AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
ON NOVEMBER 10, 2004
REGISTRATION NO. 333-
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM F-10
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
INTEROIL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW BRUNSWICK 2911 NOT APPLICABLE
(PROVINCE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL CLASSIFICATION (I.R.S. EMPLOYER IDENTIFICATION NUMBER
OF INCORPORATION OR ORGANIZATION) CODE NUMBER (IF APPLICABLE)) (IF APPLICABLE))
SUITE 2, LEVEL 2, ORCHID PLAZA
79-88 ABBOTT ST.
CAIRNS, QLD 4870, AUSTRALIA
61 7 4046 4600
(ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
GARY M. DUVALL
25025 I-45 NORTH, SUITE 420
THE WOODLANDS, TEXAS 77380
(281) 292-1800
(NAME, ADDRESS, (INCLUDING ZIP CODE) AND TELEPHONE NUMBER
(INCLUDING AREA CODE) OF AGENT FOR SERVICE IN THE UNITED STATES)
COPY TO:
GEORGE G. YOUNG III, ESQ.
HAYNES AND BOONE, L.L.P.
1221 MCKINNEY STREET, SUITE 2100
HOUSTON, TEXAS 77010
(713) 547-2000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF
THE SECURITIES TO THE PUBLIC:
FROM TIME TO TIME AFTER EFFECTIVENESS OF
THIS REGISTRATION STATEMENT.
PROVINCE OF ONTARIO
(PRINCIPAL JURISDICTION REGULATING THIS OFFERING (IF APPLICABLE))
It is proposed that this filing shall become effective (check appropriate box):
A.|_| Upon filing with the Commission, pursuant to Rule 467(a) (if in connection
with an offering being made contemporaneously in the United States and Canada)
B.|X| At some future date (check the appropriate box below):
1.|_| pursuant to Rule 467(b) on at (designate a time not sooner than 7 calendar
days after filing)
2.|_| pursuant to Rule 467(b) on at (designate a time 7 calendar days or sooner
after filing) because the securities regulatory authority in the review
jurisdiction has issued a receipt or notification of clearance on.
3.|_| pursuant to Rule 467(b) as soon as practicable after notification of the
Commission by the Registrant or the Canadian securities regulatory authority of
the review jurisdiction that a receipt or notification of clearance has been
issued with respect hereto.
4.|X| After the filing of the next amendment to this form (if preliminary
material is being filed).
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to the home jurisdiction's shelf short form
prospectus offering procedures, check the following box. |X|
CALCULATION OF REGISTRATION FEE
==================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS AMOUNT TO BE OFFERING AGGREGATE OFFERING AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED(1) PRICE PER SHARE PRICE REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------
Common Shares, no par value,
issuable upon the conversion of the
8 7/8% Senior Convertible Debentures 4,140,585 $25.94 (2) $107,406,774.90 $13,608.44
due August 28, 2009 or
the payment of interest thereon
- ------------------------------------------------------------------------------------------------------------------
Common Shares, no par value, issuable
upon exercise of warrants 359,415 $25.94 (3) $9,323,225.10 $1,181.25
- ------------------------------------------------------------------------------------------------------------------
TOTAL $14,789.69
- ------------------------------------------------------------------------------------------------------------------
1. Pursuant to Rule 416 under the Securities Act of 1933, this Registration
Statement also covers such additional number of shares of common stock as may be
issuable upon a stock split, stock dividend or similar transaction.
2. Calculated pursuant to Rule 457(c) under the Securities Act of 1933, as
amended, based upon the average of the high and low prices of InterOil's common
shares as reported on the American Stock Exchange on November 3, 2004.
3. Calculated pursuant to Rule 457(g) under the Securities Act of 1933, as
amended, based upon the offering price of the underlying common shares as
determined in accordance with Rule 457(c).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE AS PROVIDED IN RULE 467 UNDER THE SECURITIES ACT OF 1933
OR ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A) OF THE ACT,
MAY DETERMINE.
PART I
INFORMATION REQUIRED TO BE DELIVERED TO OFFEREES OR PURCHASERS
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the Registration Statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer to sale is not permitted.
Subject to Completion Dated November 10, 2004
PRELIMINARY BASE SHELF PROSPECTUS
INTEROIL CORPORATION
C$165,000,000
4,500,000 COMMON SHARES
We issued our 8.875% senior convertible debentures ("Debentures") and warrants
to purchase our common shares ("Warrants") in private placements on August 27,
2004 and September 3, 2004. This prospectus may be used by selling shareholders
in connection with resales of the common shares issuable upon the conversion,
redemption, exercise or payment of the Debentures and/or Warrants, including
common shares issued in respect of interest payable on the Debentures. Such
common shares are sometimes referred to in this prospectus as the "Registrable
Securities".
Our common shares currently trade under the symbol "IOL" on the Toronto Stock
Exchange and under the symbol "IOC" on the American Stock Exchange, the
Australian Stock Exchange and the Port Moresby Stock Exchange. The last reported
sale price of our common shares on the Toronto Stock Exchange on November 9,
2004 was C$36.60 per share and on the American Stock Exchange was U.S.$30.55 per
share.
INVESTING IN OUR COMMON SHARES INVOLVES RISKS. PLEASE CAREFULLY CONSIDER THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 7 OF THIS PROSPECTUS.
THIS PROSPECTUS HAS NOT BEEN FILED IN RESPECT OF, AND WILL NOT QUALIFY, ANY
RESALE OF REGISTRABLE SECURITIES IN ONTARIO AT ANY DATE LATER THAN JANUARY 4,
2005 OR IN ANY OTHER PROVINCE OR TERRITORY OF CANADA AT ANY TIME. THIS
PROSPECTUS WILL QUALIFY RESALES OF REGISTRABLE SECURITIES IN ONTARIO WITH A
MAXIMUM AGGREGATE VALUE OF UP TO C$165,000,000 ONLY, WHICH AGGREGATE VALUE IS
DETERMINED BY MULTIPLYING THE LAST REPORTED SALE PRICE OF OUR COMMON SHARES ON
THE TORONTO STOCK EXCHANGE ON NOVEMBER 9, 2004 OF C$36.60 PER SHARE AND
4,500,000 COMMON SHARES.
NO UNDERWRITER WILL BE INVOLVED IN ANY SALE OR RESALE OF REGISTRABLE SECURITIES
IN CANADA UNDER THIS PROSPECTUS.
UNDER THE MULTIJURISDICTIONAL DISCLOSURE SYSTEM ADOPTED BY THE UNITED STATES
SECURITIES AND EXCHANGE COMMISSION, WE ARE PERMITTED TO PREPARE THIS PROSPECTUS
IN ACCORDANCE WITH CANADIAN DISCLOSURE REQUIREMENTS, WHICH ARE DIFFERENT FROM
THOSE OF THE UNITED STATES. WE PREPARE OUR FINANCIAL STATEMENTS IN ACCORDANCE
WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES, AND ARE SUBJECT TO
CANADIAN AUDITING AND AUDITOR INDEPENDENCE STANDARDS. OUR FINANCIAL STATEMENTS
MAY NOT BE COMPARABLE TO FINANCIAL STATEMENTS OF UNITED STATES COMPANIES.
YOUR ABILITY TO ENFORCE CIVIL LIABILITIES UNDER THE UNITED STATES FEDERAL
SECURITIES LAWS MAY BE AFFECTED ADVERSELY BECAUSE WE ARE INCORPORATED IN CANADA,
SOME OF OUR OFFICERS AND DIRECTORS NAMED IN THIS PROSPECTUS ARE NOT RESIDENT IN
THE UNITED STATES AND MOST OF OUR ASSETS ARE LOCATED OUTSIDE THE UNITED STATES.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATOR HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is November __, 2004.
TABLE OF CONTENTS
REFERENCES........................................................................................... 1
EXCHANGE RATE INFORMATION............................................................................ 1
FORWARD-LOOKING STATEMENTS........................................................................... 2
ENFORCEABILITY OF CERTAIN CIVIL LIABILITIES.......................................................... 3
SUMMARY.............................................................................................. 4
Use of This Prospectus......................................................................... 4
Our Business................................................................................... 4
Recent Developments............................................................................ 6
RISK FACTORS......................................................................................... 7
Risk Related To Our Business................................................................... 7
Risk Related to an Investment in our Common Shares............................................. 12
USE OF PROCEEDS...................................................................................... 13
TRADING RANGE OF COMMON SHARES....................................................................... 14
DIVIDENDS............................................................................................ 14
DESCRIPTION OF OUR COMMON SHARES..................................................................... 15
Options........................................................................................ 15
Convertible Securities......................................................................... 15
DESCRIPTION OF OUR DEBENTURES........................................................................ 16
DESCRIPTION OF OUR WARRANTS.......................................................................... 20
CHANGES IN OUR SHARE AND DEBT CAPITAL................................................................ 22
LIST OF SELLING SHAREHOLDERS......................................................................... 22
PLAN OF DISTRIBUTION................................................................................. 25
MATERIAL CONTRACTS................................................................................... 29
Securities Purchase Agreement.................................................................. 29
Share Sale Agreement........................................................................... 29
Facilities Management Contract................................................................. 29
Engineering Procurement and Construction Contract.............................................. 30
Crude Supply Agency and Sales Agreement........................................................ 30
Domestic Sales Agreement....................................................................... 30
Purchase and Sale Agreement.................................................................... 31
Export Marketing and Shipping Agreement and Agreement for the Sale and Purchase of Naphtha..... 31
Refinery State Project Agreement............................................................... 31
CORPORATE STRUCTURE.................................................................................. 32
WITHHOLDING TAX AND CURRENCY EXCHANGE CONTROLS IN PNG................................................ 33
LEGAL MATTERS........................................................................................ 34
EXPERTS.............................................................................................. 34
AVAILABLE INFORMATION................................................................................ 34
DOCUMENTS INCORPORATED BY REFERENCE.................................................................. 34
LIST OF DOCUMENTS FILED WITH THE SEC................................................................. 36
AUDITORS, TRANSFER AGENT AND REGISTRAR............................................................... 36
PURCHASER'S STATUTORY RIGHTS......................................................................... 36
AUDITORS' CONSENT.................................................................................... 37
GLOSSARY OF CERTAIN TERMS............................................................................ 38
INDEX TO FINANCIAL INFORMATION....................................................................... 44
CERTIFICATE OF THE COMPANY........................................................................... A-1
(i)
REFERENCES
In this prospectus, unless we state otherwise, "InterOil", the "Company",
"we", "us" and "our" refer to InterOil Corporation and all of its subsidiaries.
The term "PNG" refers to Papua New Guinea. The term "Shell" refers to
subsidiaries of the Royal Dutch Shell Group. The term "BP" refers to
subsidiaries of BP p.l.c. See "Glossary of Certain Terms" for additional terms
used in this prospectus.
EXCHANGE RATE INFORMATION
Unless we state otherwise or the context otherwise requires, all
references to dollar amounts in this prospectus are references to U.S. dollars.
The exchange rate between the Canadian dollar and the U.S. dollar used in this
prospectus varies depending on the date and context of the information contained
herein. Some of the financial information about BP Papua New Guinea Limited,
which we acquired in 2004, and which is included herein, in expressed in Kina,
the local currency of Papua New Guinea.
The following table sets forth, for each period indicated, the high and
low exchange rates, the average of the exchange rates on the last day of each
month during such period indicated, and the exchange rate at the end of the
period indicated, for one PNG Kina expressed in Canadian dollars.
Fiscal Year Ended Six Months Ended
--------------------------------- ------------------------
(C$) December 31, December 31, June 30, June 30,
2002 2003 2003 2004
------------ ------------ -------- --------
High............................. $0.45440 $0.42800 $0.42800 $0.43200
Low.............................. $0.35480 $0.37810 $0.37801 $0.39410
Average.......................... $0.41150 $0.40291 $0.39876 $0.41425
Close............................ $0.40490 $0.40130 $0.39000 $0.41770
On November 9, 2004, the noon buying rate was C$0.3762 per K1.
The following table sets forth, for each period indicated, the high and
low exchange rates, the average of the exchange rates on the last day of each
month during such period indicated, and the exchange rate at the end of the
period indicated, for one PNG Kina expressed in United States dollars.
Fiscal Year Ended Six Months Ended
----------------------------- --------------------------
(U.S.$) December 31, December 31, June 30, June 30,
2002 2003 2003 2004
------------ ------------ -------- ---------
High..................................... $0.29150 $0.31000 $0.28940 $0.31050
Low...................................... $0.22760 $0.25530 $0.25530 $0.30450
Average.................................. $0.26206 $0.28841 $0.27454 $0.30948
Close.................................... $0.25680 $0.31000 $0.28940 $0.31050
On November 9, 2004, the noon buying rate was U.S.$0.3150 per K1.
The following table sets forth, for each period indicated, the high and
low exchange rates, the average of the exchange rates on the last day of each
month during such period indicated, and the exchange rate at the end of the
period indicated, for one (1) Canadian dollar expressed in United States
dollars.
Fiscal Year Ended Six Months Ended
------------------------------ ----------------------
(U.S.$) December 31, December 31, June 30, June 30,
2002 2003 2003 2004
------------ ------------ -------- --------
High............................... $0.66530 $0.77470 $0.75120 $0.78830
Low................................ $0.61750 $0.63270 $0.63270 $0.71380
Average............................ $0.63724 $0.71629 $0.68925 $0.74785
Close.............................. $0.63440 $0.77270 $0.74270 $0.74400
On November 9, 2004, the noon buying rate was U.S.$0.83619 per C$1.
FORWARD-LOOKING STATEMENTS
Certain statements contained in, or incorporated by reference into, this
prospectus are forward-looking statements as defined in the U.S. federal
securities laws. All statements, other than statements of historical facts,
included herein or incorporated by reference herein, including without
limitation, statements regarding our drilling plans, business strategy, plans
and objectives of management for future operations and those statements preceded
by, followed by or that otherwise include the words "believe", "expects",
"anticipates", "intends", "estimates" or similar expressions or variations on
such expressions are forward-looking statements. We can give no assurances that
such forward-looking statements will prove to be correct. Each forward-looking
statement reflects our current view of future events and is subject to risks,
uncertainties and other factors that could cause actual results to differ
materially from any results expressed or implied by our forward-looking
statements. Risks and uncertainties include, but are not limited to:
- our lack of substantial operating history;
- the operation of our refinery project at less than full capacity;
- commissioning and start-up costs;
- profitability of our refinery;
- our ability to market refinery output;
- the success of our exploration prospects;
- political, legal and economic risks related in PNG;
- anticipated markets for our refined products;
- dependence on exclusive relationships with our supplier and
customers;
- ability to obtain necessary licences;
- uninsured risks;
- the impact of competition;
- the enforceability of legal rights;
- the volatility of oil prices;
- weather and unforeseen operating hazards;
- the uncertainty of our ability to attract capital;
2
- debt covenants limiting ability to raise additional financing; and
- other factors.
The information contained in this prospectus and the documents
incorporated by reference into this prospectus, including the information set
forth under the heading "Risk Factors" contain more information about certain
factors that could affect our operating results and performance. Our
forward-looking statements are expressly qualified in their entirety by this
cautionary statement.
ENFORCEABILITY OF CERTAIN CIVIL LIABILITIES
We are a corporation organized under the laws of New Brunswick, Canada and
substantially all of our assets are located in PNG. Many of our directors and
officers are not residents of the United States of America. As a result, it may
be difficult for United States investors to effect service of process within the
United States on us or our directors or officers or to enforce in the United
States upon judgments of courts of the United States predicated upon civil
liability under United States federal securities laws against us or our
directors or officers.
Certain selling shareholders are incorporated, continued or otherwise
organized under the laws of a foreign jurisdiction or reside outside of Canada.
Although certain selling shareholders may have appointed agents for service of
process in Ontario, it may not be possible for investors to collect from us or
any selling shareholder, judgments obtained in Canadian courts.
3
SUMMARY
THIS SUMMARY HIGHLIGHTS CERTAIN INFORMATION FOUND IN GREATER DETAIL
ELSEWHERE IN THIS PROSPECTUS OR IN DOCUMENTS INCORPORATED BY REFERENCE HEREIN.
THIS PROSPECTUS INCLUDES DOCUMENTS INCORPORATED BY REFERENCE. YOU SHOULD READ
THE ENTIRE PROSPECTUS AND THE DOCUMENTS WE INCORPORATE BY REFERENCE, INCLUDING
THE FINANCIAL DATA AND RELATED NOTES, BEFORE MAKING AN INVESTMENT DECISION.
USE OF THIS PROSPECTUS
This prospectus may be used by selling shareholders in connection with the
resale of the Registrable Securities. A selling shareholder may sell some, none
or all of the Registrable Securities offered by this prospectus. We cannot
predict when or in what amounts a selling shareholder may sell any of the
Registrable Securities. For details of how the Registrable Securities may be
sold, see "Plan of Distribution."
This prospectus has not been filed in respect of, and will not qualify,
any resale of Registrable Securities in Ontario at any date later than January
4, 2005 or in any other province or territory of Canada at any time. No
underwriter will be involved in any sale or resale of Registrable Securities in
Canada under this prospectus.
OUR BUSINESS
OVERVIEW
We are developing a vertically-integrated energy company whose primary
focus is PNG and the surrounding region. We operate through five subsidiaries.
Please see "Corporate Structure" for additional details on our corporate
structure. Our assets consist of an oil refinery, upstream petroleum exploration
licenses and retail and commercial distribution facilities.
BP supplies crude oil feedstock to the refinery. In addition, Shell has
agreed to purchase from us the majority of the refinery's anticipated output. We
are also undertaking an extensive petroleum exploration program within our 8
million acre license area located in PNG.
Our operations are organized into three major business segments:
- The upstream segment, which includes the exploration for and the
future production of crude oil and/or natural gas;
- The midstream segment, which includes the refining of crude oil and
the marketing of refined products both domestically and for export;
and
- The downstream segment, which includes distribution of refined
products in PNG.
UPSTREAM
We have an extensive upstream portfolio consisting of approximately 8
million acres of exploration licenses. The vast majority of our licenses are
located onshore in the Eastern Papuan Basin and have the logistical advantage of
moderate terrain, barge access to infrastructure and proximity to our refinery.
We believe that this logistical advantage will allow for lower cost of
development, provide cash-flow from early production, and provide access to a
local market (our refinery) for oil production in contrast to past oil
production activities in PNG. We have not discovered on our licences any oil or
gas reserves that are deemed proved, probable or possible. Our exploration
activities on these licenses have been suspended while we seek to finance and
acquire drilling equipment with a drilling capacity sufficient to reach the
total depths we believe are appropriate to explore our licenses more
effectively.
4
MIDSTREAM
Our refinery is centrally located across the harbour from Port Moresby,
the capital city of PNG. Our refinery has a nameplate operating capacity of
32,500 barrels per day and was designed to comply with the World Bank's
environmental standards. However, we expect the refinery to be capable of
operating above the nameplate capacity, at up to 36,500 barrels per day, with a
96% annual throughput rate, resulting in an annual production of 12.8 million
barrels of refined product. Our refinery is designed to process "sweet" crude,
which is low in sulphur content and does not require product processing beyond
distillation, reforming and blending. This simplified refinery design is
expected to lower the processing cost, which should make the cost per barrel for
processing comparable with the processing costs of much larger facilities.
During the last quarter of 2004, we are in the process of commissioning
our refinery. During the commissioning process, we are performing reliability
and performance testing activities. These activities will result in sales of
refined product at lower quantities than the refinery's nameplate capacity.
In 2002, we entered into a crude supply contract with BP. Under this
agreement, BP will be the exclusive supplier of crude feedstock for our
refinery.
The margin expected to drive refinery profitability is the spread between
the sales price of our refined product and the cost of crude. Through an
agreement with the government of PNG:
- We are entitled to sell refined products in PNG for the import
parity price, or IPP; and
- The government of PNG has agreed to prohibit the dumping of imports
below the IPP.
In general, the IPP is the price that would be paid in PNG for a refined
product that is being imported. For each refined product produced, the IPP is
calculated by adding the cost that would typically be incurred to import such
product to the PLATTs posted price for such product in Singapore. The costs that
are included in this calculation include freight cost, insurance cost, landing
charges, losses incurred in the transportation of refined products, demurrage
and taxes.
We anticipate that between 50 and 60% of our refinery's throughput will be
sold into the PNG domestic market. We expect to sell the majority of the
remaining product into the export market under our agreement with Shell, with
the balance to be sold under a gas sales agreement with Origin Energy Holdings
Limited and pursuant to export sales in the spot market.
We have entered into an operating contract with a PNG subsidiary of
Petrofac Facilities Management Limited, a leading facilities management company.
Petrofac will manage the day-to-day operations and maintenance of the refinery.
DOWNSTREAM
We own and operate our own distribution, commercial and retail assets in
PNG through a wholly-owned subsidiary. Our assets account for approximately 20%
of the wholesale product market in PNG based on total volume of sales for such
products. We also have an agreement with Shell to acquire their wholesale and
distribution assets in PNG. We will lease these assets back to Shell under a
long-term lease back arrangement, and Shell will continue to operate the
business. This agreement is contingent upon successfully completing the
commissioning process and our issuance of a certificate stating that the
construction of the refinery is complete. The agreement is also subject to PNG
government approval. We have initiated the formal process to obtain PNG
government approval of the acquisition. We expect this process to be complete
and approval granted shortly after the commissioning phase of the refinery is
completed.
5
RECENT DEVELOPMENTS
ACQUISITION FROM BP
On April 28, 2004, we acquired BP's distribution assets and commercial and
retail operations in PNG, comprising 40 service stations and 10 terminals and
depots. In 2003, total sales from these assets were approximately $70 million
and through the first six months of 2004, total sales from these assets were
approximately $67 million. We will continue to operate these assets as a
stand-alone entity with separate, independent management. Our distribution
operations will purchase refined products from our refinery on the same
commercial terms as all other unaffiliated PNG distributors. We have begun a
re-branding process, with the first service station being branded with the
"InterOil" name on September 24, 2004. The re-branding of the remaining service
stations and other assets will continue into the fourth quarter of 2004.
The purchase price was $12.2 million for these BP assets and inventory, of
which $1.0 million has been paid, with the balance of funds payable on March 1,
2005. BP agreed to fund the working capital of these assets for one year after
the effective date, whereupon we will repay to BP a working capital adjustment,
certain dividend amounts and the balance of the purchase price. We expect that
the payment will be approximately $12.52 million. As a result of this
acquisition, we achieved our first operating revenue in May and June of 2004 of
$12.6 million.
Attached to this prospectus are unaudited pro forma consolidated
statements of earnings for us for the six months ended June 30, 2004 and the
year ended December 31, 2003. This illustrates, on a pro forma basis, the
effects of the acquisition, based on assumptions described in the notes to such
pro forma consolidated statements of earnings. Also attached are certain
historical financial statements of the acquired entity.
EXPLORATION PROGRAM
We suspended drilling on our two exploration projects Sterling Mustang - 1
and Moose - 2 on during the summer of 2004 in order to acquire drilling rigs
with the capacity to drill deeper than our current drilling equipment. We
continue to evaluate the acquisition and financing of suitable rigs and have
commenced a limited seismic program.
CORPORATE FINANCING ACTIVITIES
On August 28, 2004 and September 3, 2004, we issued U.S.$45,000,000 in
Debentures. These Debentures will mature on August 28, 2009. We may elect to pay
interest and the amount payable at maturity in cash or common shares or any
combination of cash and common shares. We intend to use the net proceeds for
additional working capital and general corporate purposes.
On November 3, 2004, we amended our credit facility with BNP Paribas
(Singapore branch) to increase the maximum availability under the facility from
$60,000,000 to $100,000,000. This financing facility supports the ongoing
procurement of crude oil for the refinery and includes related hedging
transactions. The amended facility comprises a base facility to accommodate the
issuance of letters of credit followed by secured loans in the form of
short-term advances. In addition to the base facility, the amended agreement
offers both a cash-secured short-term advance facility and a discounting
facility on specific monetary receivables.
REFINERY ACTIVITY
Our refinery is currently in the commissioning and benchmark testing
phase, which we expect to extend through the fourth quarter of 2004. On June 15,
2004, we received and off-loaded our first cargo of crude feedstock for refinery
operations. Subsequent deliveries of crude feedstock have continued as dictated
by the commissioning activities. We made our first domestic sale of 22,000
barrels of refined product on August 10, 2004, followed by our first sale of
240,000 barrels of refined product into the export market on September 7, 2004.
We expect to continue to make sales
6
into both markets as product is generated during the commissioning phase, as the
refinery units are undergoing reliability and performance testing and are
brought into full production.
RISK FACTORS
An investment in our common shares is speculative and involves a high
degree of risk. Before making an investment, you should give careful
consideration to the following risk factors relating to our business and our
common shares as well as to the other information in this prospectus or
incorporated herein. In addition, this prospectus contains or incorporates
statements that constitute forward-looking statements regarding, among other
matters, our intent, belief or current expectations about our business. These
forward-looking statements are subject to risks, uncertainties and assumptions.
RISK RELATED TO OUR BUSINESS
WE HAVE A LIMITED OPERATING HISTORY.
We are a development stage company, with limited financial results upon
which you may judge our potential. We may not become profitable. We may
experience many of the problems, delays and expenses encountered by any early
stage business, many of which are beyond our control, This includes, but is not
limited to, substantial delays and expenses in commissioning the refinery and
conducting our exploration drilling program, difficulty in obtaining financing
and competition from larger and more established companies.
OUR REFINERY IS NOT OPERATING AT FULL CAPACITY.
