IAN HOLDINGS LIMITED AND SUBSIDIARIES
Consolidated Financial Statements
For the Period Ended June 30, 1996
Table of Contents
Page
Independent Auditors' Report
Consolidated Financial Statements
Consolidated Balance Sheet
Consolidated Statement of Operations
Consolidated Statement of Cash Flows
Consolidated Statement of Changes in Stockholders' Equity
Notes to Financial Statements
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and stockholders
IAN Holdings Limited and Subsidiaries
We have audited the accompanying consolidated balance sheet of
IAN Holdings Limited and Subsidiaries (the Company) as of June
30, 1996, and the related consolidated statements of operations,
changes in stockholders' deficit, and cash flows for 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 audit 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
audit provides 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 IAN Holdings Limited and Subsidiaries as of June 30,
1996, and the results of their operations and their cash flows
for the period then ended 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 lack of working
capital raise substantial doubt about its ability to continue as
a going concern. Management's plans regarding those matters are
also described in Note 2. 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
January 10, 1997
Denver, Colorado
IAN HOLDINGS LIMITED AND SUBSIDIARIES
Consolidated Balance Sheet
June 30, 1996
Assets
Current Assets
Cash $ 12,277
Tax refund receivable 47
Total current assets 12,324
Oil and gas properties, full cost method
(Note 3)
Unproved 176,460
Other assets
Organizational costs 1,406
Deposits 23,700
25,106
Total assets $ 213,890
Liabilities and Stockholders' (Deficit)
Current liabilities
Accounts payable $ 6,249
Notes payable to stockholders (Note 4) 207,988
Total current liabilities 214,237
Commitments and contingencies (Notes 2, 5
and 6)
Stockholders' (deficit)
Common stock, $1 par value, 50,000 shares
authorized; 100 issued and outstanding 100
Additional paid in capital 900
Retained deficit (1,116)
Foreign currency translation adjustment (231)
(347)
Total liabilities and stockholders'
deficit) $213,890
See notes to consolidated financial statements.
IAN HOLDINGS LIMITED AND SUBSIDIARIES
Consolidated Statement of Operations
For the Period from Inception (February 29, 1996) to June 30, 1996
General and administrative expenses $ 1,211
Interest income (95)
Net loss $ 1,116
See notes to consolidated financial statements.
IAN HOLDINGS LIMITED AND SUBSIDIARIES
Consolidated Statement of Cash Flows
For the Period from Inception (February 29, 1996) to June 30, 1996
Cash used in operations
Net loss $ (1,116)
Changes to reconcile net loss to net cash
used in operations
Tax refund receivable (47)
Deposits (23,700)
Organizational costs (1,406)
Accounts payable 6,249
Cash used in operations (20,020)
Cash provided from financing activities
Notes payable and advances from
stockholders 208,988
Cash provided by financing
activities 208,988
Cash used in investing activities
Acquisition of oil and gas leases (28,921)
Oil and gas exploration capital
expenditures (147,539)
Cash used in investing
activities (176,460)
Effect of exchange rates on cash (231)
Net increase in cash 12,279
Cash at beginning of period -
Cash at end of period $ 12,279
Supplemental disclosure of non-cash financing and investing
activities:
Exchange of common stock for stockholders
100% interest in Hemley Petroleum Ltd. $ 1,000
See notes to consolidated financial statements.
IAN HOLDINGS LIMITED AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Deficit
For the Period from Inception (February 29, 1996) to June 30, 1996
Foreign
Additional Currency
Common Paid in Accumulated Transaction
Stock Capital Deficit Adjustment Total
Inception - $ - $ - $ - $ -
Exchange of 100
shares of common
stock for
shareholders
interest in
Hemley Petroleum
Pty. Ltd. 100 900 - - 1,000
Net loss - - (1,116) - (1,116)
Foreign currency
Translation - - - (231) (231)
adjustment
Balance at June 100 $ 900 $ (1,116) $ (231) $ (347)
30, 1996
See notes to consolidated financial statements.
IAN HOLDINGS LIMITED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Organization and Summary of Significant Accounting
Policies
IAN Holdings Limited and Subsidiaries (the Company) was
incorporated in the Cayman Islands on February 29, 1996 as a
limited liability company. The Company conducts principally oil
and gas acquisition, exploration, and development activities in
South Australia through a wholly owned Australian subsidiary;
Hemley Exploration Pty. Ltd.
The consolidated financial statements include the accounts of IAN
Holdings Limited and its wholly owned subsidiaries. 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 two Australian
subsidiaries are translated into U.S. dollars using the
prevailing exchange rates as of the balance sheet date. Income
and expenses are translated using the 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, 1996 was
approximately 1 U.S. dollar to 1.25 Australian dollars.
Cash and Cash Equivalents
Cash equivalents include all highly liquid investments with
original maturities of three months or less. At June 30, 1996
there were no cash equivalents included in the Company's cash
balances.
