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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED APRIL 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
----- -----
COMMISION FILE NUMBER 000-28463
AROC Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 74-2932492
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4200 EAST SKELLY DRIVE
SUITE 1000
TULSA, OKLAHOMA 74135
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (918) 491-1100
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
(NONE) (NONE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock $0.001 each
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of the Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Registrant's voting stock held by non-
affiliates as of July 15, 2000 was approximately [$3,419,074]. Solely for
purposes of this calculation, all shareholders holding more than 10% of the
voting stock of the Company are assumed to be affiliates.
On July 15, 2000, there were 55,278,837 shares of the Registrant's common
stock outstanding, 1,780,303 shares of preferred stock outstanding and
10,000,000 shares of the Registrant's convertible restricted voting stock
outstanding.
Documents Incorporated by Reference
NONE
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AROC Inc.
FORM 10-K
FISCAL YEAR ENDED APRIL 30, 2000
--------------------------------
TABLE OF CONTENTS
PART I
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Item 1. Business 1
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Item 2. Properties 3
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Item 3. Legal Proceedings 9
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Item 4. Submission of Matters to a Vote of Security Holders 10
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PART II
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Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 10
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Item 6. Selected Financial Data 11
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 13
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Item 8. Financial Statements and Supplementary Data 18
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 18
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PART III
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Item 10. Directors and Executive Officers of the Registrant 18
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Item 11. Executive Compensation 20
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Item 12. Security Ownership of Certain Beneficial Owners and Management 20
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Item 13. Certain Relationship and Related Transaction 22
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PART IV
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Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 23
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Cautionary Statement Regarding Forward Looking Statements
In the interest of providing the Company's stockholders and potential investors
with certain information regarding the Company's future plans and operations,
certain statements set forth in this Form 10-K relate to management's future
plans and objectives. Such statements are "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Although any
forward-looking statements contained in this Form 10-K or otherwise expressed by
or on behalf of the Company are, to the knowledge and in the judgment of the
officers and directors of the Company, expected to prove true and to come to
pass, management is not able to predict the future with absolute certainty.
Forward-looking statements involve known and unknown risks and uncertainties
which may cause the Company's actual performance and financial results in future
periods to differ materially from any projection, estimate or forecasted result.
These risks and uncertainties include, among other things, volatility of oil and
gas prices, competition, risks inherent in the Company's oil and gas operations,
the inexact nature of interpretation of seismic and other geological and
geophysical data, imprecision of reserve estimates, the Company's ability to
replace and expand oil and gas reserves, and such other risks and uncertainties
described from time to time in the Company's periodic reports and filings with
the Securities and Exchange Commission. Accordingly, stockholders and potential
investors are cautioned that certain events or circumstances could cause actual
results to differ materially from those projected, estimated, or predicted.
<PAGE>
PART I
ITEM 1. BUSINESS
AROC Inc. (the Company or AROC) is a Tulsa-based holding company of a
group whose principal activities are the exploration, development and production
of oil and gas and the acquisition of producing oil and gas properties. AROC
(formerly known as American Rivers Oil Company) was incorporated and registered
under the laws of Delaware on July 16, 1999. AROC's corporate headquarters are
at 4200 East Skelly Drive, Suite 1000, Tulsa, Oklahoma 74135.
During the fiscal year ended April 30, 2000, AROC acquired all of the
shares of Alliance Resources PLC (Alliance) on the basis of one share of AROC
common stock for each ordinary share of Alliance, with the result that the
former shareholders of Alliance then held approximately 98% of the outstanding
shares of AROC. Therefore, Alliance is deemed to be the predecessor of AROC for
all purposes and all financial data (and, consequently, all oil and gas reserve
information, descriptions of properties and business and all information
associated with financial or reserve information prior to the acquisition of
Alliance) relate to Alliance. Furthermore, unless the context otherwise
requires, all references to "AROC" or "the Company" include Alliance Resources
PLC, AROC Inc. and all of their subsidiaries and/or affiliates.
RECENT DEVELOPMENTS
On May 2, 2000, AROC completed the acquisition of additional oil and gas
properties, a refinancing of its debt and issuance of a new series of preferred
stock. The transactions involved several different elements.
Effective May 1, 2000, AROC designated 2,200,000 shares of its authorized
preferred stock as Series A Preferred Stock. The Series A Preferred Stock
accrues cumulative dividends at the rate of $5.00 per share per year, payable
semiannually. Until May 1, 2002, dividends are payable in kind through the
issuance of additional shares of preferred stock at a price equal to the fair
market value of the preferred stock at the time of the payment. The preferred
stock has a liquidation preference of $50.00 per share and may be redeemable at
$50.00 per share at either the Company's or the holder's option upon the
occurrence of certain events. Each share of preferred stock is convertible at
any time into 384.6 shares of the Company's common stock and has the right to
vote in all matters on the same basis as if the preferred stock had been
converted into common stock. The terms of the preferred stock prohibit the
Company from taking certain actions without the consent of the holders of the
preferred stock.
On May 2, 2000, the Company sold to Bank of America, N.A. (Bank of
America), EnCap Equity 1996 Limited Partnership (EnCap 1996 LP), Energy Capital
Investment Company PLC (ECIC), El Paso Capital Investments, L.L.C. (El Paso),
EF-II Holdings, LLC (EF-II), Picosa Creek Limited Partnership (Picosa) and EnCap
Investments, L.L.C. (EnCap Investments) 850,163 shares of the Company's newly
created Series A Preferred Stock for a total consideration of approximately
$42.5 million, received in satisfaction of outstanding obligations to those
parties and in consideration of cash and the purchase of an oil and gas property
interest.
Also on May 2, 2000, pursuant to four separate Purchase and Sale Agreements
by and between (i) EnCap Equity 1994 Limited Partnership (EnCap 1994 LP), (ii)
ECIC and ECIC Corporation, (iii) EnCap 1996 LP, and (iv) Mountaineer Limited
Partnership, and the Company, the Company also acquired direct or indirect
ownership of oil and gas properties having a net present value, discounted at
10%, of approximately $62 million at May 1, 2000, using non-escalated prices of
$2.50 per mcf of gas and $22.00 per barrel of oil. The properties include
approximately 280 wells located in Texas, Louisiana, New Mexico, and Wyoming.
The properties were acquired in exchange for the issuance to the sellers of an
aggregate of 930,140 shares of the Company's Series A Preferred Stock.
In addition, on May 2, 2000, the Company entered into a Purchase Agreement
providing for the sale to EnCap 1996 LP, ECIC and El Paso of a total of
$17,000,000 in subordinated notes in exchange for cash in that amount. The
subordinated notes bear interest at the rate of 12% per year, payable
semiannually. Principal is due May 1, 2007. Until May 1, 2002, interest is
payable in kind by increasing the principal amount of the debt. Additionally,
the Company issued to EnCap 1996 LP, ECIC and El Paso warrants to purchase a
total of 39,541,233 shares of the Company's common stock at a price of $0.01 per
share at any time until April 30, 2007 pursuant to such Purchase Agreement.
1
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As a result of these transactions, the Company has outstanding 55,278,837
shares of common stock, 10,000,000 convertible restricted voting shares,
warrants to purchase 45,813,963 shares of common stock, and 1,780,303 shares of
Series A Preferred Stock that are convertible into an aggregate of 684,731,923
shares of common stock. EnCap 1996 LP, EnCap 1994 LP, ECIC, EnCap Investments,
Picosa, EF-II and El Paso have the right to vote in the aggregate approximately
80% of the Company's voting securities and Bank of America and its affiliates
have the right to vote approximately 11.6% of the Company's voting securities.
Pursuant to a Credit Agreement dated as of May 1, 2000, among AROC, Toronto
Dominion (Texas), Inc., individually and as Agent, and the lenders named in that
agreement (the TD Credit Agreement), the Company obtained a new $35,000,000
credit facility. At May 2, 2000, the outstanding principal balance under the TD
Credit Agreement and EnCap subordinated notes was $25,000,000 and $17,000,000,
respectively. The credit facility is secured by a first lien on substantially
all of the Company's assets and the credit facility imposes certain restrictions
on the Company's activities, including the payment of dividends and purchases of
stock. The credit facility provides for a revolving line of credit for three
years. Borrowings under the credit facility bear interest at either the LIBOR
rate plus from 1.75% to 3.0% or the agent's prime rate plus from .25% to 1.5%,
at the Company's election. Interest is payable quarterly beginning July 31,
2000. Principal is payable in full on the third anniversary of the closing of
the credit facility. The borrowing base for the credit facility will typically
be redetermined semiannually, although the lenders and borrowers have the right
to make a redetermination at any time.
A portion of the proceeds of the cash received from the credit facility and
the sale of the subordinated notes were used to satisfy the Company's
obligations under its previous credit facility with Bank of America and the
remainder will be used for working capital.
COMPETITION
The oil and natural gas industry is highly competitive in all its phases.
AROC encounters strong competition from many other energy companies in acquiring
economically desirable producing properties and drilling prospects and in
obtaining equipment and labor to operate and maintain its properties. As these
trends toward increasing competition continue, local-market knowledge, operating
efficiency, access to supplies and other factors will affect AROC's success.
GOVERNMENTAL AND ENVIRONMENTAL REGULATION
Oil and gas production is subject to regulation under many international
and U.S. Federal and State statutes, rules, orders and regulation. Permits for
drilling, reworking and recompletion operations, drilling bonds and reports
concerning operations are required. Most jurisdictions have regulations
governing conservation matters, establishing maximum rates of production and the
regulation of the spacing, plugging and abandonment of wells.
Environmental laws and regulations may affect the Company's operations and
costs. In particular, production and saltwater disposal operations and use of
facilities from treating, processing or otherwise handling hydrocarbons and
wastes therefrom are subject to stringent environmental regulations.
Environmental regulations are subject to frequent change and the Company cannot
predict ongoing costs of compliance or the future impact of such regulations on
operations.
OPERATIONS HAZARDS AND INSURANCE
The operations of the Company are subject to all risks inherent in the
exploration for and production of oil and gas, including such natural hazards as
blowouts, cratering and fires, which could result in damage or injury to, or
destruction of, drilling rigs and equipment, formation, producing facilities or
other property, or could result in personal injury, loss of life or pollution of
the environment. Any such event could result in substantial expense to the
Company which could have a material adverse effect upon the financial condition
of the Company to the extent it is not fully insured against such risks but, in
accordance with standard industry practice, the Company is not fully insured for
all risks, either because such insurance is unavailable or because the Company
elects not to obtain insurance coverage because of cost. Although such
operational risks and hazards may to some extent be minimized, no combination of
experience, knowledge and scientific evaluation can eliminate the risk of
investment or assure a profit to any company engaged in oil and gas operations.
2
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EMPLOYEES
At April 30, 2000, AROC had 20 management and administrative employees and
20 technical and operating employees, none of whom belonged to a union. The
employees include 31 people located in its Tulsa, Oklahoma office, 8 people in
the Tensaw, Alabama office who conduct lease operations in the Company's South
Carlton Field, and 1 field person in Louisiana. The Company's other field
activities are accomplished through independent contractors. The Company
believes its relations with its employees and contractors are excellent.
MARKETING
AROC's production is primarily from developed fields close to major
pipelines or refineries and established infrastructure. As a result, AROC has
not experienced any difficulty in finding a market for its product as it becomes
available or in transporting its product to those markets.
Oil Marketing
AROC markets its oil to a variety of purchasers, most of which are large,
established companies. The oil is generally sold under short-term contracts
with the sales price based on an applicable posted price, plus a negotiated
premium. This price is determined on a well-by-well basis and the purchaser
generally takes delivery at the wellhead.
Gas Marketing
Virtually all of AROC's gas production is close to existing pipelines and,
consequently, AROC generally has a variety of options to market its gas. AROC
sells the majority of its gas on the spot market, with prices fluctuating month-
to-month based on published pipeline indices with slight premiums or discounts
to the applicable index.
ITEM 2. PROPERTIES
PRODUCTION
UK (East Irish Sea) Properties
AROC owns non-operated interests in 9 licenses comprising 12 blocks or part-
blocks in the East Irish Sea, offshore UK. The licenses which are operated by
Burlington Resources (East Irish Sea) Limited, contain 5 proven gas
accumulations, namely the Millom, Dalton, Calder, Crossans and Darwen gas
fields. Two of these fields, the Millom and Dalton fields, came on-stream on
August 11, 1999. Currently, 3 wells are producing via sub-sea completions tied
into the North Morecambe Platform. Gas is currently gathered on the North
Morecambe platform where it is transported via a 20 mile, 36 inch diameter gas
pipeline to onshore processing facilities at Westfield Point, near Barrow-in-
Furness, on the west coast of England. From Westfield Point the gas is sold
into the UK National Transmission System. Estimated net remaining reserves for
the 5 proven gas accumulations as of April 30, 2000 were 63,429 MMcf of gas.