We have completed the construction of our refinery in PNG and have
substantially completed its commissioning, but it is not yet operating at full
capacity. We encountered delays in the construction of the refinery. The
likelihood of the success of our refinery project must be considered in light of
the risks inherent in, and the difficulties, costs, complications and delays
frequently encountered by new start-up companies. These risks include, without
limitation, shortages of equipment, materials or labor; delays in delivery of
equipment or materials; contractual disagreements; labor disruptions; political
events; local or political opposition; accidents and unforeseen engineering,
design or environmental problems. Any further delay in the commencement of
operation of the refinery at full capacity would delay the anticipated revenues
to be realized at the refinery, which would have a corresponding adverse impact
upon our financial condition and business. Accordingly, there can be no
assurance of the future profitability of us or our refinery.
REFINERY COMMISSIONING AND START-UP COSTS MAY VARY MATERIALLY FROM OUR
ESTIMATES.
When we arranged for financing to construct our refinery, we estimated the
capital, financing and development costs necessary to complete construction and
start up of our refinery. Because our refinery project is unique, many of the
estimates we made were subject to substantial uncertainties. The actual costs of
completing the required work to commence operations at the refinery, including
costs associated with commissioning and obtaining feedstock for the refinery,
may vary from our estimates as a result of many factors, including changes in
market conditions and changes in the sots of crude feedstocks, and may influence
the completion of commissioning and final costs associated with commissioning
and start-up. In addition, the costs of our financing of any increased start-up
costs may be substantial, or may not be available at all.
OUR REFINERY OPERATIONS MAY NOT BE PROFITABLE.
Our refining operations are expected to be primarily affected by the
difference or margin between the sales prices of our refined products and the
costs we incur to purchase crude oil and other feedstocks. Historically,
refining margins have been volatile, and we expect this volatility will exist in
the future. Therefore, we will be subject to the risk that the difference
between the cost to us of our crude oil supply and the price at which we can
sell our refined products will not be sufficient for the profitable operation of
our company and to allow us to service our indebtedness, including
7
our Debentures. We cannot control the prices at which our feedstocks will be
purchased or at which refined petroleum products can be sold.
WE MAY NOT BE SUCCESSFUL IN OUR EXPLORATION FOR OIL.
We currently do not have any oil or gas reserves that are deemed proved,
probable or possible pursuant to National Instrument 51-101 Standards of
Disclosure for Oil and Gas Activities. We have drilled one exploration well,
suspended the drilling of two exploration wells and one exploration/appraisal
well, and have plans to drill at least 12 additional exploration wells in PNG.
We cannot be certain that the exploration wells we drill will be productive or
that we will recover all or any portion of the costs to drill these wells.
Because of the high cost, topography and subsurface characteristics of the areas
we are exploring, we have limited seismic or other geoscience data to assist us
in identifying drilling objectives. The lack of this data makes our exploration
activities more risky than would be the case if such information were available.
In addition, our current exploration and development plans may be
curtailed, delayed or cancelled as a result of lack of adequate capital and
other factors, such as weather, compliance with governmental regulations,
mechanical difficulties, materials shortages, delays in the delivery of
equipment, success or failure of activities in similar areas, current and
forecasted prices for oil and changes in the estimates of costs to complete the
projects. We will continue to gather information about our exploration projects,
and it is possible that additional information may cause us to alter our
schedule or determine that a project should not be pursued at all. You should
understand that our plans regarding our projects are subject to change.
OUR INVESTMENTS IN PNG ARE SUBJECT TO POLITICAL, LEGAL AND ECONOMIC RISKS.
Our investments in PNG involve risks typically associated with investments
in developing countries, such as uncertain political, economic, legal and tax
environments; expropriation and nationalization of assets; the risks of war,
expropriation, nationalization, renegotiation or nullification of existing
contracts; taxation policies; foreign exchange restrictions; international
monetary fluctuations; currency controls and foreign governmental regulations
that favor or require the awarding of drilling contracts to local contractors or
require foreign contractors to employ citizens of, or purchase supplies from, a
particular jurisdiction.
Political conditions have at times been unstable in PNG. We attempt to
conduct our business in such a manner that political and economic events of this
nature will have minimal effects on our operations. In addition, we believe that
the refinery is in the long term best interests of PNG and that we will continue
to have the support of the current government. Notwithstanding the current
support, our ability to conduct operations or exploration and development
activities is subject to changes in government regulations or shifts in
political attitudes for which we have no control. There can be no assurance that
we have adequate protection against any or all of the risks described above.
In addition, if a dispute arises with respect to our PNG operations, we
may be subject to the exclusive jurisdiction of foreign courts or may not be
successful in subjecting foreign persons, especially foreign oil ministries and
national oil companies, to the jurisdiction of the United States.
WE MAY NOT BE ABLE TO MARKET ALL OF OUR REFINERY'S OUTPUT.
We have entered into an agreement with Shell under which Shell will
purchase refined products for distribution in PNG exclusively from us.
Currently, Shell sells refined products in PNG and markets products in the
region sufficient to utilize approximately 94% of the refinery's estimated
output. In addition, the Project Agreement described under "Material Contracts"
gives us certain rights to supply the domestic market in PNG with refined
products. We have estimated that between 50% and 60% of the refinery's net
output will be used to supply the PNG market. We will market the balance of the
refinery's output in nearby regional markets. We have signed contracts with
Shell, which require Shell to purchase the majority of our output for three
years from our issuance of a
8
certificate stating that the construction of the refinery is complete. While we
will sell refined products through our domestic retail network, our agreements
with Shell are the only commercial agreements for the purchase of our refined
products for export. However, we can give no assurances that we will be able to
market the refinery's output to these nearby regional markets and we may be
unable to market all of the refinery's output we produce. In addition,
termination of the Shell agreement could have a material adverse effect on our
results of operations and financial condition.
Further, the Project Agreement between us and the PNG government provides
that if there is more than one refinery operating in PNG during the term of the
Project Agreement, the right to supply the domestic market will be shared by the
refineries in proportion to their refining capacities. Therefore, if one or more
additional refineries are built in PNG, our share of the domestic market will be
diminished.
WE MAY NOT BE ABLE TO OBTAIN CRUDE FEEDSTOCKS FOR OUR REFINERY.
The Project Agreement requires the government of PNG to take action to
ensure that domestic crude oil producers sell us their PNG domestic crude
production for use in our refinery and that refined products for domestic PNG
use will be purchased from us at the IPP. However, our agreement with BP is our
only commercial agreement for the delivery of crude feedstock. If our
relationship with BP were to terminate for any reason, we cannot assure you that
we will be able to enter into other commercial agreements to supply adequate
feedstock to our refinery. Termination of the BP agreement could have a material
adverse effect on our results of operations and financial condition.
PNG crude oil production rates are expected to satisfy the refinery's
requirements for at least five years after commercial start-up. Alternative
crude oils that are suitable for use as project feedstock are available in the
nearby region. However, crude oil sourced from outside PNG may be more expensive
than domestic crude oil and may reduce our gross profit margins. Alternatively,
imported crude oil may be selected to alter the refinery product mix in response
to changing market conditions.
WE MAY NOT BE ABLE TO OBTAIN ALL OF THE LICENSES NECESSARY TO OPERATE OUR
BUSINESS.
Our operations require licenses and permits from various governmental
authorities to drill wells, operate the refinery and market our refined
products. We believe that we hold, or will hold, all necessary licenses and
permits under applicable laws and regulations for our operations in PNG and
believe we will be able to comply in all material respects with the terms of
such licenses and permits. However, such licenses and permits are subject to
change in various circumstances. There can be no guarantee that we will be able
to obtain or maintain all necessary licenses and permits that may be required to
commission our oil refinery facilities or to maintain continued operations that
economically justify the cost.
OUR REFINING OPERATIONS WILL EXPOSE US TO RISK, NOT ALL OF WHICH ARE INSURED.
Our refining operations will be subject to various hazards common to the
industry, including explosions, fires, toxic emissions, maritime hazards and
uncontrollable flows of oil and gas. In addition, our refining operations are
subject to hazards of loss from earthquakes and severe weather conditions. As
protection against operating hazards, we maintain insurance coverage against
some, but not all of such potential losses. We may not be able to maintain or
obtain insurance of the type and amount we desire at reasonable rates. In
addition, losses may exceed coverage limits. As a result of market conditions,
premiums and deductibles for certain types of insurance policies for refiners
have increased substantially, and could escalate further. In some instances,
certain insurance could become unavailable or available only for reduced amounts
of coverage. For example, insurance carriers are now requiring broad exclusions
for losses due to risk of war and terrorist acts. If we were to incur a
significant liability for which we were not fully insured, it could have a
material adverse effect on our financial position.
9
THE EXPLORATION AND PRODUCTION, AND THE REFINING AND DISTRIBUTION BUSINESSES ARE
COMPETITIVE.
We operate in the highly competitive areas of oil exploration and
production, and refining and distribution of refined products. A number of our
competitors have materially greater financial and other resources than we
possess. Such competitors have a greater ability to bear the economic risks
inherent in all phases of the industry.
In our exploration and production business, the availability of alternate
fuel sources, the costs of our drilling program, the development of
transportation systems to bring future production to the market and
transportation costs of oil are factors that affect our ability to compete in
the marketplace. Many of our competitors operate in areas where they are able to
sell both the oil and the natural gas that they produce.
In our refining business, we will compete with numerous other companies
for available supplies of crude oil and other feedstocks and for outlets for our
refined products. BP has agreed to supply all of our feedstock. However, many of
our competitors obtain a significant portion of their feedstocks from
company-owned production, which may enable them to obtain feedstocks at a lower
cost. The high cost of transporting goods to and from PNG reduces the
availability of alternate fuel sources and retail outlets for our refined
products. Competitors that have their own production or extensive distribution
networks are at times able to offset losses from refining operations with
profits from producing or retailing operations, and may be better positioned to
withstand periods of depressed refining margins or feedstock shortages. In
addition, new technology is making refining more efficient, which could lead to
lower prices and reduced margins.
YOU MAY BE UNABLE TO ENFORCE YOUR LEGAL RIGHTS AGAINST US.
We are a New Brunswick, Canada corporation. All, or a substantial portion,
of our assets are located outside the United States. It may be difficult for
investors to enforce, outside the United States, judgments against us that are
obtained in the United States in any such actions, including actions predicated
upon the civil liability provisions of the securities laws of the United States.
In addition, certain of our directors and officers are nationals or residents of
countries outside of the United States, and all or a substantial portion of the
assets of such persons are or may be located outside the United States. As a
result, it may be difficult for investors to effect service of process within
the United States upon such persons or to enforce judgments against them
obtained in United States courts, including judgments predicated upon the civil
liability provisions of the securities laws of the United States.
THE VOLATILITY OF OIL PRICES COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
The prices we will receive for the refined products we produce and sell
are likely to be subject to large fluctuations in response to relatively minor
changes in the supply of and demand for oil and a variety of additional factors
beyond our control. These factors include but are not limited to the condition
of the worldwide economy, the actions of the Organization of Petroleum Exporting
Countries, governmental regulations, political stability in the Middle East and
elsewhere and the availability of alternate fuel sources. The prices for oil
will affect:
- our revenues, cash flows and earnings;
- our ability to attract capital to finance our operations, and the
cost of such capital;
- the value of our oil properties;
- the profit or loss we incur in refining petroleum products; and
- the profit or loss we incur in exploring and developing our
reserves.
10
WEATHER AND UNFORESEEN OPERATING HAZARDS MAY ADVERSELY IMPACT OUR OPERATING
ACTIVITIES.
Our operations are subject to risks inherent in the oil and gas industry,
such as blowouts, cratering, explosions, uncontrollable flows of oil, gas or
well fluids, fires, pollution, and other environmental risks. These risks could
result in substantial losses due to injury and loss of life, severe damage to
and destruction of property and equipment, pollution and other environmental
damage and suspension of operations. Our PNG operations are subject to a variety
of additional operating risks such as earthquakes, mudslides, tsunamis and other
effects associated with active volcanoes, extensive rainfall or other adverse
weather conditions. Our operations could result in liability for personal
injuries, property damage, oil spills, discharge of hazardous materials,
remediation and clean-up costs and other environmental damages. As a result,
substantial liabilities to third parties or governmental entities may be
incurred, the payment of which could have a material adverse effect on our
financial condition and results of operations.
WE MAY NOT BE ABLE TO GENERATE CASH FLOWS IF WE ARE UNABLE TO RAISE CAPITAL.
We make, and will continue to make, substantial capital expenditures for
the completion of our refinery and for the exploration, development, acquisition
and production of oil reserves. We believe that we will have sufficient cash
provided by operating activities and borrowings under our financing arrangements
to fund planned capital expenditures. If our ability to obtain debt or equity
financing decreases as a result of lower refining margins, lower oil prices,
delays, operating difficulties, construction costs, refinery start-up costs or
lack of drilling success, we may have limited ability to expend the capital
necessary to undertake or complete future drilling programs. There can be no
assurance that additional debt or equity financing or cash generated by
operations will be available to meet these requirements.
OUR SIGNIFICANT DEBT LEVELS AND OUR DEBT COVENANTS MAY LIMIT OUR FUTURE
FLEXIBILITY IN OBTAINING ADDITIONAL FINANCING AND IN PURSUING BUSINESS
OPPORTUNITIES.
As of September 30, 2004, we had approximately $136 million in long-term
debt, excluding current maturities. The level of our indebtedness will have
important effects on our future operations, including:
- a portion of our cash flow will be used to pay interest and
principal on our debt and will not be available for other purposes;
- our OPIC credit facility, BNP credit facility and Debentures contain
financial tests which we must satisfy in order to avoid a default
under such credit facilities or under the Debentures;
- covenants in our OPIC credit facility, BNP credit facility and
Debentures require us to meet financial tests in order to borrow
additional money, which may have the effect of limiting our
flexibility in reacting to changes in our business and our ability
to fund future operations and acquisitions; and
- our ability to obtain additional financing for capital expenditures
and other purposes may be limited.
While any of the Debentures are outstanding, neither we nor our
subsidiaries, may incur, guarantee or assume any Indebtedness other than
Permitted Indebtedness unless our aggregate Indebtedness is not greater than
400% of EBITDA both prior to and after the incurrence of such Indebtedness or
such Indebtedness would qualify as Permitted Defeased Indebtedness. As a result,
we may not be able to obtain debt financing to pursue opportunities as they
arise, which could adversely affect our cash flows or results of operations.
11
RISK RELATED TO AN INVESTMENT IN OUR COMMON SHARES
THE MARKET PRICE OF OUR COMMON SHARES FLUCTUATES.
The price of our common shares on the Toronto Stock Exchange, the American
Stock Exchange, the Australian Stock Exchange and the Port Moresby Stock
Exchange fluctuates. Between January 1, 2003 and November 9, 2004, the price of
our common shares on the TSX Venture Exchange and subsequently on the Toronto
Stock Exchange has fluctuated from a high of C$39.95 to a low of C$11.50.
Fluctuation in our common share price is caused by a number of factors, some of
which are beyond our control, including:
- additions or departures of our key personnel;
- announcements by us of significant acquisitions or capital
commitments;
- prices for oil and gas;
- quarterly variations in our operating results;
- short sales of our common shares; and
- significant sales of our common shares, among other factors.
In addition, the stock market in recent years has experienced broad price
and volume fluctuations that have often been unrelated to the operating
performance of companies. These broad market fluctuations could adversely affect
the market price of our common shares.
FUTURE ISSUANCES OF OUR COMMON SHARES MAY ADVERSELY AFFECT THE PRICE OF OUR
COMMON SHARES.
The future issuance of a substantial number of our common shares into the
public market, or the perception that such issuances could occur, could
adversely affect the prevailing market price of our common shares.
A decline in the price of our shares could make it more difficult to raise
funds through future offerings of common shares or securities convertible into
common shares.
We believe that substantially all of our outstanding common shares and
common shares issued in the future upon the exercise of outstanding options and
the conversion or exercise of the Debentures and Warrants will be tradeable
under the United States federal securities laws following this offering, subject
to certain limitations. These limitations include vesting provisions in option
agreements, and volume and manner-of-sale restrictions under Rule 144.
WE MAY NOT HAVE THE FUNDS NECESSARY TO FINANCE THE CHANGE IN CONTROL REPURCHASE
OPTION.
Upon the occurrence of specific kinds of change in control events, we may
be required to repurchase outstanding Debentures in cash at 115% of the
principal amount, plus accrued but unpaid interest. However, it is possible that
we will not have sufficient funds at such time to make the required repurchase
of Debentures in cash or that we are otherwise legally restricted from such
repurchases, which could be an event of default under the Debentures resulting
in a material and adverse effect on our financial condition, which could
negatively affect the price of our common shares.
12
CONVERSION OF THE DEBENTURES, EXERCISE OF THE WARRANTS AND ADDITIONAL SALES OF
COMMON SHARES BY OUR SELLING SHAREHOLDERS MAY DEPRESS THE PRICE OF OUR COMMON
SHARES AND SUBSTANTIALLY DILUTE YOUR EQUITY INTEREST.
If all of the principal and interest on the Debentures are converted into
common shares and all of the Warrants are converted into common shares, we may
issue up to 4,500,000 common shares. The issuance of all or a significant
portion of these shares could result in the substantial dilution to the
interests of other shareholders or a decrease in the price of our common shares
due to the additional supply of shares relative to demand in the market. A
decline in the price of our common shares could encourage short sales of our
common shares, which could place further downward pressure on the price of our
common shares.
THE DEBENTURES PROVIDE FOR VARIOUS EVENTS OF DEFAULT THAT WOULD ENTITLE THE
SELLING SHAREHOLDERS TO REQUIRE US TO REPAY THE ENTIRE AMOUNT OWED IN CASH
WITHIN SEVEN DAYS. IF AN EVENT OF DEFAULT OCCURS, WE MAY BE UNABLE TO
IMMEDIATELY REPAY THE AMOUNT OWED, AND ANY REPAYMENT MAY LEAVE US WITH LITTLE OR
NO WORKING CAPITAL IN OUR BUSINESS.
The Debentures provide for various events of default. If an event of
default occurs, selling shareholders can require us to repay the full principal
amount owed, plus the greater of (i) accrued interest, and an additional 15% of
the principal amount owed and (ii) the excess between the product of (A) the
highest closing price of the commons shares on the Toronto Stock Exchange for
the 20 Trading Days immediately preceding acceleration of the Debentures and (B)
the conversion ratio. These liquidated damages must be paid within three days of
the date of the event of default. Some of the events of default include matters
over which we may have some, little or no control. Many other events of default
are described in the agreements we executed when we issued the Debentures. If an
event of default occurs, we may be unable to repay the entire amount, plus the
liquidated damages, in cash. Any such repayment could leave us with little or no
working capital for our business.
THE DEBENTURES RESTRICT OUR ABILITY TO RAISE ADDITIONAL EQUITY, WHICH COULD
HINDER OUR EFFORTS TO OBTAIN ADDITIONAL NECESSARY FINANCING TO OPERATE OUR
BUSINESS, OR TO REPAY THE HOLDERS OF THE DEBENTURES.
The agreements we executed when we issued these Debentures prohibit us
from obtaining additional equity or equity equivalent financing in a private
transaction without first offering the selling shareholders the opportunity to
provide up to 30% of such financing upon the terms and conditions proposed. This
restriction may make it extremely difficult to raise additional equity capital
while the Debentures are outstanding. We may need to raise such additional
capital, and if we are unable to do so, we may have little or no working capital
for our business, and the market price of our common shares may decline.
WE DO NOT INTEND TO PAY, AND HAVE RESTRICTIONS UPON OUR ABILITY TO PAY DIVIDENDS
ON OUR COMMON SHARES.
We have not paid cash dividends in the past and we do not intend to pay
dividends on our common stock in the foreseeable future. We currently intend to
retain any earnings for the future operation and development of our business.
Our ability to make dividend payments in the future will be dependent on our
future performance and liquidity. In addition, the Debentures contain
restrictions on our ability to pay dividends on our common shares.
USE OF PROCEEDS
We will not receive any proceeds from the resale of Registrable Securities
from any of the selling shareholders. All of the net proceeds from sales of
Registrable Securities will be retained by the selling shareholders. We will
receive proceeds upon the exercise of Warrants, which we anticipate using for
working capital and other general corporate purposes.
13
TRADING RANGE OF COMMON SHARES
Our common shares trade on the Toronto Stock Exchange under the symbol
"IOL" in Canadian dollars and on the American Stock Exchange under the symbol
"IOC" in U.S. dollars. In addition, on the Australian Stock Exchange our common
shares trade in CHESS Depositary Interests, which are the equivalent of 1/10th
of a common share. The CHESS Depository Interests trade in Australian dollars
under the symbol "IOC". The high and low closing prices of our common shares on
the respective exchanges for the periods indicated are set forth in the
following table:
TORONTO STOCK
EXCHANGE AND TSX
VENTURE AMERICAN STOCK AUSTRALIAN STOCK
EXCHANGE (1) EXCHANGE (2) EXCHANGE (3)
-------------------- ------------------------- --------------------
HIGH LOW HIGH LOW HIGH LOW
YEAR ENDED DECEMBER 31, 2002
First quarter n/a n/a n/a n/a A$16.00 A$7.60
Second quarter C$14.22 C$9.40 n/a n/a A$17.00 A$9.70
Third quarter C$10.50 C$7.50 n/a n/a A$12.00 A$8.50
Fourth quarter C$12.00 C$8.15 n/a n/a A$13.00 A$9.40
YEAR ENDED DECEMBER 31, 2003
First quarter C$14.50 C$11.50 n/a n/a A$16.50 A$12.50
Second quarter C$18.30 C$13.75 n/a n/a A$19.50 A$14.50
Third quarter C$36.00 C$16.75 n/a n/a A$40.50 A$18.30
Fourth quarter C$32.80 C$20.00 n/a n/a A$35.40 A$23.00
YEAR ENDING DECEMBER 31, 2004
First quarter C$39.95 C$30.00 n/a n/a A$37.80 A$30.00
Second quarter C$36.00 C$28.05 n/a n/a A$36.00 A$30.10
Third quarter C$30.89 C$19.25 U.S.$24.35 U.S.$15.55 A$31.90 A$21.50
Fourth quarter (through November 9, 2004) C$36.66 C$27.90 U.S.30.70 U.S.22.65 A$40.00 A$26.90
- ----------
Notes:
(1) On July 14, 2004, our common shares began trading on the Toronto Stock
Exchange. Prior to that time our common shares were traded on the TSX Venture
Exchange.
(2) On September 8, 2004, our common shares began trading on the American Stock
Exchange.
(3)The Australian Stock Exchange column has been adjusted for a full common
share by multiplying the daily quoted price of a CHESS Depository Interest by
10. The Port Moresby Stock Exchange is associated with the Australian Stock
Exchange and has been excluded from this table.
On November 9, 2004, the closing price of our common shares on the Toronto
Stock Exchange was C$36.60 and on the American Stock Exchange was U.S.$30.55.
DIVIDENDS
We have not declared or paid dividends on our common shares in the past
two years and we do not anticipate that we will pay dividends in the near
future. In addition, the Debentures prohibit us from declaring a dividend. Our
anticipated capital requirements are such that we intend to follow a policy of
retaining earnings in order to finance further business development.
14
DESCRIPTION OF OUR COMMON SHARES
Each common share has one vote on all matters voted on by our
shareholders, including the election of our directors, and entitles the holder
thereof to receive dividends if, as and when declared by our board of directors.
Holders of common shares will participate rateably in any distribution of assets
upon liquidation, dissolution or winding-up. Our common shares are not
convertible, redeemable, assessable or entitled to the benefits of any sinking
or repurchase fund. Our articles contain restrictions on the issuance of common
shares or securities convertible into common shares except in certain
circumstances including the consent of PIE. In addition, certain persons have a
pre-emptive right upon the issuance of common shares or securities convertible
into common shares. This pre-emptive right does not apply in cases where the
consent of PIE is obtained for the issuance. Our by-laws also contain a
requirement that we must obtain shareholder approval when we propose to issue
common shares that, together with all other common shares we have issued in the
prior 12 months, equal more than 15% of our common shares outstanding at the
beginning of that 12 month period, unless we offer our common shares on a pro
rata basis to all holders of our common shares, but then only if the Port
Moresby Stock Exchange so requires such approval. Holders of common shares will
be entitled to dividends in the amounts and at the times declared by our board
of directors in its discretion out of funds legally available for the payment of
dividends.
Under New Brunswick corporate law, shareholders have cumulative voting
rights in the election of directors. Holders of our common shares are permitted
to cast a number of votes equal to the number of common shares held by such
person multiplied by the number of directors elected. Such votes may be cast for
one candidate or distributed among the candidates in any manner.
On October 31, 2004, there were 25,852,575 common shares issued and
outstanding.
OPTIONS
On October 31, 2004, there were options outstanding to purchase 1,216,523
common shares.
CONVERTIBLE SECURITIES
We have entered into an agreement with PIE under which PIE can exchange
its 5,000 shares of SPI on a one-for-one basis for our common shares. This
election may be made by PIE at any time. Mr. Phil E Mulacek, our president and
chief executive officer, is the president and majority shareholder of PIE.
We have granted to PNG Drilling Ventures Limited a right to convert its
participating interest in certain wells into a maximum of 628,305 of our common
shares under a drilling participation agreement dated July 21, 2003.
15
DESCRIPTION OF OUR DEBENTURES
Our Debentures were issued on August 27, 2004 and September 3, 2004. The
following description summarizes the material provisions of the Debentures. The
following summary does not purport to be complete and is subject to, and
qualified by reference to, the provisions of the Debentures, including the
definitions of certain terms in the Debentures. Copies of the Debentures have
been filed on SEDAR. As used in this description, the words "we", "us", "our"
and "InterOil" do not include any of our current or future subsidiaries.
Definitions for certain capitalized terms used in this section, but that are not
defined, can be found in "Glossary of Certain Terms".
