable oil and gas companies operating in similar geographic areas.
Nevertheless, no assurance can be given that environmental laws will not, in
the future, result in the curtailment in production activities or materially
increase the costs of exploration, development or production, or otherwise
adversely effect the Company's operations and financial condition.
Bankruptcy Proceeding. As has been disclosed in prior filings, on
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December 31, 1985, the Company filed a Chapter 11 Petition for Voluntary
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Bankruptcy in the United States Bankruptcy Court for the District of Utah,
Central Division. At the Company's request, on January 14, 1988 the
bankruptcy proceedings were dismissed.
Employees. The Company has two employees, both of which work full time
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for the Company. The employees are Paul Ingram and John Naylor, the two
officers of the Company, who between themselves handle all administrative
functions and the investigation and evaluation of potential exploration and
development projects.
Negotiations for Acquisition of Interest in Drilling Rig. The Company,
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directly and through its wholly owned subsidiary, is negotiating for the
acquisition of a 50% interest in a Cabot 1000 drilling rig. Under the
tentative terms of the acquisition arrangement, this rig would be made
available for use in the Company's Southeast Asia and Australian drilling
programs. Faced with the worldwide scarcity of good oil field equipment, the
Company has been working to acquire rights to, or an interest in, a drilling
rig. The tentative acquisition terms call for the Company to pay $300,000 and
deliver 806,666 unregistered shares of the Company's Common Stock to the
seller in consideration for a 50% interest in the rig. The interest in the
rig would be sold by Desco Inc., an entity doing business in the Philippines,
and would be operated under the management of TD International, an affiliate
of Desco, Inc. The Company is currently in the final negotiations of the
terms of an acquisition agreement.
ITEM 2. DESCRIPTION OF PROPERTY.
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General. The Company's primary asset is its interests in the PELs, which
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were issued by the State of South Australia, and an access agreement providing
the Company with access to the property covered by the PELs, negotiated with
the Anangu Pitjantjatjari aboriginal tribe.
The area covered by the PELs is roughly described as a portion of the
Eastern Officer Basin, consisting of 17,188 square kilometers (4.2 million
acres), situated approximately 200 miles south of Alice Springs and
approximately 700 miles north of Adelaide. Although the location is remote
from populated areas, a modern railway and a year-round, sealed highway
service the site, and provide access from the site to a refinery at Alice
Springs to the north, and a refinery and deep water port at Port Augusta and
Adelaide to the south. The terrain is relatively flat, making access to rail
and highway uncomplicated. Due to the remoteness of the site, it is
anticipated that development would cause minimal disturbance to human
population, flora or fauna. Climatic conditions typically allow operations
350 days of the year.
Grant and Area of PELs. The PELs were granted to Hemley on 23 May 1996,
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pursuant to the terms of the Petroleum Act 1940 (South Australia) (the
"Petroleum Act"). Under Australian law, minerals and petroleum are vested in
the Government; rights to explore and extract petroleum within mainland South
Australia are conferred under and regulated by the Petroleum act and
regulations made by the South Australian Government under that Act.
In broad terms, the PELs confer the right to explore for gas and liquid
hydrocarbons within the license area, but not to undertake commercial
production of any reserves which are discovered. The initial term of each PEL
is five (5) years, ending on 22 May 2001. The PELs were issued by the South
Australian Department of Mines and Energy (the "Department") on behalf of the
Minister for Mines and Energy.
PEL 61 covers an area of approximately 6,258 square kilometers, and falls
entirely within the land area known as the "Pitjantjatjara Lands." These
lands are subject of the Pitjantjatjara Land Rights Act 1981 (South Australia)
(the "Pitjantjatjara Act"). Pursuant to this Act, ownership of the
Pitjantjatjara Lands had been vested in a corporation, Anangu Pitjantjatjara,
on behalf of the local traditional occupiers of the land. The vesting of
these lands in Anangu Pitjantjatjara, and the terms of the Pitjantjatjara Act,
do not prevent Hemley Exploration from exercising its rights under PEL 61.
However, in order to comply with the Pitjantjatjara Act, Hemley Exploration is
subject to an Access Agreement with Anangu Pitjantjatjara, which further
regulates Hemley Exploration's activities on the PEL area.
PEL 63 covers an area which is adjacent to (but outside of) the
Pitjantjatjara Lands area. The total area covered by the license is 10,930
square kilometers, though the license is expressed only to apply to specified
categories of land within this area. In essence, these are categories of land
in respect of which, under Australian law, a native title claim will not (or
is most unlikely to) apply.
PEL 63 is not subject to any separate agreements with third parties.
However, a native group has asserted rights to land subject to this license
agreement. The Company is currently in the process of resolving such claims
and may be obligated under such circumstances to pay certain amounts and be
subject to additional requirements of an agreement originated with the native
group and the Company.
Petroleum Exploration Licenses - Rights and Obligations. The PELs have
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been issued for an initial term of five years, subject to the license renewal
provisions contained in the Petroleum Act. The Petroleum Act prescribes
minimum exploration expenditure requirements to apply during the initial term
of an Exploration License. However, in the case of each of PELs 61 and 63, a
detailed plan setting out minimum levels of exploration for each year of the
initial term of the PEL is included in the License conditions. The plan
includes minimum estimated expenditure levels for each year, as follows:
<TABLE>
<CAPTION>
PEL 61 PEL 63
<S> <C> <C>
Year 1 (ending 22 May 1997) A$1,250,000 A$645,000
Year 2 (ending 22 May 1998) 2,000,000 340,000
Year 3 (ending 22 May 1999) 2,450,000 1,700,000
Year 4 (ending 22 May 2000) 3,950,000 1,770,000
Year 5 (ending 22 May 2001) 4,975,000 300,000
Total A$14,625,000 A$4,755,000
</TABLE>
Under the terms of each License, if Hemley fails to comply with the
prescribed exploration requirements in any year of the term, the responsible
Minister may (in his discretion) cancel or vary the License or, alternatively,
vary these expenditure requirements. The Company has to date been unable to
meet the exploratory requirements of the PELs, as a result of certain
complications associated with the status of one of the PELs . The South
Australian Department of Mines and Energy ("MESA") has eased the requirements
associated with the Company's PELs and has agreed to work with the Company to
resolve such complications. Currently the Company believes that both PELs are
in good standing with MESA.
In brief, some of the principal rights and obligations attaching to
Hemley as the holder of a Petroleum Exploration License are as follows:
(a) the Licensee has the exclusive right to engage in petroleum
exploration on the subject area;
(b) the Licensee must comply with general conservation and
rehabilitation obligations set out in the Petroleum Act and Regulations;
(c) the Licensee is subject to ongoing reporting obligations to
the Department in respect of work undertaken and expenditure incurred;
(d) the Licensee must also consult with and obtain the approval
of the Department in respect of work to be undertaken for the remainder of the
term; and
(e) where any part of the License area is being used for certain
other purposes, such as for the cultivation of crops or as pasture, the
Licensee must first obtain the consent of the relevant occupier or user.
A most important obligation of Hemley as the Licensee under the PELs is
to notify the Minister upon the discovery of petroleum (whether liquid or
gaseous) within the relevant License area. Particulars of the quantity and
quality of the petroleum must be provided as soon as practicable. The rights
of Hemley to apply for a Production License in this event are referenced
below.
Extension of Term of PEL. The Petroleum Act makes provision for the
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renewal of Petroleum Exploration Licensees for further terms of five years.
Hemley would be entitled to apply for and obtain such an extension at the end
of the current term of the PELs, subject to satisfying the Department that all
of the obligations applicable to the initial term have been satisfied. Upon
any such renewal, the existing area of the PEL would be required to be reduced
by not less than 25% by the excision of area(s) from the existing area of the
License.
PEL 61 - Access Agreement. As referenced above, the area of PEL 61 is
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subject to the Pitjantjatjara Act. Under the terms of that Act, in order for
any exploration or production activities to be undertaken on the
Pitjantjatjara Lands under (inter alia) the Petroleum Act, the permission of
Anangu Pitjantjatjara must first be obtained. The Access Agreement dated 5
March 1996, between Anangu Pitjantjatjara (on the one hand) and Paul Ingram
and John Naylor (on the other), sets out the terms upon which permission has
been granted for both exploration and production operations within the area of
PEL 61. The Access Agreement was entered into by Messrs. Ingram and Naylor
prior to the grant of the PEL, but the Agreement contemplates the substitution
of a company owned by them. Accordingly, Hemley is now bound by the terms of
the Access Agreement.
The Access Agreement provides for certain payments to be made to Anangu
Pitjantjatjara, based on:
(a) annual exploration expenditure on the License area; and
(b) the well-head value of any petroleum produced from the License area
The Access Agreement also entitles Anangu Pitjantjatjara to take up a
participatory interest of up to 10% in any Petroleum Production License which
may be granted in respect to any petroleum discovery within the area of PEL
61.
Grant of Petroleum Production License. As the holder of PELs 61 and 63,
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Hemley enjoys priority rights in respect of any petroleum reserves which it
discovers within the area of either license. Provided that it is in
compliance with its obligations under the relevant PEL and the Petroleum Act
at the time of discovery, Hemley will be entitled to apply for a Petroleum
Production License for the area within which the petroleum is discovered. In
this event, and subject to the foreign investment and native title
considerations referenced below, the Minister will be obliged to grant the
License, unless the reserves or quality of petroleum are not sufficient to
warrant production. If the holder of a Petroleum Exploration License makes an
economic discovery, and fails to apply for a Production License within twelve
(12) months, the responsible Minister may then grant a Production License in
respect of the field to any third party.
A Petroleum Production License has a term of twenty-one (21) years, but
may be renewed for further 21 year terms. The are of such a License may not
exceed 260 square kilometers. A Production License confers upon the licensee
the exclusive right to conduct operations for the production of petroleum
within the License area, including all necessary construction and other works.
If Hemley is granted any Petroleum Production Licenses, under the terms
of the Petroleum Act, these will also be subject to a royalty, payable to the
Government, at a rate of 10% of the well-head value of petroleum recovered.
Foreign Investment Considerations. Australia's foreign investment policy
---------------------------------
is administered by the Federal Treasurer with the assistance of the Foreign
Investment Review Board ("FIRB"). For the purposes of the policy, Hemley will
constitute a "foreign interest." While the granting of the PELs to Hemley
would not have attracted the operation of the policy, it is likely that Hemley
will be required to obtain the approval of the FIRB under that policy before
being entitled to the grant of one or more Petroleum Production Licenses.