AROC has a 10% working interest in these fields.
Gas sales from the producing properties accounted for all of AROC's revenues
from U.K. operations for the year ended April 30, 2000. The following summarizes
AROC's principal areas of oil and gas production activity in the U.K. as of
April 30, 2000.
Dalton Field. The Dalton Field is located approximately 6 miles southwest of the
North Morecambe field central platform in a water depth of 123 ft. In April 2000
the field produced at an average gross rate of 58 MMcfgpd (5.8 MMcfgpd net to
AROC's revenue interest in the property) from 2 wells (Dalton R1 and R2) that
were completed in sandstones of Triassic age at a depth of approximately 3,300
ft. The Dalton R1 well was drilled and completed as a producer in April of 1999
and the Dalton R2 was completed in May 1999 following re-entry of the previously
suspended 110/2b-9 well. The estimated net remaining reserves to AROC's interest
in the field as of April 30, 2000 were 5,518 MMcf of gas.
Millom Field. The Millom Field is located approximately 6 miles north west of
the North Morecambe field central platform in a water depth of 110 ft. In April
2000 the field produced at an average gross rate of 7 MMcfgpd (0.7 MMcfgpd net
to AROC's revenue interest in the property) from 1 well (Millom Q1) which was
completed in sandstones
3
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of Triassic age at a depth of around 4,100 ft. The Millom Q1 well was completed
as a producer in June of 1999 following re-entry of the previously suspended
113/27-4/4Z well. A minimum facilities fixed pile platform has since been
installed at West Millom and drilling of the first of 3 wells from this facility
is underway, two of which are to utilize multi-lateral technology. First
production from the West Millom platform is expected in September 2000. The
estimated net remaining reserves to AROC's interest in the field as of April 30,
2000 were 20,321 MMcf of gas.
In addition to these fields, AROC has a working interest in other properties in
the East Irish Sea, including the "Rivers Fields Complex", comprising the
Calder, Crossans and Darwen fields. AROC is currently evaluating alternatives
for the development of these fields. Net proved reserves to AROC's interest in
these other properties at April 30, 2000 were 37,590 MMcf of gas.
U.S. Properties
AROC owns and operates producing properties in 12 states in the U.S., with
proved reserves located primarily in the states of Mississippi, Louisiana,
Oklahoma, Texas and Alabama. AROC continuously evaluates the profitability of
its oil, gas and related activities and has a policy of divesting itself of
unprofitable oil and gas properties or areas of operation that are not
consistent with its operating philosophy.
AROC operates 281 producing or potentially productive wells in these areas and
also owns non-operated working interests in 208 producing or potentially
productive wells and non-operated royalty interests in a further 119 wells. Oil
and gas sales from the producing oil and gas properties accounted for
substantially all of AROC's revenues from U.S. operations for the year ended
April 30, 2000.
The following summarizes AROC's principal areas of oil and gas production
activity in the U.S. as of April 30, 2000.
South Carlton Field, Alabama. The South Carlton field is located in Clarke and
Baldwin Counties in southwest Alabama. AROC operates 60 active producing or
potentially productive oil wells and 3 salt-water disposal wells. Production is
from the Massive and Pilot Sands of the Tuscaloosa Formation at depths of 5,250-
6,000 ft. In April 2000 the field produced at an average gross rate of 427 Bopd
(353 Bopd net to AROC's revenue interest in the property) from 37 active
producers. AROC has a 100% working interest in the field. The estimated net
remaining reserves to AROC's interest in the field as of April 30, 2000 were
5,700 MBbls of oil.
Chittim Ranch Field, Texas. The Chittim Ranch field is located in Maverick
County in southwest Texas. AROC operates 6 active producing gas wells in the
field and has a working interest in approximately 12,800 acres, which is
partially under a farmout agreement with TXCO, Inc. The field produces
principally from the Rodessa carbonates at a depth of 5,300 ft. with minor
production having been established in the Austin Chalk at a depth of 1,100 ft.
In April 2000 these 6 active wells produced at an average gross rate of 5 Bopd
and 0.7 MMcfgpd (3 Bopd and 0.4 MMcfgpd net to AROC's revenue interest in the
property). The property was acquired in December 1999 and AROC's current
working interest in the property is approximately 82%. The estimated net
remaining reserves to AROC's interest in the field as of April 30, 2000 were 63
MBbls of oil and 9,712 MMcf of gas.
Oakhill Field, Texas. The Oakhill field is located in Gregg County in northeast
Texas. The property was acquired in December 1999 and AROC currently owns a
100% working interest in the Grissom and Kuykendall leases covering an area in
excess of 225 acres in the Lake Cherokee area. Production has not yet been
established on the leases and AROC is preparing to spud its first well on the
Grissom lease by Mid-October 2000. The field is productive in the Cotton Valley
Formation in offset leases at a depth of approximately 11,000 ft. Notably,
immediately to the south of the Grissom lease, Torch Operating Company has
recently completed a number of wells that had initial production rates in excess
of 2 MMcfgpd. The estimated net remaining reserves to AROC's interest in the
field as of April 30, 2000 were 19 MBbls of oil and 6,444 MMcf of gas.
Black Warrior Basin Fields, Mississippi and Alabama. AROC owns operated and
non-operated working interests in 83 wells (32 operated, 51 non-operated) and 12
non-operated royalty interests in Lamar, Fayette and Pickens Counties, Alabama
and Lee and Chickasaw Counties, Mississippi. Production from these wells is
from multiple sandstone of Mississippian age at depths of 1,900 to 4,600 ft.
The fields produced at a combined average gross rate of 330 Bopd and 3.9 MMcfgpd
for the month of April 2000 (9 Bopd and 1.2 MMcfgpd net to AROC's revenue
interest in the properties).
4
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AROC's working interest in the properties varies between 1.8% and 100%. The
estimated net remaining reserves to AROC's interest in these fields as of April
30, 2000 were 5 MBbls of oil and 8,931 MMcf of gas.
Tinsley Field, Mississippi. The Tinsley field is located in Yazoo County,
Mississippi. AROC operates 11 active producing or potentially productive oil
wells and 2 salt-water disposal wells in the field. The field produces from
Upper Cretaceous age Eutaw Sandstones at a depth of approximately 4,500 ft. In
April 2000 the field produced at an average gross rate of 92 Bopd (76 Bopd net
to AROC's revenue interest in the property) from 4 active producing wells.
Subsequent workover operations have boosted gross oil production to over 115
Bopd. AROC's working interest in the property is 100%. The estimated net
remaining reserves to AROC's interest in the field as of April 30, 2000 were 579
MBbls of oil.
Bolton Field, Mississippi. The Bolton field is located in Hinds County,
Mississippi. AROC operates 1 active producing well in the field. The Ernest
Roberts G.U. #1 well is currently producing from Cotton Valley Formation
sandstones at a depth of approximately 16,000 ft. In April 2000 the well
produced at an average gross rate of 31 Bopd and 1.1 MMcfgpd (23 Bopd and 0.8
MMcfgpd net to AROC's revenue interest in the property). AROC's working
interest in the property as of April 30, 2000 was 91%. The estimated net
remaining reserves to AROC's interest in the field as of April 30, 2000 were 122
MBbls of oil and 2,775 MMcf of gas.
South Elton Field, Louisiana. The South Elton field is located in Jefferson
Davis Parish in southwest Louisiana. AROC operates 7 active producing or
potentially productive oil and gas wells and 2 salt-water disposal wells in the
field. This field produces principally from Oligocene age sandstone of the
Homeseekers C and D Formations at a depth of approximately 9,000 ft. In April
2000 the field produced at an average gross rate of 106 Bopd (75 Bopd net to
AROC's revenue interest in the property). Gas production has subsequently been
re-established and the field is now producing gas at a gross rate of
approximately 0.4 MMcfgpd (0.3 MMcfgpd net to AROC's revenue interest in the
properties). Recent workover activities have increased gross oil production by
a further 20 Bopd. AROC's current working interest in the properties is on
average approximately 97%. The estimated net remaining reserves to AROC's
interest in the field as of April 30, 2000 were 221 MBbls of oil and 554 MMcf of
gas.
Jefferson Island Field, Louisiana. The Jefferson Island field is located in
Iberia Parish in southwest Louisiana. AROC currently has a 67% working interest
in a 525-acre lease that was farmed out to Continental Resources Inc. in 1998.
The first well under the farmout agreement was successfully drilled and
completed in September 1999 and AROC has a 33% working interest in the well and
the related unit. The Continental JISMC #1well was productive in sandstones of
Siphoni Davisi age and in April 2000 was producing at an average gross rate of 6
Bopd and 0.9 MMcfgpd (2 Bopd and 0.2 MMcfgpd net to AROC's revenue interest in
the property). If Continental drills and completes a second commercially
productive well, it will earn an additional one-third working interest in the
remainder of the lease. Several more locations remain to be drilled on the lease
and the estimated net remaining reserves to AROC's interest in the field as of
April 30, 2000 were 115 MBbls of oil and 552 MMcf of gas.
War-Wink South Field, Texas. AROC owns a non-operated working interest in 47
active wells in the War-Wink South field, Ward County, Texas. This field
produces from the Fusselman, Atoka, Wolfcamp and Cherry Canyon Formations at
depths ranging from 6,200 to 17,500 ft. In March 2000, these 47 active wells
produced at a combined average gross rate of 423 Bopd and 5.1 MMcfgpd (24 Bopd
and 0.4 MMcfgpd net to AROC's revenue interest in the properties). AROC's
working interest in the properties is approximately 10%. The estimated net
remaining reserves to AROC's interest in the field as of April 30, 2000 were 92
MBbls of oil and 386 MMcf of gas.
In addition to these fields, AROC has other producing properties and associated
activities in the U.S. Net proved reserves to AROC's interest in these
properties as of April 30, 2000 were 1,746 MBbls of oil and 7,961 MMcf of gas.
RESERVES
Lee Keeling and Associates, Inc. (LKA), AROC's independent petroleum
engineering consulting firm, has made estimates of AROC's oil and gas reserves
at April 30, 2000. LKA's report covers the estimated present value of future
net cash flows before income taxes (discounted at 10%) attributable to AROC's
estimated future net cash flows therefrom.
5
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The quantities of AROC's proved reserves of oil and natural gas presented
below include only those amounts which AROC reasonably expects to recover in the
future from known oil and gas reservoirs under existing economic and operating
conditions. Proved developed reserves are limited to those quantities which are
recoverable commercially at current prices and costs, under existing regulatory
practices and with existing technology. Accordingly, any changes in prices,
operating and development costs, regulations, technology or other factors could
significantly increase or decrease estimates of AROC's proved developed
reserves. AROC's proved undeveloped reserves include only those quantities
which AROC reasonably expects to recover from the drilling of new wells based on
geological evidence from offsetting wells. The risks of recovering these
reserves are higher from both geological and mechanical perspective than the
risks of recovering proved developed reserves.
As required by the Securities and Exchange Commission, the estimates of net
proved reserves and proved developed reserves and the estimated future net
revenues from such reserves set forth below, have been made in accordance with
the provisions of Statement of Financial Accounting Standards No. 69,
"Disclosures about Oil and Gas Producing Activities." Estimated future net cash
flows from proved reserves are determined by using estimated quantities of
proved reserves and the periods in which they are expected to be developed and
produced based on economic conditions at the date of the report. The estimated
future production is priced at current prices at the date of the report. The
resulting estimated future cash inflows are then reduced by estimated future
costs to develop and produce reserves based on cost levels at the date of the
report. No deduction has been made for depletion, depreciation or for indirect
costs, such as general corporate overhead. The discounted value was computed by
discounting future net revenues at 10% per annum, without deduction for income
taxes.
The following table sets forth estimates of the proved oil and natural gas
reserves of AROC at April 30, 2000, as evaluated by LKA.