GENERAL
We issued an aggregate principal amount of U.S.$45,000,000 of Debentures.
Our Debentures will mature on August 28, 2009 (the "Maturity Date"). The amount
payable at maturity of each Debenture is the initial principal plus all accrued
but unpaid interest thereon, to the extent such principal amount and interest
has not been converted into common shares.
INTEREST
Commencing on the date the Debenture was issued, interest accrues daily on
the principal amount of the Debentures and is compounded quarterly at a rate of
8.875% per year. Interest is payable on the first day of each calendar quarter,
commencing on October 1, 2004. We have the option to pay interest either in cash
or common shares, or a combination of cash and common shares. In order to
exercise such right, we must deliver to all the holders of Debentures an
irrevocable written notice stating our election to pay such interest in full on
such Interest Payment Date in either cash or common shares or a combination
thereof (the "Interest Election Notice"). Such Interest Election Notice shall be
delivered at least forty calendar days prior to the applicable Interest Payment
Date but no more than sixty calendar days prior to such Interest Payment Date
(the "Interest Notice Date"). If we elect or are required to repay any interest
in common shares, the number of such shares to be issued for such Interest
Payment Date shall be the number determined by dividing (x) the amount of
interest, by (y) 90% of the Market Price as of such Interest Payment Date. Such
shares shall be issued and delivered within three Trading Days following such
Interest Payment Date.
Interest will cease to accrue on the Debentures at maturity, or that
portion of the Debenture which is converted, including pursuant to a special
conversion right, or conversion, which includes special conversion, or
redemption. We may not reissue a Debenture that has matured or been converted,
redeemed or otherwise cancelled, except for registration of transfer, exchange
or replacement of such Debenture.
RANKING OF DEBENTURES
Our Debentures are unsecured and subordinate to all Senior Debt, whether
outstanding on the date of issue of our Debentures or thereafter created,
incurred, assumed or guaranteed. Our Debentures shall rank equally in right of
payment with, or prior to, all our existing and future unsecured indebtedness
that is subordinated to Senior Debt.
CONVERSION RIGHTS
The holder of a Debenture has the right to convert the outstanding
Principal Amount in whole or in part into our common shares at U.S.$20.16 per
common share (the "Conversion Price") by delivering to us a Conversion Notice.
If we do not deliver the stock certificates within three Trading Days after the
Conversion Date, the holder of the Debenture shall be entitled to rescind such
conversion by written notice to us. If a holder of the Debenture does not
rescind a Conversion Notice following our failure to deliver common shares upon
conversion, we will pay the holder cash in an amount equal to 2% of the
Principal Amount per month until such shares are delivered.
16
SPECIAL CONVERSION RIGHT
In addition to the conversion rights set forth above, the holder of a
Debenture has the right to convert 5.56% of the Principal Amount (a "Special
Conversion Amount") on each of the following dates (each, a "Special Conversion
Date" and such conversion right, the "Special Conversion Right"): June 25, 2006,
July 25, 2006, August 25, 2006, September 25, 2006, October 25, 2006, June 25,
2007, July 25, 2007, August 25, 2007, September 25, 2007, October 25, 2007, June
25, 2008, July 25, 2008, August 25, 2008, September 25, 2008, October 25, 2008,
June 25, 2009, July 25, 2009 and the Maturity Date. Each conversion of a Special
Conversion Amount shall be effected at the Special Conversion Price.
REMEDY CONVERSION RIGHT
Upon the occurrence of a Remedy Triggering Event, the holder of a
Debenture has a right to convert the Remedy Conversion Amount on a Remedy
Conversion Date (such conversion right, the "Remedy Conversion Right"). In no
event shall the holder of a Debenture be permitted to exercise both the Special
Conversion Right and the Remedy Conversion Right in the same month.
A Remedy Triggering Event shall occur upon the occurrence of any of
following events:
- our Average Consolidated EBITDA for the period ending June 30,
2005 is less than U.S.$5 million;
- our Average Consolidated EBITDA for the period ending
September 30, 2005 is less than U.S.$6.25 million;
- our Average Consolidated EBITDA for any period ending on or
after December 31, 2005 is less than U.S.$7.5 million; or
- an Event of Default has occurred.
Immediately upon the first occurrence of any Remedy Triggering Event, the
Principal Amount shall be automatically adjusted to an amount equal to 110% of
such Principal Amount.
We will give the holders of a Debenture not less than 25 days nor more
than 30 days written notice of our irrevocable election to satisfy our
obligation with respect to the applicable Special Conversion Date or Remedy
Conversion Date. If we do not deliver notice within the prescribed period, we
will be deemed to have elected to pay the Special Conversion Amount or Remedy
Conversion Amount in cash. Within five Trading Days of receipt of our notice,
the holder of a Debenture must deliver written notice of exercise of their
applicable additional conversion amount.
REDEMPTION OF DEBENTURES AT OUR OPTION
Commencing on the date 12 months after the Effective Date, if (i) the
daily volume weighted average price of the common shares has been at or above
140% of the Conversion Price for at least 30 consecutive Trading Days (any such
30 Trading Day period being a "Trigger Period"), and (ii) the combined trading
volume of the common shares shall have averaged at least 65,000 shares per day
on the Toronto Stock Exchange and American Stock Exchange during each Trading
Day during the Trigger Period, we have the right to require the holder of a
Debenture to convert the Debenture in whole, as set forth and subject to the
conditions in the Debenture.
CONVERSION PRICE ADJUSTMENTS
The conversion price will be adjusted in certain instances, including the
payment of dividends or distributions on common shares payable in common shares
or other shares, subdivisions or combinations of common shares, distributions to
all holders of common shares of evidences of our indebtedness or assets or cash
or rights or warrants to subscribe for or purchase any of our securities or any
of our subsidiaries, any recapitalization, reorganization, consolidation,
17
merger, spin-off or other business combination (other than a Change in Control
Transaction) pursuant to which holders of common shares are entitled to receive
securities or other assets with respect to or in exchange for common shares.
Upon a Change in Control Transaction, the holder of a Debenture shall have the
right at its option, (i) to convert the Debenture (in whole or in part) at the
Special Conversion Price into shares of securities, receivable by holders of
common shares following such Change in Control Transaction, or (ii) to require
us or our successors to redeem the Debenture in cash at 115% of the Principal
Amount. If the holder of as Debenture does not notify us of its election within
10 Trading Days, the holder of a Debenture shall be deemed to have waived its
rights to do so.
FRACTIONAL SHARES
We will not issue any fractional common shares. Instead, we will pay cash
based on the closing price of a common share at such time. If we elect not to,
or are unable to, make such a cash payment, the holder of a Debenture shall be
entitled to receive, in lieu of the fraction of a share, one whole common share.
CERTAIN COVENANTS
Permitted Indebtedness. So long as any Debentures are outstanding, we will
not, directly or indirectly, incur or guarantee, assume or suffer to exist any
Indebtedness other than Permitted Indebtedness unless certain conditions have
been met. Namely, either of the following conditions must be met:
- both prior to and after giving effect to the incurrence of
such Indebtedness, the aggregate Indebtedness on a
consolidated basis is not in excess of 400% of EBITDA on a
consolidated basis; or
- such Indebtedness would qualify as Permitted Defeased
Indebtedness.
Dividends. While any Debentures remain outstanding, we will not declare
any dividends on any shares of any class of our capital stock, or apply any of
our property or assets to the purchase, redemption or other retirement of, or
set apart any sum for the payment of any dividends on, or for the purchase,
redemption or other retirement of, or make any other distribution by reduction
of capital in respect of, any shares of any class of our capital.
Sale of Equity Securities. Subject to certain exceptions, until the date
that no Debentures remain outstanding, we will not, directly or indirectly,
offer, sell or grant any option to purchase, or dispose of any of our
subsidiaries' equity or equity equivalent securities, including any debt,
preferred stock or other instrument or security that is convertible into or
exchangeable or exercisable for our common shares or any rights, warrants or
options to subscribe for or purchase our common shares or any stock or
securities that are convertible into or exercisable or exchangeable for our
common shares (a "Subsequent Placement") without first offering the holders of
Debentures the opportunity to provide up to 30% of such financing upon the terms
and conditions proposed.
Interest Shares. We are required to deliver cash in lieu of Interest
Shares on the applicable Interest Payment Date if at any time from and including
the Interest Notice Date until the time at which the holders of Debentures
receive such Interest Shares (i) any of the Equity Conditions are not satisfied
or (ii) an Event of Default exists or occurs pursuant to the Debenture, or any
event which, with the passage of time or notice or both, would constitute an
Event of Default, unless otherwise waived in writing by the holder of a
Debenture in whole or in part at the holder's option.
OWNERSHIP/ISSUANCE LIMITATIONS
In the event that payment in Interest Shares would result in the holder of
a Debenture exceeding 9.99% in control or direction over, or a combination of
both, of the voting rights attached to our voting securities, (i) on the
Interest Payment Date, we will pay such portion of interest, in Interest
18
Shares as may be effected without exceeding such limitations, and (ii) the
balance of the interest shall be paid in cash. In connection with the delivery
of any notices by the holder of a Debenture, we may request, and the holder
shall confirm, that in connection with receiving any applicable common shares
pursuant thereto whether or not, after giving effect to receipt of the
applicable common shares, such holder, together with its Affiliates, will have
beneficial ownership of a number of common shares which exceeds 9.99% of our
voting securities.
DEFAULT AND RELATED MATTERS
If an Event of Default occurs, and is continuing with respect to any of
our Debentures, the holder may declare all of the then outstanding Principal
Amount of the Debenture and all other Debentures held by the holder, to be due
and payable immediately in cash, except that in the case of an Event of Default
arising from events described in clauses (h) and (i) of the definition of Event
of Default in the "Glossary of Certain Terms", the Debenture will become due and
payable without further action or notice. In the event of an acceleration, the
amount due and owing to the holder of a Debenture shall be the greater of (1)
115% of the Principal Amount of our Debentures held by the holder and (2) the
product of (A) the highest closing price for the common shares on the Principal
Market for the 20 Trading Days immediately preceding the holder's acceleration
and (B) the conversion ratio. In either case we will pay interest on such amount
in cash at the Default Rate to the holder of a Debenture if such amount is not
paid within seven days of the holder's request. The remedies pursuant to the
Debenture are cumulative.
OUR OPTION TO EFFECT COVENANT DEFEASANCE
If we deposit in an account sufficient funds to cover the payment of
principal and interest in the Debentures, many of the covenants related to the
Debentures, including those related to transactions with an Affiliate, transfers
of assets or the incurrence of additional indebtedness will be waived for the
remainder of the terms of the Debentures.
MODIFICATION AND WAIVER
No provision of the Debenture may be amended other than by a written
instrument signed by us and the holders of Debentures representing at least 55%
of the aggregate principal amount of our Debentures. Any amendment to the
Debenture shall be binding on all holders of the Debentures. No provision may be
waived other than by a written instrument signed by the party against whom
enforcement is sought. Any amendment must apply to all of the holders of a
Debenture then outstanding and any consideration offered or paid to amend or
consent to a waiver or modification must be made to all holders of Debentures.
Each holder of a Debenture may elect to waive (whether permanently or
temporarily, and subject to such conditions, if any, as the holder may specify
in such notice) any of its rights under the Debenture by providing us notice, in
which event such waiver shall be binding against such holder in accordance with
its terms; provided, however, such voluntary waiver may not reduce such holder's
obligations to us pursuant to the Debenture.
GOVERNING LAW
Our Debentures are governed by, and construed in accordance with, the laws
of the State of New York.
19
DESCRIPTION OF OUR WARRANTS
The Warrants were issued on August 27, 2004 and September 3, 2004. The
following description summarizes the material provisions of the Warrants. The
following summary does not purport to be complete and is subject to, and
qualified by reference to, all of the provisions of the Warrants, including
certain defined terms in the Warrants. Copies of the Warrants have been filed on
SEDAR. As used in this description, the words "we", "us", "our" and "InterOil"
do not include any of our current or future subsidiaries. Definitions for
certain capitalized terms used in this section, but that are not defined, can be
found in "Glossary of Certain Terms".
GENERAL
Each Warrant entitles the holder to purchase one common share at an
exercise price of $21.91, subject to certain adjustments, until 5:00 p.m.
(Toronto time) on August 27, 2009. Any Warrants not exercised prior to such time
will expire.
EXERCISE OF WARRANTS
In the event that a Warrant is not exercised in full, the number of common
shares to be available for purchase thereunder shall be reduced by the number of
such common shares for which that Warrant is exercised. The holder of a Warrant
will only need to physically surrender the Warrant to us upon the purchase of
the full amount of common shares represented by the Warrant.
REORGANIZATION, RECLASSIFICATION, MERGER, CONSOLIDATION OR DISPOSITION OF ASSETS
In the case of a reorganization, reclassification, merger, consolidation,
sale, transfer or disposition of assets, the holder of a Warrant has the right
to exercise the Warrant and receive the number of common shares of the successor
or acquiring corporation or our common shares that would have been exercisable
immediately prior to such event.
DISTRIBUTIONS TO COMMON SHAREHOLDERS
If there is a distribution to our common shareholders, other than as part
of a dissolution, we will provide to the holder of the Warrant, without payment
of any additional consideration, upon exercise of the Warrant, the amount of the
distribution to which the holder of a Warrant would have been entitled to
receive had the exercise occurred before the record date for such distribution.
EXERCISE PRICE AND COMMON SHARE ADJUSTMENTS
The number of securities purchasable upon the exercise of the Warrant and
the exercise price will be adjustable upon the occurrence of the following:
- payment of a dividend or a distribution in common shares to
holder of our common shares;
- subdivision of our outstanding common shares into a greater
number of shares;
- combination of our outstanding common shares into a smaller
number of shares; or
- issuance of any shares of our capital stock in a
reclassification of the common shares.
We will provide notice to the holder of the Warrant upon the occurrence of
any such event and the number of shares purchasable upon exercise of the Warrant
will be adjusted as though the Warrant had been exercised prior to such event.
20
FRACTIONAL SHARES
We will not issue any fractional shares upon the exercise of the Warrant.
A cash adjustment will be paid for each such final fraction in an amount equal
to such fraction multiplied by the exercise price.
OWNERSHIP/ISSUANCE LIMITATIONS
We will not effect the exercise of the Warrant, and no holder of a Warrant
shall have the right to exercise the Warrant to the extent that after giving
effect to such exercise, the number of common shares that may be acquired by the
holder, when added to the total number of common shares deemed beneficially
owned by such holder at such time, exceeds 9.99% of our voting securities.
TRANSFERABILITY
Subject to the compliance with applicable securities laws and the terms
and conditions of the Warrant, the Warrants are transferable in whole or in
part, and may be divided or combined with other Warrants.
MODIFICATION AND WAIVER
No provision of the Warrants may be amended other than by a written
instrument signed by us and the holders of Debentures representing at least 55%
of the aggregate principal amount of the Debentures. Any amendment to the
Warrants shall be binding on all holders of Warrants. No provision may be waived
other than by a written instrument signed by the party against whom enforcement
is sought. Any amendment made must apply to all of the holders of a Warrant then
outstanding and any consideration offered or paid to amend or consent to a
waiver or modification must be made to all holders of the Warrants.
Each holder of a Warrant may elect to waive (whether permanently or
temporarily, and subject to such conditions, if any, as the holder may specify
in such notice) any of its rights under the Warrant by providing us notice, in
which event such waiver shall be binding against such holder in accordance with
its terms; provided, however, such voluntary waiver may not reduce such holder's
obligations to us pursuant to the Warrant.
GOVERNING LAW
The Warrants are governed by, and construed in accordance with, the laws
of the State of New York.
21
CHANGES IN OUR SHARE AND DEBT CAPITAL
Since December 31, 2003, the following changes have occurred in our share
and loan capital:
- we issued 263,929 of our common shares upon the exercise of
previously granted options, which has increased our share
capital by $2,080,192, increased cash receipts by $1,495,945
and reduced in other paid in capital of $584,247;
- we issued U.S.$45,000,000 principal amount of Debentures on
August 27, 2004 and September 3, 2004, which will cause an
increase to our long-term debt and to our shareholder's
equity. We are in the process of determining the correct split
between debt and equity under Canadian GAAP; and
- we issued 772,685 of our common shares on conversion of
certain previously granted participating interests, which has
increased our share capital by $8,929,169, and reduced
long-term liabilities in an equal amount.
LIST OF SELLING SHAREHOLDERS
On August 27, 2004 we issued $30,000,000 aggregate principal amount of
Debentures and Warrants to purchase 239,612 common shares. We issued an
additional $15,000,000 aggregate principal amount of Debentures and Warrants to
purchase 119,801 common shares on September 3, 2004. The selling shareholders in
the table listed below acquired Debentures and Warrants from us, or are
transferees of holders who acquired Debentures and Warrants from us in these
private placements on August 27, 2004 and September 3, 2004.
The common shares listed in the following table as being beneficially
owned by a selling shareholder prior to the offering include common shares that
are issuable upon conversion of the Debentures held by the selling shareholder,
based on the current conversion price of the Debentures of $20.16 per share, and
that are issuable upon exercise of Warrants held by the selling shareholder.
Beginning on June 25, 2006, holders of Debentures will be permitted to convert
their Debentures into common shares at 90% of the market price of our common
shares as described under "Description of Our Debentures -- Conversion Rights"
and "Description of Our Debentures -- Special Conversion Right." In addition, we
have the right to pay interest on the Debentures in common shares as described
under "Description of Our Debentures -- Interest." As a result of these and
other provisions, holders of the Debentures may acquire more common shares than
are currently listed in the following table. In addition, the calculation of the
shares beneficially owned does not take into account the limitation on more than
9.99% beneficial ownership contained in the terms of the Debentures and the
Warrants.
Currently, 2,591,556 common shares are issuable upon conversion of the
Debentures and exercise of the Warrants. This prospectus covers an additional
1,908,444 common shares that in the future may be issued to holders of the
Debentures in lieu of cash interest payments and any increase in the number of
common shares that may be acquired upon conversion of the Debentures after June
25, 2006. The selling shareholders listed below are offering all of the common
shares beneficially owned by such holders that are issuable upon conversion of
the Debentures and exercise of the Warrants.
The information in this table is as of November 8, 2004, and is based upon
information provided by the selling shareholders. Information with respect to
selling shareholders in this prospectus will be updated by way of prospectus
supplements. The selling shareholders may from time to time offer and sell
pursuant to this prospectus any or all of the common stock being registered. To
prevent dilution to the selling shareholders, the following numbers may change
because of adjustments to reflect stock splits, stock dividends or similar
events involving our common shares.
22
The term selling shareholders includes the shareholders listed below and
their transferees, pledgees, donees and other successors. Unless otherwise
indicated, each selling shareholder has sole voting and investment power with
respect to the common shares described in this table.
NUMBER OF
NUMBER OF SHARES SHARES PERCENTAGE
BENEFICIALLY NUMBER OF BENEFICIALLY OWNED
OWNED PRIOR TO SHARES BEING OWNED AFTER AFTER
NAME OF SELLING SHAREHOLDER OFFERING(1) OFFERED OFFERING OFFERING(1)
--------------------------- ---------------- ------------ ------------ -----------
AIG Global Investment Corp. (Canada)(2) 410,975 143,975 267,000 1.0%
BTR Global Arbitrage Trading Limited(3) 280,561 230,361 50,200 *(13)
Centrum Bank AG(4) 1,862,416 138,216 1,724,200 2.8%
Front Street Investment Management(5) 57,590 57,590 0 0
Kings Road Investments Ltd.(6) 192,926 192,926 0 0
Manchester Securities Corporation(7) 863,853 863,853 0 0
Middlemarch Partners Limited (8) 43,192 43,192 0 0
Portside Growth and Opportunity Fund(9) 575,902 575,902 0 0
Provident Premier Master Fund, Ltd.(10) 287,951 287,951 0 0
TD Asset Management Inc.(11) 28,795 28,795 0 0
TD Newcrest (12) 78,795 28,795 50,000 *(13)
- ----------
Notes:
(1) The percentage of shares beneficially owned after the offering is based on
25,852,575 common shares outstanding as of October 31, 2004 plus, with respect
to each selling shareholder, the number of common shares being offered by such
selling shareholder pursuant to this prospectus. We do not know when or in what
amounts the selling shareholders may offer for sale the shares of common stock
pursuant to this offering. The selling shareholders may choose not to sell any
of the shares offered by this prospectus. Because the selling shareholders may
offer all or some of the common shares pursuant to this offering, and because
there are currently no agreements, arrangements or undertakings with respect to
the sale of any of the common shares, we cannot estimate the number of common
shares that the selling shareholders will hold after completion of the offering.
For purposes of this table, we have assumed that the selling shareholders will
have sold all of the shares covered by this prospectus upon the completion of
the offering.
(2) The shares beneficially owned by AIG Global Investment Corp. (Canada)
include 124,008 common shares issuable upon conversion of $2,500,000 aggregate
principal amount of Debentures and 19,967 common shares issuable upon exercise
of Warrants held by AIG Global Investment Corp. (Canada). AIG Global Investment
Corp. (Canada) shares voting and investment powers with respect to all of these
common shares with the Office of the Superintendent of Financial Institutions
(Canada).
(3) The shares beneficially owned by BTR Global Arbitrage Trading Limited
include 198,413 common shares issuable upon conversion of $4,000,000 aggregate
principal amount of Debentures and 31,948 common shares issuable upon exercise
of Warrants held by BTR Global Arbitrage Trading Limited. BTR Global Arbitrage
Trading Limited shares voting and investment power with respect to all of these
common shares with Salida Capital Corp., third party investment advisor to BTR
Global Arbitrage Trading Limited, Danny Guy and Brad White. Danny Guy and Brad
White are both portfolio managers of BTR Global Arbitrage Trading Limited.
(4) The shares beneficially owned by Centrum Bank AG include 119,048 common
shares issuable upon conversion of $2,400,000 aggregate principal amount of
Debentures and 19,168 common shares issuable upon exercise of Warrants held by
Centrum Bank AG.
(5) The shares beneficially owned by Front Street Investment Management include
49,603 common shares issuable upon conversion of $1,000,000 aggregate principal
amount of Debentures and 7,987 common shares issuable upon exercise of Warrants
held by Front Street Investment Management.
(6) The shares beneficially owned by Kings Road Investments Ltd. include 166,171
common shares issuable upon conversion of $3,350,000 aggregate principal amount
of Debentures and 26,755 common shares issuable upon exercise of Warrants held
by Kings Road Investments Ltd. Kings Road Investments Ltd. shares voting and
investment power with respect to all of these common shares with Alexander
Jackson, Reade Griffith and Paddy Dear.
23
(7) The shares beneficially owned by Manchester Securities Corporation include
744,048 common shares issuable upon conversion of $15,000,000 aggregate
principal amount of Debentures and 119,805 common shares issuable upon exercise
of Warrants held by Manchester Securities Corporation. Manchester Securities
Corporation is a wholly-owned subsidiary of Elliott Associates, L.P. Paul E.
Singer and Elliott Capital Advisors, L.P., an entity controlled by Mr. Singer,
are the general partners of Elliott Associates, L.P. Manchester Securities
Corporation shares voting and investment power with respect to all of these
common shares with Elliott Associates, L.P. and Paul E. Singer.
(8) The shares beneficially owned by Middlemarch Partners Limited include 37,202
common shares issuable upon conversion of $750,000 aggregate principal amount of
Debentures and 5,990 common shares issuable upon exercise of Warrants held by
Middlemarch Partners Limited.
(9) The shares beneficially owned by Portside Growth and Opportunity Fund
include 496,032 common shares issuable upon conversion of $10,000,000 aggregate
principal amount of Debentures and 79,870 common shares issuable upon exercise
of Warrants held by Portside Growth and Opportunity Fund. Ramius Capital Group,
LLC is the investment advisor of Portside Growth and Opportunity Fund. C4S &
Co., LLC is the sole managing member of Ramius Capital Group, LLC. Peter A.
Cohen, Morgan B. Stark, Thomas W. Strauss and Jeffrey M. Solomon, the four
managing members of C4S & Co., LLC, and Ramius Capital Group, LLC share voting
and investment power with respect to all of these common shares with Portside
Growth and Opportunity Fund. Ramius Capital Group, LLC, Peter A. Cohen, Morgan
B. Stark, Thomas W. Strauss and Jeffrey M. Solomon disclaim beneficial ownership
of these common shares.
(10) The shares beneficially owned by Provident Premier Master Fund, Ltd.
include 248,016 common shares issuable upon conversion of $5,000,000 aggregate
principal amount of Debentures and 39,935 common shares issuable upon exercise
of Warrants held Provident Premier Master Fund, Ltd. The managing members of
Gemini Investment Strategies, LLC, the investment advisor to Provident Premier
Master Fund, Ltd., are Steven W. Winters and Richard S. Yakomin. Mr. Winters and
Mr. Yakomin share voting and investment power with respect to all of these
common shares with Provident Premier Master Fund, Ltd. Mr. Winters and Mr.
Yakomin disclaim beneficial ownership of these common shares.
(11) Of the aggregate principal amount of Debentures, $72,000 is for the account
of Emerald North American Long Short Fund, $214,000 is for the account of TD
Energy Fund and $214,000 is for the account of TD Resource Fund, each of which
is managed by TD Asset Management Inc. These shares include 24,802 common shares
issuable upon conversion of $500,000 aggregate principal amount of Debentures
and 3,993 common shares issuable upon exercise of Warrants.
(12) The shares beneficially owned by TD Newcrest include 24,802 common shares
issuable upon conversion of $500,000 aggregate principal amount of Debentures
and 3,993 common shares issuable upon exercise of Warrants beneficially owned by
TD Newcrest.
(13) Less than 1%.