Under the current policy, the level of scrutiny of the proposal will, in broad
terms, depend on the projected level of investment in the development. If the
planned investment is less than A$50 million, the FIRB will normally approve
the grant without examination. If this level is exceeded, the FIRB will
examine the proposal, and will approve the grant of the License unless this is
considered by the Government to be contrary to the national interest.
Native Title Considerations
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1. Native Title. In 1992, the High Court of Australia handed down
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its decision in the "Mabo case." In that decision, the Court rejected the
traditional doctrine that Australia was terra nullius (land belonging to no
one) at the time of British settlement. It stated that the common law of
Australia recognizes the existence of a form of native title held by
Australia's indigenous inhabitants over their traditional lands where:
(a) a group of indigenous people can establish that it has
maintained a substantial connection with the land, in accordance with
traditional laws and customs of the group, since the time of British
settlement; and
(b) the native title rights have not been lawfully extinguished.
The Court found that the content of native title is dependent upon
the traditions, customs and laws of the particular Aboriginal group. There is
no single, universal native title - rather it will vary from group to group.
Therefore, once a group has established that it has maintained the requisite
connection with the land since British settlement, the court must look to the
traditions, customs and laws of that group to determine the precise content of
native title.
In response to the High Court's decision, the Commonwealth
Parliament enacted the Native Title Act 1993 (the "NTA") in December 1993.
The NTA has a number of objectives:
(a) PROTECTION OF NATIVE TITLE -- to provide for the recognition
and protection of native title.
(b) VALIDATION OF PAST ACTS - to provide for, or allow, the
validation of Government acts (including the grant of interests in land) done
before the commencement of the NTA on 1 January 1994, which might otherwise be
invalid because of the existence of native title.
(c) COMPENSATION - to provide for compensation to be paid to
native title holders where native title has been extinguished or impaired as a
result of validation of a past act.
(d) VALIDITY OF FUTURE ACTS - to establish procedures to be
followed to ensure that Government acts after 1 January 1994 which may affect
native title can proceed without extinguishing or impairing native title, and
are therefore valid. These include the "right to negotiate" procedure which
applies in relation to the grant, renewal and extension of mining and
exploration titles.
(e) NATIVE TITLE CLAIMS - to establish a procedure for native
title claims to be made and determined.
The NTA also established the National Native Title Tribunal ("NNTT")
for the purposes of carrying out specified functions under the NTA.
2. Future Act Regime. In order to ensure that native title rights
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are protected in relation to future grants of interests in land, the NTA
specifies that such grants can only be validly made over land in which native
title might exist if certain conditions are satisfied. These conditions
include giving native title holders the same procedural rights as the holders
of ordinary "freehold" title to the land, including the right to be notified.
In addition, the NTA prescribes a special procedure called the
"right to negotiate" procedure (the "RTN procedure") which must be followed to
ensure the validity of certain types of future acts relating to onshore land.
These acts include:
(a) the creation of a right to mine (which is defined to include exploration
and prospecting for petroleum or gas); and
(b) an extension of the period of a right to mine, where the extension was
not part of the original grant of the right to mine.
Under the RTN procedure, a State Government that is planning to do
the act (for example, the granting of a petroleum exploration license) must
give notice of its intention to do so to various parties, including:
(a) any registered native title holders or claimants (native title parties)
in relation to the land;
(b) any representative Aboriginal body that will be affected by the proposed
act; and
(c) the general public.
Aboriginal groups which wish to oppose or have input in relation to
the proposed future act have two months from the issuance of the notice in
which to notify the NNTT. The Government must then give the native title
parties an opportunity to make submissions in relation to the proposed future
act, and must negotiate in good faith with the native title parties and the
grantee with a view to obtaining the agreement of the native title parties to
the doing of the act. If the parties fail to reach an agreement within a
specified period of time, the NNTT can be requested to make a determination.
3. Conditions Relating to Grant of Petroleum Exploration Licenses 61
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and 63. Both PELs were granted after the commencement of the NTA.
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Accordingly, the future act regime and the RTN procedure applied to the grant
- ------
of the Licenses. Although it is not apparent from the terms of the License
documents themselves, it is assumed that these procedures were followed by the
South Australian Department of Mines and Energy and the Licenses were
therefore validly granted under the NTA.
PEL 63 is a "Swiss cheese" grant, in that the License relates only
to land for which native title is likely to have been extinguished. This land
is described in the License document as including:
(a) land that is now or was formerly the subject of a grant of freehold title
or of a perpetual Government lease; and
(b) land which is or was formerly subject to a pastoral lease granted by the
South Australian Government.
Land over which native title may still exist is intended to be excluded from
the scope of the License.
4. Native Title Claims. As mentioned above, the NTA allows for
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Aboriginal groups to register claims for native title with the NNTT. Once a
claim is accepted and registered, the claimants are then entitled to receive
notice of any proposed dealing in the claimed land by the relevant Government.
If other parties, such as the relevant State or Territory Government or
underlying landowners, oppose the claim, the NNTT must direct the parties to
try and reach an agreement about the existence of native title.
On the basis of a search of the Register of Native Title Claims kept
by the NNTT, the only claim which has been registered with the NNTT and which
may affect the PELs is a claim lodged by William Lennon Snr on behalf of the
Antakirinja Muntuntjarra people (Claim No. SC 95/7). This claim would only
affect land within the boundary of PEL 63. The claim was accepted by the
Registrar on August 29, 1996.
5. Renewal of the PELs and Grant of Petroleum Production Licenses.
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Under the current regime, renewal of the PELs or the grant of a Petroleum
Production License to Hemley will constitute a future act to which the RTN
procedure applies. Therefore, prior to renewal or grant, the governmental
authority will be required to notify any registered native title holders or
claimants, who will then have the opportunity to oppose the renewal or grant.
On the assumption that no further native title claims are lodged
over the areas covered by the PELs, it appears that the renewal of PEL 61, or
a grant of a PPL in substitution for it, is unlikely to be opposed by any
aboriginal groups. This is because the area covered by the PEL (or PPL) is
part of the Pitjantjatjara Lands, and so covered by the Pitjantjatjara Act and
the Access Agreement. However, the position is less certain in respect of PEL
63.
6. Legislative Amendments; Recent Developments. The current Federal
-------------------------------------------
Government has proposed extensive amendments to the NTA. These amendments
include the exclusion of certain exploration and mining tenements from the RTN
procedure, provided certain conditions are met. It is expected that
substantial revisions will be made to the amendments before they are passed.
The content of the amendments will also be affected by the
Government's response to the High Court's decision in the recent "Wik case,"
which was handed down on 23 December 1996. In that case, the Court held that
pastoral leases did not necessarily extinguish native title rights. This
decision may have some impact on PEL 63, as it appears to cover substantial
areas of land which are or have been the subject of pastoral leases. The
South Australian Government may also take steps to clarify the status of
mineral and petroleum tenements granted over pastoral lease land, as a result
of the High Court's decision.
No Active Exploration Activities or Wells. The Company has not yet
-----------------------------------------
commenced active exploration and production activities, has drilled no wells
and has no production wells or developed acres.
Company Facilities. The Company currently conducts its business
------------------
operations out of facilites located in Sarasota, Florida provided by its
---
officers, at no cost to the Company. In March 1997, Hemley entered into an
operating lease for office space in AustraliaThe terms of the lease provide
for payments of approximately $10,500 annually and the lease expires in March
of 1999. It is anticipated that at the time of commencement of substantial
exploration and development activities, offices and facilities will be
established at the site of such operations
ITEM 3. LEGAL PROCEEDINGS.
- ----------------------------
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- -------------------------------------------------------------
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year covered by this report.
PART II
-------
ITEM 5. MARKET FOR ISSUER'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
- ----------------------------------------------------------------------------
The Company's Common Stock is traded on the NASDAQ bulletin board, under
the symbol MSNO. The Company estimates that at September 30, 1997, there were
approximately 2,365 holders of record of the Company's Common Stock.
The Company has not declared or paid any cash dividends on its Common
Stock during the last two fiscal years, and does not anticipate the
declaration or payment of dividends in the foreseeable future. The Company is
not subject to any restrictions that limit its ability to pay dividends, other
than the unavailability of funds and a statutory restriction found in the Utah
Revised Business Corporation Act, which prohibits the payment of distributions
to sharehodlers if, after giving effect to such distribution:
(a) The Company would not be able to pay its debts as they become due in the
usual course of business; or
(b) The Company's total assets would be less than the sum of its total
liabilities.
The following table sets forth the range of high and low bid information,
as reported by the bulletin board services, for the Company's Common Stock for
each quarter since Mr. Naylor and Mr. Ingram acquired a controlling interest
in the Company and transferred the PELs to the Company, reviving it from its
dormant status. Over-the-counter quotations reflect inter-dealer prices
without retail mark-up, mark-down, or commission and may not represent actual
transactions.
<TABLE>
<CAPTION>
Quarter Ended Common Stock
----------------- -------------
High Low
----------------- -------------
<S> <C> <C>
June 30, 1997 $ 0.4375 $0.4375
March 31, 1997 $ 1.50 $1.4373
December 31, 1996 $ 1.00 $ 1.00
</TABLE>
Since the filing by the Company of a General Form for Registration of
Securities of Small Business Issuers on Form 10-SB in May of 1996, the Company
has sold securities that were not registered under the Securities Act of 1933,
as follows:
A. On or about October 14, 1996, the Company issued 3,000,000 shares
of Common Stock to Paul Ingram and 3,000,000 shares of Common Stock to John
Naylor, in exchange for the transfer to the Company from each purchaser of a
fifty percent (50%) equity interest in Hemley.
B. On or about February 28, 1997, the Company issued 1,475,050 shares
of Common Stock to FAI Overseas Investments Pty. Ltd. in consideration for the
payment to the Company $2,065,000.
No underwriters were involved in any of the transactions described in the
preceding paragraph. No underwriting discounts or commissions were paid with
respect to such transactions. The Company claimed exemption under Section
4(2) of the Securities Act of 1933 with respect to the first transaction
listed above, and under Section 4(2) and/or Regulation S as with respect to
the second transaction.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
- --------------------------------------------------------------------
The Company has not had revenues from operations in either of the last
two fiscal years. The Company's plan of operation for the next twelve months
is set forth below.