<TABLE>
<CAPTION>
Oil (MBbls) Gas (Mmcf)
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Developed Undeveloped Total Developed Undeveloped Total
--------- ----------- ----- --------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
U.S. Reserves
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Alabama 4,151 1,564 5,715 5,076 - 5,076
Louisiana 636 113 749 1,701 323 2,024
Mississippi 787 162 949 7,014 - 7,014
Oklahoma 49 - 49 1,809 547 2,356
Texas 587 110 697 5,210 15,438 20,648
Other 502 1 503 197 - 197
----- ----- ----- ------ ------ ------
Total 6,712 1,950 8,662 21,007 16,308 37,315
===== ===== ===== ====== ====== ======
Oil (MBbls) Gas (Mmcf)
----------------------------------------- ------------------------------------------
Developed Undeveloped Total Developed Undeveloped Total
--------- ----------- ----- --------- ----------- -----
U.K. Reserves
----------------------
All Fields - - - 7,256 56,173 63,429
===== ===== ===== ====== ====== ======
</TABLE>
The following table sets forth amounts as of April 30, 2000 determined in
accordance with the requirements of the applicable accounting standards
pertaining to the estimated future net cash flows from production and sale of
the proved reserves attributable to AROC's oil and gas properties before income
taxes and the present value thereof. NYMEX
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benchmark prices used in determining the future U.S. net cash flow estimates at
April 30, 2000 were $25.74 per barrel for oil and $3.141 per MMBtu for gas,
adjusted for location and grade. A delivery price of 12.45 pence per therm was
used in determining the future U.K. net cash flow estimates at April 30, 2000.
<TABLE>
<CAPTION>
Proved Proved Total
Developed Undeveloped Proved
Reserves Reserves Reserves
----------------------------------------------------------
U.S. Reserves (in thousands) (in thousands) (in thousands)
-------------
<S> <C> <C> <C>
Estimated future net cash flows from proved
reserves before income taxes $ 107,088 $ 42,508 $ 149,596
============= ============= =============
Present value of estimated future net cash flows
from proved reserves before
income taxes (discounted at 10%) $ 43,152 $ 22,256 $ 65,408
============= ============= =============
Standardized Measure $ 39,591 $ 18,099 $ 57,690
============= ============= =============
U.K. Reserves
-------------
Estimated future net cash flows from proved
reserves before income taxes $ 6,522 $ 42,651 $ 49,173
============ ============ ============
Present value of estimated future net cash flows
from proved reserves before
income taxes (discounted at 10%) $ 4,537 $ 12,090 $ 16,627
============ ============ ============
Standardized Measure $ 1,765 $ 13,662 $ 15,427
============ ============ ============
</TABLE>
The estimation of oil and gas reserves is a complex and subjective process
which is subject to continued revisions as additional information becomes
available. Reserve estimates prepared by different engineers from the same data
can vary widely. Assumptions have to be made regarding the timing of future
production and the timing and amount of future development and production costs.
The calculations assume that economic conditions existing at the end of the
reporting period will continue. Other, but equally valid, assumptions might
lead to a significantly different final result. Therefore, the reserve data
presented herein should not be construed as being exact. Any reserve estimate
depends in part on the quality of available data, engineering and geologic
interpretation, and thus represents only an informed professional judgment.
Subsequent reservoir performance may justify upward or downward revision of such
estimate. The information provided, therefore, does not represent management's
estimate of AROC's expected future cash flows or value of proved reserves.
Estimates of AROC's proved reserves have never been filed or included in
reports to any United States federal authority or agency, other than the
Securities and Exchange Commission.
For further information on reserves, costs relating to oil and gas
activities, and results of operations from producing activities, see Note 16 to
the Consolidated Financial Statements--Supplementary Financial Information for
Oil and Gas Producing Activities (Unaudited) incorporated by reference herein.
The following table sets forth AROC's producing wells at April 30, 2000.
<TABLE>
<CAPTION>
Productive Wells
Oil Gas Total
-------------------------------------------------------------------------------------------------------
Gross Net Gross Net Gross Net
------------- --------------- ---------------- ------------- --------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
U.S. 340 179.1 149 57.6 489 236.7
============= =============== ================ ============= =============== =================
U.K. - - 3.0 0.3 3.0 0.3
============= =============== ================ ============ =============== =================
</TABLE>
Productive wells consist of producing wells and wells capable of
production, including gas wells awaiting pipeline connections to commence
deliveries and oil wells awaiting connection to production facilities. Wells
that are
7
<PAGE>
completed in more than one producing horizon are counted as one well. Of the
gross wells reported above, 12 had multiple completions.
Developed and Undeveloped Acreage
The following table sets forth the developed and undeveloped leasehold
acreage held by AROC at April 30, 2000. Developed acres are acres that are
spaced or assignable to productive wells. Undeveloped acres are acres on which
wells have not been drilled or completed to a point that would permit the
production of commercial quantities of oil and gas, regardless of whether or not
such acreage contains proved reserves. Gross acres are the total number of
acres in which AROC has a working interest. Net acres are the sum of AROC's
fractional interests owned in the gross acres.
States in which AROC held developed and undeveloped acreage at April 30,
2000 include Alabama, Arkansas, Colorado, Kansas, Louisiana, Mississippi,
Montana, New Mexico, North Dakota, Oklahoma, Texas and Wyoming.
U.S. Gross Net
---- -------------- ---------------
Developed acreage 27,011.9 20,102.7
Undeveloped acreage 10,956.6 8,428.5
-------------- ---------------
Total 37,968.5 28,531.2
-------------- ---------------
U.K. Gross Net
---- -------------- ---------------
Developed acreage 41,360.4 3,945.0
Undeveloped acreage 159,297.6 15,194.0
-------------- ---------------
Total 200,658.0 19,139.0
-------------- ---------------
PRODUCTION, UNIT PRICES AND COSTS
The following table sets forth information with respect to sales of
production and average unit prices and costs for the periods indicated.
<TABLE>
<CAPTION>
Year ended April 30
-------------------------------------
<S> <C> <C> <C> <C>
1998 (2) 1999 (2) 2000
--------------------------------------------------
Production:
Gas (Mmcf) 1,689 1,402 3,406
Oil (MBbls) 396 278 279
Average sales prices (1)
Gas (per Mcf) $ 2.36 $ 1.79 $ 2.25
Oil (per Bbl) $ 15.75 $ 13.20 $ 17.35
Average production costs per BOE (3) $ 8.13 $ 6.05 $ 8.13
</TABLE>
(1) After giving effect to the impact of AROC's price hedging arrangements.
Without such hedging arrangements, the average sales prices for the years
ended April 30, 2000, 1999, and 1998 would have been $17.80, $10.11 and
$15.14 for oil and $2.29, $1.92, and $2.34 for gas, respectively.
(2) No figures are included for U.K. production activities since first
production started mid-August 1999.
(3) The components of production costs may vary substantially among wells
depending on the methods of recovery employed and other factors, but
generally include production taxes, lease overhead, maintenance and repair,
labor and utilities.
8
<PAGE>
DRILLING ACTIVITY
During the periods indicated, AROC drilled or participated in the drilling
of the following exploratory and development wells. The information excludes
wells in which AROC has only an overriding interest.
<TABLE>
<CAPTION>
Year ended April 30
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998 1999 2000
-------------------------------------------------------------------------------
Gross Net Gross Net Gross Net
----------- ------------- --------- ---------- ------------- -----------
U.S.
------
Exploratory:
Productive - - - - - -
Non-Productive 1 0.10 - - - -
----------- ------------- --------- ---------- ------------- -----------
Total 1 0.10 - - - -
=========== ============= ========= ========== ============= ===========
Development:
Productive 7 0.53 - - 1.0 0.34
Non-Productive - - - - - -
----------- ------------- --------- ---------- ------------- -----------
Total 7 0.53 - - 1.0 0.34
=========== ============= ========= ========== ============= ===========
Total:
Productive 7 0.53 - - 1.0 0.34
Non-Productive 1 0.10 - - - -
---------- -------------- --------- ---------- ------------- -----------
Total 8 0.63 - - 1.0 0.34
========== ============== ========= ========== ============= ===========
U.K.
------
Development:
Productive - - 1.0 0.1 - -
Non-Productive - - - 0.0 - -
----------- ------------- --------- ---------- ------------- -----------
Total - - 1.0 0.1 - -
=========== ============= ========= ========== ============= ===========
</TABLE>
At April 30, 2000, AROC was participating in the drilling of one oil and
gas well.
All of AROC's drilling activities are conducted with independent
contractors. AROC owns no drilling equipment.
TITLE TO PROPERTIES
As is customary in the oil and gas industry, AROC conducts only a
perfunctory title examination at the time properties believed to be suitable for
drilling operations are first acquired. Prior to commencement of drilling
operations, a thorough drill site title examination is normally conducted and
curative work is performed with respect to significant defects. During
acquisitions, title reviews are performed on all material properties being
acquired.
ITEM 3. LEGAL PROCEEDINGS
The Company is a named defendant in lawsuits, and is subject to claims of
third parties from time to time arising in the ordinary course of business.
While the outcome of lawsuits or other proceedings and claims against the
Company cannot be predicted with certainty, management does not believe the
outcome of these lawsuits to have a material adverse effect on the financial
position, results of operations or liquidity of the Company.
9
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MARKET INFORMATION AND DIVIDENDS
The Ordinary Shares of Alliance were traded on the London Stock Exchange
under the symbol "ARS" until January 11, 2000. The Common Stock of AROC is not
listed or quoted.
The following table sets forth in pounds, for the calendar quarter
indicated, the high and low sales prices for the Alliance Shares on the London
Stock Exchange (in pence) for the periods indicated derived from the official
list of the London Stock Exchange. Bid quotations represent quotations between
dealers without adjustment for retail mark-ups, mark-downs or commissions and
may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Prices
Alliance Shares
----------------------------
High Low
<S> <C> <C> <C>
Fiscal year ended April 30, 1999
First Quarter 32.5 32.5
Second Quarter 32.5 32.5
Third Quarter 19 8
Fourth Quarter 8 4.5
Fiscal year ended April 30, 2000
First Quarter 7.5 4.5
Second Quarter 6 4
Third Quarter 7 3.25
Fourth Quarter - -
</TABLE>
As of April 30, 2000, the approximate number of record holders of the AROC
Common Shares was 3,499.
Quotations for shares listed on the London Stock Exchange are not generally
readily available in newspapers or other publication in the United States, but
are available in the daily U.S. edition of the Financial Times.
AROC has not paid any cash dividends on the AROC Shares for at lease the
last two complete fiscal years. In addition, AROC is now restricted from paying
dividends under the Company's credit agreement with the Toronto Dominion Bank.
EXCHANGE RATES
The table below sets forth, for the periods and dates indicated, certain
information regarding the U.S. dollar/pound sterling exchange rate, based on the
Noon Buying Rate, expressed in U.S. dollars per (Pounds)1.00.
<TABLE>
<CAPTION>
Calendar Year Period End Average Rate High Low
------------- ---------- ------------ ---- -----
<S> <C> <C> <C> <C>
1998 1.67 1.66 1.74 1.61
1999 1.61 1.62 1.66 1.55
2000 (1) 1.56 1.60 1.65 1.56
</TABLE>
(1) 2000 exchange rates are for the period from January 1, 2000 to April 30,
2000 only.
10
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
On May 1, 1997, the Company completed its acquisition of LaTex. The
acquisition resulted in the issuance of 21,448,747 shares to the former
shareholders of LaTex compared to the 8,103,816 shares then outstanding. As a
result, the former LaTex shareholders had a controlling interest in the combined
company and so for accounting and financial reporting purposes, LaTex is treated
as having acquired the Company (Reverse Acquisition). The historical financial
information for all financial periods to April 30, 1997 reflect the results of
operations and assets and liabilities of LaTex. LaTex's fiscal year end was July
31, whereas that of the Company is April 30.
On December 8, 1999, AROC acquired a majority of the shares of Alliance on
the basis of one share of AROC common stock for each ordinary share of Alliance,
with the result that the former shareholders of Alliance then held approximately
98% of the outstanding shares of AROC. Therefore, Alliance is deemed to have
acquired AROC for accounting purposes. The historical financial information for
all financial periods from April 30, 1997 to December 8, 1999 reflects the
results of operations and assets and liabilities of Alliance.
11
<PAGE>
The selected financial information presented below should be read in conjunction
with the Company's audited financial statements and the notes thereto included
under Item 8 and Management's Discussion and Analysis of financial Condition and
Results of Operations at item 7.