24
PLAN OF DISTRIBUTION
Our Debentures and Warrants pursuant to which the Registrable Securities
are issuable were issued on August 27, 2004 and September 3, 2004 and offered
and sold in the United States, Canada and elsewhere to accredited investors.
THIS PROSPECTUS HAS NOT BEEN FILED IN RESPECT OF, AND WILL NOT QUALIFY, ANY
RESALE OF REGISTRABLE SECURITIES IN ONTARIO AT ANY DATE LATER THAN JANUARY 4,
2005 OR IN ANY OTHER PROVINCE OR TERRITORY OF CANADA AT ANY TIME. This
prospectus will qualify resales of Registrable Securities in Ontario with a
maximum aggregate value of up to C$165,000,000 only, which aggregate value is
determined by multiplying the last reported sale price of our common shares on
the Toronto Stock Exchange on November 9, 2004 of C$36.60 per share and
4,500,000 common shares. No underwriter will be involved in any sale or resale
of Registrable Securities in Canada under this prospectus. Our outstanding
common shares are listed on the Australian Stock Exchange, Port Moresby Stock
Exchange, American Stock Exchange and the Toronto Stock Exchange, each of which
has approved the listing of the common shares.
The holders of our Debentures, Warrants and our Registrable Securities are
entitled to the benefits of a registration rights agreement, dated as of August
26, 2004, between us and each selling shareholder (the "Registration Rights
Agreement"), pursuant to which we have filed this base shelf prospectus with the
Ontario Securities Commission under the Canadian shelf prospectus system and a
registration statement including this prospectus with the SEC under the United
States Securities Act (the "Shelf Registration Statement") covering resales of
the Registrable Securities. Pursuant to this agreement, we have agreed, at
our expense:
(a) to file with the SEC a registration statement on such form as we
deem appropriate covering resales by holders of all Registrable
Securities;
(b) to use our best efforts to cause such registration statement to
become effective as promptly as is practicable, but in no event
later than 120 days after August 26, 2004; and
(c) to use our best efforts to keep the registration statement effective
until the earlier of:
(i) two years from the effective date of the registration
statement; or
(ii) until all Registrable Securities may be sold by the holders
under Rule 144(k).
We are registering our Registrable Securities covered by this prospectus
under the United States Securities Act to permit any of the selling shareholders
to conduct public secondary trading of these securities from time to time after
the date of this prospectus in accordance with the federal securities laws of
the United States and under the securities laws of the province of Ontario prior
to January 4, 2005. There can be no assurance that any of the selling
shareholders will sell any or all of the shares offered hereby.
The selling shareholders will be responsible for any fees, disbursements
and expenses of any counsel for the selling shareholders in excess of $10,000.
All other expenses incurred in connection with the registration and sale of the
Registrable Securities, including printer's and accounting fees and the fees,
disbursements and expenses of counsel for the Company will be borne by us.
Additionally, we have agreed to indemnify the selling shareholders against
certain liabilities that they may incur in connection with the sale of the
Registrable Securities registered hereunder, including liabilities under the
United States Securities Act, and each selling shareholder has agreed to
indemnify us, other holders and any persons who control us, as defined in the
federal securities laws of the United States, against any liability with respect
to any information furnished by such holder in writing to us (including the
selling shareholder's questionnaire) expressly for use in this shelf
registration statement. Agents, underwriters, brokers and dealers may be
entitled under agreements entered into by the selling
25
shareholders or us to indemnification against certain civil liabilities,
including liabilities under the United States Securities Act.
The selling shareholders may sell all or any portion of the Registrable
Securities beneficially owned by them and offered hereby from time to time
directly, to or through underwriters or agents designated from time to time, to
or through brokers or dealers, or through any combination of these methods of
sale. The sales may be effected from time to time in one or more transactions:
- on the American Stock Exchange;
- in the over-the-counter market;
- on any other U.S. national securities exchange or quotation service
on which the common shares may be listed or quoted at the time of
the sale;
- in transactions otherwise than on such exchanges or systems or in
the over-the-counter market;
- through the writing of options, whether such options are listed on
an options exchange or otherwise;
- ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
- block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
- purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
- an exchange distribution in accordance with the rules of the
applicable exchange;
- privately negotiated transactions;
- short sales;
- broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
- pledges of our common shares as security for any loan or
obligation, including pledges of brokers or dealers;
- firm commitment or best efforts underwriting;
- in a combination of any such methods of sale; and
- any other method permitted pursuant to applicable law.
The Registrable Securities may be sold at:
- fixed prices that may be changed;
- market prices prevailing at the time of sale;
- prices related to the prevailing market prices at the time of sale;
or
- negotiated prices.
All shelf information omitted from this base shelf prospectus will be
contained in a prospectus supplement that will be delivered to purchasers
together with this base shelf prospectus. Each prospectus supplement will be
incorporated by reference into this base shelf prospectus as at the date of the
prospectus supplement and only for purposes of the resale to which the
prospectus supplement pertains. Each prospectus supplement to this base shelf
prospectus will contain current information with respect to the selling
shareholders.
Any underwriter, agent, broker or dealer may receive compensation in the
form of discounts, commissions or concessions from the selling shareholders or
the purchasers of the shares for whom such broker-dealers may act as agents or
to whom they sell as principals, or both (which compensation as to a particular
broker-dealer might be in excess of customary commissions). A member firm of an
exchange on which our common shares are traded may be engaged to act as a
selling shareholder's agent in the sale of Registrable Securities by such
selling shareholder.
26
In connection with distributions of the Registrable Securities offered by
this prospectus or otherwise, the selling shareholders may enter into hedging
transactions with brokers or dealers or other financial institutions with
respect to our common shares. In connection with such transactions, such brokers
or dealers or other financial institutions may engage in short sales of our
common shares in the course of hedging the positions they assume with the
selling shareholders. Such hedging transactions may require or permit the
selling shareholders to deliver the Registrable Securities to such brokers or
dealers or other financial institutions to settle such hedging transactions. The
selling shareholders may also sell our common shares short and deliver the
Registrable Securities to close out such short positions. If so required by
applicable law, this prospectus, as amended or supplemented, may be used to
effect:
- the short sales of our common shares referred to above;
- the sale or other disposition by the brokers or dealers or other
financial institutions of any Registrable Securities they receive
pursuant to the hedging transactions referred to above; or
- the delivery by the selling shareholders of Registrable Securities
to close out short positions.
The selling shareholders may also pledge or grant a security interest in
the Registrable Securities registered hereunder to a broker or dealer or other
financial institution and, upon a default, such broker or dealer or other
financial institution may effect sales of the pledged shares pursuant to this
prospectus (as supplemented or amended to reflect such transaction). The selling
shareholders may also transfer the Registrable Securities registered hereunder
to a third party and such transferee may effect sales of the Registrable
Securities pursuant to this prospectus (as supplemented or amended to reflect
such transaction). In addition, any Registrable Securities covered by this
prospectus that qualify for resale in the United States pursuant to Rule 144
under the United States Securities Act, may be sold under Rule 144 rather than
pursuant to this prospectus. Any Registrable Securities covered by this
prospectus that qualify for resale outside the United States pursuant to
Regulation S may, after January 4, 2005, be sold under Regulation S rather than
under this prospectus.
Once sold under the registration statement, of which this prospectus
forms a part, the common shares will be freely tradable in the hands of persons
other than our affiliates.
27
The selling shareholders and any underwriters, brokers, dealers, agents or
others that participate with the selling shareholders in the distribution of the
Registrable Securities offered by this prospectus may be deemed to be
"underwriters" within the meaning of the United States Securities Act and any
underwriting discounts, commissions, concessions or fees received by such
persons and any profit on the resale of the Registrable Securities purchased by
such persons may be deemed to be underwriting commissions or discounts under the
United States Securities Act. To the extent the selling shareholders may be
deemed to be underwriters, the selling shareholders may be subject to certain
statutory liabilities of the United States Securities Act, including, but not
limited to, Sections 11, 12 and 17 of the United States Securities Act and Rule
10b-5 under the United States Exchange Act. In addition and without limiting the
foregoing, the selling shareholders will be subject to applicable provisions of
the United States Securities Exchange Act of 1934, and the rules and regulations
thereunder.
28
MATERIAL CONTRACTS
DATE DESCRIPTION PARTIES
- ----------------- ------------------------------------------------- ----------------------------------------------------------
August 26, 2004 Securities Purchase Agreement InterOil Corporation and the Initial Purchasers as listed
March 10, 2004 Share Sale Agreement InterOil Corporation, SPI Distribution Limited, Gas Tank
Nederland B.V. and BP Papua New
Guinea Limited
November 9, 2003 Facilities Management Contract InterOil Limited and Petrofac Niugini Limited
March 26, 2002 Engineering Procurement and Construction Contract InterOil Limited and Clough Niugini Limited
December 21, 2001 Crude Supply Agency and Sales Agreement EP InterOil, Ltd. and BP Singapore Pte Limited
April 9, 2001 Domestic Sales Agreement InterOil Limited and Shell Papua New Guinea Limited
April 9, 2001 Purchase and Sale Agreement InterOil Corporation and Shell Overseas Holdings Limited
March 26, 2001 Export Marketing and Shipping Agreement EP InterOil, Ltd. and Shell International Eastern Trading
Company
February 8, 2001 Agreement for the Sale and Purchase of Naphtha EP InterOil, Ltd. and Shell International Eastern Trading
Company
May 29, 1997 Refinery State Project Agreement InterOil Limited and EP InterOil, Ltd. and The Independent
State of Papua New Guinea
SECURITIES PURCHASE AGREEMENT
This agreement is between us and the selling shareholders. The agreement
provides for the issuance of the Debenture and the Warrants. See "Description of
Our Debentures" and "Description of Our Warrants".
SHARE SALE AGREEMENT
This agreement is between us, SPI Distribution Limited, Gas Tank Nederland
B.V. and BP PNG and provides for the sale and purchase by us of the shares in BP
PNG. The agreement includes the following key components:
(a) a BP entity, GAS Tank Nederland agrees to sell its wholly-owned
subsidiary, BP PNG, with all of its current assets and business as a
going concern to, SPI Distribution Limited; and
(b) BP agrees to fund the working capital of BP PNG for one year after
the effective date, whereupon InterOil will repay to BP the working
capital adjustment, certain dividend amounts and the balance of the
purchase price.
FACILITIES MANAGEMENT CONTRACT
This agreement is between InterOil Limited and Petrofac Niugini Limited
and provides for the management of the day-to-day operation and maintenance of
our refinery. The agreement includes the following key components:
29
(a) Initial term of 5 years from "practical completion" of our refinery,
subject to a 6-month notice of termination by either party;
(b) Reimbursable cost basis;
(c) Contractor remuneration based on a fixed management fee subject to
rebate and incentive arrangements according to achievement against
key performance indicators;
(d) Contractor provided performance security and parent company
guarantee from Petrofac Facilities Management Limited.
ENGINEERING PROCUREMENT AND CONSTRUCTION CONTRACT
This agreement is between InterOil Limited and Clough Niugini Limited and
provides for the design, procurement, and construction of our refinery. The
agreement includes the following key components:
(a) Lump sum turnkey contract;
(b) 26 months construction/commissioning period to "practical
completion" of our refinery; and
(c) Liquidated damages against delay in completion and 12-month defect
liability period.
CRUDE SUPPLY AGENCY AND SALES AGREEMENT
This agreement is between EP InterOil, Ltd. and BP Singapore Pte Limited
and provides for the supply of feedstock for InterOil's refinery. The agreement
includes the following key components:
(a) Ensures supply (feedstock) to the refinery for a marketing fee;
(b) Supply will first be sourced from PNG local producers at the
prevailing market price for domestically produced crude;
(c) BP may provide alternative supply at or below the posted price of
the domestically produced crude; and
(d) InterOil may decline acceptance of BP supplied crude and replace
with alternative crude.
DOMESTIC SALES AGREEMENT
This agreement is between InterOil Limited and Shell Papua New Guinea
Limited ("Shell PNG") and provides for the supply and purchase of refined
product from the refinery for the purposes of re-supply and sale in PNG upon the
physical completion and commissioning ("practical completion") of our refinery.
The agreement includes the following key components:
(a) Shell PNG agrees to source all of its product requirements from
InterOil and to limit import of product in accordance with the
agreement; and
(b) Shell PNG agrees to pay InterOil under the IPP methodology provided
for in the Refinery State Project Agreement.
30
PURCHASE AND SALE AGREEMENT
These agreements are executory between us and Shell Overseas Holdings
Limited ("Shell Overseas") and provide for the sale and purchase of the shares
in Shell PNG upon the physical completion and commissioning ("practical
completion") of our refinery. The agreements include the following key
components:
(a) Shell Overseas agrees to sell its PNG operating company with all its
physical product distribution assets having transferred its business
to a new operating company to be owned by Shell; and
(b) Shell Overseas will lease the distribution assets back from InterOil
to continue Shell's product distribution business unabated.
EXPORT MARKETING AND SHIPPING AGREEMENT AND AGREEMENT FOR THE SALE AND PURCHASE
OF NAPHTHA
These agreements are between EP InterOil, Ltd. and Shell International
Eastern Trading Company ("SIETCO") and provide for the purchase for export of
refined product from the refinery of volumes not sold domestically. These
agreements include the following key components:
(a) Provide for market-based pricing of product for export; and
(b) SIETCO agrees to take 100% of any excess volumes, after domestic
sales, of all products available for export including unleaded
mogas, Jet-A1, kerosene and diesel and to take 100% of the
refinery's naphtha production.
REFINERY STATE PROJECT AGREEMENT
This agreement is between InterOil Limited, EP InterOil, Ltd. and The
Independent State of Papua New Guinea and provides the following key components:
(a) Minimum 30-year term;
(b) The right for InterOil to construct, manage and operate our refinery
and to sell product domestically and by export;
(c) 5-year tax holiday for income derived from operation of our
refinery;
(d) First call on domestically produced crude oil, at market pricing,
for feedstock into the refinery;
(e) 30-year Import Parity Pricing ("IPP") methodology for pricing of
refined products sold from our refinery provides the overall
refinery margin; and
(f) Provides mechanism to require local refined product distributors and
wholesalers to purchase their supply first from our refinery using
prices determined using the IPP methodology and prevents product
dumping at below IPP levels.
31
CORPORATE STRUCTURE
We have five, majority-owned, principal subsidiaries SPI InterOil LDC
("SPI"); EP InterOil, Ltd. ("EPI"); InterOil Limited ("IOL"); SP InterOil
Exploration and Production Corporation ("SPI E&P") and InterOil Products Limited
("IPL"). Other than IPL, all companies have integrated, shared management.
INTEROIL CORPORATION
We were formed under the Business Corporations Act (New Brunswick) by
articles of amalgamation dated May 29, 1997. Our registered office is located at
Brunswick House, 10th Floor, 44 Chipman Hill, Saint John, New Brunswick E2L 4S6.
SPI INTEROIL, LDC
SPI was incorporated under the International Business Companies Act, 1989,
of the Commonwealth of the Bahamas on November 22, 1996. The registered office
of SPI is located in Nassau, the Bahamas. SPI was formed under the laws of the
Bahamas to facilitate investment and to maximise the tax advantages available to
its investors. The General Manager of SPI is Petroleum Independent and
Exploration Corporation ("PIE"), a privately held company registered in Texas,
USA and incorporated in 1981. The management fee paid to PIE in 2002 was
U.S.$150,000. Mr. Phil E Mulacek, our president and chief executive officer, is
the president and majority shareholder of PIE.
SPI negotiated the purchase of the refinery assets, which included a
modular crude unit, a reformer and two ocean-going American-flagged steel deck
barges. After acquiring the equipment, SPI directed the dismantling, loading and
transportation of the equipment off the Texas Gulf coast.
We entered into an agreement with PIE under which PIE can exchange its
5,000 shares of SPI on a one-for-one basis for fully paid and validly issued
shares in InterOil. This election may be made by PIE at any time.
EP INTEROIL, LTD.
EPI was incorporated under the Companies Law of the Cayman Islands in 1996
to form a joint venture with Enron Papua New Guinea Limited ("EPNG"). Its
registered office is located in Grand Cayman. Currently, SPI controls EPI, with
100% of the voting stock.
EPI acquired the crude distillation and reformer units from SPI and
arranged for this equipment to be refurbished in Texas by Gulf Copper
Manufacturing Corp. It also acquired two PGT-5 gas turbine generators from GM
Services of Italy. This equipment has been transferred to IOL in PNG for the
construction of the refinery.
INTEROIL LIMITED
IOL is incorporated in PNG, and was formed in 1994 to construct, own and
operate the refinery once the refinery is completed. Its registered office is in
Port Moresby, PNG. IOL has played a very active role in working with the PNG
government to obtain the permits, authorizations and certificates required under
the State Project Agreement and has also obtained a 99-year lease of the
refinery site. IOL has received "Pioneer status" in PNG, which grants a
five-year income tax holiday to IOL in PNG.
SP INTEROIL EXPLORATION AND PRODUCTION CORPORATION
SPI E&P was incorporated under the International Business Companies Act,
1989, of the Commonwealth of the Bahamas on September 3, 1998. The registered
office of SPI E&P is located in Nassau, the Bahamas. SPI E&P was formed under
the laws of the Bahamas to facilitate investment and to maximise the tax
advantages available to its investors.
32
SPI E&P owns all of the specific purpose exploration companies holding and
operating exploration rights in PNG, including SPI (208) Limited, which is
undertaking a drilling program in its petroleum prospecting licence (PPL 238).
INTEROIL PRODUCTS LIMITED
IPL is incorporated in PNG and was formed in October 1969 as BP Papua New
Guinea. IPL changed its name in April 2004 after its acquisition by us. Its
registered office is in Lae, Morobe Province, PNG. IPL owns and operates a
petroleum products distribution, wholesale and retail business in PNG and has
approximately 20% of the wholesale product market in PNG based on total volume
of sales for such products, in competition with Shell and ExxonMobil.
CORPORATE CHART
[CORPORATE FLOW CHART]
PRINCIPAL OPERATIONAL OFFICES
Our principal operational offices are located at Suite 2, Level 2, Orchid
Plaza 79-88 Abbott Street, Cairns, QLD 4870, Australia, our telephone number is
(61) 7 4046 4600 and our website address is www.interoil.com.
WITHHOLDING TAX AND CURRENCY EXCHANGE CONTROLS IN PNG
The current rate of dividend withholding tax stipulated by the Income Tax
Act 1959 (PNG) is 17%.
The Central Banking (Foreign Exchange & Gold) Regulation (Ch138) (PNG)
regulates the flow of currency into and out of PNG. A PNG company can only send
PNG Kina or a foreign currency (other than that which was the subject of a
previously approved exchange) out of PNG with the Central Bank's prior approval.
These authorities or approvals are delegated to certain commercial banks as
authorised dealers up to certain limits. The limits to exchanging and remitting
foreign currency overseas from PNG are K50,000 per transaction without further
tax clearance from the Internal Revenue Commission and K500,000 in aggregate per
annum without further Central Bank approval.
33
LEGAL MATTERS
Certain Canadian legal matters relating to the issue and sale of common
shares offered hereby will be passed upon on behalf of us by Stikeman Elliott
LLP. Certain United States legal matters will be passed upon on behalf of us by
Haynes and Boone LLP.
EXPERTS
Our consolidated annual financial statements as at and for the years ended
December 31, 2003 and 2002 incorporated by reference herein, have been audited
by KPMG. The financial statements of InterOil Products Limited as of December
31, 2003, 2002 and 2001 and for each of the three years in the period ended
December 31, 2003 included in this Prospectus have been so included in reliance
on the report of PricewaterhouseCoopers, independent accountants, given on the
authority of said firm as experts in auditing and accounting. The Commonwealth
Scientific & Industrial Research Organization ("CSIRO"), an agency of the
Australian Government, has provided technical support in relation to our
exploration program. CSIRO is not an expert for purposes of the United States
Securities Act. The CSIRO reports are available for review at our offices in
Cairns, Queensland.
AVAILABLE INFORMATION
Information has been incorporated by reference in this base shelf
prospectus from documents filed with the SEC and the securities commissions or
similar regulatory authorities in Canada. Copies of the documents incorporated
herein by reference and of the permanent information record may be obtained on
request without charge from our Vice-President, Corporate Development, Gary M.
Duvall (telephone: (281-292-1800)), or by accessing the disclosure documents
available through the Internet on the Canadian System for Electronic Document
Analysis and Retrieval ("SEDAR") which can be accessed as www.sedar.com, for
Canadian filings, and SEC's Electronic Data Gathering, Analysis and Retrieval
("EDGAR") system, which can be accessed at www.sec.gov.
We are subject to the informational requirements of the Exchange Act, and
in accordance therewith file reports and other information with the SEC. Such
reports and other information filed by the company can be inspected and copied
at the public reference facilities maintained by the SEC at Judiciary Plaza, 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549; and at the following
regional offices of the SEC: 175 West Jackson Blvd., Suite 900 Chicago, IL
60604; and 233 Broadway New York, NY 10279.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents of ours filed with the SEC and/or securities
commissions or similar authorities in Canada are incorporated by reference for
purposes of sales by the selling shareholders in Ontario (the document as so
used is referred to as the "Canadian Prospectus") and for the purpose of sales
by the selling shareholders in the United States (the document as so used is
referred to as the "U.S. Prospectus"):
(a) Annual Information Form dated May 19, 2004;
(b) Comparative consolidated financial statements for the years ended
December 31, 2003 and December 31, 2002, together with the auditors'
report thereon, contained on pages 29-42 of the 2003 Annual Report
of the Company;
(c) Management's Discussion and Analysis for the year ended December 31,
2003 contained on pages 43-48 of the 2003 Annual Report of the
Company;
(d) Amended comparative consolidated financial statements for the years
ended December 31, 2003, December 31, 2002 and December 31, 2001,
together with the notes and the auditors' report thereon;
34
(e) Unaudited comparative consolidated financial statements for the six
months ended June 30, 2004 and June 30, 2003;
(f) Management's discussion and analysis in respect of the six months
ended June 30, 2004;
(g) Amended unaudited comparative consolidated financial statements for
the six months ended June 30, 2004, June 30, 2003 and June 30, 2002;
(h) Management Information Circular for the annual and special meeting
of shareholders held on June 29, 2004 (excluding those portions,
which, in accordance with National Instrument 44-101, need not be
incorporated by reference);
(i) Material change report dated February 2, 2004 in respect of a
revision to the estimate for completion of our refinery project in
PNG;
(j) Material change report dated March 16, 2004 in respect of the share
sale agreement with BP plc to acquire BP's PNG subsidiary, BP PNG;
(k) Material change report dated June 17, 2004 in respect of the first
shipment of crude oil for our refinery has arrived at our marine
terminal located across the harbour from Port Moresby, PNG;
(l) Material change report dated July 7, 2004 in respect of the
refinery's crude distillation unit accepting feedstock for the first
time;
(m) Material change report dated August 27, 2004 in respect of the
definitive agreement for the private placement of $30 million to $40
million of Debentures; and
(n) Material change report dated September 10, 2004 in respect of the
closing the issuance of an additional $15 million of Debentures,
raising a total of $45 million.
Any document of the type referred to in the preceding paragraph (excluding
confidential material change reports) filed by us with a securities commission
or similar authority in Canada, after the date of this prospectus and prior to
January 5, 2005, shall be deemed to be incorporated by reference into this base
shelf prospectus for purposes of any distribution of Registrable Securities in
Ontario pursuant to the Canadian Prospectus. Any document of the type referred
to in the preceding paragraph filed by us after the date of this prospectus with
the SEC shall be deemed to be incorporated by reference into this base shelf
prospectus for purposes of any sale of Registrable Securities in the United
States pursuant to the U.S. Prospectus.
Any statement contained herein in a document incorporated or deemed to be
incorporated or deemed to be incorporated by reference herein shall be modified
or superseded for purposes of this base shelf prospectus to the extent that a
statement contained herein, or in any other subsequently filed document which
also is incorporated or is deemed to be incorporated by reference therein,
modifies or supersedes such statement. The modifying or superseding statement
need not state that it has modified or superseded a prior statement or include
any other information set forth in the document that it modifies or supersedes.
The making of a modifying or superseding statement shall not be deemed an
admission for any purpose that the modified or superseded statement, when made,
constituted a misrepresentation, an untrue statement of a material fact or an
omission to state a material fact that is required to be stated or that is
necessary to make a statement not misleading in light of the circumstances in
which it was made. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this base shelf
prospectus.
35
LIST OF DOCUMENTS FILED WITH THE SEC
The following documents have been filed with the SEC as part of the
Registration Statement of which the prospectus forms a part: the documents
referred to under the heading "Documents Incorporated by Reference"; U.S. GAAP
Reconciliations; documents referred to under the heading "Material Contracts";
reports of CSIRO; and the consents of KPMG and PricewaterhouseCoopers.
AUDITORS, TRANSFER AGENT AND REGISTRAR
Our auditors are KPMG, Sydney, Australia.
The transfer agent and registrar for our common shares is Computershare
Trust Company of Canada at its principal transfer office in Toronto, Ontario.
PURCHASER'S STATUTORY RIGHTS
Securities legislation in Ontario provides purchasers with the right to
withdraw from an agreement to purchase securities. This right may be exercised
within two business days after receipt or deemed receipt of a prospectus and any
amendment. The securities legislation further provides a purchaser with remedies
for rescission or, in some jurisdictions, damages where the base shelf
prospectus and any amendment contains a misrepresentation or is not delivered to
the purchaser, provided that such remedies for rescission or damages are
exercised by the purchaser within the time limit prescribed by the securities
legislation of the purchaser's province. The purchaser should refer to any
applicable provisions of the securities legislation for the particulars of these
rights or consult with a legal advisor.