Given its current cash position and resources, the Company anticipates
that it can satisfy its cash requirements, at current operating levels, for a
period of one year. The Company will continue to conduct investigations and
evaluations of promising exploration and development opportunities, and will
conduct testing and gather data with respect to such properties, but will
defer any substantial exploration or production activities pending receipt of
additional financing.
The Company plans to seek to raise additional capital to fund future
exploration and development operations, through the issuance of additional
equity in either the private or public markets within the next 12 months.
There can be no assurance that the Company will be able to obtain any such
financing.
The Company is proceeding with negotiations for the purchase of a 50%
equity interest in a drilling rig, as referenced in Item 1 above.
The Company does not anticipate any significant changes in the number of
employees, pending receipt of additional funding and commencement of
exploration and development activities.
ITEM 7. FINANCIAL STATEMENTS.
- -------------------------------
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -------------------------------------------------------------------------
FINANCIAL DISCLOSURE.
- ---------------------
As previously reported in a current report on Form 8-K dated September
22, 1997, effective as of September 22, 1997, the firm of Mantyla, McReynolds
& Associates ("Mantyla") was dismissed as the Company's principal independent
accountant, and the accounting firm of Ehrhardt Keefe Steiner & Hottman PC was
engaged by the Company to serve as the principal accountants to audit the
Company's financial statements.
The reports of Mantyla on the Company's financial statements for the two
fiscal years ended December 31, 1995 and December 31, 1994 did not contain an
adverse opinion or disclaimer of opinion and were not qualified or modified as
to uncertainty, audit, scope, or accounting principles. The decision to
change accountants was approved by the Company's Board of Directors. There
were no disagreements with Mantyla, whether or not resolved, on any matter of
accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which, if not resolved to Mantyla's satisfaction,
would have caused Mantyla to make reference to the subject matter of the
disagreement in connection with its report.
PART III
--------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
- -----------------------------------------------------------------------
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
- --------------------------------------------------
The information required by this item is hereby incorporated by reference
to the Company's proxy statement which will be filed with the Commission
within one hundred twenty (120) days of the close of the fiscal year.
ITEM 10. EXECUTIVE COMPENSATION.
- ----------------------------------
The information required by this item is hereby incorporated by reference
to the Company's proxy statement which will be filed with the Commission
within one hundred twenty (120) days of the close of the fiscal year.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- --------------------------------------------------------------------------
The information required by this item is hereby incorporated by reference
to the Company's proxy statement which will be filed with the Commission
within one hundred twenty (120) days of the close of the fiscal year.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- ----------------------------------------------------------
The information required by this item is hereby incorporated by reference
to the Company's proxy statement which will be filed with the Commission
within one hundred twenty (120) days of the close of the fiscal year.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
- --------------------------------------------
(a) Exhibits
*Exhibit 3.1 Articles of Incorporation of the Registrant. (Filed as Exhibit
3.1 to the Registrant's Form 10-SB-A1, Reg. No. 0-28184 filed
May 31, 1996).
*Exhibit 3.2 Articles of Amendment to Articles of Incorporation. (Filed as
Exhibit 3.2 to the Registrant's Form 10-SB-A1, Reg. No. 0-28184
filed May 31, 1996).
*Exhibit 3.3 Bylaws of the Registrant. (Filed as Exhibit 3.3 to the
Registrant's Form 10-SB-A1, Reg. No. 0-28184 filed May 31, 1996).
*Exhibit 3.4 Amended Bylaws of the Registrant. (Filed as Exhibit 3.4 to the
Registrant's Form 10-SB-A1, Reg. No. 0-28184 filed May 31, 1996).
*Exhibit 10 Stock Purchase Agreement, dated September 10, 1996, by and
between Craig Carpenter, Mason Oil Company, Inc., Paul B. Ingram
and John L. Naylor. (Filed as Exhibit 2.1 to the Registrant's
Form 10-QSB Reg. No. 000-28184 filed November 15, 1996).
*Exhibit 10.1 Stock Purchase and Sale Agreement, dated October 14, 1996,
between Registrant, Paul B. Ingram and John L. Naylor. (Filed
as Exhibit 2.2 to the Registrant's Form 10-QSB Reg.
No. 000-28184 filed November 15, 1996).
*Exhibit 10.2 Access Agreement between Anangu Pitjantjatjara and John Leonard
Naylor and Paul Bryan Ingram. (Filed as Exhibit 2.5 to the
Registrant's Form 10-QSB, Reg. No. 000-28184 filed February 21,
1997).
*Exhibit 10.3 Petroleum Exploration License (PEL) No. 61 and PEL Agreement.
(Filed as Exhibit 2.3 to the Registrant's Form 10-QSB Reg. No.
000-28184 filed February 21, 1997).
*Exhibit 10.4 Petroleum Exploration License No. 63 and PEL Agreement. (Filed
as Exhibit 2.4 to the Registrant's Form 10-QSB Reg.
No. 000-28184 filed February 21, 1997).
Exhibit 10.5 Joint Venture Agreement between Hemley Exploration PTY. LTD.,
an Australian corporation and PT. PUTRA BAKTI MAHKOTA, an
Indonesian corporation.
*Exhibit 10.6 Subscription Agreement and Investment Representation, dated
February 28, 1997. (Filed as Exhibit 10.1 to the Registrant's
Form 10-QSB Reg. No. 000-28184 filed May 20, 1997).
*Exhibit 10.7 Consulting Fee Agreement dated February 28, 1997. (Filed as
plan to the Registrant's Registration Statement in Form S-8
Reg. No. 333-24467 filed April 3, 1997).
*Exhibit 10.8 Amendment No. 1 to Consulting Fee Agreement dated May 8, 1997,
amending the Consulting Fee Agreement dated February 28, 1997,
and previously filed with the Securities and Exchange Commission
on a Form S-8 Registration Statement dated March 25, 1997.
(Filed as Exhibit 10.2 to the Registrant's Form 10-QSB Reg.
No. 000-28184 filed May 20, 1997).
*Exhibit 16 Letter on Change in Certifying Accountant. (Filed as Exhibit 16
to the Registrant's Form 8K Reg. No. 0-28184 filed September 29,
1997.
Exhibit 21 Subsidiaries of the Registrant
Exhibit 24 Power of Attorney
Exhibit 27 Financial Data Schedule
*Exhibits incorporated herein by reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities and Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
October 13, 1997
MASON OIL COMPANY, INC.
By: /s/Paul B. Ingram
------------------
Paul B. Ingram, President (Principal
Executive Officer) and Director
<PAGE>
MASON OIL COMPANY, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 1997
AND THE PERIOD FROM INCEPTION
(FEBRUARY 29, 1996) TO JUNE 30, 1996
<PAGE>
MASON OIL COMPANY, INC. AND SUBSIDIARY
TABLE OF CONTENTS
-----------------
Page
----
Independent Auditors' Report 1
Consolidated Financial Statements
Consolidated Balance Sheet 2
Consolidated Statements of Operations 3
Consolidated Statement of Changes in Stockholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 7
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and stockholders
Mason Oil Company, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of Mason Oil
Company, Inc. and Subsidiary (the Company) as of June 30, 1997, and the
related consolidated statements of operations, changes in stockholders'
equity, and cash flows for the year ended June 30, 1997 and the period from
inception (February 29, 1996) to June 30, 1996. These financial statements
are the responsibility of the Companys' management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 financial position of Mason Oil Company,
Inc. and Subsidiary as of June 30, 1997, and the results of their operations
and their cash flows for the year ended June 30, 1997 and the period from
inception (February 29, 1996) to June 30, 1996 in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company's future exploration and development
commitments and recurring net losses raise substantial doubt about its ability
to continue as a going concern. Management's plans regarding those matters
are also described in Note 2. As further described in Note 5, the Company has
been unable to meet the exploratory operation requirements for its petroleum
leases (PEL's). These PEL's reflect the Company's only cost center and
potential revenue source at this time. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
/S/Ehrhardt Keefe Steiner & Hottman PC
Ehrhardt Keefe Steiner & Hottman PC
October 10, 1997
Denver, Colorado
<PAGE>
MASON OIL COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
ASSETS
Current Assets
<TABLE>
<CAPTION>
<S> <C>
Cash and cash equivalents. . . . . . . . . . . . . . . . . $1,587,627
Prepaid expenses and other . . . . . . . . . . . . . . . . 1,904
-----------
Total current assets . . . . . . . . . . . . . . . . . . 1,589,531
-----------
Property and equipment, at cost
Unproved oil and gas properties, full cost method
(Notes 3 and 5) . . . . . . . . . . . . . . . . . . . . . 192,893
Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . 33,825
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,530
-----------
229,248
Less accumulated depreciation. . . . . . . . . . . . . . . (1,786)
-----------
227,462
Other assets
Intangible asset (net of accumulated amortization of $281) 1,048
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . 24,643
-----------
25,691
-----------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . $1,842,684
===========
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
Current liabilities
Accounts payable . . . . . . . . . . . . . . . . . . . . . $ 19,165
Notes payable - related parties (Note 4) . . . . . . . . . 196,591
Current portion of notes payable (Note 4). . . . . . . . . 11,358
-----------
Total current liabilities. . . . . . . . . . . . . . . . 227,114
-----------
Long-term notes payable (Note 4). . . . . . . . . . . . . . 11,011
Deferred salary - stockholder . . . . . . . . . . . . . . . 24,000
-----------
Commitments and contingencies (Notes 2, 4, 5 and 7)
Stockholders' (equity)
Common stock, $.001 par value, 200,000,000 shares
authorized; 10,890,504 issued and outstanding . . . . . . 10,890
Additional paid in capital . . . . . . . . . . . . . . . . 1,881,801
Retained deficit . . . . . . . . . . . . . . . . . . . . . (310,554)
Foreign currency translation adjustment. . . . . . . . . . (1,578)
-----------
1,580,559
-----------
Total liabilities and stockholders' equity. . . . . . . . . $1,842,684
===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
MASON OIL COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Period
from Inception
(February 29,
For the Year 1996) to
Ended June 30, June 30,
1997 1996
------------- -------------
<S> <C> <C>
General and administrative expenses. . . . $ (312,940) $(1,211)
Other (expense) income
Interest income . . . . . . . . . . . . . 25,507 95
Interest expense. . . . . . . . . . . . . (13,939) -
------------- --------
11,568 95
------------- --------
Net loss . . . . . . . . . . . . . . . . . $ (301,372) $(1,116)
============= ========
Net loss per common share. . . . . . . . . (.04) $(11.16)
============= ========
Weighted average common shares outstanding 8,028,767 100
============= ========
</TABLE>
See notes to financial statements.