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(in thousands, except per share amounts and average sales data)
<TABLE>
<CAPTION>
Year ended Nine months Year ended April 30
July 31 ended April 30 ----------------------------------------
1996 1997 1998 1999 2000
------------ -------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues:
Oil and gas sales $ 11,980 $ 5,699 $ 10,210 $ 6,234 $ 12,506
Crude oil and gas marketing 540 146 - - -
--------- --------- --------- --------- ---------
Total revenues 12,520 5,845 10,210 6,234 12,506
--------- --------- --------- --------- ---------
Operating expenses:
Lease operating expense 5,472 3,117 5,506 3,096 6,884
Cost of crude oil and gas marketing 133 16 - - -
Cessation of overseas exploration (1) 3,447 - - - -
General and administrative 2,893 3,481 3,364 3,486 3,930
Depreciation, depletion and amortization 3,511 1,542 2,598 1,671 3,128
Impairment of oil and gas properties - - - 28,260 2,500
Loss on termination of derivative contract (2) - - 1,128 - -
--------- --------- --------- --------- ---------
Total operating expenses 15,456 8,156 12,596 36,513 16,442
--------- --------- --------- --------- ---------
Loss from operations (2,936) (2,311) (2,386) (30,279) (3,936)
--------- --------- --------- --------- ---------
Other income (expense):
Equity in losses and write-offs of investments
in affiliates (4,034) (20) - - -
Write-off deferred loan costs - - - (870) -
Gain (loss) on sale of assets - - 35 (9) -
Interest income 280 52 62 26 32
Interest expense (2,830) (2,102) (2,573) (3,355) (7,530)
Miscellaneous income (expense) (3) (1,810) (8) 133 23 461
--------- --------- --------- --------- ---------
Net loss before income taxes (11,330) (4,389) (4,729) (34,464) (10,973)
Income tax expense - - - - -
--------- --------- --------- --------- ---------
Net loss (11,330) (4,389) (4,729) (34,464) (10,973)
Preferred stock dividends 571 518 - - -
--------- --------- --------- --------- ---------
Net loss for ordinary shareholders $ (11,901) $ (4,907) $ (4,729) $ (34,464) $ (10,973)
========= ========= ========= ========= =========
Income (loss) per share $ (0.57) $ (0.23) $ (.15) $ (0.82) $ (0.21)
========= ========= ========= ========= =========
Weighted average shares outstanding (4) 20,763 21,638 31,126 41,936 53,281
--------- --------- --------- --------- ---------
Balance Sheet Data (end of period):
Total assets $ 36,493 $ 30,858 $ 34,760 $ 36,162 $ 46,365
Net property, plant and equipment 29,473 26,708 29,808 30,355 40,200
Working capital (deficit) (27,970) (9,620) (9,480) (5,621) (6,922)
Long term debt - 18,095 18,792 43,177 63,057
Stockholders' equity (deficit) 3,846 85 2,183 (16,637) (26,843)
Reserve and Production Data:
Production:
Oil (MBbls) 405 190 396 278 279
Gas (MMcf) 3,481 1,640 1,689 1,402 3,406
Average sales prices:
Oil (per Bbl) $ 15.24 $ 15.34 $ 15.75 $ 13.20 $ 17.35
Gas (per Mcf) 1.67 1.70 2.36 1.79 2.25
Proved reserves (end of period):
Oil (MBbls) 6,353 6,581 6,494 8,708 8,662
Gas (MMcf) 28,172 25,955 26,321 32,584 100,744
Present value of estimated future oil and gas net revenues
before income taxes (discounted 10%) $ 53,499 $ 39,631 $ 48,600 $ 46,642 $ 82,035
Standardized Measure $ 43,889 $ 35,368 $ 45,106 $ 37,663 $ 73,117
</TABLE>
1) During the year ended July 31, 1996, the Company ceased its overseas
exploration activities in both Tunisia and Kazakhstan and wrote off its
costs relating to these activities of $3,447.
2) On May 15, 1997, the existing commodity price hedging agreements were
terminated through a buyout. On October 23, 1997, new commodity price
hedging agreements were initiated. The loss relating to the buy-out, $1,128
has been recognized in its entirety in the year ended April 30, 1998.
12
<PAGE>
3) The miscellaneous expenses in the year ended July 31, 1996 arose from
litigation in connection with the sale in July 1993 of a subsidiary of the
Company.
4) For periods ending on or before December 8, 1999, the weighted average
number of shares outstanding has been restated for the equivalent number of
shares received in the American Rivers acquisition.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" refers to the Consolidated
Financial Statements of AROC included in this Form 10-K which are presented in
accordance with U.S. GAAP.
RESULTS OF OPERATIONS
The factors which most significantly affect results of operations are
(i) the sale prices of crude oil and gas, (ii) the level of total sales volumes,
(iii) the level of lease operating expenses and (iv) the level of and interest
rates on borrowings. Total sales volumes and the level of borrowings are
significantly impacted by the degree of success in efforts to acquire oil and
gas properties and in the ability to maintain or increase production from
existing oil and gas properties through development activities.
The following table reflects certain historical operating data for the
periods presented.
<TABLE>
<CAPTION>
Year ended April 30
---------------------------------------------
1998 1999 2000
------------- ------------- -------------
<S> <C> <C> <C>
Net sales volumes
Oil (Mbbls) 396 278 279
Natural gas (Mmcf) 1,689 1,402 3,406
Oil equivalent (MBOE) 678 512 847
Average sales prices
Oil (per Bbl) $ 15.75 $ 13.20 $ 17.35
Natural gas (per Mcf) $ 2.36 $ 1.79 $ 2.25
Operating expenses per BOE of net sales
Lease operating $ 7.16 $ 5.41 $ 7.52
Severance tax $ 0.97 $ 0.64 $ 0.61
General and administrative $ 4.97 $ 6.81 $ 4.64
Depreciation, depletion and amortization $ 3.84 $ 3.27 $ 3.69
Loss on termination of commodity derivative
contract $ 1.67 $ - $ -
</TABLE>
YEAR ENDED APRIL 30, 2000 COMPARED TO THE YEAR ENDED APRIL 30, 1999
Total revenues for the year ended April 30, 2000 were $12,505,885
compared to $6,234,477 for the year ended April 30, 1999. This 101% increase in
total revenues primarily resulted from an overall increase in production volumes
and realized prices during the year ended April 30, 2000 compared to the year
ended April 30, 1999. The increase in production volumes was mainly due to the
Company's U.K. properties which started first production during August 1999.
There was a 32% increase in the average sales price received for oil, and a 26%
increase in the average sales price received for natural gas. Crude oil
contributed 38% and natural gas contributed 62% of oil and gas production
revenues during the year ended April 30, 2000. For the year ended April 30,
1999, crude oil contributed 56% and natural gas contributed 44% of oil and gas
production revenues, respectively. The rise of natural gas from 44% of revenues
during 1999 to 62% during 2000 was also due to first sales from the Company's
U.K. properties.
Lease operating expenses increased to $6,883,736 for the year ended
April 30, 2000, compared to $3,096,468 for the year ended April 30, 1999. The
increase in operating expenses is primarily a result of the U.K. properties
13
<PAGE>
commencing production in August, 1999, increased workover expenses and higher
production taxes associated with improved sales volumes. On an equivalent barrel
basis, lease operating expenses, including severance tax, increased to $8.13 for
the year ended April 30, 2000, compared to $6.05 for the year ended April 30,
1999.
General and administrative expenses for the year ended April 30, 2000
were $3,930,300 which represents an increase of 13% over the $3,486,007 incurred
in the prior fiscal year. This was primarily due to costs associated with
increased staff levels required to manage the additional properties acquired by
the Company prior to and subsequent to the year ended April 30, 2000. On an
equivalent barrel basis general and administrative expenses decreased by $2.17
to $4.64 for the year ended April 30, 2000 compared to $6.81 for the year ended
April 30, 1999.
Depreciation, depletion and amortization expense increased 88% from
$1,670,711 for the year ended April 30, 1999 to $3,128,497 for the year ended
April 30, 2000. This was due primarily to higher production volumes. On an
equivalent barrel basis depreciation, depletion, and amortization increased
$0.42 to $3.69 for the year ended April 30, 2000, compared to $3.27 for the year
ended April 30, 1999.
Ceiling test charges associated with the Company's U.K. Interests led
to an impairment charge of $28 million during the year ended April 30, 1999. Due
to continued low spot prices, the Company also recorded an aggregate impairment
charge of $2.5 million during the quarters ended July 31, 1999 and October 31,
1999. Since then, spot prices have improved and no additional impairment was
required during the remainder of the year ended April 30, 2000.
Future quarterly full cost ceiling tests will be based on the then-
current prices for both natural gas and oil. The net carrying value of the
Company's U.K. natural gas properties has been reduced due to the full cost
ceiling limitation such that the present value of the Company's U.K. proved
natural gas reserves (discounted at 10 percent) does not exceed the Company's
net natural gas properties recorded in its balance sheet. There is a risk of
future property write-downs due to factors that negatively affect the estimated
present value of proved natural gas and oil reserves, including volatile natural
gas and oil prices, downward revision in estimated proved natural gas and oil
quantities, and unsuccessful exploratory operations.
Interest expense for the year ended April 30, 2000 increased $4,175,847
from the year ended April 30, 1999. This was due to additional drawdowns from
the Company's credit facility with Bank of America to fund the East Irish Sea
Development. The EnCap debt issued during October 1998 to fund the acquisition
of the U.K Interests also was a reason for the increase in interest expense.
This debt only accrued interest during a six month period in the year ended
April 30, 1999, compared to a twelve month period in the year ended April 30,
2000. During December 1999, the Company completed several property acquisitions
with $6.5 million of additional EnCap debt which also caused increased interest
expense during the current fiscal year end.
The net loss for the year ended April 30, 2000 was $10,973,789 ($0.21
per common share) compared to a net loss of $34,463,502 ($0.82 per common share)
for the year ended April 30, 1999.
YEAR ENDED APRIL 30, 1999 COMPARED TO THE YEAR ENDED APRIL 30, 1998
Total revenues for the year ended April 30, 1999 were $6,234,477
compared to $10,209,881 for the year ended April 30, 1998. This 39% decrease in
total revenue can be attributed to a 30% decrease in oil sales volumes
(primarily at the South Carlton Alabama field), and a 17% decrease in natural
gas sales volumes. A portion of the decreased sales volumes is due to the sale
of non-operated, non-strategic properties. Additionally there was a 17% decrease
in the average sales price received for oil, and a 25% decrease in the average
sales price received for natural gas. Crude oil contributed 56% and natural gas
contributed 44% of oil and gas production revenues during the year ended April
30, 1999. For the year ended April 30, 1998, crude oil contributed 61% and
natural gas contributed 39% of oil and gas production revenues, respectively.
Lease operating expenses decreased 44% to $3,096,468 for the year ended
April 30, 1999, compared to $5,505,826 for the year ended April 30, 1998. The
reduction in operating expenses is a result of a reduced property base, lower
expenses in the Alabama operations, and the shutting-in of marginal operated
wells. On an equivalent barrel basis, lease operating expenses decreased by
$1.75 to $5.41 for the year ended April 30, 1999, compared to $7.16 for the year
ended April 30, 1998.
14
<PAGE>
General and administrative expenses for the year ended April 30, 1999
were $3,486,007 which represents an increase of 3.6% over the $3,363,885
incurred in the prior fiscal year. On an equivalent barrel basis general and
administrative expenses rose by $1.84 to $6.81 for the year ended April 30, 1999
compared to $4.97 for the year ended April 30, 1998.
Depreciation, depletion and amortization expense decreased 36% from
$2,598,066 for the year ended April 30, 1998 to $1,670,711 for the year ended
April 30, 1999. This was due primarily to lower production volumes. On an
equivalent barrel basis depreciation, depletion, and amortization decreased
$0.57 to $3.27 for the year ended April 30, 1999, compared to $3.84 for the year
ended April 30, 1998.
AROC limits, on a country-by-country basis, the net capitalized cost of
proved oil and gas properties, to estimated future net cash flows from proved
oil and gas reserves discounted at 10 percent, net of related tax effects, plus
the lower of cost or fair value of unproved properties included in the costs
being amortized. Since the acquisition of the U.K. Interests on October 30,
1998, development plans for the fields have become firmer, drilling results on
two wells have been reviewed and significant progress has been made on the
development of the Dalton and Millom Fields. This additional information
indicates that, while the aggregate reserves estimates at the time of
acquisition are confirmed, the reserves are likely to be produced at a slower
rate than originally anticipated and that development costs are likely to be in
excess of those originally anticipated. These factors led to an impairment in
value of the U.K. Interests. The Company utilized the spot price at April 30,
1999 in calculating the carrying cost limit resulting in an impairment charge of
some $28 million. The charge had no impact on cash flows from operating
activities.