36
AUDITORS' CONSENT
TO THE BOARD OF DIRECTORS OF INTEROIL CORPORATION
We have read the prospectus dated November 10, 2004 relating to the
distribution of certain common shares of the Company. We have complied with
Canadian generally accepted standards for an auditors' involvement with offering
documents.
We consent to the incorporation by reference in the above-mentioned
prospectus of our auditor's report to the shareholders of the Company on the
consolidated balance sheets of the Company as at December 31, 2003 and 2002 and
the consolidated statements of earnings, retained earnings and cash flows for
each of the years then ended and to the reference to our firm under the heading
"Experts" in the prospectus. Our report is dated March 4, 2004 (except as to
note 13 which is as of March 24, 2004).
Sydney, Australia /s/ KPMG
November 10, 2004
37
GLOSSARY OF CERTAIN TERMS
Unless otherwise specified in the applicable shelf prospectus supplement,
the following defined terms shall have the following meanings:
"AFFILIATE" of any specified person means any other person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified person. For the purposes of this definition,
"control", when used with respect to any specified person, means the power to
direct the management and policies of such person, directly or indirectly,
whether through the ownership of voting securities, by contract otherwise; and
the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"APPROVED MARKET" means the New York Stock Exchange, the American Stock Exchange
or the Nasdaq National Market.
"AVERAGE CONSOLIDATED EBITDA" means as of the end of any fiscal quarter, the
average of the EBITDA for the two consecutive fiscal quarters ending on the date
of calculation. If the refinery owned by the Company's subsidiary does not reach
Practical Completion by December 31, 2004, the calculation of the earnings
interest expense, taxes, depreciation, depletion and amortization comprising
EBITDA will be calculated on a pro forma basis as if Practical Completion
occurred on December 31, 2004.
"BANKRUPTCY EVENT" means any of the following events:
(a) the Company or any subsidiary commences a case or other proceeding
under any bankruptcy, reorganization, arrangement, adjustment of
debt, relief of debtors, dissolution, insolvency or liquidation or
similar law of any jurisdiction relating to the Company or any
subsidiary thereof;
(b) there is commenced against the Company or any subsidiary any such
case or proceeding that is not dismissed within 60 days after
commencement;
(c) the Company or any subsidiary is adjudicated insolvent or bankrupt
or any order of relief or other order approving any such case or
proceeding is entered;
(d) the Company or any subsidiary suffers any appointment of any
custodian or the like for it or any substantial part of its property
that is not discharged or stayed within 60 days;
(e) the Company or any subsidiary makes a general assignment for the
benefit of creditors;
(f) the Company or any subsidiary fails to pay, or states that it is
unable to pay or is unable to pay, its debts generally as they
become due;
(g) the Company or any subsidiary calls a meeting of its creditors with
a view to arranging a composition, adjustment or restructuring of
its debts; or
(h) the Company or any subsidiary, by any act or failure to act,
expressly indicates its consent to, approval of or acquiescence in
any of the foregoing or takes any corporate or other action for the
purpose of effecting any of the foregoing.
"CHANGE IN CONTROL TRANSACTION" will be deemed to exist if (i) there occurs any
consolidation, merger or other business combination of the Company with or into
any other corporation or other person (whether or not the Company is the
surviving corporation), or any other corporate
38
reorganization or transaction or series of related transactions in which in any
of such events the existing voting stockholders of the Company prior to such
event cease to own 50% or more of the voting stock, or corresponding voting
equity interests, of the surviving corporation after such event (including
without limitation any "going private" transaction or tender offer by the
Company for 20% or more of the Company's common shares), (ii) any person
together with its affiliates and associates beneficially owns or is deemed to
beneficially own in excess of 50% of the Company's voting power, (iii) there is
a replacement of more than one-half of the members of the Company's Board of
Directors which is not approved by those individuals who are members of the
Company's Board of Director's on the date thereof, or (iv) in one or a series of
related transactions, there is a sale or transfer of all or substantially all of
the assets of the Company, determined on a consolidated basis, (v) a transaction
occurs as a result of which the common shares ceases to be listed on the
Principal Market, or (vi) the occurrence of the closing by the Company pursuant
to an agreement to which the Company is a party or which it is bound providing
for an event set forth in (i), (ii), (iii), (iv), or (v) above.
"COMMON SHARES" means the shares of InterOil Corporation, no par value per
share, purchased by the Holder or Holders.
"CONTINGENT OBLIGATION" means, as to any person, any direct or indirect
liability, contingent or otherwise, of that person with respect to any
indebtedness, lease, dividend or other obligation of another person if the
primary purpose or intent of the person incurring such liability, or the primary
effect thereof, is to provide assurance to the obligee of such liability that
such liability will be paid or discharged, or that any agreements relating
thereto will be complied with, or that the holders of such liability will be
protected (in whole or in part) against loss with respect thereto.
"CONVERSION NOTICE" means the fully executed notice of conversion in the form
attached to the Debenture as Exhibit A that is delivered to the Company when the
holder decides to convert the outstanding Principal Amount under the Debenture.
"CONVERSION PRICE" shall equal U.S. $20.16, as adjusted pursuant to the terms
hereof.
"CONVERTIBLE SECURITIES" means any convertible securities, warrants, options or
other rights to subscribe for or to purchase or exchange for, shares of common
stock.
"CSIRO" means the Australian Commonwealth Scientific and Industrial Research
Organisation.
"DEFAULT RATE" equals the lower of fifteen percent (15%) per annum or the
highest rate permitted by law.
"DEFEASANCE AMOUNT" means (i) with respect to any Indebtedness incurred solely
in connection with the purchase of equipment ("Equipment Financing"), an amount
equal to 20% of such Equipment Financing (ii) with respect to any such
Indebtedness incurred solely in connection with a Project Financing
Indebtedness, and amount equal to 5% of such Project Financing Indebtedness and
(iii) in all other circumstances an amount equal to 25% of such Indebtedness.
"EBITDA" means for any fiscal quarter, earnings for such quarter plus the sum of
the following for such quarter to the extent deducted in calculating earnings
for such quarter: interest expense, taxes, depreciation, depletion and
amortization, in each case (i) calculated in accordance with Canadian GAAP and
consistent with past practice including the allocation of all corporate costs,
and (ii) excluding results attributable to the Company's oil and gas exploration
and production business.
"EFFECTIVE DATE" means the date on which the registration statement covering
resale of our Registrable Securities becomes effective under the United States
Securities Act.
39
"EQUITY CONDITIONS" means each of the following:
(a) the Company is in compliance with all requirements of the applicable
U.S. and Canadian federal, state and provincial securities
regulators, including, without limitation, all disclosure
requirements;
(b) the Company shall be in compliance with its obligations under the
Registration Rights Agreement;
(c) during the period beginning on the Initial Closing Date and ending
on and including the applicable date of determination, there shall
not have occurred an event of default under Section 4(a)(iv);
(d) on each day during the period beginning on the Initial Closing Date
and ending on and including the applicable date of determination,
the common shares (including our Registrable Securities) shall be
listed on the Principal Market and delisting or suspension by such
market or exchange shall not have been threatened either (A) in
writing by such market or exchange or (B) by falling below for at
least the requisite period the applicable minimum listing
maintenance requirements of such market or exchange;
(e) on the applicable date of determination the registration statement
or registration statements required pursuant to the Registration
Rights Agreement shall be effective and available for the sale of
all of the Registrable Securities in accordance with the terms of
the Registration Rights Agreement;
(f) the Company shall have no knowledge of any fact that would cause the
registration statements required pursuant to the Registration Rights
Agreement not be effective and available for the sale of at least
all of the Registrable Securities in accordance with the terms of
the Registration Rights Agreement; and
(g) on the applicable date of determination, our Registrable Securities
may be sold in Canada either pursuant to a qualified prospectus or
without any restriction.
"EVENT OF DEFAULT" means any of the following:
(a) the suspension from trading or failure of the common shares to be
listed on the Principal Market for a period of 5 consecutive days or
for more than an aggregate of 10 days in any 365 day period;
(b) at any time following the tenth consecutive Business Day that the
number of shares of common shares that the holder would be entitled
to receive upon a conversion of the full Principal Amount of the
Debenture;
(c) in the case of a default in payment of the principal amount or
accrued but unpaid interest thereon continuing for at least 5 days
of any of our Debentures on or after the date such payment is due;
(d) a default in the timely issuance of Registrable Securities which
default continues for 5 business days after the Company has received
written notice that it has failed to issue shares within the fifth
day following the Conversion date;
40
(e) failure by the Company for 10 days after written notice has been
received by the Company to comply with any material provision of any
Debentures, the Purchase agreement, the warrants or the Registration
Rights Agreement;
(f) a breach by the Company of its material representation or warranties
in the Purchase Agreement;
(g) any default after any cure period under any mortgage, indenture or
instrument under which there may be issued or by which there may be
secured or evidenced any indebtedness for money borrowed by the
Company or any of its subsidiaries for in excess of $500,000;
(h) a final judgement for the payment of money aggregating in excess of
$2,500,000 are rendered against the Company or any of its
subsidiaries; or
(i) if the Company or any of its subsidiaries is subject to any
Bankruptcy Event.
"INDEBTEDNESS" of any person means, without duplication:
(a) all indebtedness for borrowed money;
(b) all obligations issued, undertaken or assumed as the deferred
purchase price of property or services;
(c) all reimbursement or payment obligations with respect to letters of
credit, surety bonds and other similar instruments;
(d) all obligations evidenced by notes, bonds, debentures or similar
instruments, including obligations so evidenced incurred in
connection with the acquisition of property, assets or businesses;
(e) all indebtedness created or arising under any conditional sale or
other title retention agreement, or incurred as financing, in either
case with respect to any property or assets acquired with the
proceeds of such indebtedness (even though the rights and remedies
of the seller or bank under such agreement in the event of default
are limited to repossession or sale of such property);
(f) all monetary obligations under any leasing or similar arrangement
which, in accordance with Canadian GAAP, is classified as a capital
lease;
(g) all indebtedness referred to in clauses (a) through (f) above
secured by (or for which the holder of such Indebtedness has an
existing right, contingent or otherwise, to be secured by) any lien
upon or in any property or assets (including accounts and contract
rights) owned by any person, even though the person which owns such
assets or property has not assumed or become liable for the payment
of such indebtedness; and
(h) (h) all Contingent Obligations in respect of indebtedness or
obligations of others of the kinds referred to in clauses (a)
through (g) above;
"INTEREST PAYMENT DATE" is the date elected through the Interest Election Notice
to pay interest on the Debenture either in cash or common shares, or a
combination thereof.
41
"INTEREST SHARES" means the shares that are issued to the holder when an
Interest Election Notice states that the Company elects to pay interest in
common shares in lieu of cash.
"MARKET PRICE" shall equal the arithmetic mean of the daily VWAP's during the
twenty (20) Trading Days immediately preceding the date as of which such Market
Price is being determined. The VWAP's used to determine the Market Price shall
be appropriately and equitably adjusted for any stock splits, stock dividends,
recapitalizations and the like.
"NI 44-101" means National Instrument 44-101 Short Form Prospectus
Distributions.
"PERMITTED DEFEASED INDEBTEDNESS" means Indebtedness incurred by the Company or
its Subsidiaries provided that the Company irrevocably deposits in the
Collateral Amount cash in U.S. dollars, non-callable U.S. Government Obligations
(as defined in the Debentures), or a combination thereof, in an amount equal to
or greater than the applicable Defeasance Amount.
"PERMITTED INDEBTEDNESS" means:
(a) the BNP Credit Facility and the ANZ Credit Facility;
(b) Loan Agreement between E.P. InterOil, Ltd. and Overseas Private
Investment Corporation (OPIC) dated as of June 12, 2001 in the
principal amount not to exceed U.S.$85,000,000;
(c) Deferred payment of second instalment of purchase price of
$3,000,000 due February 28, 2005; Promissory Note dated June 11,
2004 by the Company to Gas Tank Nederland B.V. in the principal
amount of $8,000,000; Deferred payment of 2003 profits dividend of
K13,503,000 ($4,000,000) due February 24, 2005;
(d) The vendor financing of the balance of the purchase price with
respect to the prospective purchase of Shell PNG by the Company or a
nominee of the Company under the Purchase and Sale Agreement between
Shell Overseas Holdings Limited and the Company not to exceed $18
million;
(e) Loan of $4.5 million from Aton Select Fund Ltd. and Talras Overseas
S.A., through Clarion Finanz AG under Letter Agreement dated June
23, 2004;
(f) Loan Agreements between Phil Mulacek and Petroleum Independent and
Exploration Corporation, as lender, and InterOil Corporation, as
borrower, under which Phil Mulacek and Petroleum Independent and
Exploration Corporation advanced the principal sum of Cdn$2.1
million to InterOil Corporation;
(g) Obligations with respect to customary provisions regarding
post-closing purchase price adjustments and indemnification in
agreement for the purchase or sale of a business or assets;
(h) Permitted Refinancing Indebtedness;
(i) Indebtedness arising out of payment obligations under
non-speculative hedging transaction; and
(j) Inter-company Indebtedness.
"PLATTS" means the Singapore Product Postings located in the PLATT'S Oilgram
Price Report published by Standard and Poor's Corporation.
42
"PRACTICAL COMPLETION" has the meaning given to it in the Engineering,
Procurement & Construction Contract described under "Material Contracts".
"PRINCIPAL AMOUNT" shall refer to the sum of (i) the outstanding principal
amount of the Debenture, (ii) all accrued but unpaid interest thereunder, and
(iii) any default payments owing under the Transaction Documents but not
previously paid or added to the Principal Amount.
"PRINCIPAL MARKET" shall mean the Toronto Stock Exchange.
"REMEDY CONVERSION AMOUNT" shall mean an amount equal to 10% of the Principal
Amount.
"REMEDY CONVERSION DATE" shall mean the 25th day of each of the ten consecutive
calendar months immediately following the month in which a Remedy Triggering
Event shall have been publicly reported; provided, that if such day is not a
Trading Day, hen the Remedy Conversion Date shall be the next Trading Day.
"SEDAR" means the System for Electronic Document Analysis and Retrieval.
"SELLING SHAREHOLDER" means the holders of Registrable Securities who have
delivered a completed selling shareholder's questionnaire.
"SENIOR DEBT" shall mean Indebtedness of the Company described in clauses (a)
through (f) and clause (h) in the definition of Permitted Indebtedness. If the
Company is not liable for such Indebtedness either directly or indirectly or
pursuant to a guarantee or other Contingent Obligation, such Indebtedness shall
not be Senior Debt.
"SPECIAL CONVERSION PRICE" means the lesser of (i) the Conversion Price and (ii)
90% of the Market Price.
"SUBSIDIARIES" means any entity in which the Company, directly or indirectly,
owns 25% or more of the capital stock or other equity or similar interest.
"TRADING DAY" means a day on which there is trading on the Principal Market.
"TRANSACTION DOCUMENTS" means the Securities Purchase Agreement dated August 26,
2004, as amended by an amending agreement dated September 2, 2004, the
Debentures, the Warrants, and the Registration Rights Agreement.
"VWAP" shall mean the daily volume weighted average of: (1) the daily volume
weighted average price of the common shares on the Principal Market, expressed
in U.S. dollars based upon the most current Bank of Canada buy rate on the day
such price determined and (2) the daily volume weighted average price of the
common shares on the Approved Market, where (1) and (2) are as reported by
Bloomberg Financial LP (based on the trading day from 9:30 a.m. Eastern Time to
4:00 p.m. Eastern Time) using the "Volume at Price" function on the date in
question. If the foregoing does not apply, the dollar volume-weighted average
price of such security in the over-the-counter market on the electronic bulletin
board for such security during the period beginning at 9:30:01 a.m., New York
City Time (or such other time as the Principal Market and the Approved Market
publicly announces is the official open of trading), and ending at 4:00:00 p.m.,
New York City Time (or such other time as the Principal Market and the Approved
Market publicly announces is the official open of trading) as reported by
Bloomberg.
43
INDEX TO FINANCIAL INFORMATION
PAGE
INTEROIL CORPORATION
A. PRO FORMA FINANCIAL STATEMENTS
Compilation Report 46
Statement of Operations for the six months ended June 30, 2004 48
Statement of Operations for the year ended December 31, 2003 49
Notes 50
B. RECONCILIATION OF INTERIM FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTH
PERIODS ENDED JUNE 30, 2004 AND 2003 AND CUMULATIVE PERIOD ENDED JUNE 30, 2004
FROM CANADIAN GAAP TO U.S. GAAP 52
INTEROIL PRODUCTS LIMITED (FORMERLY BP PAPUA NEW GUINEA LIMITED)
A. ANNUAL FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
Annual Report of the Directors to the Shareholders for the year ended December 31, 2003 59
PricewaterhouseCoopers Report of Independent Accountants 60
Balance Sheet 61
Statement of Earnings 62
Statement of Cash Flows 63
Statement of Changes in Equity 64
Notes to the Financial Statements 65
44
B. INTERIM FINANCIAL STATEMENTS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2004 AND 2003
Condensed Balance Sheet 72
Condensed Statement of Earnings 73
Condensed Statement of Cash Flows 74
Condensed Statement of Changes in Equity 75
Notes to the Condensed Interim Financial Statements 76
45
COMPILATION REPORT
The Board of Directors of
InterOil Corporation
We have read the accompanying unaudited pro forma consolidated statements
of operations for the six months ended June 30, 2004 and for the year ended
December 31, 2003 and have performed the following procedures:
1. Compared the figures in the columns captioned "InterOil Corporation"
to the unaudited financial statements of InterOil Corporation (the
"Company") for the six months ended June 30, 2004, and the audited
financial statements of the Company for the year ended December 31,
2003, respectively, and found them to be in agreement.
2. Compared the figures in the columns captioned "BP Papua New Guinea
Limited" to the unaudited financial statements of BP Papua New
Guinea Limited (now renamed InterOil Products Limited) for the three
months ended March 31, 2004, and the audited financial statements of
BP Papua New Guinea Limited for the year ended December 31, 2003,
respectively, and found them to be in agreement.
3. Made enquiries of certain officials of the Company who have
responsibility for financial and accounting matters about:
(a) The basis for determination of the pro forma adjustments; and
(b) Whether the unaudited pro forma consolidated statements of
operations comply as to form in all material respects with the
Ontario Securities Act and the related regulations.
The officials:
(c) described to us the basis for determination of the pro forma
adjustments, and
(d) stated that the unaudited pro forma consolidated statements of
operations comply as to form in all material respects with the
Ontario Securities Act and the related regulations.
4. Read the notes to the unaudited pro forma consolidated statements of
operations, and found them to be consistent with the basis described
to us for determination of the pro forma adjustments.
5. Recalculated the application of the pro forma adjustments to the
aggregate of the amounts in the columns captioned "InterOil
Corporation" for the six months ended June 30, 2004, and for the
year ended December 31, 2003 and "BP Papua New Guinea Limited" for
the three months ended March 31, 2004, and for the year ended
December 31, 2003, and found the amounts in the column captioned
"Pro forma" to be arithmetically correct.
46
A pro forma financial statement is based on management assumptions and
adjustments which are inherently subjective. The foregoing procedures are
substantially less than either an audit or a review. The objective of an audit
or a review is the expression of assurance with respect to management's
assumptions, the pro forma adjustments, and the application of the adjustments
to the historical financial information. Accordingly, we express no such
assurance. The foregoing procedures would not necessarily reveal matters of
significance to the unaudited pro forma consolidated statements of operations,
and we therefore make no representation about the sufficiency of the procedures
for the purposes of a reader of such statements.
(signed) KPMG
Sydney, Australia
November 9, 2004
COMMENTS FOR UNITED STATES READERS ON DIFFERENCES BETWEEN CANADIAN AND UNITED
STATES REPORTING STANDARDS
The above report, provided solely pursuant to Canadian requirements, is
expressed in accordance with standards of reporting generally accepted in
Canada. To report in conformity with United States standards on the
reasonableness of the pro forma adjustments and their application to the
unaudited pro forma consolidated statements of earnings requires an examination
or review substantially greater in scope than the review we have conducted.
Consequently, we are unable to express any opinion in accordance with standards
of reporting generally accepted in the United States with respect to the
compilation of the accompanying unaudited pro forma consolidated statements of
operations.
(signed) KPMG
Sydney, Australia
November 9, 2004
47
INTEROIL CORPORATION
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2004
(Unaudited)
(Expressed in thousands of United States Dollars, unless otherwise stated,
except share numbers)
CANADIAN GAAP U.S. GAAP
------------------------------------------------------------- ----------------------
BP PAPUA
INTEROIL NEW GUINEA PRO FORMA GAAP
CORPORATION LIMITED NOTE ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
(MARCH 31, 2004)
($'000S) ($'000S) ($'000S) ($'000S) ($'000S) ($'000S)
----------- --------------- ---------- ----------- ---------- ----------- ----------
REVENUE
Sales and operating revenues................. 12,586 18,698 4(a) 8,619 39,903 - 39,903
Interest..................................... 175 32 4(a) 36 243 - 243
Rent......................................... - 31 4(a) 8 39 - 39
Other........................................ 85 69 - 154 - 154
---------- ------ ----- ---------- --- ----------
12,846 18,830 8,663 40,339 - 40,339
---------- ------ ----- ---------- --- ----------
EXPENSES
Cost of sales and operating expenses......... 10,469 14,853 4(b) 6,701 32,023 - 32,023
Administrative and general expenses.......... 3,620 1,962 4(c)(d)(e) 1,431 7,013 - 7,013
Exploration costs............................ 1,491 - - 1,491 - 1,491
Legal and professional fees.................. 829 - - 829 - 829
Foreign exchange loss (gain)................. 97 141 4(f) (450) (212) - (212)
---------- ------ ----- ---------- --- ----------
16,506 16,956 7,682 41,144 - 41,144
---------- ------ ----- ---------- --- ----------
Profit (loss) before income taxes and
non-controlling interest................... (3,660) 1,874 981 (805) - (805)
Income tax (expense)......................... (509) (554) 4(g) 49 (1,014) - (1,014)
---------- ------ ----- ---------- --- ----------
Profit (loss) before non-controlling
interest.................................... (4,169) 1,320 1,030 (1,819) - (1,819)
---------- ------ ----- ---------- --- ----------
Non-controlling interest..................... 2 - - 2 - 2
---------- ------ ----- ---------- --- ----------
Net profit (loss)............................ (4,167) 1,320 1,030 (1,817) (1,817)
---------- ------ ----- ---------- --- ----------
Basic (loss) per share...................... (0.17) (0.07) (0.07)
Diluted (loss) per share..................... (0.17) (0.07) (0.07)
Shares used in per share calculation
- basic.................................... 24,938,621 24,938,621 24,938,621
Shares used in per share calculation
- diluted.................................. 24,938,621 24,938,621 24,938,621
See accompanying notes to the unaudited pro forma consolidated statements of
operations
48
INTEROIL CORPORATION
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003
(Unaudited)
(Expressed in United States Dollars, unless otherwise stated, except share
numbers)
CANADIAN GAAP U.S. GAAP
----------------------------------------------------------- -------------------------
BP PAPUA
INTEROIL NEW GUINEA PRO FORMA GAAP
CORPORATION LIMITED NOTE ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
(AUDITED) (AUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
$'000 $'000 $'000 $'000 $'000 $'000
----------- ---------- ------- ----------- ---------- ----------- -----------
REVENUE
Sales and operating revenues................ - 69,897 - 69,897 - 69,897
Interest.................................... 247 146 - 393 - 393
Rent........................................ - 157 - 157 - 157
Other....................................... 12 86 - 98 - 98
---------- ------ ----- ---------- --------- ----------
259 70,286 - 70,545 - 70,545
---------- ------ ----- ---------- --------- ----------
EXPENSES
Cost of sales and operating expenses........ - 55,640 - 55,640 - 55,640
Administrative and general expenses......... 2,337 7,348 4(d)(h) (125) 9,560 - 9,560
Management fees for prior periods waived.... (840) - - (840) - (840)
Exploration costs........................... 165 - - 165 - 165
Legal and professional fees................. 1,421 - - 1,421 - 1,421
Foreign exchange loss (gain)................ 679 (1,644) - (965) (8,071) (9,036)
---------- ------ ----- ---------- --------- ----------
3,762 61,344 (125) 64,981 (8,071) 56,910
---------- ------ ----- ---------- --------- ----------
Profit (loss) before income taxes and
non-controlling interest................... (3,503) 8,942 125 5,564 8,071 13,635
Income tax (expense)........................ (37) (2,593) - (2,630) - (2,630)
---------- ------ ----- ---------- --------- ----------
Profit (loss) before non-controlling
interest.................................. (3,540) 6,349 125 2,934 8,071 11,005
---------- ------ ----- ---------- --------- ----------
Non-controlling interest.................... 23 - - 23 (117) (94)
---------- ------ ----- ---------- --------- ----------
Net profit (loss)........................... (3,517) 6,349 125 2,957 7,954 10,911
---------- ------ ----- ---------- --------- ----------
Basic profit (loss) $ per share............. (0.16) 0.13 0.48
Diluted profit (loss) $ per share........... (0.16) 0.12 0.45
Shares used in per share calculation
- basic................................... 22,649,924 22,649,924 22,649,924
Shares used in per share calculation
- diluted................................. 22,649,924 4(i) 24,192,138 24,192,138
See accompanying notes to the unaudited pro forma consolidated statements of
operations
49
INTEROIL CORPORATION
NOTES TO THE PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2004 AND YEAR ENDED DECEMBER 31, 2003
(Unaudited)
(Expressed in United States Dollars, unless otherwise stated)
1. BASIS OF PRESENTATION
(a) Actual historic financial information
On March 10, 2004, InterOil Corporation ("the Company") signed an
agreement to acquire 100% of BP Papua New Guinea Limited (renamed InterOil
Products Limited or "IPL"). IPL is a distributor of refined petroleum
products in Papua New Guinea. The results of IPL's operations have been
included in the actual historic consolidated financial statements of
InterOil Corporation from that date.