<PAGE>
MASON OIL COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Foreign
Common Stock Paid in Currency
------------ Accumulated Transaction
Shares Amount Capital Deficit Adjustment Total
-------- -------- --------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Inception . . - $ - $ - $ - $ - $ -
Exchange of 100
shares of common
stock for
shareholders
interest in
Hemley Petroleum
Pty. Ltd. . . . 100 100 900 - - 1,000
Net loss . . . . - - - (1,116) - (1,116)
Foreign currency
translation
adjustment. . . - - - - (231) (231)
------- -------- -------- -------- ------- -----
Balance at
June 30, 1996 . 100 100 900 (1,116) (231) (347)
Recapitalization
and issuance of
stock for assets
in connection
with reverse
acquisition
(Note 1) . . 9,225,354 9,125 (900) (8,066) - 159
Issuance of
stock for
consulting
services
(Note 6) . . 190,000 190 34,776 - - 34,966
Issuance of
stock, net of
related costs
of $216,500
(Note 6). . 1,475,050 1,475 1,847,025 - - 1,848,500
Net loss . . - - - (301,372) - (301,372)
Foreign currency
translation
adjustment . - - - - (1,347) (1,347)
------------ -------- ----------- --------- ------- --------
Balance at
June 30,
1997. . . . 10,890,504 $ 10,890 $ 1,881,801 $(310,554) $(1,578) $1,580,559
========== ======== =========== ========== ======== =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
MASON OIL COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Period
from Inception
(February 29,
For the Year 1996) to
Ended June 30, June 30,
1997 1996
-------------- --------------
<S> <C> <C>
Cash used in operations
Net loss . . . . . . . . . . . . . . . . $ (301,372) $ (1,116)
------------- ------------
Changes to reconcile net loss to net
cash used in operations
Stock issued for services. . . . . . . 34,966 -
Depreciation and amortization. . . . . 2,067 -
Changes in assets and liabilities
Prepaid expenses and other . . . . . (1,857) (47)
Deposits . . . . . . . . . . . . . . (943) (23,700)
Organizational costs . . . . . . . . 77 (1,406)
Accounts payable and accrued
expenses. . . . . . . . . . . . . . 36,916 6,249
------------ ------------
71,226 (18,904)
------------ ------------
Net cash used in operations. . . . (230,146) (20,020)
------------ ------------
Cash used in investing activities
Acquisition of oil and gas leases. . . . - (28,921)
Oil and gas exploration capital
expenditures. . . . . . . . . . . . . . (16,433) (147,539)
Purchase of vehicles and equipment . . . (11,754) -
------------ ------------
Net cash used in investing
activities. . . . . . . . . . . . (28,187) (176,460)
------------ ------------
Cash provided from financing activities
Notes payable and advances from
stockholders. . . . . . . . . . . . . . - 208,988
Payments on notes payable. . . . . . . . (15,629) -
Issuance of common stock . . . . . . . . 1,848,500 -
Cash acquired in reverse acquisition . . 2,159 -
------------ ------------
Net cash provided by financing
activities. . . . . . . . . . . . 1,835,030 208,988
------------ ------------
Effect of exchange rates on cash. . . . . (1,347) (231)
------------ ------------
Net increase in cash and cash
equivalents. . . . . . . . . . . . . . . 1,575,350 12,277
Cash and cash equivalents at beginning
of period. . . . . . . . . . . . . . . . 12,277 -
------------ ------------
Cash and cash equivalents at end of
period . . . . . . . . . . . . . . . . . $ 1,587,627 $ 12,277
============ ============
</TABLE>
Supplemental disclosure of non-cash financing and investing activities:
During the year ended June 30, 1997, the Company entered into a merger
agreement which has been accounted for as a reverse acquisition. The
following assets were acquired and liabilities were assumed in exchange for
all common stock of the surviving company (Note 1):
<TABLE>
<CAPTION>
<S> <C>
Cash. . . . . . . . . . . . . . . . . . $ 2,159
Notes payable . . . . . . . . . . . . . (2,000)
----------
Net assets acquired . . . . . . . . . . $ 159
==========
Net common stock received . . . . . . . $ 9,125
Reduction of additional paid-in-capital (900)
Net effect on retained earnings . . . . (8,066)
----------
Net effect on equity. . . . . . . . . . $ (159)
=========
</TABLE>
During fiscal year 1997, the Company financed $24,601 of the purchase price of
two vehicles.
See notes to financial statements.
<PAGE>
MASON OIL COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -----------------------------------------------------------------------------
Nature of Business and Organization
- ---------------------------------------
Mason Oil Company, Inc. and Subsidiary (the Company) was incorporated in Utah
and conducts principally oil and gas acquisition, exploration, and development
activities in South Australia through a wholly owned Australian subsidiary;
Hemley Exploration Pty. Ltd.
In October 1996, Mason Oil Company, Inc. (Mason Oil) acquired all of the
issued and outstanding common shares of IAN Holdings Limited and
Subsidiaries (IAN) in exchange for 6,000,000 shares of common stock of Mason
Oil. For financial reporting purposes, the business combination was accounted
for as an additional capitalization of the Company (a reverse acquisition with
IAN as the acquirer). IAN is considered the surviving entity. The historical
financial statements prior to the merger are those of IAN. Mason Oil's only
assets consisted of cash and a liability with a net book value of $159.
Mason Oil and IAN subsequently merged with Mason Oil (the Company) as the
legal survivor and continues to be governed under such Articles of
Incorporation and bylaws in effect immediately prior to consummation of the
merger.
Principles of Consolidation
- -----------------------------
The consolidated financial statements include the accounts of Mason Oil, Inc.
and its wholly owned subsidiary. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Risks and Uncertainties
- -------------------------
Currently the Company has not identified any proven reserves, and therefore,
is not involved in any oil & gas production activities. There can be no
assurance that in the future the Company will locate proved reserves
associated with its leasehold interests. In the event proved reserves are
identified the feasibility of recovery is strongly dependent upon world market
prices for oil & gas, and accordingly there can be no guarantee that amounts
capitalized as acquisition, exploration, and development costs will be
recoverable through future operations.
The Company's principal operations are conducted in South Australia where the
Australian dollar is the functional currency. Future operations of the
Company could be adversely affected by unfavorable foreign currency
fluctuations.
Foreign Currency Translation
- ------------------------------
All assets and liabilities of the Company's subsidiary are translated into
U.S. dollars using the prevailing exchange rates as of the balance sheet date.
Income and expenses are translated using the weighted average exchange rates
for the period. Stockholders' investments are translated at the historical
exchange rates prevailing at the time of such investments. Any gains or
losses from foreign currency translation are included as a separate component
of stockholders' equity. The prevailing exchange rate at June 30, 1997 was
approximately 1 U.S. dollar to 1.34 Australian dollars.
Cash and Cash Equivalents
- ----------------------------
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents. The Company had balances in
excess of FDIC limits of approximately $1,461,000 at June 30, 1997.
Deposits
- --------
Deposits at June 30, 1997 consist of security bonds on deposit with the
Australian department of Mines and Energy as required by the associated
license agreements.
Intangible Asset
- -----------------
The intangible asset reflects organizational costs which are being amortized
using the straight-line method over five years.
Property and Equipment
- ------------------------
Property and equipment are stated at cost. Depreciation is computed on the
straight-line method over the estimated useful lives of the assets which is
five to seven years.
Oil and Gas Properties
- -------------------------
The Company follows the full cost method of accounting for oil and gas
properties. Accordingly, all costs associated with acquisition, exploration,
and development of oil and gas reserves, including directly related overhead
costs, are capitalized. Amounts capitalized by the Company as exploration
costs currently consist of geological and geophysical (G&G) costs in addition
to leasehold maintenance costs.
Investments in unproved properties are not amortized until proved reserves
associated with the projects can be determined or until impairment occurs. If
the results of an assessment indicate that the properties are impaired, the
amount of the impairment is included in capitalized costs to be amortized.
Management of the Company assesses costs excluded from the full cost pool
periodically for impairment.
Income Taxes
- -------------
The Company is subject to U.S. Federal income taxes and subject to foreign
taxes in Australia for earnings of its Australian subsidiaries. No income
taxes are currently due. The Company recognizes deferred tax assets and
liabilities for future tax consequences attributable to differences between
financial statement carry amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rules expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered and settled at June
30, 1997. The Company has foreign net operating loss carryforwards of
approximately $63,000, which can be used to offset future Australian income
taxes payable. The net operating loss carryforwards have been fully reserved
for by a valuation allowance.
Fair Value of Financial Instruments
- ---------------------------------------
The carrying amount for cash, receivables, accounts payable, notes payable and
accrued expenses approximated their fair values as of June 30, 1997 due to the
relatively short maturities of these instruments.
Use of Estimates
- ------------------
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Net Loss Per Common Share
- -----------------------------
Net loss per common share has been computed based on the weighted average
number of common shares outstanding during each period. There are no common
stock equivalents as of June 30, 1997.
NOTE 2 - GOING CONCERN
- --------------------------
The Company's commitments for future exploration and development activities
required under its Petroleum Exploration Leases coupled with the recurring net
losses from inception to June 30, 1997 raise substantial doubt about the
entity's ability to continue as a going concern. Management's plans to fund
such commitments include raising additional capital through a private
placement and the public markets. Management believes that the Company will
be able to raise adequate capital to fund such future exploration and
development operations.
NOTE 3 - UNPROVED OIL AND GAS PROPERTIES
- -----------------------------------------------
The Company maintains two petroleum exploration leases (PEL's) with 5 years
terms expiring May 22, 2001. The Company may renew the leases for additional
5 year terms subject to the terms contained in the PEL's (Note 5).
The Company is currently participating in oil and gas exploration activities
on approximately 4,200,000 acres in the state of South Australia. Such
acreage comprises the Company's only cost center. The Company anticipates
commencement of drilling activities during fiscal year 1998.