Interest costs for 1999 increased $780,981, or 31%, from 1998 primarily
due to the revised credit facility put in place to fund the East Irish Sea
acquisition and development. In 1999, AROC wrote off $869,906 in deferred loan
costs related to the Company's previous credit facility.
The net loss for the year ended April 30, 1999 was $34,463,502 ($0.82
per common share) compared to a net loss of $4,728,923 ($0.15 per common share)
for the year ended April 30, 1998.
CAPITAL RESOURCES AND LIQUIDITY
The Company's capital requirements relate primarily to the acquisition
of developed oil and gas properties and undeveloped leasehold acreage and
exploration and development activities, and the servicing of the Company's debt.
In general, because the Company's oil and gas reserves are depleted by
production, the success of its business strategy is dependent upon a continuous
acquisition and exploration and development program and the acquisition of
additional reserves.
CASH FLOWS AND LIQUIDITY
At April 30, 2000, AROC reported current assets of $3,228,603 and
current liabilities of $10,151,330, which resulted in a net current deficit of
$6,922,727.
Operating activities of AROC used $857,936 during the year ended April
30, 2000, as compared to $3,991,251 used in net cash flow for the year ended
April 30, 1999.
For the years ended April 30, 2000 and April 30, 1999, AROC's investing
activities used $10,650,721 and $24,174,756, respectively.
Financing activities provided $11,796,326 for the year ended April 30,
2000, due primarily to proceeds from the issuance of long-term debt of
$12,639,118, offset by the payments of long-term debt of $567,670 and loan
acquisition costs of $275,122, compared to cash provided from financing of
$28,043,726 for the year ended April 30, 1999.
The domestic spot prices of oil and gas have traded in a volatile
manner over various periods in recent years. To the extent that oil and gas
prices are volatile, material fluctuations in revenues from quarter to quarter
can be expected which, in turn, could adversely affect the Company's ability to
service its debt with its principal bank in a timely manner and to fund its
ongoing operations and could, under certain circumstances, require a write-down
of the carrying value of the Company's oil and gas properties.
15
<PAGE>
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. As shown in the financial
statements for the years ended April 30, 1998, 1999, and 2000 the Company
incurred losses of $4,728,923; $34,463,502; and $10,973,789, respectively and
continues to experience working capital deficits. Despite its negative cash
flow, the Company has been able to secure financing to support its ongoing
operations. As described in Note 5, the Company was not in compliance with
certain covenants of its loan agreements at April 30, 2000. As a result of the
replacement of the BoA Credit Agreement with the new Toronto Dominion Credit
Agreement and exchange of preferred stock for EnCap debt on May 2, 2000, these
covenant violations were no longer applicable. In addition, the Company obtained
a $17,000,000 subordinated loan from EnCap 1996 LP, ECIC, and El Paso with
interest of 12%, payable in kind to May 1, 2002. The new debt agreements
extended the repayment dates, originally scheduled to begin in October 2000, to
May 1, 2003. As a result of the May 2, 2000 transactions, the Company believes
it will be able to meet its obligations as they become due and to comply with
the terms of the new borrowing agreements. Management believes it has a business
plan that, if successfully executed, will achieve these objectives.
CAPITAL EXPENDITURES
The timing of most of the Company's U.S. capital expenditures is
discretionary. Currently, there are no material long-term commitments
associated with the Company's U.S. capital expenditure plans. Consequently, the
Company has a significant degree of flexibility to adjust the level of such
expenditures as circumstances warrant. The Company primarily uses funds
available under its credit facility and proceeds from the sale of oil and gas
properties to fund capital expenditures, other than significant acquisitions,
and to fund its working capital deficit. If the Company's internally generated
cash flows should be insufficient to meet its banking or other obligations, the
Company may reduce the level of discretionary U.S. capital expenditures or
increase the sale of non-strategic oil and gas properties in order to meet such
obligations.
The timing of the Company's U.K. capital expenditures is determined
annually by a budget prepared by the operator and approved by AROC. Currently,
there are material commitments for the 2001 fiscal year. These commitments will
be met by funds available under the Company's credit facility and internally
generated cash flow.
The level of the Company's capital expenditures will vary in future
periods depending on energy market conditions and other related economic
factors. As a result, the Company will continue its current policy of funding
capital expenditures with funds available under its credit facility and
internally generated cash flow.
SEASONALITY
The results of operations of the Company are somewhat seasonal due to
fluctuations in the price for crude oil and natural gas. Recently, crude oil
prices have been generally higher in the third calendar quarter, and natural gas
prices have been generally higher in the first calendar quarter. Due to these
seasonal fluctuations, results of operations for individual quarterly periods
may not be indicative of results which may be realized on an annual basis.
INFLATION AND PRICES
In recent years, inflation has not had a significant impact on the
operations or financial condition of the Company.
Prices obtained for oil and gas production depend upon numerous factors
that are beyond the control of the Company including the extent of domestic and
foreign production, imports of foreign oil, market demand, domestic and world-
wide economic and political conditions, and government regulations and tax laws.
Prices for oil and gas have fluctuated significantly in recent years.
The following table sets forth the average price received by the
Company.
Oil Gas
-------- -------
Year ended April 30, 2000 $17.35 $2.25
Year ended April 30, 1999 $13.20 $1.79
Year ended April 30, 1998 $15.75 $2.36
16
<PAGE>
Between September 8, 1999 and February 10, 2000, the Company completed
several transactions with El Paso Merchant Energy to hedge approximately 30%-40%
of its existing monthly oil production by installing a floor of $19.00/barrel
(NYMEX WTI) and caps between $24.00/barrel and $26.65/barrel (NYMEX WTI). These
commodity price hedge arrangements will expire on December 31, 2000.
On August 30, 1999, the Company completed a transaction with El Paso
Merchant Energy to hedge approximately 50% of its existing monthly U.S. gas
production by installing a floor of $2.40/MMBTU (NYMEX) and a cap of $3.00.
This commodity price hedge agreement will expire on October 31, 2000. On March
31, 2000, the Company completed a transaction with El Paso to hedge
approximately 50% of its existing monthly U.K. gas production by installing a
floor of 10.5 pence/therm (IPE) and a cap of 12.55 pence/therm. This commodity
price hedge agreement will expire on September 30, 2000.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivatives Instruments and Hedging Activities" (Statement 133) was issued by
the FASB in June 1998. Statement 133 standardizes the accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts. Under the standard, entities are required to carry all derivative
instruments in the balance sheet at fair value. The accounting for changes in
the fair value of a derivative instrument depends on whether it has been
designated and qualifies as part of a hedging relationship and, if so, on the
reason for holding it. If certain conditions are met, entities may elect to
designate a derivative instrument as a hedge of exposures to changes in fair
values, cash flows, or foreign currencies. If the hedge exposure is a fair
value exposure, the gain or loss on the derivative instrument is recognized in
earnings in the period of change together with the offsetting loss or gain on
the hedged item attributable to the risk being hedged. If the hedged exposure
is a cash flow exposure, the effective portion of the gain or loss on the
derivative instrument is reported initially as a component of other
comprehensive income (outside earnings) and subsequently reclassified into
earnings when the forecasted transaction affects earnings. Any amounts excluded
from the assessment of hedge effectiveness as well as the ineffective portion of
the gain or loss is reported in earnings immediately. Statement 133 was amended
by Statement No. 137 in June 1999 which delayed implementation until fiscal
years beginning after June 15, 2000, with early adoption permitted. The Company
is not required to adopt this pronouncement until fiscal year ended April 30,
2002. The Company believes the impact of adopting Statement 133 will not be
significant.
QUANTITATIVE AND QUALITATIVE ANALYSIS ON MARKET RISK
The Company's primary market risks relate to changes in interest rates
and in the prices received from sales of oil and natural gas. The Company's
primary risk management strategy is to partially mitigate the risk of adverse
changes in its cash flows caused by increases in interest rates on its variable
rate debt, and decreases in oil and natural gas prices, by entering into
derivative financial and commodity instruments, including swaps, collars and
participating commodity hedges. By hedging only a portion of its market risk
exposures, the Company is able to participate in the increased earnings and cash
flows associated with decreases in interest rates and increases in oil and
natural gas prices; however, it is exposed to risk on the unhedged portion of
its variable rate debt and oil and natural gas production.
Historically, the Company has attempted to hedge the exposure related
to its variable rate debt and its forecasted oil and natural gas production in
amounts which it believes are prudent based on the prices of available
derivatives and, in the case of production hedges, the Company's deliverable
volumes. The Company attempts to manage the exposure to adverse changes in the
fair value of its fixed rate debt agreements by issuing fixed rate debt only
when business conditions and market conditions are favorable.
The Company does not use or hold derivative instruments for trading
purposes nor does it use derivative instruments with leveraged features. The
Company's derivative instruments are designated and effective as hedges against
its identified risks, and do not of themselves expose the Company to market risk
because any adverse change in the cash flows associated with the derivative
instrument is accompanied by an offsetting change in the cash flows of the
hedged transaction.
Personnel who have appropriate skills, experience and supervision carry
out all derivative activity. The personnel involved in derivative activity must
follow prescribed trading limits and parameters that are regularly reviewed by
senior management. The Company uses only well-known, conventional derivative
instruments and attempts to manage its credit risk by entering into financial
contracts with reputable financial institutions.
Following are disclosures regarding the Company's market risk sensitive
instruments by major category. Investors and other users are cautioned to avoid
simplistic use of these disclosures. Users should realize that the actual
impact of future interest rate and commodity price movements will likely differ
from the amounts disclosed below due to ongoing changes in risk exposure levels
and concurrent adjustments to hedging positions. It is not possible to
accurately predict future movements in interest rates and oil and natural gas
prices.
Interest Rate Risks (non-trading) - the Company uses both fixed and
variable rate debts to partially finance operations and capital expenditures. As
of April 30, 2000, the Company's debt, including interest on the subordinated
debt, consists of $50,601,851 in borrowings under its BoA Credit Agreement which
bear interest at a variable rate, and $18,043,539 in borrowings under its 10%
Senior Subordinated Notes which bear interest at a fixed rate. The Company
hedged a portion of the risk associated with its variable rate debt through
derivative instruments which consist of interest rate swaps and collars. Under
the swap contracts, the Company made interest payments on its BoA Credit
Agreement as scheduled and received or made payments based on the differential
between the fixed rate of the swap and a floating rate plus a defined
differential. These instruments reduced the Company's exposure to increases in
interest rates on the hedged portion of its debt by enabling it to effectively
pay a fixed rate of interest or a rate which only fluctuates within a
predetermined ceiling and floor. This hedge expired on March 31, 2000. The
Company currently has no instruments in place. A hypothetical increase in
interest rates of two percentage points in variable rate debt would cause an
increase in
17
<PAGE>
interest expense of $440,000 during the 2001 fiscal year, assuming that variable
rate outstanding borrowings under the Toronto Dominion Credit Agreement (see
Recent Developments) remain at current levels.
Commodity Price Risk (non trading) - The Company hedges a portion of
the price risk associated with the sale of its oil and natural gas production
through the use of derivative commodity instruments, which consist of floors and
caps. These instruments reduce the Company's exposure to decreases in oil and
natural gas prices on the hedged portion of its production by enabling it to
effectively receive a fixed price on its oil and natural gas sales or a price
that only fluctuates between a predetermined floor and ceiling. As of April 30,
2000, the Company had entered into derivative commodity hedges covering an
aggregate of 132,500 barrels of oil and 1,250,000 MMBTU's of gas that extended
through December 2000 (oil) and October 2000 (gas). Under these contracts, the
Company sells its oil and natural gas production at spot market prices and
receives or makes payments based on the differential between the contract price
and a floor and cap price which is based on spot market indices. The amount
received or paid upon settlement of these contracts is recognized as oil or
natural gas revenues at the time the hedged volumes are sold. A hypothetical
decrease in oil and natural gas prices of 10% from the price in effect as of
April 30, 2000, would cause a loss in income and cash flows of approximately
$2,400,000 during the 2001 fiscal year, assuming that oil and gas production
remain at current levels. This loss in income and cash flows would be offset by
a $0 increase in income and cash flows associated with the oil and natural gas
derivative contracts that are in effect.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
Independent Auditors' Report.......................................... F-1
Consolidated Balance Sheets........................................... F-2
Consolidated Statements of Operations................................. F-4
Consolidated Statements of Stockholders' Equity (Deficit)
and Comprehensive Income...................................... F-5
Consolidated Statements of Cash Flows................................. F-6
Notes to the Consolidated Financial Statements........................ F-7
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
John A. "Jak" Keenan, aged 46, is the Chairman, President and Chief
Executive Officer of AROC. He has worked in the oil industry since 1976 and was
successively first vice president of corporate development, chief operating
officer and director and president of the oil and gas division of Great Western
Resources, Inc. He resigned his position at Great Western Resources, Inc. in
August 1995 and accepted a position at the law firm of Jenkens & Gilchrist in
Houston, Texas, where he specialized in oil and gas transactions. He joined the
Board of Alliance in April 1996 and was Chairman and Managing Director of
Alliance at the time that AROC acquired all of the outstanding shares of
Alliance.