Under the acquisition agreement, InterOil Corporation was entitled to the
profit of IPL from March 1, 2004. However, control of IPL's shares was not
transferred to InterOil Corporation until April 28, 2004. Accordingly, the
profit earned after tax between March 1, 2004 and April 28, 2004 was
recognized as a reduction in the Company's acquisition cost. The results
of IPL's operations from April 29, 2004 have been included in the
Company's actual historic consolidated statement of earnings.
(b) Pro forma consolidated financial information
The unaudited pro forma consolidated statements of operations have been
prepared to illustrate the notional earnings of the consolidated group as
it was structured at June 30, 2004 as if that group had existed at January
1, 2003.
Accordingly, the pro forma assumptions are as follows:
(i) InterOil Corporation obtained 100% control of IPL on January
1, 2003 and was entitled to 100% of IPL's results of
operations for the year ended December 31, 2003 and the six
months ended June 30, 2004.
(ii) Imputed interest is recognized on the basis that the amounts
payable to the vendor were repaid one year after control of
IPL was assumed to have passed to InterOil Corporation.
(iii) The pro forma consolidated financial information disclosed in
the consolidated statements of operations is based on:
SIX MONTHS ENDED JUNE 30, 2004
- The unaudited statement of earnings of InterOil
Corporation for the six months ended June 30, 2004 which
includes the results of IPL for the two months from
April 29, 2004.
- The unaudited statement of earnings of IPL for the three
months ended March 31, 2004. The average Kina to United
States Dollar exchange rate for the three months ended
March 31, 2004 is 0.3093.
- The pro forma adjustments set out in Note 4.
YEAR ENDED DECEMBER 31, 2003
- The audited statement of earnings of InterOil
Corporation for the year ended December 31, 2003.
- The audited statement of earnings of IPL for the year
ended December 31, 2003. The average Kina to United
States Dollar exchange rate for the twelve months ended
December 31, 2003 is 0.2884.
- The pro forma adjustments set out in Note 4.
It is management's opinion that these unaudited pro forma consolidated
statements of operations include all adjustments necessary for the fair
presentation, in all material respects, of the transaction described in
Note 3 in accordance with the pro forma assumptions on a basis consistent
with InterOil Corporation's accounting policies.
The unaudited pro forma consolidated statements of operations are not
intended to reflect the results of operations of InterOil Corporation
which would have actually resulted had the proposed transaction been
effected on the date indicated. Further, the pro forma consolidated
financial information is not necessarily indicative of the results of
operations that may be obtained in the future.
50
The unaudited pro forma consolidated statements of operations should be
read in conjunction with the historical financial statements and notes
thereto of InterOil Corporation and IPL described above.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited pro forma consolidated statements of operations have been
compiled using the significant accounting policies as set out in the
audited financial statements of InterOil Corporation for the year ended
December 31, 2003 and the unaudited financial statements of InterOil
Corporation for the six months ended June 30, 2004 which are incorporated
by reference in this prospectus. The generally accepted accounting
principles ("GAAP") applied by InterOil Corporation in its financial
statements are those applicable to Canadian public enterprises. The
significant accounting policies of IPL after adjustment to Canadian GAAP
conform in all material respects to those of InterOil Corporation.
The unaudited pro forma consolidated statements of operations have also
been restated in conformity with Unites States GAAP.
3. BUSINESS ACQUISITION
As indicated in Note 1, the Company, through its wholly owned subsidiary,
S.P.I. Distribution Limited, acquired 100% of the outstanding common
shares of BP Papua New Guinea Limited which was subsequently renamed
InterOil Products Limited.
This acquisition has been accounted for using the purchase method and
results from IPL's operations have been included in InterOil Corporation's
results of operations from April 28, 2004. The allocation of the purchase
price is summarised in the table below:
$
----------
PURCHASE PRICE:
Cash paid.................................................................. 1,000,000
Payable to vendor on March 1, 2005 (net of imputed interest of $559,118)... 10,667,736
Payable to vendor on March 1, 2005 under related service agreement......... 1,000,000
Acquisition costs.......................................................... 227,613
----------
12,895,349
----------
NET ASSETS ACQUIRED:
Cash....................................................................... 5,859,517
Non-cash working capital................................................... 3,215,018
Property, plant and equipment.............................................. 3,180,530
Future income tax benefits................................................. 640,284
----------
12,895,349
----------
4. PRO FORMA ADJUSTMENTS
The unaudited pro forma consolidated statements of operations include the
following adjustments which reflect the pro forma assumptions described in
Note 1(b):
(a) To record the revenues earned by IPL during the period April 1, 2004
to April 28, 2004.
(b) To record the cost of sales and operating expenses incurred by IPL
during the period April 1, 2004 to April 28, 2004.
(c) To record the administrative and general expenses incurred by IPL
during the period April 1, 2004 to April 28, 2004.
(d) To record changes in depreciation expense resulting from adjustments
to the property, plant and equipment carrying values made on the
consolidation of IPL into IOC.
(e) To reverse the imputed interest expense included in the June 30,
2004 InterOil Corporation statement of earnings relating to the
purchase price payable by InterOil Corporation to the vendor of IPL
one year from the date of control. This amount was assumed to have
been paid by December 31, 2003.
(f) To record the foreign exchange gain incurred by IPL during the
period April 1, 2004 to April 28, 2004.
(g) To record the income tax expense incurred by IPL during the period
April 1, 2004 to April 28, 2004.
(h) To record imputed interest expense on the portion of the purchase
price payable by InterOil Corporation to the vendor of IPL one year
from the date of control.
(i) Certain securities that were previously antidilutive are considered
dilutive as a result of the pro forma adjustments that generated a
pro forma profit.
51
INTEROIL CORPORATION
RECONCILIATION OF THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS TO
UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2004 AND 2003 AND CUMULATIVE
PERIOD ENDED JUNE 30, 2004
FROM CANADIAN GAAP TO U.S. GAAP
(Expressed in U.S. dollars)
InterOil Corporation's (the "Company" or "InterOil") primary business interest
is the development of an oil refinery (the "Project") in Papua New Guinea
("PNG"). The Company is also engaged in oil and gas exploration and development
activity in PNG.
The unaudited interim consolidated financial statements of the Company for the
three and six month periods ended June 30, 2004 and 2003 and the period from the
commencement of the development stage to June 30, 2004 have been prepared in
accordance with generally accepted accounting principles in Canada ("Canadian
GAAP") which, in most respects, conforms with generally accepted accounting
principles in the United States ("U.S. GAAP"). The following are the significant
differences in accounting principles as they pertain to the unaudited interim
consolidated financial statements for the three and six month periods then
ended:
1. DERIVATIVE INSTRUMENTS AND HEDGING: SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133") established accounting
and reporting standards requiring all derivative instruments be recorded
in the consolidated balance sheet at their fair value. If hedge accounting
is appropriate based upon specific criteria, the impact of recording the
derivative instrument is offset to the extent that the hedging
relationship is effective. All ineffectiveness in the hedging relationship
as well as derivative instruments not qualifying for hedge accounting is
reflected immediately in the consolidated statement of operations.
The Company elected not to adopt the FASB's optional hedge accounting
provisions. Accordingly, for U.S. GAAP reporting purposes only, effective
January 1, 2001, unrealized gains and losses resulting from the valuation
of derivatives at fair value are recognized in income as the gains and
losses arise and not concurrently with the recognition of the transactions
being hedged. In its Canadian GAAP financial statements, the Company
continues to recognize the gains and losses on derivative contracts
designated as hedges concurrently with the recognition of the transactions
being hedged.
On initial adoption of SFAS 133, the Company recorded additional
liabilities of $5,179,131, and a resulting cumulative transitional
adjustment to increase accumulated losses, for the fair value of
derivatives which did not qualify as hedges on January 1, 2001.
2. STOCK BASED COMPENSATION: SFAS 123, "Accounting for Stock-based
Compensation" ("SFAS 123"), establishes financial accounting and reporting
standards for stock-based employee compensation plans as well as
transactions in which an entity issues its equity instruments to acquire
goods or services from non-employees. The Company issues options to
non-employees, and to employees that are direct awards of stock or call
for settlement by the issuance of equity instruments using the fair value
based method. Consideration paid by employees on the exercise of stock
options is recorded as share capital and contributed surplus. Disclosure
required under SFAS 123 is included after the reconciliations to U.S.
GAAP.
The Company applies the recommendations of the Canadian Institute of
Chartered Accountants in Handbook Section 3870, "Stock-based compensation
and other stock-based payments", which result in recognition of
compensation expense for stock options issued to employees and
non-employees under Canadian GAAP on a basis consistent with the
requirements of SFAS 123.
52
3. INCOME TAX EFFECT OF ADJUSTMENTS: The income tax effect of U.S. GAAP
adjustments was expense of nil (unaudited) for both the three and six
month periods ended June 30, 2004 and $1,844,887 (unaudited) and
$2,679,109 (unaudited) for the three and six month periods ended June 30,
2003. However, the impact of these adjustments is offset by a
corresponding fluctuation in the valuation allowance (unaudited) for U.S.
GAAP purposes.
RECONCILIATION OF CANADIAN AND U.S. GAAP NET INCOME
(Unaudited)
(U.S. $'000s)
CUMULATIVE
AMOUNTS
FROM
INCEPTION OF
DEVELOPMENT
THREE MONTHS ENDED SIX MONTHS ENDED STAGE TO
JUNE 30, JUNE 30, JUNE 30,
2004 2003 2004 2003 2004
-------- ------- ------- ----- ------------
Net (loss) as shown in unaudited interim financial statements in
accordance with Canadian GAAP .............................................. (2,522) (1,205) (4,167) (518) (15,198)
Adjustments (before income tax and minority interest):
Recognition of unrealized forward contract gains (1) .............. - 4,777 - 6,937 8,239
Income tax effect of adjustments (3) ........................................ - - - - -
------ ----- ------ ----- ------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE .......................................................... (2,522) 3,572 (4,167) 6,419 (6,959)
Cumulative effect of accounting changes (1) ................................. - - - - (5,179)
Minority interests share of after tax adjustments ........................... - (64) - (93) 145
------ ----- ------ ----- ------
NET INCOME (LOSS) IN ACCORDANCE WITH U.S. GAAP .............................. (2,522) 3,508 (4,167) 6,326 (11,993)
------ ----- ------ ----- ------
- ----------
Note: The notes in the above table refer to the discussion above the table.
53
STATEMENT OF COMPREHENSIVE INCOME (LOSS), NET OF TAX
(Unaudited)
(U.S. $'000s)
CUMULATIVE
AMOUNTS
FROM
INCEPTION OF
DEVELOPMENT
THREE MONTHS ENDED SIX MONTHS ENDED STAGE TO
JUNE 30, JUNE 30, JUNE 30,
2004 2003 2004 2003 2004
------- ----- ------- ----- ------------
NET INCOME (LOSS) IN ACCORDANCE WITH U.S. GAAP ........................ (2,522) 3,508 (4,167) 6,326 (11,993)
Foreign currency translation reserve
Movement under Canadian GAAP ................................ 50 - 50 - 50
Movement under U.S. GAAP .................................... - - - - -
Income tax effect of movement in foreign currency translation reserve.. - - - - -
------ ----- ------ ----- -------
Other comprehensive income (loss) ..................................... 50 - 50 - 50
------ ----- ------ ----- -------
COMPREHENSIVE INCOME (LOSS) ........................................... (2,472) 3,508 (4,117) 6,326 (11,943)
------ ----- ------ ----- -------
STATEMENT OF ACCUMULATED OTHER COMPREHENSIVE INCOME, NET OF TAX (AOCI)
(Unaudited)
(U.S. $'000s)
FOREIGN TAX EFFECT ON ACCUMULATED
CURRENCY FOREIGN CURRENCY OTHER
TRANSLATION TRANSLATION COMPREHENSIVE
RESERVE RESERVE INCOME
----------- ---------------- -------------
AOCI BALANCE AS OF DECEMBER 31, 2002..... - - -
Current period change.................... - - -
--- --- ---
AOCI BALANCE AS OF MARCH 31, 2003........ - - -
Current period change.................... - - -
--- --- ---
AOCI BALANCE AS OF JUNE 30, 2003......... - - -
=== === ===
AOCI BALANCE AS OF DECEMBER 31, 2003..... - - -
Current period change.................... - - -
--- --- ---
AOCI BALANCE AS OF MARCH 31, 2004........ - - -
Current period change.................... 50 - 50
--- --- ---
AOCI BALANCE AS OF JUNE 30, 2004......... 50 - 50
=== === ===
EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income available to
shareholders by the weighted average number of shares outstanding for the
reporting period. Diluted earnings per share reflects the potential dilution
that could occur if options or contracts to issue shares were exercised or
converted into shares.
For the calculation of diluted earnings per share, the basic weighted average
number of shares is increased by the dilutive effect of stock options determined
using the treasury method. No
54
(unaudited) potential shares in options on issue were antidilutive for the three
and six month periods ended June 30, 2004. The potential shares in options of
135,000 (unaudited) on issue were antidilutive for the three and six month
periods ended June 30, 2003.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
WEIGHTED AVERAGE NUMBER OF SHARES ON WHICH EARNINGS PER SHARE
CALCULATIONS ARE BASED IN ACCORDANCE WITH U.S. GAAP ('000s) ('000s) ('000s) ('000s)
------ ------ ------ ------
Basic.......................................................... 25,057 22,238 24,939 21,646
Effect of dilutive options..................................... - 1,211 - 859
------ ------ ------ ------
Diluted........................................................ 25,057 23,449 24,939 22,505
------ ------ ------ ------
NET EARNINGS (LOSS) PER SHARE IN ACCORDANCE WITH U.S. GAAP) ($) ($) ($) ($)
----------- ----------- ----------- -----------
Basic.......................................................... (0.10) 0.16 (0.17) 0.30
Diluted........................................................ (0.10) 0.15 (0.17) 0.28
The adjustments under U.S. GAAP result in changes to the consolidated balance
sheet of the Company as follows:
RECONCILIATION OF CANADIAN AND U.S. GAAP BALANCE SHEET AMOUNTS
(Unaudited)
(U.S. $'000s
AS AT JUNE 30, 2004 AS AT DECEMBER 31, 2003
---------------------- -----------------------
CANADIAN U.S. CANADIAN U.S.
GAAP GAAP GAAP GAAP
-------- ------- -------- --------
Current assets............................. 58,441 58,441 35,012 35,012
Oil and gas properties..................... 38,691 38,691 23,018 23,018
Capital assets............................. 52,044 52,044 48,855 48,855
Deferred project costs..................... 167,669 170,728 153,455 156,514
Future income tax benefit.................. 642 642 - -
------- ------- ------- -------
TOTAL ASSETS............................... 317,487 320,546 260,340 263,399
------- ------- ------- -------
Current liabilities........................ 66,652 66,652 16,315 16,315
Deferred financing costs................... 834 834 - -
Long term debt............................. 92,610 92,610 90,600 90,600
Non-controlling interest................... 6,465 6,320 6,467 6,323
Shareholders' equity....................... 150,926 154,130 146,958 150,161
------- ------- ------- -------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY... 317,487 320,546 260,340 263,399
------- ------- ------- -------
STOCK BASED COMPENSATION
As permitted by SFAS 123, the Company has elected to follow the intrinsic value
method of accounting for stock-based compensation arrangements, as provided for
in Accounting Principles Board Opinion 25. In December 2002 the FASB issued
Statement No. 148, "Accounting for Stock-Based Compensation -- Transition and
Disclosure, an amendment of FASB Statement No. 123" ("SFAS 148"). SFAS 148
provides alternative methods of transition for a voluntary change to the fair
value method of accounting for stock-based employee compensation. In addition,
SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent
disclosure in annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. SFAS 148 became effective in the year ended December
55
31, 2002. The Company has not adopted a fair value based method of accounting
for stock options granted to employees.
Options are exercisable on a 1:1 basis. Options are issued at no less than
market price to directors, staff and contractors. Options vest at various dates
in accordance with the applicable option agreement, have an exercise period of
three to five years assuming continuous employment by the InterOil Group and may
be exercised at any time after vesting within the exercise period. Upon
resignation or retirement, vested options must be exercised within 30 days for
employees and 90 days for directors.
The following summarizes the stock options outstanding at respective balance
sheet dates:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2004 2003 2004 2003
------------------------ ----------------------- ----------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
(`000s) (U.S.$) (`000s) (U.S.$) (`000s) (U.S.$) (`000s) (U.S.$)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Outstanding at beginning of
period......................... 1,344 7.51 1,265 5.92 1,363 7.55 1,510 5.48
Granted ......................... 154 25.05 187 10.92 174 25.26 192 10.85
Exercised ....................... (5) 6.00 (4) 2.75 (15) 5.81 (254) 4.44
Expired ......................... (10) 23.71 - - (39) 23.55 - -
----- ---- ----- ---- ----- ----- ----- ----
Outstanding at end of period..... 1,483 9.23 1,448 6.57 1,483 9.23 1,448 6.57
----- ---- ----- ---- ----- ----- ----- ----
Weighted average fair value of
options granted during the
period (U.S. $`000s)............ 1,564 668 1,742 682
----- ----- ----- -----
The fair values of the options granted as detailed above have been estimated at
the date of grant using a Black-Scholes option pricing model with the following
assumptions: risk-free interest rate of 3.2%; dividend yield of nil; volatility
factor of the expected market price of the Company's common stock of 45%; and a
weighted average expected life of the options of three years.
The following table summarizes information about fixed stock options outstanding
at June 30, 2004:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE (VESTED)
- ------------------------------------------------------------------ -----------------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
NUMBER OF EXERCISE CONTRACTUAL NUMBER OF EXERCISE
RANGE OF EXERCISE PRICES OPTIONS PRICE LIFE OPTIONS PRICE
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
(U.S.$) (`000s) (U.S.$) (Years) (U.S.$) (Years)
- --------------------------- ----------- ----------- ----------- ----------- -----------
2.75 to 5.00............... 533 4.36 1.14 514 4.34
5.01 to 8.00............... 439 5.87 2.55 364 5.60
8.01 to 12.00.............. 279 11.24 1.47 107 11.65
12.01 to 23.50............. 60 21.88 2.45 30 20.28
23.51 to 27.00............. 172 25.24 4.03 90 24.00
----- ----- ---- ----- -----
2.75 to 27.00.............. 1,483 9.23 2.52 1,105 7.50
----- ----- ---- ----- -----
56
Where options were granted with exercise prices equal to the market price when
the options were granted, no compensation expense has been charged to income at
the time of the option grants.
During the three and six month periods ended June 30, 2004, the Company recorded
compensation expense of $487,263 and $569,695, respectively, under Canadian
GAAP. This is equivalent to the amount the Company recognized under U.S. GAAP
following the fair value treatment required under SFAS 123.
Had compensation cost for the Company's stock options been determined based on
the fair market value at the grant dates of the awards, and amortized on a
straight-line basis, consistent with methodology prescribed by SFAS 123, the
Company's net income and net income per share for the three and six month
periods ended June 30, 2003 would have been the pro forma amounts indicated as
follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2003 JUNE 30, 2003
------------- -------------
(unaudited)
(U.S. $'000s)
Net income under U.S. GAAP.................................... 3,508 6,326
Pro forma stock based compensation............................ (374) (379)
---------- ---------
Pro forma net income.......................................... 3,134 5,947
---------- ---------
Earnings per share as reported
Basic.......................................... 0.16 0.30
Diluted........................................ 0.15 0.28
Pro forma earnings per share
Basic.......................................... 0.14 0.27
Diluted........................................ 0.13 0.26
---------- ---------
ACQUISITION OF INTEROIL PRODUCTS LIMITED ("IPL")
The following summary unaudited pro forma condensed consolidated financial
information for the six month periods ended June 30, 2004 and 2003 shows the
estimated pro forma impact on the Company's unaudited interim consolidated
financial statements of the acquisition of IPL as of April 28, 2004.
This pro forma information is based on management's current estimates of, and
good faith assumptions regarding, the adjustments arising from the transactions
described above. The pro forma adjustments are based on currently available
information and actual adjustments could differ materially from the current
estimates.
The pro forma information does not purport to represent what the financial
position and results of operations actually would have been had the acquisition
of IPL been consummated on the dates indicated or to project the financial
position of any future date of operations for any future period.
The following pro forma statements of earnings for the six month periods ended
June 30, 2004 and 2003 give effect of the acquisition of IPL as if it had
occurred on January 1, 2003.
57
INTEROIL IPL(1) PRO FORMA
-------- ------ ---------
SIX MONTHS ENDED JUNE 30, 2004 (unaudited) (unaudited) (unaudited)
(U.S.$ '000s) (U.S. '000s) (U.S.$ '000s)
Sales and operating revenue.......................................... 12,586 27,317 39,903
Net loss - Canadian GAAP............................................. (4,167) 2,350 (1,817)
Net loss - U.S. GAAP................................................. (4,167) 2,350 (1,817)
Basic loss per share (cents per share)
Canadian GAAP(2)..................................... (0.17) (0.07)
U.S. GAAP(3)......................................... (0.17) (0.07)
Diluted loss per share (cents per share)
Canadian GAAP(2)..................................... (0.17) (0.07)
U.S. GAAP(3)......................................... (0.17) (0.07)
SIX MONTHS ENDED JUNE 30, 2003
Sales and operation revenue.......................................... - 34,999 34,999
Net loss - Canadian GAAP............................................. (518) 3,175 2,657
Net loss - U.S. GAAP................................................. 6,326 3,175 9,501
Basic loss per share (cents per share)
Canadian GAAP(2)..................................... (0.02) 0.12
U.S. GAAP(3)......................................... 0.30 0.44
Diluted (loss)/earnings per share (cents per share)
Canadian GAAP(2)..................................... (0.02) 0.12
U.S. GAAP(3)......................................... 0.28 0.42
- -----------
Notes:
(1) Financial data for the six months ended June 30, 2004 represents results for
the period from January 1, 2004 to April 28, 2004, the effective date the
Company gained control of IPL, and is derived from the unaudited management
accounts of IPL. Financial data for the six months ended June 30, 2003
represents results for the year ended 31 December 2003 divided in half.
(2) The weighted average number of shares used in the earnings per share
information is consistent with that used under Canadian GAAP for the respective
periods.
(3) The weighted average number of shares used in the earnings per share
information is consistent with that used under U.S. GAAP for the respective
periods.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
U.S. GAAP requires the disclosure of accounting pronouncements that have been
issued but are not yet effective for the Company reporting. The following
applicable accounting pronouncements have been recently issued:
DEBT: In May 2003, the FASB issued SFAS No. 150 "Accounting for certain
financial instruments with characteristics of both liabilities and equity"
("SFAS 150"). SFAS 150 changes the classification in the balance sheet of
certain common financial instruments from whether equity or mezzanine
presentation to liabilities and requires the issuer of those financial
instruments to recognize changes in fair value or redemption amount, as
applicable, in earnings. SFAS 150 is effective for financial instruments entered
into or modified after May 31, 2003 and with one exception, is effective at the
beginning of the first interim period beginning after June 15, 2003. The effect
of adopting SFAS 150 will be recognised as a cumulative effect on an accounting
change as of the period beginning the period of adoption. Restatement of prior
periods is not permitted. SFAS 150 did not have any impact on the financial
position or results of operations.
58
BP PAPUA NEW GUINEA LIMITED
ANNUAL REPORT OF THE DIRECTORS TO THE SHAREHOLDERS
FOR THE YEAR ENDED 31 DECEMBER 2003
The directors take pleasure in presenting their annual report on the affairs of
the company, including the financial statements, for the year ended 31 December
2003.
ACTIVITIES
The principal continuing activity of the company is that of importing and
distribution of petroleum products in Papua New Guinea.
RESULT
The net profit of the company for the year after tax was K22,010,000 (2002
profit: K11,094,000).
DIVIDEND
Dividends paid during the year amounted to K8,000,000 (2002: KNil). Dividends
declared subsequent to year end totalled K15,729,688 and encompass profits from
the 2003 year and the first two months of 2004 and are payable to the owner of
the shares at this time as part of the share sale agreement dated 10 March 2004.
DIRECTORS
The directors at balance date were:
Gerry R Hueston
Robert Welsh
Peter Diezmann
Mr G Bourne resigned from the Board of Directors on 12 September 2003. Mr GR
Hueston was appointed to the Board on 12 September 2003.
AUDITORS
Details of amounts paid to the auditors for audit and other services are shown
in note 2 to the financial statements.
DONATIONS
The total amount of donations made by the company is stated in note 2 to the
financial statements.
REGISTERED OFFICE
The company's registered office and principal place of business is situated at
Section 34, Lot 22, Speybank Street, Lae, Morobe Province.
CHANGE OF NAME
The Company changed its name to InterOil Products Limited on 29 April 2004.
OTHER DISCLOSURES
The board has received the agreement of all shareholders for the annual report
not to include the disclosures required by Section 212(1)(a) and (1)(d) to (j).