Costs excluded from amortization consist of the following at June 30, 1997:
<TABLE>
<CAPTION>
Period Acquisition Exploration
Incurred Costs Costs Total
- -------------------------- ------------ ------------ --------
<S> <C> <C> <C>
Inception to June 30, 1997 $ 27,339 $ 165,553 $192,893
============ ============ ========
</TABLE>
NOTE 4 - NOTES PAYABLE
- --------------------------
Notes payable consists of the following at June 30, 1997:
<TABLE>
<CAPTION>
<S> <C>
Note payable - shareholder, interest at
8%, due on demand. The note is
without collateral. $ 177,498
Note payable - shareholder, interest
at 8%, due on demand. The note is
without collateral 19,093
-----------
Total related party notes payable $ 196,591
============
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Note payable - finance corporation, interest at
11%, due in monthly installments of $903
including interest through April 2000. The
note is collateralized by a vehicle. $ 12,825
Note payable - finance corporation, interest
at 10.35%, due in monthly installments of
$615 through June 2000. The note is
collateralized by a vehicle 9,544
---------
22,369
Less current portion (11,358)
---------
$ 11,011
=========
</TABLE>
Installments due on notes payable subsequent to June 30, 1997 are as follows:
<TABLE>
<CAPTION>
Year Ending June 30,
- ---------------------------
<S> <C>
1998 . . . . . . . . . . . . . . . $ 11,358
1999 . . . . . . . . . . . . . . . 11,011
---------
$ 22,369
=========
</TABLE>
NOTE 5 - COMMITMENTS AND CONTINGENCIES
- -------------------------------------------
Petroleum Exploration Leases (PEL's)
- ---------------------------------------
The Company has two Petroleum Exploration Licenses (PEL's) with the state of
South Australia which contain certain commitments related to exploratory
operations to be incurred over the five year term of each lease. The leases
contain estimates of the costs to complete such exploratory operation
requirements, stated in both Australian dollars (A $) and United States
dollars using the June 30, 1997 exchange rate (U.S. $) as follows:
<TABLE>
<CAPTION>
A $ U.S. $
----------- -----------
<S> <C> <C>
Year one, ending May 22, 1997. . . . . . . . . . . $ 1,895,000 $ 1,414,000
Year two, ending May 22, 1998. . . . . . . . . . . 2,340,000 1,746,000
Year three, ending May 22, 1999. . . . . . . . . . 4,150,000 3,097,000
Year four, ending May 22, 2000 . . . . . . . . . . 5,720,000 4,269,000
Year five, ending May 22, 2001 . . . . . . . . . . 5,275,000 3,937,000
----------- -----------
Total estimated exploratory costs. . . . . . . . . $19,380,000 $14,463,000
=========== ===========
</TABLE>
As of June 30, 1997, the Company has been unable to meet the exploratory
operation requirements of the PEL's, as a result of certain complications
associated with the status of one of the Company's PEL's. The Australian
Department of Mines and Energy (MESA) has eased the requirements associated
with the Company's PEL's and has agreed to work with the Company to resolve
such complications. Currently, the Company's management and legal counsel
believes that both PEL's are in good standing with MESA. Although the Company
has not yet received a modified program of exploratory requirements with MESA,
management believes a revised program of exploratory commitments will be
reached very soon.
In addition to the exploration operation requirements of the PEL's, one of the
PEL's granted is also subject to the provisions of a separate Access Agreement
with Anangu Pitjanjatjara (AP), a corporate body constituted under the name by
the Pitjanjatjara Land Rights Act 1981 of South Australia. The access
agreement with AP provides for annual rental payments to be made, which
consists of a minimum annual rental of approximately $15,000 and additional
amounts payable based upon the amount of Annual Exploration Expenditures
(AEE's) incurred as follows:
2.5% of AEE's less than or equal to $373,400, and
1.5% of AEE's in excess of $373,400
The conversion rate used for these financial statement disclosures are as of
June 30, 1997 and reflect an exchange rate of approximately 1.34 U.S. dollars
to 1 Australian dollar.
Under the terms of the Access Agreement, any application for a PPL by the
Company would entitle AP at their option to obtain a participatory interest in
any exploration and production joint venture agreement (JVA). AP may elect to
take up to a maximum 10% participating interest and a minimum of a 1%
participating interest in any respective JVA.
The access agreement with AP also provides for certain overriding royalty
payments to be made for all petroleum recovered under any PEL's or any
Petroleum Production License (PPL) granted by the South Australian Department
of Mines and Energy. In addition, certain stockholders' of the Company have
been personally granted a 3% overriding royalty interest in any PPL's granted
to the Company's subsidiary Hemley Exploration Pty. Ltd.
One of the license agreements currently held by the Company is not subject to
any separate agreements with third parties, however, a native group has
asserted rights to title of the land subject to the license agreement. The
Company is currently in the process of resolving such claims and may be
obligated under such circumstances to pay certain amounts and be subject to
additional requirements of an agreement similar in terms to the Access
Agreement with AP.
Operating Leases
- -----------------
In March 1997, the Company's Australian subsidiary entered into an operating
lease for office space. The terms of the lease provide for payments of
approximately $10,500 annually and the lease expires in March 1999. Future
minimum lease payments under the office lease are approximately as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------
<S> <C>
1998. . . . . . . . . . . . . . . $10,500
1999. . . . . . . . . . . . . . . 7,875
-------
$18,375
=======
</TABLE>
Rental expense under the office lease was approximately $2,860 for the year
ended June 30, 1997.
NOTE 6 - EQUITY
- ---------------
In February 1997, the Company entered into a subscription agreement with an
Australian Investment Company. Pursuant to the terms of the agreement, the
Investment Company purchased 1,475,050 shares of the Company's common stock at
a price of $1.40 per share under a Regulation S offering of the Securities and
Exchange Act of 1933. The Company realized net proceeds of approximately
$1,850,000 from this transaction.
In February 1997, the company entered into an agreement with four consultants
for the performance of certain services. In connection with this agreement,
the Company issued 190,000 shares of common stock for consulting services
provided from February 1997 through June of 1997. The Company has recorded
$34,966 of consulting expense which is reflected in the accompanying
Consolidated Statement of Operations for the year ended June 30, 1997 and
represents the fair market value of such services provided.
NOTE 7 - SUBSEQUENT EVENTS
- ------------------------------
In September 1997, the Company entered into an agreement to purchase a 50%
interest in a drilling rig. Based on the terms of the agreement, the purchase
price of $905,000 is expected to be funded by issuing approximately 800,000
shares of common stock valued at $600,000 and $305,000 cash.
JOINT VENTURE AGREEMENT
BETWEEN
PT. PUTRA BAKTI MAHKOTA ("PUTRA")
AND
HEMLEY EXPLORATION PTY. LTD ("HEMLEY")
This Joint Venture Agreement (the "Agreement") is made and entered into
effective as of the 28th day of July, 1997, by and between Hemley Exploration
Pty. Ltd, an Australian Corporation ("Hemley"), and PT. Putra Bakti Mahkota, a
corporation organized and existing under the laws of the Republic of Indonesia
("Putra")
Recitals
--------
A. Putra has entered into a Technical Assistance Contract in the form
attached hereto as Exhibit A (the "TAC") with Perusahaan Pertambangan
Minyak Dan Gas Bumi Negara, an Indonesian State Enterprise established
on the basis of Law No. 8/1971 ("Pertamina"), relating to development of
the Sambidoyong Oil Field (which falls within the Contract Area as
defined in the TAC). Fort Point Resources Ltd., a corporation organized
and existing under the laws of the Province of Alberta, Canada
("Fort Point") was also a named party to, and a Contractor under, the
TAC, but all rights and interests of Fort Point under the TAC have been
terminated, and Putra and Pertamina are now the sole parties to the TAC
and Putra is the sole Contractor thereunder.
B. Putra has incurred certain costs and expenses (the "TAC Related
Expenses") in connection with the procurement, negotiation and execution
of the TAC, the creation of an initial plan of development and the
collection of data for use in connection with the tender process, and
establishment of a Work Program (as defined in the TAC) and budget
relating to the Petroleum Operations (as defined in the TAC) to be
conducted within the Contract Area (as defined in the TAC) for the
Contract Year (as defined in the TAC) ending November 16, 1997.
C. Putra was granted the authority to perform the Work Program by
Pertamina, which has exclusive authority, granted by the laws and
government of the Republic of Indonesia, for the mining, extraction,
exploitation and production of minerals, petroleum products and natural
gas throughout the Contract Area.
D. Putra is not legally bound or committed to any third party with
respect to the development or operation of the Petroleum Operations as
described in the TAC, and the parties hereto desire to establish a joint
venture for the development of the Sambidoyong Field, in accordance with
the requirements of the TAC. To this end, the parties desire that all
rights and obligations of Putra arising pursuant to the TAC be
transferred and assigned to a joint venture entity established by the
parties hereto (the "JV"), so that the JV may pursue the conduct of
Petroleum Operations within the Contract Area, assume all obligations
of Putra as set forth in the TAC, and realize the benefits of all
rights of the Contractor (as defined in the TAC) arising thereunder.
E. The parties desire that Putra receive certain consideration in
exchange for the transfer of rights and obligations under the TAC to JV,
including a payment of a specified fee, reimbursement of certain of the
TAC related Expenses, and a participating interest in profits from the
Petroleum Operations, all upon the terms and conditions set forth below.
Agreement
---------
NOW THEREFORE, in consideration of the foregoing premises and the
provisions hereafter set forth, the parties hereto agree as follows:
1. Formation of Joint Venture Entity to Serve as Substitute Contractor
-------------------------------------------------------------------
Under TAC.
---------
1.1 Formation of Entity. Promptly after the effective date of
-------------------
this Agreement, the parties hereto shall form a corporation or
other form of joint venture limited liability company under the
laws of such jurisdiction as the parties hereto may agree upon
(the "JV") for the purpose of assuming all rights, obligations
and interests of Putra under the TAC, and carrying out the
Petroleum Operations and Work Program as defined in the TAC,
subject to the terms and conditions of this Agreement.
1.2 Name and Charter Documents. The name of JV shall consist of
--------------------------
the words "Hemley Putrabakti Sambidoyong," and words or
abbreviations identifying the type of entity, or shall be such
other name as each of the parties hereto may agree upon. The
charter documents of JV shall be in a form
mutually agreed upon by the parties hereto.
1.3 Capitalization of JV.
--------------------
(a) Shares or equity interests in JV will be issued, and
other actions will be taken, such that upon the
organization of JV, Hemley will have an eighty two percent
(82%) interest and Putra will have an eighteen
percent (18%) interest in the profits of JV. Putra's
participation will be in the nature of a carried interest,
so that it will be entitled to an 18% share of profits to
be distributed as dividends. However, Putra will not have
any obligation to contribute to the capital of JV, other
than to contribute Putra's entire rights and interests
under the TAC.
(b) Profits and management controls will be allocated in
accordance with the respective equity interests of the
owners of JV, unless otherwise specified.