Deposits
Deposits at June 30, 1996 consist of security bonds on deposit
with the Australian department of Mines and Energy as required by
the associated license agreements.
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 not subject to U.S. Federal income taxes, however,
the Company is 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. The
Company has foreign net operating loss carryforwards of
approximately $20,000, which can be used to offset future foreign
income taxes payable.
Fair Value of Financial Instruments
The carrying amount for cash, receivables, and accounts payable
approximate their fair values due to the relatively short
maturities of these instruments.
The fair value of notes payable to stockholders are measured
based on rates currently available to the Company for similar
debt, which approximates their carrying amounts.
Related Party Transactions
The Company and its subsidiaries have received advances from its
stockholders during the period of approximately $209,000. In
addition, one of the stockholders also provides engineering
services to the Company related to oil and gas exploration
activities. Amounts paid for such services for the period ended
June 30, 1996 were approximately $73,300.
Note 2 - Going Concern
The Company's commitments for future exploration and development
activities required under its Petroleum Exploration Leases
coupled with the lack of working capital available at June 30,
1996 raise substantial doubt about the entities 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 6,821,000 acres in the state of South
Australia. Such acreage comprises the Company's only cost
center. The Company anticipates commencement of drilling
activities in the second quarter of calendar 1997.
Costs excluded from amortization consist of the following at June
30, 1996:
Period Acquisition Exploration
Incurred Costs Costs Total
Inception to June 30, $ 28,291 $ 147,539 $ 176,460
1996
Note 4 - Notes Payable to Shareholders
During the period ended June 30, 1996 the Company and its
subsidiaries received working capital advances from stockholders
which are represented by two notes payable to the individual
stockholders. The notes provide for interest at an annual rate
of 8%, which is payable annually. The principal balance on the
notes with any remaining accrued interest is payable in full on
August 31, 1999. At any time prior to August 31, 1999, the notes
are payable upon demand, within 20 days of written notice being
received by the Company. As the advances were converted to notes
on September 1, 1996, no interest expense has been recorded in
the accompanying financial statements.
Note 5 - Commitments and Contingencies
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 as
follows:
Year one, ending May 22, 1997 $ 1,516,000
Year two, ending May 22, 1998 1,872,000
Year three, ending May 22, 1999 3,320,000
Year four, ending May 22, 2000 4,576,000
Year five, ending May 22, 2001 4,220,000
Total estimated exploratory costs $ 15,504,000
If the Company fails to comply with the exploratory operation
requirements of the PEL's, the Minister for the South Australian
Department of Mines and Energy may, at his discretion, terminate
the PEL agreements with the Company.
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 $16,000 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 $400,000, and
1.6 % of AEE's in excess of $400,000
The conversion rate used for these financial statement
disclosures are as of December 31, 1996 and reflect an exchange
rate of approximately 1.25 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, as
there are no identifiable third parties having asserted rights to
title of the land subject to the license agreement. This does
not preclude any third parties from asserting a successful claim
to title of the land subject to the license agreement in the
future, and therefore, the Company may be obligated under such
circumstances to pay certain amounts and be subject to additional
requirements of any agreement originated with such third parties
and the Company.
Note 6 - Subsequent Events
On September 10, 1996, the stockholders of IAN Holdings Limited
and Subsidiaries (IAN) entered into a stock purchase agreement
with the majority stockholder of Mason Oil Company, Inc. (Mason
Oil) (a Utah Corporation). The agreement provides for the sale
of 1,400,000 common shares of Mason Oil stock held by the
majority stockholder in two phases. Upon closing 1,300,000
shares were purchased by the stockholders of IAN for $35,000,
with the stockholders of IAN also being granted an irrevocable
option to purchase an additional 100,000 common shares for
$25,000. The option is exercisable for a period of one year from
the initial closing with the stockholders of IAN being granted
from the selling stockholder a proxy to vote on the 100,000
common shares under option without restrictions.
On October 14, 1996 the stockholders of the IAN entered into a
stock purchase and sale agreement (purchase agreement) with Mason
Oil Company, Inc. The purchase agreement provides for the
exchange of all issued and outstanding shares of IAN to be
exchanged for 6,000,000 newly issued unregistered shares of Mason
Oil. Immediately after the exchange the stockholders of IAN will
own approximately 79% of Mason Oil`s common stock then issued and
outstanding. The transaction is expected to be treated as a
reverse acquisition for accounting purposes, with IAN as the
acquirer.
On December 26, 1996, IAN and Mason Oil entered into a merger
agreement which will effectively merge IAN into Mason Oil, a Utah
Corporation. Subsequent to the merger, Mason Oil will be the
legal survivor and will continue to be governed under such
articles of incorporation in effect immediately prior to
consummation of the merger.
Effective December 30, 1996, the Board of Directors of Mason Oil
voted to adopt the fiscal year end of IAN.