For, and on behalf of, the Board
Director Director
(signed) "Tom S. Donovan" (signed) "Graeme K. Alexander"
November 9, 2004
59
PRICEWATERHOUSECOOPERS
PRICEWATERHOUSECOOPERS
ANZ Haus
REPORT OF INDEPENDENT ACCOUNTANTS Central Avenue
PO Box 451
LAE
TO THE MEMBERS AND DIRECTORS OF BP PAPUA NEW GUINEA PAPUA NEW GUINEA
LIMITED Website: www.pwc.com.pg
Telephone 675 472 2644
Facsimile 675 472 6270
In our opinion, the accompanying balance sheets and the related statements of
earnings, of cash flows and changes in equity, set out on pages 60 to 70, after
the restatement described in Note 21, present fairly, in all material respects,
the financial position of BP Papua New Guinea Limited (the "Company") as at 31
December 2003, 2002 and 2001, and the results of its operations and its cash
flows for each of the years in the three-year period ended 31 December 2003, in
conformity with International Financial Reporting Standards and with the Papua
New Guinea Companies Act 1997. These financial statements are the responsibility
of the directors of the Company. Our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with the International Standards on Auditing and the
auditing standards generally accepted in Canada. 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
International Financial Reporting Standards vary in certain significant respects
from accounting principles generally accepted in Canada and the United States of
America. Information relating to the nature and effect of such differences is
presented in Note 23 to the financial statements.
(signed) PricewaterhouseCoopers
Stephen Beach
Partner
Lae, Papua New Guinea
Dated November 9, 2004
60
BP PAPUA NEW GUINEA LIMITED
FINANCIAL STATEMENTS
AS AT DECEMBER 31, 2003, 2002 AND 2001
BALANCE SHEET
(Expressed in Papua New Guinea Kina, except supplementary information)
SUPPLEMENTARY
INFORMATION
-----------
DECEMBER 31,
2003
USD'000 DECEMBER 31, DECEMBER DECEMBER
@ 1 K = 0.3105 2003 31, 2002 31,2001
NOTE USD K'000 K'000 K'000
---- --- ----- ----- -----
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... 5,808 18,706 6,452 4,137
Trade receivables.................. 5 7,285 23,462 27,029 15,211
Other receivables and
prepayments........................ 5 199 642 2,607 523
Inventories........................ 6 6,518 20,992 22,538 22,230
---------- -------- ------- -------
19,810 63,802 58,626 42,101
NON CURRENT ASSETS:
Property, plant and equipment...... 4 4,735 15,249 12,606 12,971
Deferred income tax benefit........ 3 861 2,776 1,593 2,004
---------- -------- ------- -------
25,406 81,827 72,825 57,076
---------- -------- ------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Income tax payable................. 3 1,893 6,097 1,547 225
Accounts payable and accrued
liabilities........................ 8 2,382 7,673 2,843 5,768
Employee provisions................ 9 104 336 209 211
Due to related parties............. 12 3,625 11,674 26,206 19,993
---------- -------- ------- -------
8,004 25,780 30,805 26,197
NON CURRENT LIABILITIES:
Employee provisions................ 9 120 388 371 324
---------- -------- ------- -------
8,124 26,168 31,176 26,521
---------- -------- ------- -------
SHAREHOLDERS' EQUITY:
Share capital...................... 10 - - - -
General reserve.................... 10 260 838 838 838
Retained earnings.................. 17,022 54,821 40,811 29,717
---------- -------- ------- -------
17,282 55,659 41,649 30,555
---------- -------- ------- -------
25,406 81,827 72,825 57,076
---------- -------- ------- -------
See accompanying notes to the financial statements
Approved by the Board on November 2, 2004
(signed) "Tom S. Donovan" (signed) "Graeme K. Alexander"
- ---------------------------------------- -----------------------------------
Director Director
61
BP PAPUA NEW GUINEA LIMITED
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
STATEMENT OF EARNINGS
(Expressed in Papua New Guinea Kina, except supplementary information)
YEAR ENDED
-------------------------------------------------------------
SUPPLEMENTARY
INFORMATION
-------------
DECEMBER 31,
2003
USD'000 DECEMBER 31, DECEMBER DECEMBER
@ 1 K = 0.3105 2003 31, 2002 31, 2001
NOTE USD K'000 K'000 K'000
---- --- ----- ----- -----
(Unaudited)
Sales revenue...................... 75,253 242,361 191,230 164,480
Cost of sales...................... (59,904) (192,927) (162,535) (136,733)
---------- --------- -------- --------
GROSS PROFIT....................... 15,349 49,434 28,695 27,747
Other operating income............. 261 840 1,057 1,345
Administrative and general
expenses 2 (7,911) (25,479) (19,448) (21,373)
Foreign exchange gains/(losses) 1,770 5,699 4,388 (425)
---------- --------- -------- --------
OPERATING PROFIT................... 9,469 30,494 14,692 7,294
Finance income..................... 157 506 159 122
---------- --------- -------- --------
PROFIT BEFORE INCOME TAXES......... 9,626 31,000 14,851 7,416
Income tax (expense)............... 3 (2,792) (8,990) (3,757) (1,850)
---------- --------- -------- --------
NET PROFIT 6,834 22,010 11,094 5,566
---------- --------- -------- --------
See accompanying notes to the financial statements
62
BP PAPUA NEW GUINEA LIMITED
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
STATEMENT OF CASH FLOWS
(Expressed in Papua New Guinea Kina, except supplementary information)
YEAR ENDED
---------------------------------------------------------------
SUPPLEMENTARY
INFORMATION
-------------
DECEMBER 31,
2003
USD'000 DECEMBER 31, DECEMBER DECEMBER
@ 1 K = 0.3105 2003 31, 2002 31, 2001
USD K'000 K'000 K'000
-------------- ------------ -------- ---------
(Unaudited)
OPERATING ACTIVITIES
Profit before income taxes.................... 9,626 31,000 14,851 7,416
Adjustments for non-cash transactions:
Depreciation and profit on sale
of property, plant and equipment......... 578 1,863 1,717 2,065
Unrealized exchange (gain)/loss.......... - - (2,336) 12
Change in non-cash operating working capital:
Inventories......................... .... 480 1,546 (308) 4,628
Trade and other receivables.............. 1,718 5,532 (13,902) 8,823
Accounts payable and accrued
liabilities.............................. 1,544 4,974 (2,880) 1,723
Due to related parties................... (4,512) (14,532) 8,549 (23,670)
Taxes Paid (1,746) (5,623) (2,024) (445)
----------- --------- -------- ---------
Cash flows provided by operating
activities.................................... 7,688 24,760 3,667 552
----------- --------- -------- ---------
INVESTING ACTIVITIES
Expenditure on capital assets............ (1,454) (4,682) (1,640) (1,442)
Funds received on sale of assets......... 55 176 288 155
----------- --------- -------- ---------
Cash flows used in investing activities....... (1,399) (4,506) (1,352) (1,287)
----------- --------- -------- ---------
FINANCING ACTIVITIES
Dividend paid............................ (2,484) (8,000) - -
----------- --------- -------- ---------
Cash flows used in investing activities....... (2,484) (8,000) - -
----------- --------- -------- ---------
Increase (decrease) in cash and cash
equivalents................................... 3,805 12,254 2,315 (735)
Cash and cash equivalents, beginning
of period..................................... 2,003 6,452 4,137 4,871
----------- --------- -------- ---------
Cash and cash equivalents, end of period...... 5,808 18,706 6,452 4,137
----------- --------- -------- ---------
CASH AND CASH EQUIVALENTS COMPRISES:
Cash on hand and at bank...................... 5,808 18,706 6,452 4,137
Bank overdrafts............................... - - - -
----------- --------- -------- ---------
5,808 18,706 6,452 4,137
----------- --------- -------- ---------
See accompanying notes to the financial statements
63
BP PAPUA NEW GUINEA LIMITED
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
STATEMENT OF CHANGES IN EQUITY
(Expressed in Papua New Guinea Kina, except supplementary information)
YEAR ENDED
-------------------------------------------------------------
SUPPLEMENTARY
INFORMATION
-------------
DECEMBER 31,
2003
USD'000 DECEMBER 31, DECEMBER DECEMBER
@ 1 K = 0.3105 2003 31, 2002 31, 2001
USD K'000 K'000 K'000
-------------- ------------ --------- --------
(Unaudited)
SHARE CAPITAL
At beginning of year................ - - - -
Issue of capital stock.............. - - - -
---------- --------- ------- -------
At end of year...................... - - - -
---------- --------- ------- -------
GENERAL RESERVE
At beginning of year................ 260 838 838 838
Change in year...................... - - - -
---------- --------- ------- -------
At end of year...................... 260 838 838 838
---------- --------- ------- -------
RETAINED EARNINGS
At beginning of year................ 12,672 40,811 29,717 24,151
Dividends declared and paid......... (2,484) (8,000) - -
Net profit for year................. 6,834 22,010 11,094 5,566
---------- --------- ------- -------
At end of period.................... 17,022 54,821 40,811 29,717
---------- --------- ------- -------
SHAREHOLDERS' EQUITY AT END OF YEAR. 17,282 55,659 41,649 30,555
---------- --------- ------- -------
See accompanying notes to the financial statements
64
BP PAPUA NEW GUINEA LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
1 BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
BP Papua New Guinea Limited (the "Company") is a company incorporated in
Papua New Guinea. Its primary business interest is to distribute refined
fuel products in Papua New Guinea. All amounts are expressed in Papua New
Guinea Kina rounded to the nearest thousand kina, unless noted otherwise.
These financial statements are presented in accordance with the Papua New
Guinea Companies Act 1997 and comply with International Financial
Reporting Standards ("IFRS").
These financial statements were approved for issue by the Board of
Directors on November 2, 2004.
A. GENERAL ACCOUNTING POLICIES
The fundamental accounting assumptions recognised as appropriate for the
measurement and reporting of results, cash flows and the financial
position have been followed in the preparation of these financial
statements.
These accounts have been prepared using the historical cost convention as
modified by the re-measurement of certain financial instruments at fair
value through profit and loss. Unless otherwise stated, the accounting
policies adopted are consistent with those of the previous year.
B. PARTICULAR ACCOUNTING POLICIES
The following particular accounting policies, which significantly affect
the measurement of profit and of financial position, have been applied:
(a) Revenue
Revenue comprises the fair value for the sale of goods and services net of
goods and services tax, rebates and discounts. Revenue is recognised as
follows:
(i) Sales of goods
Sales of goods are recognised when the Company has delivered
products to the customer, the customer has accepted the products and
collectability of the related receivables is reasonably assured. It
is not the Company's policy to sell products with a right of return.
(ii) Rental income
Rental income is recognised on an accrual basis in accordance with
the substance of the relevant rental agreements.
(iii) Interest income
Interest income is recognised on a time-proportionate basis using
the effective interest method.
(b) Property, Plant and Equipment
The cost of purchased fixed assets is the value of the consideration given
to acquire the assets and the value of other directly attributable costs
which have been incurred in bringing the assets to the location and
condition necessary for their intended service. Where the carrying amount
of an individual non-current asset is greater than its recoverable amount
the asset is written down to its recoverable amount. The recoverable
amount is the higher of an asset's fair value less costs to sell and value
in use.
(c) Depreciation
Depreciation is charged on a straight line basis so as to write off the
cost or valuation of the fixed assets to their residual value over the
expected useful lives. The estimated economic lives are as follows:
Leasehold land and improvements................ Shorter of 100 years or lease period
Buildings...................................... 30-40 years
Plant & equipment.............................. 10-15 years
Motor vehicles................................. 4 years
Office furniture & fittings.................... 10-15 years
65
(d) Foreign Currencies
Foreign currency transactions are recorded at the exchange rates in effect
at the date of the transaction. Monetary assets and liabilities arising
from trading transactions or overseas borrowings are translated at closing
rates. Gains and losses due to currency fluctuations on these items are
included in the profit and loss account.
(e) Inventories
Inventories are stated at the lower of cost or net realisable value.
Cost is determined on a first in, first out basis including appropriate
freight inward, wharfage and insurance costs.
(f) Taxation
Deferred income tax is provided in full, using the liability method, on
temporary differences arising between the tax bases of assets and
liabilities and their carrying amounts in the financial statements.
Deferred income tax is determined using tax rates (and laws) that have
been enacted or substantially enacted by the balance sheet date and are
expected to apply when the related deferred income tax asset is realized
or the deferred income tax liability is settled. Deferred income tax
assets are recognised to the extent that it is probable that future
taxable profit will be available against which the temporary differences
can be utilised.
The tax effect of transactions or events that are taken directly to
reserves are charged or credited directly to the same reserve.
(g) Components of Cash and Cash Equivalents
For the purposes of the statement of cash flows, cash is considered to be
cash on hand and current accounts in banks, net of bank overdrafts. Cash
equivalents are short-term, highly liquid investments with original
maturities less than 90 days that are readily convertible to known amounts
of cash.
(h) Employee Entitlements
The amounts expected to be paid to employees for their pro-rata
entitlement to long service and annual leave and leave fares are accrued
annually having regard to anticipated periods of service, remuneration
levels and statutory obligations.
(i) Provisions
A provision is recognised when there is a present obligation to transfer
economic benefits as a result of past events. The amount provided is the
best estimate of the expenditure that would be required to settle the
obligation that existed at the balance sheet date.
(j) Leased Assets
Operating lease payments are representative of pattern of benefit derived
from the leased asset and accordingly are charged to the profit and loss
account in the periods in which they are incurred.
(k) Trade Receivables
Trade receivables are recognised initially at fair value and subsequently
measured at amortised cost using the effective interest method, less
provision for impairment. A provision for impairment of trade receivables
is established when there is objective evidence that the Company will not
be able to collect all amounts due according to the original terms of
receivables. The amount of the provision is the difference between the
asset's carrying amount and the present value of estimated future cash
flows, discounted at the effective interest rate. The amount of the
provision is recognised in the income statement.
(l) Use of estimates
The preparation of the financial statements in conformity with
International Financial Reporting Standards and with the Papua New Guinea
Companies Act 1997 requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expense
during the year. Actual results could differ from those estimates.
C. RELEASE OF NEW INTERNATIONAL FINANCIAL REPORTING STANDARDS
The International Accounting Standards Board has issued 18 revised
standards and five new financial reporting standards that will be
applicable to the company from 1 January 2005. The company has conducted
investigations and does not consider that there are any measurement or
recognition issues arising from the release of these new pronouncements
that will have a significant impact on the reported financial position or
financial performance of the company.
66
2. ADMINISTRATIVE AND GENERAL EXPENSES
2003 2002 2001
K'000 K'000 K'000
------- ------- -------
Auditors remuneration
Audit..................................... 49 40 38
Other services............................ 36 64 42
Bad debts written off....................... 671 197 812
Costs arising from kerosene contamination... 23 1,636 5,600
Depreciation................................ 1,939 1,792 2,081
Donations................................... 102 103 71
Impairment of receivables................... - - (608)
Lease rentals............................... 605 695 949
Other operating expenses.................... 9,319 5,869 4,916
Profit on sale of property, plant and
equipment................................... (76) (75) (16)
Repairs and maintenance..................... 4,784 2,454 1,863
Staff costs................................. 8,027 6,673 5,625
------ ------ ------
25,479 19,448 21,373
3 (a) INCOME TAX EXPENSE
The prima facie tax payable on the operating profit differs from the
income tax provided in the accounts and is reconciled as follows:
2003 2002 2001
K'000 K'000 K'000
------- ------ ------
Operating profit before tax......................... 31,000 14,851 7,416
------ ------ -----
Prima facie tax payable @ 30% (2002 and 2001:25%)... 9,300 3,713 1,854
Effect of change n tax rate......................... (275) - -
Over provision in previous year..................... (151) - (78)
Non deductible items................................ 116 44 74
------ ------ -----
Income tax expense.................................. 8,990 3,757 1,850
------ ------ -----
COMPRISING
Current year income tax............................. 10,324 3,346 1,093
Deferred income tax................................. (908) 411 835
Effect of change in tax rate........................ (275) - -
Prior year tax...................................... (151) - (78)
------ ------ -----
8,990 3,757 1,850
------ ------ -----
The PNG corporate tax rate changed from 25% to 30% effective from January
1, 2003.
(b) DEFERRED INCOME TAX BENEFIT
2003 2002 2001
K'000 K'000 K'000
------ ------ ------
At beginning of year........................ 1,593 2,004 2,839
Temporary differences movement.............. 1,183 (411) (835)
----- ----- -----
At end of year.............................. 2,776 1,593 2,004
----- ----- -----
The deferred income tax benefit relates to:
Depreciation................................ 1,195 953 995
Employee provisions......................... 227 145 134
Duty provision.............................. 217 217 0
Unrealized Foreign exchange (gain)/loss..... - (584) 3
Trade receivables impairment................ 439 366 365
Minor capital expenditure................... 835 627 617
Others...................................... (137) (131) (110)
----- ----- -----
2,776 1,593 2,004
----- ----- -----
67
4. PROPERTY, PLANT AND EQUIPMENT
WORK IN LAND & PLANT & MOTOR
PROGRESS BUILDINGS EQUIPMENT VEHICLES TOTAL
K'000 K'000 K'000 K'000 K'000
-------- --------- --------- -------- -------
2003
COST
January 1, 2003............ 491 7,441 23,472 2,054 33,458
Additions.................. 4,685 - - - 4,685
Disposals.................. - (122) (12) (348) (482)
Transfers.................. (2,487) 232 1,376 879 -
------ ----- ------ ----- ------
December 31, 2003.......... 2,689 7,551 24,836 2,585 37,661
------ ----- ------ ----- ------
DEPRECIATION
January 1, 2003............ - 3,796 15,620 1,436 20,852
Change for the year........ - 271 1,139 529 1,939
Disposals.................. - (46) (11) (322) (379)
------ ----- ------ ----- ------
December 31, 2003.......... - 4,021 16,748 1,643 22,412
------ ----- ------ ----- ------
WDV at December 31, 2003... 2,689 3,530 8,088 942 15,249
------ ----- ------ ----- ------
2002
COST
January 1, 2002............ 825 7,704 22,377 1,486 32,392
Additions.................. 1,640 - - - 1,640
Disposals.................. - (387) (61) (126) (574)
Transfers.................. (1,974) 124 1,156 694 -
------ ----- ------ ----- ------
December 31, 2002.......... 491 7,441 23,472 2,054 33,458
------ ----- ------ ----- ------
DEPRECIATION
January 1, 2002............ - 3,863 14,628 930 19,421
Change for the year........ - 114 1,046 632 1,792
Disposals.................. - (181) (54) (126) (361)
------ ----- ------ ----- ------
December 31, 2002.......... - 3,796 15,620 1,436 20,852
------ ----- ------ ----- ------
WDV at December 31, 2002... 491 3,645 7,852 618 12,606
------ ----- ------ ----- ------
2001
COST
January 1, 2001............ 24 7,761 22,730 1,102 31,617
Additions.................. 1,440 - - - 1,440
Disposals.................. - (108) (474) (83) (665)
Transfers.................. (639) 51 121 467 -
------ ----- ------ ----- ------
December 31, 2001.......... 825 7,704 22,377 1,486 32,392
------ ----- ------ ----- ------
DEPRECIATION
January 1, 2001............ - 3,639 13,588 641 17,868
Change for the year........ - 324 1,414 343 2,081
Disposals.................. - (100) (374) (54) (528)
------ ----- ------ ----- ------
December 31, 2001.......... - 3,863 14,628 930 19,421
------ ----- ------ ----- ------
WDV at December 31, 2001... 825 3,841 7,749 556 12,971
------ ----- ------ ----- ------
5. TRADE AND OTHER RECEIVABLES
2003 2002 2001
K'000 K'000 K'000
------- ------- -------
Trade receivables.................... 24,924 28,491 16,673
Less: Provision for doubtful debts... (1,462) (1,462) (1,462)
------ ------ ------
23,462 27,029 15,211
------ ------ ------
Other receivables and prepayments.... 603 499 486
VAT recoverable...................... - 1,896 -
Customer loans....................... 39 212 37
------ ------ ------
642 2,607 523
------ ------ ------
Total trade and other receivables.... 24,104 29,636 15,734
------ ------ ------
68
6. INVENTORIES
2003 2002 2001
K'000 K'000 K'000
------ ------ ------
Trading stock - Petroleum products.. 19,965 21,505 21,469
Stores and other materials.......... 1,027 1,033 761
------ ------ ------
20,992 22,538 22,230
------ ------ ------
7. BANK OVERDRAFT FACILITY
An unsecured bank overdraft facility of K500,000 is available at all times
with Westpac Bank PNG Limited. Additional short term needs to exceed this
facility, where required, are discussed and agreed at the time. There was
no bank overdraft in existence at the balance date or comparative year
ends.
8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
2003 2002 2001
K'000 K'000 K'000
----- ----- -----
Trade creditors... 611 225 152
Accrued expenses.. 3,226 1,282 3,844
Duty payable...... 2,756 1,336 1,080
VAT payable....... 1,080 - 692
----- ----- -----
7,673 2,843 5,768
----- ----- -----
9. EMPLOYEE PROVISIONS
2003 2002 2001
K'000 K'000 K'000
----- ----- -----
Current liability......................... 336 209 211
Non current liability..................... 388 371 324
---- ---- ----
724 580 535
---- ---- ----
Opening balance........................... 580 535 360
Net charge to provisions during the year.. 406 181 177
Less: Payments............................ (262) (136) (2)
---- ---- ----
Closing balance........................... 724 580 535
---- ---- ----
10. PAID UP CAPITAL AND RESERVES
2003 2002 2001
K K K
---- ---- ----
--- --- ---
Issued and paid up capital
100 ordinary shares.......... 200 200 200
--- --- ---
Under the Papua New Guinea Companies Act, shares have no par value and
there is no authorised share capital.
The general reserve of K838,000 has no restrictions on its use. There is
no tax on the undistributed profits of the Company. Payments of dividends
to shareholders from the retained earnings and reserves of the Company are
subject to a dividend withholding tax.
11. CONTINGENT LIABILITIES
The Company had no known contingent liabilities at December 31, 2003 (2002
and 2001: KNil).
12. RELATED PARTY INFORMATION
Related parties comprise entities within the BP Group. Refined fuel
products are predominantly sourced under contract from BP Australia
Limited, with contract rates based on quoted market prices ex Singapore.
Amounts attributable to transactions with related parties and outstanding
balances are given below.
2003 2002 2001
K'000 K'000 K'000
------- ------- -------
Refined fuel products............ 149,498 110,479 100,785
------- ------- -------
Payable to BP Australia Limited.. 11,674 26,206 19,993
------- ------- -------
69
13. ULTIMATE HOLDING COMPANY
As at December 31, 2003 the shares in the Company were held by Gas Tanks
Nederland BV. The ultimate holding Company was BP Plc, incorporated in UK.
Subsequent to year-end, the shares in the Company held by Gas Tanks
Nederland BV were sold effective April 28, 2004 to InterOil Corporation
headquartered in Canada.
14. RETIREMENT BENEFITS
The Company participates in the National Superannuation Fund of Papua New
Guinea, a multi-employer defined contribution superannuation scheme, in
respect of its citizen employees. Mandatory employer and employee
contribution rates to an authorised superannuation fund on behalf of
citizen employees are established by legislation. Employer contributions
expensed during the year amounted to K169,000 (2002: K160,000; 2001:
K158,000). No superannuation contributions are made on behalf of
non-citizen employees. The Company has no further retirement benefit
obligations.
15. OPERATING LEASE OBLIGATIONS
Obligations payable after balance date on non-cancellable operating leases
are as follows:
2003 2002 2001
K'000 K'000 K'000
----- ----- -----
Not later than 1 year.......................... 829 571 641
Later than 1 year but not later than 2 years... 213 447 189
Later than 2 years but not later than 3 years.. 176 213 171
Later than 3 years but not later than 4 years.. 193 176 159
Later than 4 years but not later than 5 years.. 103 193 176
Later than 5 years............................. 103 168 360
----- ----- -----
1,617 1,768 1,696
----- ----- -----
The above operating leases are predominantly for residential and
commercial properties, and there are no significant contingent rent or
escalation clauses or other restrictions under these leases. In addition,
the Company holds State land leases on which annual land rentals are
payable. The remaining lease terms on these land leases range from 76 to
99 years. The annual land lease rental expense for 2004 is expected to be
K62,634, with anticipated periodic rent increases in future years linked
to land values.
16. SEGMENT INFORMATION
2003 2002 2001
K'000 K'000 K'000
------- ------- -------
Revenue derived within Papua New Guinea.. 231,163 177,504 154,653
Export revenue........................... 11,198 13,726 9,827
------- ------- -------
242,361 191,230 164,480
------- ------- -------
The Company operates in one segment which is the distribution of refined
fuel products throughout Papua New Guinea through a network of retail
service stations and under commercial contracts. Export sales are
incidental to domestic sales and there are no assets or liabilities
located outside of Papua New Guinea.
17. CAPITAL COMMITMENTS
The Company had no material commitments for future capital expenditure at
December 31, 2003 (2002 and 2001: K Nil).
18. FINANCIAL INSTRUMENTS
Activities and Management Policies
(a) Foreign Exchange
The Company undertakes transactions denominated in foreign currencies from
time to time in which exposures in foreign currency arise. The Company
does not hedge its foreign currency risks.
The Company imports petroleum products from a related company, BP
Australia. At December 31, 2003 the Company's exposure for unpaid
shipments and other charges amounted to AUD 2,393,294 (2002: AUD
11,147,666; 2001: AUD 9,098,510) and USD 1,613,189 (2002 and 2001: Nil),
which were not hedged.
The exchange rate applicable at December 31, 2003 to the Kina/AUD was K1=
AUD 0.3890 (2002: K1=AUD 0.4396: 2001 K1=AUD0.4952) and Kina/USD was
K1=USD0.2925.
70
(b) Credit
In the normal course of its business the Company incurs credit risk from
trade debtors and financial institutions. There are no significant
concentrations of credit risk. The Company has a credit policy that is
used to manage this exposure to credit risk. As part of this policy,
limits on exposures have been set and are monitored on a regular basis.
(c) Net Fair Value
The carrying amount of the financial assets and liabilities are considered
to approximate their fair value. The Company did not hold any derivative
financial instruments for hedging or risk management purposes.