(c) The charter documents shall reflect that no dividends
or distributions will be declared or paid to Putra until:
(i) all loans and contributions made by Hemley to satisfy
the obligation set forth in Section 3,
4 and 5 below have been repaid to Hemley; and (ii) all
additional expenses, contributions and loans paid,
incurred or made by Hemley to finance the
Petroleum Operations and Work Program have been repaid to
Hemley. The expenses Hemley shall be entitled to recover
shall include all investment costs incurred to secure
the necessary funds to meet the obligations set forth
in Sections 3, 4 and 5 below and to ensure the performance
of the Work Program. JV will execute an agreement to repay
all such loans, expenses and contributions, in a form
approved by Hemley.
1.4 Management.
----------
(a) Management of JV shall be under the direction of its
Board of Directors. The Board shall initially consist of
four members, selected as follows:
(i) The Chairman of the Board shall be an individual
designated by the mutual agreement of Hemley and
Putra.
(ii) The President of JV, who will also serve as a
director of JV, shall be an individual designated by
Hemley.
(iii) One of the final two directors shall be an individual
nominated by Putra, and the other shall be an
individual nominated by Hemley.
(b) The initial officers of JV will be the President, who
will be a designee of Hemley, and such other officers as
the Board of Directors of JV may determine to be
appropriate.
(c) JV shall be staffed so as to comply with applicable
requirements regarding participation of qualified
Indonesian personnel.
1.5 Restrictions on Transfer of Ownership Interests. The
-----------------------------------------------
parties to this Agreement shall enter into an agreement in a
form mutually agreed upon, placing certain restrictions on the
transfer of the shares or equity interests in JV held by them.
Such restrictions shall include a right of first refusal, such
that if a shareholder or owner of JV proposes to sell
any shares or equity or carried interests, such shares or
interests must first be offered to the other shareholders or
owners of JV, on a pro-rata basis, in accordance with their
relative interests in JV. A party proposing to sell any
shares or equity or carried interests will be required to give
written notice to the other parties of the proposed sale, and
the proposed sales price. If the right of first refusal is not
exercised within thirty (30) days following
the receipt of written notice thereof, then the offering party
may proceed with the proposed sale at a price and on terms no
less favorable to the buyer than those offered to the other
parties hereto. If a sale is not concluded
within sixty (60) days, the transfer shall once again be subject
to the right of first refusal. The right of first refusal shall
continue for a period of two years commencing from the effective
date of this Agreement. The right of first refusal will not
apply to sales to assist in the funding of the payment
obligations set forth herein or the funding of the Work Program
under the TAC.
1.6 Books, Records and Expenses.
---------------------------
(a) The books and records of JV shall be kept in accordance
with generally accepted accounting principles consistently applied and
accepted by the Association of Indonesia Accountants.
(b) Each of the parties hereto shall have the right, at its
own expense, at all reasonable times while a shareholder or owner of JV, to
inspect any books or records of JV, including all records, well samples, data
and materials which relate to the TAC Contracts. JV may condition the release
of such information on the execution of appropriate confidentiality
agreements.
(c) Each of the parties hereto shall have the right, at its
own expense, while a shareholder or owner of JV, to audit the financial and
other records of JV, in accordance with accepted procedures and practices.
2. Transfer and Assignment of Rights and Obligations under TAC.
-----------------------------------------------------------
2.1 Transfer of TAC. All rights, obligations and interests of
---------------
Putra arising under the TAC shall be assigned and transferred to JV (the "TAC
Transfer") immediately upon the delivery to Hemley and Putra of the letters
referenced in Section 3.2 below, subject to final approval of the Government
of the Republic of Indonesia.
2.2 Modification of TAC. The parties hereto agree to
-------------------
immediately pursue an amendment and modification of the TAC, to put the TAC in
a form that is mutually acceptable to Pertamina, Hemley and JV. It is
anticipated that such modifications shall include, without limitation, the
following:
(a) Appointment of JV as the sole Contractor under the TAC
in substitution of Putra, and release of Putra from any future obligations
under the TAC.
(b) A determination of the Commencement Date of the Work
Program to be conducted by JV, which date will be no earlier than the date of
the TAC Transfer.
(c) An agreement between Pertamina and JV in a form
approved by Hemley regarding the Work Program, expenditures to be made in
conducting Petroleum Operations, and associated budgets, for the first two
Contract Years (as defined in the TAC) following the Commencement Date. The
Work Program is to be based on a description of services to be rendered, and
programs to be accomplished, rather than on a specific amount of funds to be
expended. A proposed revised Work Program is attached hereto as Exhibit C.
(d) A waiver by Pertamina of any right to cause a
termination of the TAC pursuant to Section II of the TAC.
(e) Termination of the right granted to Pertamina in
Section XV of the TAC to demand the Pertamina Participating Interest (as
defined in the TAC).
(f) A confirmation by Pertamina that as of the date of the
TAC Transfer, neither Putra nor JV will be considered to be in breach or
default of any obligations under the TAC, no liability will arise against any
such party with respect to any actions taken or failed to be taken prior to
the TAC Transfer, and the TAC is in full force and effect in the form attached
hereto as Exhibit A, subject to such amendments and modifications as have been
approved by Hemley and JV.
(g) A modification of Section III of the TAC, to delete
references to the Work Program that was to have been performed prior to the
TAC Transfer, to provide that the Work Program to be conducted in each
Contract Year will be subject to the results obtained in the prior Contract
Year, and to clarify that while portions of a Work Program may be deferred
from one year to the next, such deferral will not result in a requirement to
pay to Pertamina funds that would otherwise have been spent in the Work
Program.
(h) Confirmation by Pertamina that Fort Point has no
further rights or interests in or under the TAC.
(i) Documentation that JV, as the substitute Contractor
under the TAC, is a joint venture between Putra and Hemley, to permit
recovery, pursuant to Section V of the TAC, of expenses incurred at the
director level.
2.3 JV as Party to TAC. Upon the TAC Transfer, JV shall be
------------------
substituted for Putra as a party to the TAC, and Putra shall be released and
relieved from any further rights and obligations under the TAC, except that
Putra shall remain liable for any breaches of the TAC occurring prior to the
date of the TAC Transfer if not released from such liability by Pertamina. JV
will not assume any liabilities with respect to any breaches of the TAC
occurring prior to the date of the TAC Transfer.
3. Payment of Fee to Putra.
-----------------------
3.1 Fee Payment Amount. In consideration for Putra's agreement to
------------------
transfer to JV all of Putra's rights and benefits under the TAC as provided in
Section 2 above, JV will pay to Putra an amount equal to US$380,000 (three
hundred eighty thousand U.S. dollars) (the "Fee Payment Amount").
3.2 Timing of Fee Payment Amount - Letter From Pertamina. The Fee
----------------------------------------------------
Payment Amount will be paid to Putra within ten days following receipt and
authentication by Hemley of an authorized letter or letters from Pertamina,
addressed to Putra and Hemley and including the following, in a form
reasonably approved by Hemley:
(a) The approval and consent of Pertamina to the assignment
and transfer of all rights, obligations and interests of Putra arising under
the TAC to JV;
(b) Confirmation that the Contractor's commitment under the
TAC to spend a minimum of US$9,500,000 in the performance of the Work Program
within the initial two Contract Years has been extended for one Contract Year
and will be extended, on a year by year basis, for two additional Contract
Years;
(c) Confirmation that the Commencement Date for the Work
Program and Petroleum Operations under the TAC will not occur until JV
commences operations in furtherance of the Work Program following the
effectiveness of the TAC Transfer;
(d) Confirmation that the TAC is in full force and effect
with Putra and Pertamina as the sole parties thereto, Putra's failure to
perform the Work Program has been excused, and neither party is in breach or
default of any of its obligations thereunder; and
(e) Confirmation that Pertamina will favorably consider
appropriate modifications to the TAC to facilitate a development of the
Contract Area on a basis that is reasonable for both Pertamina and JV,
including the modifications contemplated by Section 2.2 of this Agreement.
3.3 Escrow of Fee Payment Amount. Promptly after the execution
----------------------------
of this Agreement, Hemley will arrange for a deposit into an escrow account
with a financial institution selected by Hemley an amount equal to the Fee
Payment Amount, and will provide evidence of such deposit to Putra. The Fee
Escrow Amount will be withdrawn from such account and delivered to Putra upon
satisfaction of the condition set forth in Section 3.2 above.
4. Payment of Verified Expenses, or Portion Thereof.
------------------------------------------------
4.1 Payment of Verified Expenses Upon Commerciality Declaration.
-----------------------------------------------------------
JV will pay to Putra an amount equal to the actual out-of-pocket TAC Related
Expenses incurred by Putra, to the extent such expenses are recoverable by the
Contractor under Section V of the TAC, as verified by independent auditors
appointed by Hemley to audit Putra's record of expenses (the "Verified
Expenses"). The payment of the Verified Expenses will be made on the later
of: (i) the TAC Transfer; (ii) the completion of the audit by the auditors
appointed by Hemley to establish the Verified Expenses; and (iii) a
determination by Hemley and Pertamina, based on data developed by the
Petroleum Operations, that the Sambidoyong Field can be commercially developed
(a "Commerciality Declaration").
4.2 Payment of Portion of Verified Expenses if Project Fails to
-----------------------------------------------------------
Achieve
- -------
Commerciality. If the TAC Transfer takes place, but the TAC is
-------------
thereafter terminated due to the lack of a Commerciality Declaration, so that
the Verified Expenses do not become payable to Putra pursuant to paragraph 4.1
above, then upon such termination JV will pay to Putra an amount equal to
eighteen percent (18%) of the Verified Costs, in exchange for Putra's transfer
to Hemley of Putra's entire rights and interests with respect to JV.
5. Hemley to Fund Payments. To the extent the capital contributions
-----------------------
to, and revenues of, JV are not sufficient to pay the amounts payable to Putra
as specified in Sections 3 and 4 above, Hemley will fund such payments through
loans to JV. Such loans shall be documented by promissory notes, security
instruments and other documentation in a form approved by Hemley. All such
loans shall be repaid to Hemley before any distribution or dividend is made by
JV to its shareholders or owners.
6. Representations and Warranties of Putra. Putra hereby represents,
---------------------------------------
warrants and covenants to Hemley as follows:
6.1 Organization and Standing. Putra is an entity duly
-------------------------
organized, validly existing and in good standing under the laws of the
Republic of Indonesia.