Paul R. Fenemore, aged 44, is the Executive Vice President, Chief
Operating Officer and a director of AROC. He has a B.Sc. degree in combined
science obtained in 1975 and a M.Sc. degree in marine geotechnics. He has
extensive experience in detailed technical and economic evaluations of
exploration and oil field appraisal and development projects and project
management and has held several technical and senior management positions with
Gulf Oil Corporation, Amoco Europe and West Africa Limited, Amerada-Hess UK
Limited, Hamilton Brothers (UK) Limited, CSX Oil and Gas Corporation, Cairn
Energy PLC and Hunting Surveys Limited. From 1991 until 1995, he was managing
director of Petroleum Ventures International and Spectron Petroleum Limited and
became a fellow of the Geological Society in 1992. He joined the Board of
Alliance in May 1996 and was the Operations and Business Development Director of
Alliance at the time that AROC acquired all of the outstanding shares of
Alliance.
18
<PAGE>
Francis M. Munchinski, aged 45, is the Vice President-Law and General
Counsel of AROC. He has been involved in the oil and gas business for over 20
years. He joined Alliance in June 1998 and was General Counsel of Alliance at
the time that AROC acquired all of the outstanding shares of Alliance. Prior to
joining Alliance, he was a shareholder at the law firm of Jenkens & Gilchrist in
Dallas, Texas, where he specialized in oil and gas law for over 13 years.
Robert E. Schulte, aged 42, is the Chief Financial Officer and Vice
President of AROC. He has a B.S. degree in accounting obtained in 1981. He has
worked in the oil and gas industry since 1981 in both domestic and international
arenas. He has held management positions with Bow Valley Petroleum and Kelt
Energy. He served as accounting supervisor at Great Western Resources, Inc.
until he resigned in December 1995, at which time he became accounting manager
at Apache Corporation. He joined Alliance in September 1997 and was the
Controller of Alliance at the time that AROC acquired all of the outstanding
shares of Alliance.
Phillip Douglas, aged 61, is a non-executive Director of AROC. He was a
director and head of international investment at Morgan Grenfell for 16 years
and was a director of G T Management. He also has a number of other non-
executive directorships in public and private companies. He joined the Board of
Alliance in November 1993.
William J. A. Kennedy, aged 61, is a non-executive Director of AROC.
After 25 years experience in the investment industry, he became vice president
of a major conglomerate, Crownx, Inc. For the past nine years, he has operated a
management consulting service and sits on the board of two public Canadian
companies. He joined the Board of Alliance in January 1994.
Michael E. Humphries, aged 43, is a non-executive Director of AROC.
Having begun his career at Britoil Plc, he has spent 16 years working in the
international oil and gas arena and is currently Senior Vice President of
Rothschild Natural Resources, LLC, based in Washington DC, where he has
responsibility for Rothschild's oil and gas activities in North America. He
joined the Board of Alliance in December 1997.
John R. Martinson, aged 64, is a non-executive Director of AROC. He
has a B.Sc. degree in engineering and a masters degree in business
administration. He became a director of LaTex in May 1995, having served as a
consultant to that company since 1994. He is Managing Director of Wood Roberts,
LLC, where he has been engaged in financial consulting since January 1989. From
1973 to 1988, Mr. Martinson was an independent oil and gas entrepreneur.
Previously, he was with Kidder Peabody & Co., Oppenheimer & Co. and Mobil
Corporation. He joined the Board of Alliance in May 1997.
19
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information regarding
compensation paid or accrued during each of the Company's last three fiscal
years to the Company's Chief Executive Officer and each of the other most highly
compensated executive officers who earned at least $100,000 in salary and bonus
in fiscal 2000 (the "Named Executives"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
--------------------------------------------------------------------------------------------------------
Securities
Other Annual Restricted Stock Underlying All Other
Name and Principal Position Year Salary Bonus Compensation (1) Award(s) ($) (2) Options/SARs(#) Compensation (3)
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
John A. Keenan 2000 $189,000 $90,000 $44,000 $247,000 - $ -
Chairman and President 1999 162,000 75,000 22,500 - 890,000 -
Chief Executive Officer 1998 174,500 30,000 - - 400,000 107,103
Paul R. Fenemore 2000 173,000 70,000 27,000 182,000 - -
Vice President 1999 172,000 45,000 10,000 - 670,000 -
Chief Operating Officer 1998 164,990 20,000 8,361 - 200,000 -
Francis M. Munchinski 2000 141,000 60,000 7,000 130,000 - -
Vice President-Law 1999 75,833 42,000 - - 520,000 8,526
General Counsel
Robert E. Schulte 2000 102,000 40,000 10,000 97,500 - -
Vice President 1999 82,083 42,000 - - 285,000 10,321
Chief Financial Officer 1998 45,569 4,000 - - 25,000 4,208
</TABLE>
(1) Amounts shown under Other Annual Compensation in 2000, 1999 and 1998
represent pension and benefits.
(2) The Named Executives were granted the following numbers of shares of
restricted stock: Mr. Keenan - 1,900,000; Mr. Fenemore - 1,400,000; Mr.
Munchinski - 1,000,000; and Mr. Schulte - 750,000, all of which were
held at April 30, 2000. The Company believes that the value of the
shares at April 30, 2000 was the same as at the date of grant as
indicated in the table above. The shares vest in equal increments in
April of 2001, 2002 and 2003 or upon a change in control of the
Company. The Company does not intend to pay dividends on the shares
during this period.
(3) Amounts shown under All Other Compensation in 1999 and 1998 represent
relocation expenses.
None of the Named Executives received or exercised any stock options
during the fiscal year ended April 30, 2000, and none of the Named Executives
held any stock options at April 30, 2000. In connection with the completion of
the transaction with American Rivers Oil Company, options that were granted to
the Named Executives in prior years by Alliance were canceled in consideration
for the payment of $1,000 to each of the Named Executives. The exercise prices
of the canceled options at the time of the cancellation exceeded the market
price of Alliance's ordinary shares.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of May 2, 2000,
about any person that is known to the Company to be the beneficial owner of more
than 5% of each class of AROC Common Stock and each executive officer and
director of AROC and all executive officers and directors of AROC as a group.
Except as otherwise indicated, each of the persons named below is believed by
AROC to possess sole voting and investment power with respect to the shares
beneficially owned by such person.
20
<PAGE>
<TABLE>
<CAPTION>
Name and Address of Shares Owned Percent Owned
Beneficial Owner (1) Beneficially Beneficially (2)
-------------------- ------------ ----------------
<S> <C> <C>
John A. Keenan (3) 2,000,000 *
Paul R. Fenemore (4) 1,400,000 *
Francis M. Munchinski (5) 1,000,000 *
Robert E. Schulte (6) 750,000 *
Michael E. Humphries 250,000 *
William J.A. Kennedy 254,125 *
Philip Douglas 349,583 *
John R. Martinson (7) 1,028,987 *
Bank of America, N.A. (8) 99,176,442 13.2%
EnCap Equity 1994 Limited Partnership (9) 52,197,308 7.0%
EnCap Equity 1996 Limited Partnership (10) 321,982,440 43.2%
Energy Capital Investment Company PLC (11) 157,960,942 21.2%
EnCap Investments L.C. (12) 537,517,298 70.2%
El Paso Capital Investments, L.C. (13) 88,552,851 11.5%
All Directors and executive officers of AROC as a
Group (8 persons) (3), (4), (5), (6), (7) 6,439,484 *
</TABLE>
* Less than 1%
(1) All of AROC's directors and executive officers may be contacted at 4200
East Skelly Drive, Suite 1000, Tulsa, Oklahoma 74135.
(2) All share amounts and percentage information is calculated on the basis
that the Company's Common Stock and Series A Convertible Preferred Stock
(Preferred Stock) constitute a single class because each share of
Preferred Stock is convertible at any time into 384.6 shares of the
Company's Common Stock and has the right to vote in all matters on the
same basis as if the Preferred Stock had been converted into Common
Stock.
(3) Includes 1,900,000 shares granted as restricted stock under the Company's
2000 Omnibus Stock and Incentive Plan, which vest in equal increments in
April of 2001, 2002 and 2003.
(4) Consists of 1,400,000 shares granted as restricted stock under the
Company's 2000 Omnibus Stock and Incentive Plan, which vest in equal
increments in April of 2001, 2002 and 2003.
(5) Consists of 1,000,000 shares granted as restricted stock under the
Company's 2000 Omnibus Stock and Incentive Plan, which vest in equal
increments in April of 2001, 2002 and 2003.
(6) Consists of 750,000 shares granted as restricted stock under the
Company's 2000 Omnibus Stock and
21
<PAGE>
Incentive Plan, which vest in equal increments in April of 2001, 2002 and
2003.
(7) Includes presently exercisable warrants to purchase 593,211 shares of
Common Stock held by Wood Roberts, Inc., a corporation under the control
of Mr. Martinson.
(8) Consists of 1,500,000 shares of Common Stock and immediately exercisable
warrants convertible into or exercisable for 2,404,519 shares of Common
Stock issued to an affiliate of Bank of America, 239,192 shares of
Preferred Stock and warrants to purchase 3,275,000 shares of Common Stock
at a price of $0.01 per share. The address of Bank of America is 901 Main
Street, Dallas, Texas 75202.
(9) Consists of 135,713 shares of Preferred Stock. The address of EnCap
Equity 1994 Limited Partnership is 1100 Louisiana, Suite 3150, Houston,
Texas 77002. EnCap Equity 1994 Limited Partnership shares voting and
dispositive power with EnCap Investments L.C., its general partner.
(10) Consists of 11,250,000 shares of Common Stock, 753,477 shares of
Preferred Stock, and warrants to purchase 20,993,594 shares of Common
Stock. The address of EnCap Equity 1996 Limited Partnership is 1100
Louisiana, Suite 3150, Houston, Texas 77002. EnCap Equity 1996 Limited
Partnership shares voting and dispositive power with EnCap Investments
L.C., its general partner, and shares dispositive power of 37,439 of the
Preferred Shares with Energy Capital Investment Company PLC.
(11) Consists of 3,750,000 shares of Common Stock, 382,806 shares of Preferred
Stock, and warrants to purchase 6,977,865 shares of Common Stock. The
address of Energy Capital Investment Company PLC is c/o Aberdeen Asset
Management, 1 Bow Churchyard, Cheapside, London EC4M 9HH, England. Energy
Capital Investment Company PLC shares dispositive and voting power over
these shares with EnCap Investment L.C. by virtue of an Investment
Agreement whereby EnCap Investments L.C. acts as an investment advisor to
Energy Capital Investment Company PLC and shares dispositive power over
37,439 of the Preferred Shares with EnCap Equity 1996 Limited
Partnership.
(12) Consists of 15,545,454 shares of Common Stock, 1,284,557 shares of
Preferred Stock, and warrants to purchase 27,911,459 shares of Common
Stock. The address of EnCap Investments L.C. is 1100 Louisiana, Suite
3150, Houston, Texas 77002. EnCap Investment L.C. shares dispositive and
voting power over 15,000,000 of the shares of Common Stock with EnCap
Equity 1996 Limited Partnership and Energy Capital Investment Company PLC
and shares dispositive and voting power over 1,234,557 shares of
Preferred Stock identified in Notes 9, 10, and 11 above.