(d) Petroleum Products
Contracts for the purchase and sale of petroleum products are held for
receipt/delivery in accordance with the Company's expected purchase, sale
or usage. The Company has no history of settling such contracts net for
cash.
19. EMPLOYEES
The average number of people employed by the Company during the year was
189 (2002: 155; 2001: 154). The increase from 2002 was predominantly due
to hired casuals who were required for short-term projects.
20. VULNERABILITY TO CONCENTRATION RISK
The Company`s predominant activity is to distribute refined fuel products
throughout Papua New Guinea through a network of retail service stations
and under commercial contracts. There is no dependence on a single
customer or geographic region of the country. Refined fuel products are
predominantly sourced under contract from BP Australia Limited. Retail
fuel prices in Papua New Guinea are subject to price control by an
independent regulator.
21. CORRECTION TO PREVIOUSLY ISSUED FINANCIAL STATEMENTS
These accounts include adjustments as compared to the financial statements
previously issued by the Company as of and for the years ended December
31, 2003 and 2002. The adjustments correct the recognition of a provision
for a duty claim in 2003 that should have been recognized in 2002
including the tax effect. The effect of these adjustments are as follows:
2003 2002
K'000 K'000
----- -----
NET PROFIT
As reported...................................... 21,503 11,601
As restated...................................... 22,010 11,094
TOTAL SHAREHOLDERS' EQUITY
As reported...................................... 55,659 42,156
As restated...................................... 55,659 41,649
22 CONVENIENCE TRANSLATION INTO UNITED STATES DOLLAR AMOUNTS
The Company reports its financial statements in Papua New Guinea Kina. The
United States dollar ("U.S. dollar") amounts disclosed in the accompanying
financial statements are presented solely for the convenience of the
reader, and have been converted at the rate of one Papua New Guinea Kina
to 0.3105 U.S. dollar, the spot rate as of June 30, 2004. Such convenience
translations should not be construed as representations that the Papua New
Guinea Kina amounts represent, have been, or could be, converted into,
United States dollars at that or any other rate. The U.S. dollar amounts
are unaudited and are not presented in accordance with International
Financial Reporting Standards.
23. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN CANADA AND
THE U.S.
The Company's financial statements have been prepared in accordance with
International Financial Reporting Standards ("IFRS") and the Papua New
Guinea Companies Act 1997. IFRS differs in certain significant respects
from accounting principles generally accepted in Canada ("Canadian GAAP")
and in the United States of America ("U.S. GAAP"). However, there are no
significant reconciling differences between IFRS and Canadian and U.S.
GAAP, as those standards relate to the Company and these financial
statements.
24. EVENTS AFTER THE BALANCE SHEET DATE
On 10 March 2004 an agreement was signed for all the shares in the company
to be acquired by InterOil Corporation, with control passing effective 28
April 2004. The purchase price at the date of transfer was U.S.$12.2
million for assets and inventory. In accordance with the sale agreement,
dividends of K15,729,688 are payable to the former shareholder, comprising
profits from the 2003 year and the first two months of 2004. The Company
changed its name to InterOil Products Limited on 29 April 2004.
71
BP PAPUA NEW GUINEA LIMITED
CONDENSED INTERIM FINANCIAL STATEMENTS
AS AT MARCH 31, 2004 AND 2003
CONDENSED BALANCE SHEET
(Expressed in Papua New Guinea Kina, except supplementary information)
SUPPLEMENTARY
INFORMATION
MARCH 31, 2004
USD'000 MARCH 31, DECEMBER MARCH 31,
@ 1 K = 0.3105 2004 31, 2003 2003
NOTE USD K'000 K'000 K'000
---- --- ----- ----- -----
(Unaudited) (Unaudited) (Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... 6,464 20,819 18,706 6,901
Trade receivables.................. 7,251 23,352 23,462 26,441
Other receivables and 1,077 3,468 642 1,316
prepayments........................
Inventories........................ 8,099 26,084 20,992 25,948
------ ------ ------ ------
22,891 73,723 63,802 60,606
NON CURRENT ASSETS:
Property, plant and equipment...... 4,658 15,002 15,249 12,809
Deferred income tax benefit........ 667 2,147 2,776 2,320
------ ------ ------ ------
28,216 90,872 81,827 75,735
------ ------ ------ ------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Income tax payable................. 1,781 5,736 6,097 5,025
Accounts payable and accrued
liabilities........................ 4 1,265 4,074 7,673 2,871
Employee provisions................ 100 323 336 198
Dividends payable.................. 6 4,884 15,730 - -
Due to related parties............. 6,335 20,403 11,674 19,141
------ ------ ------ ------
14,366 46,266 25,780 27,235
------ ------ ------ ------
NON CURRENT LIABILITIES:
Employee provisions................ 126 406 388 384
14,492 46,672 26,168 27,619
SHAREHOLDERS' EQUITY:
Share capital...................... - - - -
General reserve.................... 260 838 838 838
Retained earnings.................. 13,464 43,362 54,821 47,278
------ ------ ------ ------
13,724 44,200 55,659 48,116
------ ------ ------ ------
28,216 90,872 81,827 75,735
------ ------ ------ ------
See accompanying notes to the condensed financial statements
Approved by the Board on November 2, 2004
(signed) "Tom S. Donovan" (signed) "Graeme K. Alexander"
- ------------------------------------- ---------------------------------------
Director Director
72
BP PAPUA NEW GUINEA LIMITED
CONDENSED INTERIM FINANCIAL STATEMENTS
FOR THE 3 MONTH PERIODS ENDED MARCH 31, 2004 AND 2003
CONDENSED STATEMENT OF EARNINGS
(Expressed in Papua New Guinea Kina, except supplementary information)
SUPPLEMENTARY
INFORMATION
31 MARCH
2004
USD'000 31 MARCH 31 MARCH
@ 1 K = 0.3105 2004 2003
NOTE USD K'000 K'000
---- --- ----- -----
(Unaudited) (Unaudited) (Unaudited)
Sales revenue...................... 18,771 60,453 59,095
Cost of sales...................... (14,911) (48,020) (44,529)
------- ------- -------
GROSS PROFIT....................... 3,860 12,433 14,566
Other operating income............. 101 324 151
Administrative and general 3 (1,969) (6,342) (4,764)
expenses
Foreign exchange gains/(losses) (142) (456) (798)
------- ------- -------
OPERATING PROFIT................... 1,850 5,959 9,155
Finance income..................... 33 104 73
------- ------- -------
PROFIT BEFORE INCOME TAXES......... 1,883 6,063 9,228
Income tax (expense)............... 3 (557) (1,792) (2,761)
------- ------- -------
NET PROFIT 1,326 4,271 6,467
------- ------- -------
73
BP PAPUA NEW GUINEA LIMITED
CONDENSED INTERIM FINANCIAL STATEMENTS
FOR THE 3 MONTH PERIODS ENDED MARCH 31, 2004 AND 2003
CONDENSED STATEMENT OF CASH FLOWS
(Expressed in Papua New Guinea Kina, except supplementary information)
3 MONTH PERIOD ENDED
-------------------------------------------
SUPPLEMENTARY
INFORMATION
MARCH 31, 2004
USD'000 MARCH 31, MARCH 31,
@ 1 K = 0.3105 2004 2003
USD K'000 K'000
--- ----- -----
(Unaudited) (Unaudited) (Unaudited)
OPERATING ACTIVITIES
Profit before income taxes.................... 1,883 6,063 9,228
Adjustments for non-cash
transactions:
Depreciation and profit on
sale of property, plant and
equipment................................ 100 323 437
Unrealized exchange loss................. 213 687 670
Change in non-cash operating working capital:
Inventories.............................. (1,581) (5,092) (3,410)
Trade and other receivables.............. (843) (2,716) 1,879
Accounts payable and accrued
liabilities.............................. (1,116) (3,594) 30
Due to related parties................... 2,497 8,042 (7,735)
Taxes paid (473) (1,524) (10)
------ ------ ------
Cash flows provided by operating
activities.................................... 680 2,189 1,089
------ ------ ------
INVESTING ACTIVITIES
Expenditure on capital assets............ (187) (602) (652)
Funds received on sale of assets......... 163 526 11
------ ------ ------
Cash flows used in investing activities....... (24) (76) (641)
------ ------ ------
Increase in cash and cash equivalents......... 656 2,113 448
Cash and cash equivalents,
beginning of period........................... 5,808 18,706 6,452
------ ------ ------
Cash and cash equivalents, end of period...... 6,464 20,819 6,901
------ ------ ------
CASH AND CASH EQUIVALENTS COMPRISES:
Cash on hand and at bank...................... 6,464 20,819 6,901
Bank overdrafts............................... - - -
------ ------ ------
6,464 20,819 6,901
------ ------ ------
See accompanying notes to the condensed financial statements
74
BP PAPUA NEW GUINEA LIMITED
CONDENSED INTERIM FINANCIAL STATEMENTS
FOR THE 3 MONTH PERIODS ENDED MARCH 31, 2004 AND 2003
CONDENSED STATEMENT OF CHANGES IN EQUITY
(Expressed in Papua New Guinea Kina, except supplementary information)
3 MONTH PERIOD ENDED
---------------------------------------------------
SUPPLEMENTARY
INFORMATION
------------------ ---------------------------
MARCH 31, MARCH 31, MARCH 31,
2004 2004 2003
USD'000 K'000 K'000
@ 1 K = 0.3105
USD
-------------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited)
SHARE CAPITAL
At beginning of period.................... - - -
Issue of capital stock.................... - - -
------ ------ ------
At end of period.......................... - - -
------ ------ ------
GENERAL RESERVE
At beginning of period.................... 260 838 838
Change in period.......................... - - -
------ ------ ------
At end of period.......................... 260 838 838
------ ------ ------
RETAINED EARNINGS
At beginning of period.................... 17,022 54,821 40,811
Dividends declared........................ (4,884) (15,730) -
Net profit for period..................... 1,326 4,271 6,467
------ ------ ------
At end of period.......................... 13,464 43,362 47,278
------ ------ ------
SHAREHOLDERS' EQUITY AT END OF PERIOD..... 13,724 44,200 48,116
------ ------ ------
See accompanying notes to the condensed financial statements
75
PAPUA NEW GUINEA LIMITED
NOTES TO THE CONDENSED INTERIM FINANCIAL STATEMENTS
FOR THE 3 MONTH PERIODS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
1. STATEMENT OF ACCOUNTING POLICIES
BP Papua New Guinea Limited (the "Company") is incorporated in Papua New
Guinea, and all amounts are expressed in Papua New Guinea Kina rounded to
the nearest thousand kina, unless noted otherwise and with the Papua New
Guinea Companies Act 1997.
These financial statements comply with International Accounting Standard
IAS 34: Interim Financial Reporting and with the Papua New Guinea
Companies Act 1997.
In the opinion of management, the accompanying condensed financial
statements contain all adjustments, consisting only of normal recurring
adjustments, that are necessary to present fairly the financial position
of the Company as of March 31, 2004 and 2003 and the statement of earnings
and of cash flows for the three month periods ended March 31, 2004 and
2003.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested that
these condensed financial statements be read in conjunction with the
annual financial statements of the Company for the year ended December 31,
2003. The results of operations for the interim periods are not
necessarily indicative of the results of the full fiscal year.
2. GENERAL ACCOUNTING POLICIES
The fundamental accounting assumptions recognised as appropriate for the
measurement and reporting of results, cash flows and the financial
position have been followed in the preparation of these financial
statements.
These accounts have been prepared using the historical cost convention as
modified by the re-measurement of certain financial instruments at fair
value through profit and loss.
The accounting policies adopted and methods of computation used are
consistent with those of the previous financial year ended December 31,
2003.
3. INTERIM OPERATIONS
There are no significant seasonal or cyclical factors that impact the
interim financial periods ended March 31, 2004 and 2003.
4. ADMINISTRATIVE AND GENERAL EXPENSES
MARCH 31, 2004 MARCH 31, 2003
K'000 K'000
-------------- --------------
Auditors remuneration
Audit...................................... 31 11
Other services............................. 12 -
Bad debts written off................................ - -
Depreciation......................................... 544 448
Donations............................................ 34 69
Environmental remediation............................ 120 116
Lease rentals........................................ 185 273
Other operating expenses............................. 2,502 1,529
Profit on sale of property, plant and equipment...... (221) (11)
Repairs and maintenance.............................. 1,258 575
Staff costs.......................................... 1,877 1,754
----- -----
6,342 4,764
----- -----
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
MARCH 31, 2004 MARCH 31, 2003
K'000 K'000
-------------- --------------
Trade creditors...................................... 153 392
Accrued expenses..................................... 1,870 1,313
Duty payable......................................... 2,051 1,166
VAT payable.......................................... - -
----- -----
4,074 2,871
----- -----
76
6. PAID UP CAPITAL
MARCH 31, 2004 MARCH 31, 2003
K K
-------------- --------------
Issued and paid up capital
---- ----
100 ordinary shares................................. 200 200
---- ----
7. DIVIDENDS PAID AND PAYABLE
There were no dividends paid in the periods ended March 31, 2004 or 2003.
Dividends declared in the period to March 31, 2004 totalled K15,729,688
and encompass profits from the 2003 year and the first two months of 2004
and are payable to the owner of the shares at this time as part of the
share sale agreement dated March 10, 2004.
8. CONTINGENT LIABILITIES
The Company had no known contingent liabilities at March 31, 2004 (2003:
KNil).
9. RELATED PARTY INFORMATION
Related parties comprise entities within the BP Group and InterOil
Corporation. Refined fuel products are predominantly sourced under
contract from BP Australia Limited, with contract rates based on quoted
market prices ex Singapore. There were no material transactions with
InterOil Corporation. Amounts attributable to transactions with the BP
Group during the three month periods ended March 31, 2004 and 2003 and
outstanding balances at March 31, 2004 and 2003 are given below
MARCH 31, 2004 MARCH 31,2003
K'000 K'000
-------------- -------------
Refined fuel products..................................... 42,991 42,053
------ ------
Payable to BP Australia Limited, excluding dividend....... 20,403 19,141
------ ------
10. ULTIMATE HOLDING COMPANY
As at April 28, 2004, the shares in the Company were held by S.P.
Distribution Limited, a subsidiary of InterOil Corporation, a company
registered in New Brunswick, Canada. Prior to April 28, 2004, the shares
were owned by Gas Tanks Nederland BV., and the ultimate holding company
was BP Plc, incorporated in UK. The purchase price at the date of transfer
was U.S.$12.2 million for assets and inventory. The Company changed its
name to InterOil Products Limited on 29 April 2004.
11. CONVENIENCE TRANSLATION INTO UNITED STATES DOLLAR AMOUNTS
The Company reports its financial statements in Papua New Guinea Kina. The
United States dollar ("U.S. dollar") amounts disclosed in the accompanying
financial statements are presented solely for the convenience of the
reader, and have been converted at the rate of one Papua New Guinea Kina
to 0.3105 U.S. dollar, the spot rate as of June 30, 2004. Such convenience
translations should not be construed as representations that the Papua New
Guinea Kina amounts represent, have been, or could be, converted into,
United States dollars at that or any other rate. The U.S. dollar amounts
are unaudited and are not presented in accordance with International
Financial Reporting Standards..
12. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN CANADA AND
THE U.S.
The Company's financial statements have been prepared in accordance with
International Financial Reporting Standards ("IFRS") and the Papua New
Guinea Companies Act 1997. IFRS differs in certain significant respects
from accounting principles generally accepted in Canada ("Canadian GAAP")
and the United States of America ("U.S. GAAP"). However, there are no
significant reconciling differences between IFRS and Canadian and U.S.
GAAP, as those standards relate to the Company.
77
CERTIFICATE OF THE COMPANY
November 10, 2004
This short form prospectus, together with the documents incorporated in
this prospectus by reference, will, as of the date of the last supplement to
this prospectus relating to the securities offered by this prospectus and the
supplement(s), constitute full, true and plain disclosure of all material facts
relating to the securities offered by this prospectus and the supplement(s) as
required by the securities legislation of Ontario.
(Signed) PHIL E. MULACEK (Signed) TOM S. DONOVAN
Chief Executive Officer Chief Financial Officer
On behalf of the Board of Directors
(Signed) CHRISTIAN VINSON (Signed) ROGER GRUNDY
Director Director
A-1
PART II
INFORMATION NOT REQUIRED TO BE DELIVERED TO OFFEREES OR PURCHASERS
INDEMNIFICATION
Section 22 of the Bylaws of the Company provides, with regard to indemnity and
insurance under the Business Corporations Act (New Brunswick) (the "Act"), in
part as follows:
"Subject to Section 81 of the Act, except in respect of an action by or on
behalf of the Corporation or Another Body Corporate (as hereinafter
defined) to procure a judgement in its favour, the Corporation shall
indemnify each director and officer of the Corporation and each former
director and officer of the Corporation and each person who acts or acted
at the Corporation's request as a director or officer of Another Body
Corporate, and his heirs and legal representatives, against all costs,
charges and expenses, including any amount paid to settle an action or
satisfy a judgment, reasonably incurred by him in respect of any civil,
criminal or administrative action or proceeding to which he is made a
party by reason of being or having been a director or officer of the
Corporation or Another Body Corporate, as the case may be, if
(a) he acted honestly and in good faith with a view to the best
interests of the Corporation; and
(b) in the case of a criminal or administrative action or
proceeding that is enforced by a monetary penalty, he had
reasonable grounds for believing that his conduct was lawful.
"Another Body Corporate" as used herein means a body corporate of which
the Corporation is or was a shareholder or creditor."
The Act provides that no officer or director of the Company may be indemnified
in connection with the defense of any civil, criminal or administrative action
or proceeding to which such person is made a party by reason of being or having
been a director or officer of the corporation or body corporate, unless a court
of competent jurisdiction has approved the terms of such indemnification.
However, the Act further provides that notwithstanding any provision to the
contrary therein, any officer or director is entitled to indemnification if such
person (i) was substantially successful on the merits of the defense of the
action or proceeding; (ii) acted honestly and in good faith with a view to the
best interests of the corporation; and (iii) where a criminal or administrative
action or monetary penalty is involved, such person had reasonable grounds for
believing that his or her conduct was lawful.
Insofar as indemnification for liabilities arising from the Securities Act of
1933 may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the U.S. Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
PART III
UNDERTAKING AND CONSENT TO SERVICE OF PROCESS
ITEM 1. UNDERTAKING.
The Company undertakes to make available, in person or by telephone,
representatives to respond to inquiries made by the Commission staff, and to
furnish promptly, when requested to do so by the Commission staff, information
relating to the securities registered pursuant to Form F-10 or to transactions
in said securities.
ITEM 2. CONSENT TO SERVICE OF PROCESS.
Concurrently with the filing of this Registration Statement on Form F-10, the
Company is filing with the Commission a written irrevocable consent and power of
attorney on Form F-X.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on this Form F-10 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Toronto, Province of Ontario, Canada, on the 10th day
of November, 2004.
INTEROIL CORPORATION
By: /S/ PHIL E. MULACEK
-------------------------------------
Phil E. Mulacek
Chairman of the Board,
Chief Executive Officer and President
POWER OF ATTORNEY
NOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints each of Phil E. Mulacek and Gary M. Duvall his or her
true and lawful attorneys-in-fact and agents, with full power of substitution
and resubstitution, for him or her and in his or her name, place and stead, in
any and all capacities, to sign, execute and file with the Securities and
Exchange Commission and any state securities regulatory board or commission any
documents relating to the proposed issuance and registration of the securities
offered pursuant to this Registration Statement on Form F-10 under the
Securities Act of 1933, as amended, including any amendment or amendments
relating thereto (and, in addition, any post effective amendments), with all
exhibits and any and all documents required to be filed with respect thereto
with any regulatory authority, granting unto said attorneys-in-fact and agents,
and each of them, full power and authority to do and perform each and every act
and thing requisite and necessary to be done in and about the premises in order
to effectuate the same as fully to all intents and purposes as he or she might
or could do if personally present, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or either of them, or their or his substitute or
substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
indicated, on the 10th day of November, 2004.
/S/ PHIL E. MULACEK Chairman of the Board,
- ----------------------------- Chief Executive Officer and President
Phil E. Mulacek (Principal Executive Officer)
/S/ TOM S. DONOVAN General Manager-Finance/Accounts
- ----------------------------- and Chief Financial Officer
Tom S. Donovan (Principal Financial Officer and
Principal Accounting Officer)
/S/ CHRISTIAN M. VINSON Director; Chief Operating Officer
- ----------------------------- and Vice President
Christian M. Vinson
/S/ GEOFFREY M. FOLIE Deputy Chairman of the Board
- -----------------------------
Geoffrey M. Folie
/S/ ROGER N. GRUNDY Director
- -----------------------------
Roger N. Grundy
/S/ GAYLEN J. BYKER Director
- -----------------------------
Gaylen J. Byker
/S/ EDWARD N. SPEAL Director
- -----------------------------
Edward N. Speal
EXHIBIT INDEX
EXHIBIT DESCRIPTION
NUMBER
1 Base Shelf Prospectus (included herein as Part I of this
Registration Statement)
2 Annual Information Form dated May 19, 2004
3 U.S. GAAP reconciliation which includes audited comparative
financial statements of the Registrant and notes thereto for the
years ended December, 31, 2003, December 31, 2002, December 31, 2001
and cumulative, together with the report and rates of the auditors
thereon (incorporated herein by reference to Exhibit 5 of the
Company's Report on Form 40-F dated May 12, 2004)
4 Amending Agreement to Securities Purchase Agreement, dated September
1, 2004, by and among, InterOil Corporation, Portside Growth and
Opportunity Fund, Manchester Securities Corp. and Provident Master
Fund LTD.
5 8.78% Senior Convertible Debenture due August 28, 2009 of InterOil
Corporation, dated August 27, 2004
6 Management's Discussion and Analysis for the year ended December 31,
2003, contained on pages 43-48 of the 2003 Annual Report of the
Company (incorporated herein by reference to Exhibit 3 of the
Company's Report on Form 40-F dated May 12, 2004)
7 Amended unaudited comparative consolidated financial statements for
the six months ended June 30, 2004, June 30, 2003 and June 30, 2002
8 Management Information Circular for the annual meeting of
shareholders held on June 29, 2004 (excluding those portions, which,
in accordance with National Instrument 44-101, need not be
incorporated by reference)
9 Unaudited comparative consolidated financial statements for the six
months ended June 30, 2004 and June 30, 2003 and management's
discussion and analysis thereof
10 Material Change Report dated February 2, 2004 in respect of a
revision to the estimate for completion of our refinery project in
Papua New Guinea (incorporated herein by reference to Exhibit 123 of
the Company's Report on Form 40-F dated May 12, 2004)
11 Material Change Report dated March 16, 2004 in respect of the share
sale agreement with British Petroleum plc to acquire British
Petroleum's Papua New Guinea subsidiary, BP PNG (incorporated herein
by reference to Exhibit 122 of the Company's Report on Form 40-F
dated May 12, 2004)
12 Material Change Report dated June 17, 2004 in respect of the arrival
of the first shipment of crude oil for our refinery at our marine
terminal located across the harbor from Port Moresby, Papua New
Guinea
13 Material Change Report dated July 7, 2004 in respect of our
refinery's crude distillation unit accepting feedstock for the first
time
14 Material Change Report dated August 27, 2004 in respect of the
definitive agreement for the private placement of U.S.$30 million to
U.S.$40 million of Debentures
15 Material Change Report dated September 10, 2004 in respect of
closing the issuance of an additional U.S.$15 million of Debentures,
raising a total of U.S.$45 million
16 Refinery State Project Agreement by and among InterOil Limited to
InterOil, Ltd. and the Independent State of Papua New Guinea dated
May 29, 1997
17 Agreement for the Sale and Purchase of Naphtha dated February 8,
2001
18 Export Marketing and Shipping Agreement by and between EP InterOil,
Ltd. and Shell International Eastern Trading Company dated March 23,
2001
19 Domestic Sales Agreement by and between InterOil Limited and Shell
Papua New Guinea Limited dated April 9, 2001
20 Sale and Purchase Undertaking Agreement, by and between InterOil
Corporation and Shell Overseas Holdings Limited dated July 21, 2004.
21 Crude Supply Agency and Sales Agreement by and between EP InterOil,
Ltd. and BP Singapore Plc Limited dated December 21, 2001
22 Engineering Procurement and Construction Contract by and between
InterOil Limited and Clough Niugini Limited dated March 26, 2002
23 Facilities Management Contract by and between InterOil Limited and
Petrofac Niugini Limited dated November 9, 2003
24 Share Sale Agreement by and among InterOil Corporation, SPI
Distribution Limited, Gas Tank Nederland B.V., and BP Papua New
Guinea Limited dated March 9, 2004
25 Securities Purchase Agreement by and between InterOil Corporation
and the Initial Purchasers as listed therein dated August 26, 2004
26 CSIRO Petroleum Confidential Report No. 02-019, Preliminary Report
on the Geochemistry of Solid Bitumens in the Pale Sandstone, Subu-1
Well and Outcrop at the Aure Scarp, East Papuan Basin, dated April
2002
27 CSIRO Petroleum Confidential Report No. 04-002 (Part I), The
Geochemistry and Organic Petrology of Oil Shows and Fine-Grained
Rocks in Moose-1 and Moose-1ST1, East Papuan Basin, dated January
2004
28 CSIRO Petroleum Confidential Report No. 04-059 (Part I), The
Geochemistry of Oil Shows in the Moose-2 Well, East Papuan Basin,
dated September 2004
29 CSIRO Petroleum Confidential Report No. 04-059 (Part II), The
Geochemistry of Oil Shows in the Moose-2 Well, East Papuan Basin,
dated September 2004
30 Consent of KPMG
31 Consent of PricewaterhouseCoopers
32 Power of Attorney (included on the signature page of this
Registration Statement)