6.2 Authority, Authorization and Validity. Putra has all
-------------------------------------
requisite power and authority to conduct its business as presently conducted,
to enter into this Agreement, and to carry out and perform its obligations
hereunder. The execution, delivery and performance of this Agreement have
been duly authorized by all requisite corporate action. This Agreement has
been duly executed and delivered by Putra and constitutes the legal, valid and
binding obligation of each of Putra, enforceable in accordance with its terms,
subject as to enforcement of remedies to applicable bankruptcy, insolvency,
reorganization or similar laws relating to or affecting the enforcement of
creditors rights. The execution, delivery and performance of this Agreement
and compliance with the provisions hereof Putra do not conflict with, or
result in a breach or violation of the terms, conditions or provisions of, or
constitute a default under, or result in the creation or imposition of any
lien pursuant to the terms of, the charter documents of Putra, or any statute,
law, rule or regulation or any order, judgment, decree, contract, agreement or
instrument to which Putra or any of its properties are bound or subject.
Putra is not legally bound or committed to any other third party with respect
to the development or operation of the Sambidoyong Field, except for the
obligations owed to Pertamina, as set forth in the TAC.
6.3 Status of TAC.
-------------
(a) The TAC is in full force and effect in the form
attached hereto as Exhibit A. Although Putra has not yet commenced the Work
Program contemplated by the TAC, or conducted the environmental baseline
assessment called for by the TAC, Pertamina has excused such non-performance,
so that Putra is not in default of any of its obligations under the TAC.
Pertamina is not in breach or default of any of its obligations under the TAC.
(b) All services performed, expenses incurred and
commitments undertaken by Putra in connection with the TAC have been
consistent with the requirements of the TAC and in accordance with the
applicable budgets approved by Putra and Pertamina, copies of which are
attached hereto as Exhibit B. All expenses incurred have been fully paid for.
The costs and expenses incurred to date by Putra pursuant to the TAC and in
preparation for the Work Program do not exceed $500,000. Putra understands
that the extent to which such expenses will qualify as Verified Expenses as
provided in Section 4.1 above will be determined pursuant to the audit to be
conducted as provided in Section 4.1.
(c) Putra is not aware of any reason that the Commerciality
Declaration contemplated by the TAC would not be given.
(d) Putra knows of no reason why the TAC Transfer cannot
occur as contemplated or why JV would not be able to proceed with the
Petroleum Operations and Work Program after the TAC Transfer as contemplated
by the TAC and this Agreement.
6.4 No Adverse Actions. No action, suit, proceeding or
------------------
governmental investigation is pending, or to the knowledge of Putra
threatened, which seeks to question, delay or prevent the consummation of the
transactions contemplated by this Agreement, or the performance of the TAC or
the Petroleum Operations or Work Program described therein.
7. Representations and Warranties of Hemley. Hemley hereby represents and
warrants to Putra as follows:
------------------------------------------------------------------------
7.1 Organization and Standing. Hemley is duly organized, validly existing
and in good standing under the laws of Australia.
--------------------------------------------------------------------
7.2 Authority, Authorization and Validity. Hemley has full
-------------------------------------
power and authority to enter into this Agreement and to carry out and perform
its obligations hereunder. This Agreement has been duly authorized, executed
and delivered by Hemley and constitutes the legal, valid and binding
obligation of Hemley, enforceable against Hemley in accordance with its terms
except as such enforceability may be limited by applicable bankruptcy,
reorganization, insolvency and other similar laws affecting the enforcement of
creditors' rights.
8. Covenants and Agreements of the Parties.
----------------------------------------
8.1 Affirmative Covenants and Agreements of Putra. Putra covenants and
agrees with Hemley as follows:
--------------------------------------------------------------------
(a) Maintenance of TAC. From and after the effective date
------------------
of this Agreement and until the TAC Transfer, Putra shall: perform and
fulfill all of its obligations under the TAC; incur and pay expenses under the
TAC and in conduct of the Work Program only as approved by Hemley and
consistent with the budgets established pursuant thereto, as set forth in the
Exhibits to this Agreement; and maintain the TAC in full force and effect, in
the form attached hereto as Exhibit A, subject to such modifications and
amendments thereto as may be specifically approved in writing by Hemley.
(b) Access to Information. From and after the effective
---------------------
date of this Agreement and until the TAC Transfer, Putra shall make available
to Hemley, and its representatives and agents, all books, records and
information relating to the Work Program, the Petroleum Operations, the TAC,
and the services provided and studies conducted in connection therewith.
(c) Confidential Information. Putra confirms, acknowledges
------------------------
and covenants that all information relating to the Petroleum Operations, Work
Program and Contract Area in its possession or to which it has had access
shall be treated as confidential, and shall not be used, reproduced, disclosed
or disseminated to any party without the prior written consent of Hemley.
Effective upon the TAC Transfer, all such information previously owned by
Putra shall become the exclusive property of JV. All such information
previously owned by Pertamina shall remain the property of Pertamina. All
copies thereof in the possession of Putra shall be delivered, promptly after
the TAC Transfer, to JV or Pertamina, whichever is the party entitled thereto.
(d) Cooperation in Transition. Putra shall take all
-------------------------
actions reasonably requested by JV to facilitate or permit the TAC Transfer,
and will cooperate with JV in the transition of the Work Program and Petroleum
Operations, and will assist in the transfer of any existing agreements with
vendors and suppliers, in an effort to preserve vendor and customer
relationships and to ensure the uninterrupted continuation of the Work
Program.
(e) Additional Deliveries. Putra will execute, acknowledge
---------------------
or deliver such documents or instruments as may be reasonably requested by
Hemley or JV, and will take any other action consistent with the terms of this
Agreement that may be reasonably requested by Hemley or JV, for the purposes
of effecting the TAC Transfer and carrying out the other transactions
contemplated by this Agreement. All such actions shall be at the expense of
the party requesting such action.
8.2 Covenants and Agreements of Hemley -- Confidential
--------------------------------------------------
Information. Hemley confirms, acknowledges, and covenants that information
--
which is marked "confidential," and is received or to be received by it from
Putra pursuant to this Agreement, is and shall be confidential and for the use
of Hemley and JV only, and Hemley will not use such information or reproduce,
disclose or disseminate such information to any other person (other than
employees, directors or agents of Hemley or its parent company having a need
to know the contents of such information and attorneys, accountants and
engineers employed by Hemley or its parent company), except in connection with
the exercise of rights under this Agreement, unless Putra has made such
information available to the public generally, such information has otherwise
been made generally or publicly available, or Hemley or its parent company is
required to disclose such information by a duly authorized governmental body.
Hemley understands that all oral communications of a confidential nature are
to be followed by a written document summarizing such conversation, which
shall be labeled confidential. Hemley shall be relieved of any
confidentiality obligation effective as of the TAC Transfer, at which time it
shall become the owner of, and entitled to the unrestricted use of, all
confidential information received with respect to the Work Program, Petroleum
Operations and Contract Area, subject to the contractual restrictions relating
thereto set forth in the TAC.
9. Indemnification.
---------------
9.1 Putra's Indemnities. Putra shall indemnify, defend and hold
-------------------
harmless Hemley and JV from and against any and all losses, costs,
liabilities, damages and expenses (including legal and other expenses incident
thereto) arising out of or suffered or incurred in connection with: (a) the
material breach of any representation or warranty of Putra set forth in, or
delivered pursuant to the terms of, this Agreement; or (b) the material breach
of any of Putra's covenants or other agreements contained in or arising out of
this Agreement or the transactions contemplated hereby.
9.2 Hemley's Indemnities. Hemley shall indemnify, defend and
--------------------
hold harmless Putra from and against any and all losses, costs, liabilities,
damages and expenses (including legal and other expenses incident thereto)
arising out of or suffered or incurred in connection with: (a) the material
breach of any representation or warranty of Hemley set forth in this
Agreement; or (b) the material breach of any of Hemley's covenants or other
agreements contained in or arising out of this Agreement or the transactions
contemplated hereby.
9.3 Notice of Claim. Putra or Hemley, upon discovery of the
---------------
breach of any of the representations, warranties or covenants of the other
under this Agreement, shall each give to the other prompt written notice of
the discovery of such breach. If any action, suit or proceeding shall be
commenced against, or any claim or demand be asserted against, Putra or
Hemley, as the case may be, in respect of which such party proposes to seek
indemnification from the other under this Section 9.3, then such party (the
"Claimant") shall notify the party from whom indemnification is sought (the
"Indemnifying Party") to that effect in writing with reasonable promptness and
in any event, if such claim arises out of a claim by a person or entity other
than the Claimant, then within ten (10) days after notice of such claim was
given to the Claimant; provided, however, that the Claimant's failure to give
such notice to the Indemnifying Party shall not relieve the Indemnifying Party
of its obligations hereunder unless, and only to the extent that, it has a
prejudicial effect on the Indemnifying Party's ability to defend the claim.
9.4 Assumption and Defense of Third-Party Action. If any claim
--------------------------------------------
hereunder arises out of a claim against the Claimant by a third party, the
Indemnifying Party shall have the right, at its own expense, to participate in
or assume control of the defense or settlement of such claim, and the Claimant
shall fully cooperate with the Indemnifying Party subject to reimbursement for
actual out-of-pocket expenses incurred as the result of a request by the
Indemnifying Party. If the Indemnifying party elects to assume control of the
defense of any third-party claim, the Claimant shall have the right to
participate in the defense of such claim at its own expense. If a claim
requires immediate action, the parties will make every effort to reach a
decision with respect thereto as expeditiously as possible. If the
Indemnifying Party does not elect to assume control or otherwise participate
in the defense of any third-party claim, it shall be bound by the results
obtained by the Claimant with respect to such claim.
9.5 Limitations on Indemnification. Notwithstanding any
------------------------------
provisions herein to the contrary, neither party shall be obligated under this
Section to indemnify, defend or hold harmless the other from and against any
loss, cost, liability, damage or expense: (i) arising out of or in connection
with facts or circumstances occurring more than two (2) years after the date
of the TAC Transfer; or (ii) which has a total liability or exposure to the
Claimant of less than $10,000.
10. Termination; Amendment; Waiver.
-------------------------------
10.1 Termination. This Agreement may be terminated as provided below:
------------
(a) Mutual Agreement. This Agreement may be terminated at any
time by the mutual written consent of Putra and Hemley;
(b) This Agreement may be terminated by either Putra or
Hemley, if such party has not received a letter from Pertamina meeting the
requirements of paragraphs 3(a) through 3(e) above by August 31, 1997.