(13) Consists of 200,000 shares of Preferred Stock and warrants to purchase
11,629,774 shares of Common Stock. The address of El Paso Capital
Investments, L.C. is c/o El Paso Energy Corporation, 1001 Louisiana,
Houston, Texas 77002.
In addition to the interests set out above, John A. Keenan is interested
in 45,000 shares of Common Stock held in the name of Diamond Securities Limited
and 102,500 shares of Common Stock held in the name of Havensworth Limited by
virtue of having proxy over the voting rights attached to these shares of Common
Stock pending their sale, as required by a settlement of legal proceedings with
the former Managing Director of Alliance in August 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company currently has entered into several energy derivative
transactions with El Paso Merchant Energy, a subsidiary of El Paso Energy and a
significant shareholder in the Company.
During February 1999, the Company completed a transaction with El Paso
Merchant Energy to hedge approximately 65% of its existing monthly gas
production by installing a floor of $1.60/MMBTU and a cap of $2.07/MMBTU (NYMEX
Natural Gas). In Addition, during April 1999, the Company completed a
transaction with El Paso Merchant Energy to hedge approximately 40% of its
existing monthly oil production by installing a floor of $12.00/barrel (NYMEX
WTI). These commodity price hedge agreements expired on October 31, 1999.
Between September 8, 1999 and February 10, 2000, the Company completed
several transactions with El Paso Merchant Energy to hedge approximately 30%-40%
of its existing monthly oil production by installing a floor of $19.00/barrel
(NYMEX WTI) and caps between $24.00/barrel and $26.65/barrel (NYMEX WTI). These
commodity price hedge arrangements will expire on December 31, 2000.
22
<PAGE>
On August 30, 1999, the Company completed a transaction with El Paso
Merchant Energy to hedge approximately 50% of its existing monthly U.S. gas
production by installing a floor of $2.40/MMBTU (NYMEX Natural Gas) and a cap of
$3.00. This commodity price hedge agreement will expire on October 31, 2000.
On March 31, 2000, the Company completed a transaction with El Paso to hedge
approximately 50% of its existing monthly U.K. gas production by installing a
floor of 10.5 pence/therm (IPE) and a cap of 12.55 pence/therm. This commodity
price hedge agreement will expire on September 30, 2000. The Company paid El
Paso Merchant Energy approximately $293,000 in connection with all hedge
agreements during the year ended April 30, 2000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements (included at Item 8. Financial Statements and
Supplementary Data)
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company with the Securities and
Exchange Commission during the fourth quarter of the Company's fiscal year
ended April 30, 2000.
(c) Exhibits
23
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report................................ F-1
Consolidated Balance Sheets................................. F-2
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)
and Comprehensive Income.................................... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to the Consolidated Financial Statements.............. F-7
</TABLE>
<PAGE>
Independent Auditors' Report
Board of Directors
AROC Inc. and Subsidiaries
We have audited the consolidated balance sheets of AROC Inc. and subsidiaries as
of April 30, 1999 and 2000, and the related consolidated statements of
operations, stockholders' equity (deficit) and comprehensive income, and cash
flows for each of the years in the three-year period ended April 30, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of AROC
Inc. and subsidiaries as of April 30, 1999 and 2000 and the results of their
operations and their cash flows for each of the years in the three-year period
ended April 30, 2000 in conformity with accounting principles generally accepted
in the United States of America.
KPMG LLP
Tulsa, Oklahoma
August 10, 2000
F-1
<PAGE>
AROC INC. AND SUBSIDIARIES
Consolidated Balance Sheets
April 30, 1999 and 2000
<TABLE>
<S> <C> <C>
Assets 1999 2000
------ ------------ ------------
Current assets:
Cash $ 286,158 $ 573,827
Accounts receivable 2,105,082 2,546,500
Other current assets 59,837 108,276
------------ ------------
Total current assets 2,451,077 3,228,603
------------ ------------
Property and equipment, at cost
Oil and gas properties, full cost method:
United States 42,901,608 49,339,137
United Kingdom 31,054,083 39,632,097
Other depreciable assets 1,095,147 1,008,124
------------ ------------
75,050,838 89,979,358
Less accumulated depreciation, depletion, and (44,695,726) (49,779,760)
impairments ------------ ------------
Net property, plant and equipment 30,355,112 40,199,598
------------ ------------
Other assets:
Deposits and other assets 141,422 144,990
Deferred loan costs, less accumulated amortization 3,215,384 2,791,478
------------ ------------
$ 36,162,995 $ 46,364,669
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
AROC INC. AND SUBSIDIARIES
Consolidated Balance Sheets
April 30, 1999 and 2000
(continued)
<TABLE>
<S> <C> <C>
Liabilities and Stockholders' Deficit 1999 2000
------------------------------------- ------------ ------------
Current liabilities:
Accounts payable - trade $ 7,238,502 $ 7,693,071
Accrued expenses payable 833,750 2,458,259
------------ ------------
Total current liabilities 8,072,252 10,151,330
Long-term liabilities:
Long-term debt, less current portion 43,176,621 63,056,600
Convertible subordinated unsecured loan notes 1,550,700 -
------------ ------------
Total liabilities 52,799,573 73,207,930
------------ ------------
Stockholders' deficit:
Common Shares - par value $0.001;
100,000,000 authorized; 47,487,142, and 55,278,837 issued 47,487 55,279
and outstanding at April 30, 1999 and 2000,
respectively
Convertible Shares - par value $0.001;
10,000,000 authorized; 10,000,000 issued and outstanding
at April 30, 1999 and 2000 10,000 10,000
Additional paid-in capital 41,643,197 43,274,496
Unearned compensation - restricted stock - (858,000)
Accumulated other comprehensive loss (17,391) (31,376)
Accumulated deficit (58,319,871) (69,293,660)
------------ ------------
Total stockholders' deficit (16,636,578) (26,843,261)
------------ ------------
Commitments (Note 11)
$ 36,162,995 $ 46,364,669
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
AROC INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended April 30, 1998, 1999, and 2000
<TABLE>
<S> <C> <C> <C>
1998 1999 2000
------------ ------------ -------------
Oil and gas revenues $ 10,209,881 $ 6,234,477 $ 12,505,885
------------ ------------ -------------
Operating expenses
Lease operating expenses 5,505,826 3,096,468 6,883,736
General and administrative expenses 3,363,885 3,486,007 3,930,300
Depreciation, depletion, and amortization 2,598,066 1,670,711 3,128,497
Impairment of oil and gas properties - 28,260,037 2,499,824
Loss on termination of derivative contracts 1,128,000 - -
------------ ------------ -------------
Total operating expenses 12,595,777 36,513,223 16,442,357
------------ ------------ -------------
Loss from operations (2,385,896) (30,278,746) (3,936,472)
------------ ------------ -------------
Other income (expense):
Write-off of deferred loan costs - (869,906) -
Interest expense (2,573,646) (3,354,627) (7,530,474)
Interest income 62,226 26,299 32,376
Miscellaneous income 132,951 22,662 460,781
Gain (loss) on sale of assets 35,442 (9,184) -
------------ ------------ -------------
Total other expense (2,343,027) (4,184,756) (7,037,317)
------------ ------------ -------------
Net loss $ (4,728,923) $(34,463,502) $ (10,973,789)
============ ============ =============
Basic loss per common share $ (0.15) $ (0.82) $ (.21)
============ ============ =============
Weighted average number of shares
outstanding 31,125,689 41,935,718 53,280,596
============ ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
AROC INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit) and Comprehensive
Income
Years Ended April 30, 1998, 1999, and 2000
<TABLE>
<CAPTION>
Unearned
Additional Compensation
Common Convertible Paid-in Restricted
Shares Shares Capital Stock
--------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at April 30, 1997 $ 22,402 $ $ 19,679,008 $ -
Issuance of 8,103,816 shares to 8,104 - 4,031,235 -
Alliance shareholders (Note 2c)
Issuance of 1,343,750 shares for 1,344 - 2,369,956 -
acquisition of overriding royalty
interest (Note 2c)
Issuance of 256,250 shares for 256 - 352,744 -
settlement of various advisory
and banking fees (Note 2c)
Issuance of 56,805 shares for 57 - 49,943 -
warrants
Cancellation of 953,099 treasury (953) - (488,412) -
shares
Comprehensive income (loss):
Foreign exchange adjustment - - - -
Net loss - - - -
Total comprehensive loss - - - -
--------- ----------- ------------- -------------
Balance at April 30, 1998 31,210 - 25,994,474 -
Issuance of 10,000,000 shares for - 10,000 7,198,000 -
Difco Limited (Note 2b)
Issuance of 15,545,454 shares to 15,545 - 6,636,455 -
Lender (Note 5)
Warrants issued to principal - - 1,335,000 -
Lender (Note 5)
Issuance of 732,280 shares for 732 - 479,268 -
Services (Note 2b and 2c)
Comprehensive income (loss):
Foreign exchange adjustment - - - -
Net loss - - - -
Total comprehensive loss - - - -
--------- ----------- ------------- -------------
Balance at April 30, 1999 47,487 10,000 41,643,197 -
Conversion of convertible loan - - 1,550,700 -
notes to warrants (Note 2a)
Acquisition of American Rivers 1,192 - (770,801) -
Oil Company (Note 2a)
Issuance of Restricted Stock (Note 8) 6,600 - 851,400 (858,000)
Comprehensive income (loss):
Foreign exchange adjustment - - - -
Net loss - - - -
Total comprehensive loss - - - -
--------- ----------- ------------- -------------
Balance at April 30, 2000 $ 55,279 $ 10,000 $ 43,274,496 $ (858,000)
========= =========== ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
AROC INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit) and Comprehensive
Income
Years Ended April 30, 1998, 1999, and 2000
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Accumulated Treasury
Income (Loss) Deficit Stock Total
------------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Balance at April 30, 1997 $ $(19,127,446) $(489,365) $ 84,599
Issuance of 8,103,816 shares to
Alliance shareholders (Note 2c) - - - 4,039,339
Issuance of 1,343,750 shares for
acquisition of overriding royalty
interest (Note 2c) - - - 2,371,300
Issuance of 256,250 shares for
settlement of various advisory
and banking fees (Note 2c) - - - 353,000
Issuance of 56,805 shares for
warrants - - - 50,000
Cancellation of 953,099 treasury
shares - - 489,365 -
Comprehensive income:
Foreign exchange adjustment 13,823 - - 13,823
Net loss - (4,728,923) - (4,728,923)
------------
Total comprehensive loss - - - (4,715,100)
------------- ------------ ---------- ------------
Balance at April 30, 1998 13,823 (23,856,369) - 2,183,138
Issuance of 10,000,000 shares for
Difco Limited (Note 2b) - - - 7,208,000
Issuance of 15,545,454 shares to
Lender (Note 5) - - - 6,652,000
Warrants issued to principal
Lender (Note 5) - - - 1,335,000
Issuance of 732,280 shares for
Services (Note 2b and 2c) - - - 480,000
Comprehensive income:
Foreign exchange adjustment (31,214) - - (31,214)
Net loss - (34,463,502) - (34,463,502)
------------
Total comprehensive loss - - - (34,494,716)
------------- ------------ ---------- ------------
Balance at April 30, 1999 (17,391) (58,319,871) - (16,636,578)
Conversion of convertible loan
notes to warrants (Note 2a) - - - 1,550,700
Acquisition of American Rivers
Oil Company (Note 2a) - - - (769,609)
Issuance of Restricted Stock (Note 8) - - - -
Comprehensive income (loss):
Foreign exchange adjustment (13,985) - - (13,985)
Net loss - (10,973,789) - (10,973,789)
------------
Total comprehensive loss - - - (10,987,774)
------------- ------------ ---------- ------------
Balance at April 30, 2000 $ (31,376) $(69,293,660) $ - $(26,843,261)
============= ============ ========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
AROC INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended April 30, 1998, 1999, and 2000
<TABLE>
<S> <C> <C> <C>
Year ended Year ended Year ended
April 30, April 30, April 30,
1998 1999 2000
------------- -------------- --------------
Cash flows from operating activities:
Net loss $ (4,728,923) $ (34,463,502) $ (10,973,789)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation, depletion and amortization 2,598,066 1,670,711 3,128,497
Write-off of deferred loan costs - 869,906 -
Impairment of oil and gas properties - 28,260,037 2,499,824
Other amortization 813,096 1,289,493 2,007,559
(Gain)loss on sale of assets (35,442) 9,184 -
Changes in assets and liabilities, net of
effects from acquisitions:
Accounts receivable 487,427 27,572 (441,418)
Other assets 97,500 17,707 (48,770)
Accounts payable (4,032,763) (1,519,293) 1,345,652
Accrued expenses payable 409,454 (13,440) 1,624,509
Other liabilities (792,554) (139,626) -
------------- -------------- --------------
Net cash used in operating activities (5,184,139) (3,991,251) (857,936)
------------- -------------- --------------
Cash flows from investing activities:
Proceeds from sale of property and equipment 5,729,300 1,742,336 122,688
Additions of property and equipment, including (2,407,162) (3,829,425) (10,109,253)
interest capitalized
Acquisition of Difco (221,987) (22,087,667) -
Acquisition of American Rivers - - (664,156)
Other (15,181) - -
------------- -------------- --------------
Net cash provided by (used in) investing activities $ 3,084,970 $ (24,174,756) $ (10,650,721)
------------- -------------- --------------
Cash flows from financing activities:
Deferred loan and reorganization costs $ (385,680) $ (1,213,635) $ (275,122)
Proceeds from issuance of long-term debt 2,770,340 45,464,123 12,639,118
Exercise of warrants 50,000 - -
Payments of long-term debt - (22,566,762) (567,670)
Proceeds from issuance of stock - 6,360,000 -
------------- -------------- --------------
Net cash provided by financing activities 2,434,660 28,043,726 11,796,326
------------- -------------- --------------
Net increase (decrease) in cash 335,491 (122,281) 287,669
Cash at beginning of period 72,948 408,439 286,158
------------- -------------- --------------
Cash at end of period $ 408,439 $ 286,158 $ 573,827
============= ============== ==============
Supplemental disclosures of cash flow information-
Cash paid during the period for interest $ 1,634,360 $ 2,910,000 $ 3,378,000
============= ============== ==============
Supplemental disclosure of noncash investing and
financing activities:
Common stock issued for services and bonus $ 353,000 $ 772,000 $ -
Issuance of convertible loan notes 150,000 - -
Common stock issued on acquisition of LaTex 4,039,339 - -
Common stock issued for overriding royalty 2,371,300 - -
Convertible loan notes issued for overriding royalty 1,400,700 - -
Convertible shares issued to Difco shareholders - 7,208,000 -
Overriding royalty interest conveyed to bank - (2,100,000) -
Common stock issued to American Rivers - - 105,453
Warrants issued for convertible loan notes - - 1,550,700
Debt issued for oil and gas properties - - 6,500,000
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
AROC INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Organization and Summary of Significant Accounting Policies
Organization and basis of presentation
AROC Inc. (AROC or the Company) is a Tulsa-based holding company of a group
whose principal activities are the exploration, development, and production
of oil and gas and the acquisition of producing oil and gas properties.