10.2 Effect of Termination. If this Agreement is terminated in
---------------------
accordance with Section 10.1, this Agreement shall become void and there shall
be no further liability or obligations on the part of any party or their
respective officers, directors, shareholders or agents, except as to the
obligations set forth in Section 8.2 (Confidentiality), Section 11.1 (Costs
and Expenses) and Section 9 (Indemnification), and with respect to any
liabilities or damages incurred or suffered by a party as a result of the
breach by the other party of any of its other representations, warranties,
covenants or agreements set forth in this Agreement, and the pursuit of
remedies with respect thereto as permitted hereby.
11. Miscellaneous.
-------------
11.1 Costs and Expenses. Each of the parties hereto shall
------------------
pay all of the fees and expenses that it incurs in connection with the
negotiation, preparation and execution of this Agreement and the transactions
contemplated hereby, including, without limitation, all professional and other
fees.
11.2 Indemnification from Obligations to Brokers. Each party
-------------------------------------------
hereto will indemnify and hold harmless the other against and in respect of
any other claim for a brokerage commission, finders fee or other similar
payment relative to this Agreement or to the transactions contemplated hereby,
based in any way on agreements, arrangements or understandings made or claimed
to have been made by the indemnifying party.
11.3 Parties in Interest. Except as otherwise specifically
-------------------
provided herein, all representations, covenants and agreements contained in
this Agreement by or on behalf of any of the parties hereto shall bind and
inure to the benefit of the respective successors and assigns of the parties
hereto whether so expressed or not. All representations, warranties,
covenants and agreements made herein by Putra shall inure to the benefit of
JV. JV is specifically made a third party beneficiary of this Agreement.
11.4 Notices. All notices, requests, consents and other
-------
communications hereunder shall be in writing and shall be delivered in person
or sent by electronic facsimile or telecopy, followed promptly by a notice
mailed by certified or registered mail, return receipt requested, addressed as
follows:
(a) if to Hemley, at the telecopy number and address set
forth below:
Hemley Exploration Pty. Ltd.
ECH House 174 Greenhill Road
Parkside 5063, South Australia
Attn: John Naylor
Fax: (618) 8272 0355
With a copy to:
P. Christian Anderson
Holme Roberts & Owen LLP.
111 East Broadway, Suite 1100
Salt lake City, Utah 84111
Fax: (801) 521-9639
(b) if to Putra, at the telecopy number and address set
forth below:
PT. Putrabakti Mahkota
Perkantoran Roxy Mas Blok D4 No. 9
Jl. K.H. Hasyim Ashari, Jakarta 10150
Attn: Mohammad Ishak, President Director
Fax: (021) 385 9904
or in any such case, at such other telecopy number and address as shall have
been furnished in writing by such party to the others. All notices sent by
telecopy or electronic facsimile shall be deemed delivered upon receipt of
confirmation of the telecommunication.
11.5 Arbitration.
-----------
(a) The parties will make every reasonable effort to settle
amicably any problems arising from this Agreement. Any disputes arising under
or relating to this Agreement which cannot be settled amicably shall be
settled by final and binding arbitration conducted in Singapore in accordance
with the rules then in effect of the Singapore International Arbitration
Centre. Arbitration will be conducted by three arbitrators, with Hemley and
Putra each selecting one arbitrator, and those two arbitrators selecting the
third. The decision of a majority of the arbitrators shall be final and
binding upon the parties. Judgment upon any award rendered by the arbitrators
may be entered in any court having jurisdiction. In the event any arbitration
or other permitted action is commenced to enforce this Agreement or to remedy
any default hereunder, the prevailing party shall be entitled to recover its
reasonable attorney fees, and all costs, fees and expenses of arbitration, in
addition to any other relief to which it may be entitled.
(b) The parties hereto expressly waive Section 461 of the
Regelement of the Rechtsvordering (the "R.V.") and Articles 15 and 108 of Law
No. 1 of 1050, being The Supreme Court Rules of Indonesia, so that there will
be no appeal in the Indonesian Supreme Court from the decision of the
arbitrators.
(c) The parties agree that in accordance with Section 631
of the R.V., the arbitrators need not be bound by strict rules of law in
making their decision, but may pronounce judgment as reasonable men. The
parties further agree to waive the provisions of Articles 1266 and 1267 of the
Indonesian Civil Code to the extent that a judicial decision or order would be
required as a precondition to an award of damages in a dispute relating to
this Agreement.
11.6 Entire Agreement. This Agreement, including schedules and
----------------
exhibits hereto, constitutes the sole and entire agreement and understanding
of the parties with respect to the subject matter hereof, and specifically
supersedes the terms of the Memorandum of Understanding dated June 24, 1997.
All schedules and exhibits hereto are hereby incorporated herein by reference.
No party shall be liable or bound to any other party in any manner by any
warranties, representations or covenants, except as specifically set forth
herein or therein.
11.7 Counterparts--Facsimile Signatures. This Agreement may be
----------------------------------
executed in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument. This Agreement shall be considered duly executed and delivered by
a party hereto when an electronic facsimile transmission of the signature page
hereto and purporting to reflect the execution of such signature page by a
representative of such party shall have been delivered by such party to the
other parties hereto. Each party hereto agrees that if it executes this
Agreement by delivery of a facsimile transmission of the signature pages as
provided in the preceding sentence, it will thereafter deliver to each of the
parties hereto duly executed original counterparts of such signature pages.
11.8 Waivers and Amendments. Except as otherwise expressly
----------------------
provided herein, neither this Agreement nor any term hereof may be amended,
waived, discharged or terminated other than by a written instrument signed by
the party against whom enforcement of any amendment, waiver, discharge or
termination is sought.
11.9 Severability. If any provision of this Agreement shall be
------------
declared void or unenforceable by any judicial or administrative authority,
the validity of any other provision and of the entire Agreement shall not be
affected thereby.
11.10 Titles and Subtitles. The titles and subtitles used in
--------------------
this Agreement are for convenience only and are not to be considered in
construing or interpreting any term or provision of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the date first above written.
HEMLEY:
Hemley Exploration Pty. Ltd., an Australian corporation
By:_____________________________________
John L. Naylor, Managing Director
PUTRA:
PT. PUTRA BAKTI MAHKOTA, a corporation
organized and existing under the laws of the Republic of
Indonesia
By:_______________________________________
Mohammad Ishak, President Director
JOINT VENTURE AGREEMENT
between:
HEMLEY EXPLORATION PTY. LTD., an Australian corporation ("Hemley")
and
PT. PUTRA BAKTI MAHKOTA, an Indonesian corporation ("Putra")
______________________
Dated as of July 28, 1997
EXHIBIT A
[Attach a copy of the TAC Agreement}
<PAGE>
EXHIBIT B
Budgets Approved For Current Contract Year of the TAC
<PAGE>
EXHIBIT C
Revised Work Program
It is proposed that Section 3.2 of the TAC be amended to read in its
entirety as follows:
3.2 The Work Program to be conducted by Contractor during the four
Contract Years commencing from November 17, 1998 shall be as follows:
<TABLE>
<CAPTION>
Contract Year Work Program
- ------------- -------------------------------------------
<S> <C>
Year One: Interpretation of seismic data and possible
reprocessing of old data as well as
consider acquisition of additional new
seismic data to locate more appropriate
well site to test Sambidoyong structure.
Drill new well (SBD-2) on selected
location and test.
Petrophysical analysis of SBD-1 well data
with view to remedial cementing job and
retesting.
Year Two: Workover SBD-1 well or side-track
drilling and retesting.
Drill development well (SBD-3) on
Sambidoyong structure.
Drill a third well if warranted on
Sambidoyong structure or on one of
the other prospects A, B, C or D.
Reservoir engineering analysis of
Sambidoyong Field.
Year Three: Design and install production facilities for
Sambidoyong oil and gas field and
commence production.
Drill a fourth well - development well on
Sambidoyong field or one one of the other
previously mentioned prospects.
Reservoir study.
Year Four: Drill exploration well on one of the
undrilled mapped prospects.
Drill development well.
Production engineering study.
Contractor shall resubmit the Work Program for each Contract Year based on
the results of the Work Program conducted during the prior Contract Year.
If during any Contract Year Contractor should not complete all portions
of the Work Program to be conducted during such Contract Year, then the
remaining, uncompleted portions of such Work Program may be carried forward to
the next Contract Year.
The foregoing Work Program is based on completion of designated tasks,
rather than the expenditure of specified amounts of funds. Contractor shall
be responsible for completing the designated tasks, and assuming the
responsibility of payment of the necessary costs associated therewith.
</TABLE>
Exhibit 21 Subsidiaries of the Registrant
Hemley Exploration Pty, Ltd.
Exhibit 24
POWER OF ATTORNEY
KNOW ALL PERSONS by these presents that each person whose signature to
this Annual Report appears below hereby constitutes and appoints Paul B.
Ingram and John L. Naylor, and each of them as his true and lawful
attorney-in-fact and agent, with full power of substitution, to sign on his
behalf individually and in the capacity stated below and to perform any acts
necessary to be done in order to file all amendments and post-effective
amendments to this Annual Report, and any and all instruments or documents
filed as part of or in connection with this Annual Report or the amendments
thereto and each of the undersigned does hereby ratify and confirm all that
said attorney-in-fact and agent, or his substitutes, shall do or cause to be
done by virtue hereof.
In accordance with the requirements of Section 13, or 15(d) of the
Securities and Exchange Act of 1934, the Registrant has duly caused this
report to be signed below by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
October 13, 1997 /s/ Paul B. Ingram
-------------------
Paul B. Ingram, President (Principal
Executive Officer) and Director
October 13, 1997 /s/ John Naylor
-------------------
John L. Naylor, Secretary-Treasurer
(Principal Accounting and Financial
Officer) and Director
October 13, 1997 /s/ John Price
---------------
John Price, Director
October 13, 1997 /s/ Geoffrey J. Pickles
------------------------
Geoffrey J. Pickles, Director
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,587,627
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,589,531
<PP&E> 229,248
<DEPRECIATION> (1,786)
<TOTAL-ASSETS> 1,842,684
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 10,890
<OTHER-SE> 1,569,669
<TOTAL-LIABILITY-AND-EQUITY> 1,842,684
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 312,940
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,939
<INCOME-PRETAX> (301,372)
<INCOME-TAX> 0
<INCOME-CONTINUING> (301,372)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (301,372)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