Oil and gas production operations are currently conducted principally in
Oklahoma, Texas, Louisiana, Mississippi, Alabama, Arkansas, New Mexico, and
the United Kingdom. Included in oil and gas revenues are sales from 10
significant producing properties, which aggregated approximately
$2,210,000, $2,155,000, and $6,946,000, for the years ended April 30, 1998,
1999, and 2000, respectively.
In these financial statements, the Company refers to AROC and its
subsidiaries for periods ending on or after December 9, 1999 and to
Alliance Resources PLC and its subsidiaries for periods ending on or before
December 8, 1999 (see Note 2). These financial statements are prepared in
accordance with generally accepted accounting principles in the United
States.
Financial Condition
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. As shown in the financial
statements for the years ended April 30, 1998, 1999, and 2000 the Company
incurred losses of $4,728,923; $34,463,502; and $10,973,789, respectively
and continues to experience working capital deficits. Despite its
negative cash flow, the Company has been able to secure financing to
support its ongoing operations. As described in Note 5, the Company was
not in compliance with certain covenants of its loan agreements at April
30, 2000. As a result of the replacement of the BoA Credit Agreement with
the new Toronto Dominion Credit Agreement and exchange of preferred stock
for EnCap debt on May 2, 2000, these covenant violations were no longer
applicable. In addition, the Company obtained a $17,000,000 subordinated
loan from EnCap affiliates, with interest of 12%, payable in kind to May 1,
2002. The new debt agreements extended the repayment dates, originally
scheduled to begin in October 2000, to May 1, 2003. As a result of the May
2, 2000 transactions, the Company believes it will be able to meet its
obligations as they become due and to comply with the terms of the new
borrowing agreements. Management believes it has a business plan that, if
successfully executed, will achieve these objectives.
Reporting Currency
The current operations are in the oil and gas industry in the United States
and the United Kingdom and are conducted through subsidiaries, LaTex
Petroleum Corporation, Alliance Resources (USA), Inc., Germany Oil Company,
Difco Limited, AROC (Texas), Inc., and Source Petroleum Inc. Transactions
are conducted primarily in U.K. Sterling and U.S. dollars. Managements
considers the U.S. dollar the functional currency of the Company and the
Company's consolidated financial statements have been prepared in U.S.
dollars.
Consolidation
The consolidated financial statements include the financial statements of
the Company and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
F-7
<PAGE>
AROC INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Loss Per Share
Basic loss per share has been computed by dividing the net loss
attributable to common shareholders by the weighted average number of
common shares outstanding during the period.
The effect of potential common shares (warrants) is anti-dilutive.
Accordingly, diluted loss per share is not presented.
Foreign Currency Translation
The financial statements of subsidiaries of the Company whose functional
currency is not U.S. dollars are translated for consolidation purposes at
the rate of exchange at the balance sheet date. Exchange differences
arising on the retranslation of net assets are reported as a component of
stockholders' equity (deficit) in accumulated other comprehensive loss. In
the underlying financial statements, transactions with third parties are
translated into the functional currency at the exchange rate prevailing at
the date of each transaction. Monetary assets and liabilities denominated
in currencies other than the functional currency are translated into U.S.
dollars at the exchange rate prevailing at the balance sheet date. Any
exchange gain or loss is recorded in the consolidated statements of
operations.
Revenues
Revenues represent income from production and delivery of oil and gas,
recorded net of royalties in kind. The Company follows the sales method of
accounting for gas imbalances. A liability is recorded only if the
Company's takes of gas volumes exceed its share of estimated recoverable
reserves from the relevant well. No receivables are recorded for those
wells where the Company has taken less than its ownership share of gas
production.
Oil and Gas Properties
The Company follows the full cost method of accounting for oil and gas
operations whereby all costs of exploring for and developing oil and gas
reserves are capitalized as tangible fixed assets. Such costs include
lease acquisition costs, geological costs, the costs of drilling both
productive and non-productive wells, capitalized interest, production
equipment and related overhead costs. Capitalized costs, plus estimated
future development costs, are accumulated in pools on a country-by-country
basis and depleted using the unit-of-production method based upon estimated
net proved reserve volumes. Reserve volumes are combined into equivalent
units using approximate relative energy content.
Costs of acquiring and evaluating unproved properties and major development
projects are excluded from the depletion calculation until it is determined
whether or not proved reserves are attributable to the properties, the
major development projects are completed, or impairment occurs, at which
point such costs are transferred into the pool.
Proceeds from the sale or disposal of properties are deducted from the
relevant cost pool except for sales involving significant reserves where a
gain or loss is recognized.
The Company performs a "ceiling test" calculation in line with industry
practice. Costs permitted to be accumulated in respect of each cost pool
are limited to the future estimated net recoverable amount from estimated
production of proved reserves. Future estimated net recoverable amounts
are determined after discounting and using prices and cost levels at the
balance sheet date.
F-8
<PAGE>
AROC INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Provision is made for abandonment costs net of estimated salvage values, on
a unit-of-production basis, where appropriate.
Depreciation of Other Fixed Assets
Other tangible fixed assets are stated at cost less accumulated
depreciation. Depreciation is provided on a straight line basis to write
off the cost of assets, net of estimated residual values, over their
estimated useful lives as follows:
Fixtures and equipment - 3 to 7 years
Buildings - 30 years
Deferred Taxation
Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in the consolidated statement of operations in the period that includes the
enactment date.
Leases
Rentals under operating leases are charged to the consolidated statements
of operations on a straight-line basis over the lease term.
Debt Issuance Costs
Debt issuance costs are initially capitalized as intangible assets and are
amortized over the term of the debt to which they relate.
Derivatives
Changes in value of financial instruments, utilized to hedge commodity
price and interest rate risk are recognized in the consolidated statement
of operations when the underlying transactions are recognized. Changes in
value of financial instruments which do not meet the criteria to be treated
as a hedge of an underlying risk are recognized in the consolidated
statements of operations as they occur.
The Company's criteria for a derivative instrument to qualify for hedge
accounting treatment are as follows:
--the timing or duration and characteristics of the underlying exposure
must have been identified;
--changes in the value of the derivative must highly correlate with
changes in the value of the exposure;
--the derivative has been designated as a hedge of a specific asset,
liability or anticipated transaction; and
--the derivative instrument reduces exposure to fluctuations caused by
movements in commodity prices, currency exchange rates, or interest
rates.
For any termination of derivatives receiving hedge accounting treatment,
gains and losses are deferred when the relating underlying exposures remain
outstanding and are included in the measurement of the related transaction
or balance. In addition, upon any termination of the underlying exposures,
the derivative is marked-to-market and the resulting gain or loss is
included with the gain or loss on the terminated transaction.
F-9
<PAGE>
AROC INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Cash Flow Statement
For the purposes of the consolidated statement of cash flows, the Company
treats all investments with an original maturity of three months or less to
be cash equivalents.
Stock Option Plan
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations, in
accounting for its fixed plan stock options. As such, compensation expense
would be recorded on the date of grant only if the current market price of
the underlying stock exceeded the exercise price. Financial Accounting
Standards Board Statement ("FAS") 123, "Accounting for Stock-Based
Compensation," established accounting and disclosure requirements using a
fair value-based method of accounting for stock-based employee compensation
plans. As allowed by FAS 123, the Company has elected to continue to apply
the intrinsic value-based method of accounting described above, and has
adopted the disclosure requirement of FAS 123.
Accounting Estimates
In the course of preparing financial statements, management makes various
assumptions and estimates to determine the reported amounts of assets,
liabilities, revenue and expenses and in relation to the disclosure of
commitments and contingencies. Changes in these assumptions and estimates
will occur as a result of the passage of time and the occurrence of future
events and, accordingly, the actual results could differ from the amounts
estimated.
Business Segments
The Company considers itself to be involved in one business activity and
does not meet the criteria established by Financial Accounting Standards
Board Statement FAS 131, "Segment Disclosures and Related Information".
Comprehensive Income (Loss)
The Company follows FAS 130, "Reporting Comprehensive Income" which
established standards for reporting and display of comprehensive income and
its components in a full set of general-purpose financial statements. The
components of total comprehensive income (loss) for the periods consist of
net losses and foreign currency translation adjustments.
(2) Acquisitions
(a) American Rivers
On December 8, 1999, American Rivers Oil Company, a Wyoming corporation
(American Rivers) merged into the subsidiary of a new Delaware holding
company, and the new Delaware holding company (New Alliance) subsequently
acquired all of the shares of Alliance Resources PLC (Alliance). In the
reincorporation, each shareholder of American Rivers received 0.11 shares
of New Alliance, par value $0.001 per share, for each share of common stock
or Class B common stock of American Rivers, resulting in the issuance of
1,191,695 shares of New Alliance common stock. New Alliance acquired all of
the outstanding ordinary shares of Alliance on the basis of one share of
New Alliance common stock for each ordinary share of Alliance, resulting in
the issuance of 47,487,142 shares of New Alliance common stock.
F-10
<PAGE>
AROC INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
In connection with the reincoporation, restricted convertible shares of
Alliance were exchanged for 10,000,000 convertible restricted voting shares
of New Alliance, which may be converted into up to 20,000,000 shares of New
Alliance's common stock dependent on the achievement of sales production
levels from certain U.K. interests. Further, in exchange for convertible
subordinated unsecured loan notes ($1,550,700) convertible into 1,193,581
ordinary shares of Alliance, New Alliance issued warrants to subscribe for
1,193,581 shares of New Alliance common stock. Also, in exchange for
warrants to subscribe for 5,079,149 ordinary shares of Alliance, New
Alliance issued warrants to subscribe for 5,079,149 shares of New Alliance
common stock.
The Alliance shareholders received approximately 98% of the total common
shares of New Alliance and the American Rivers shareholders received
approximately 2% of the total common shares of New Alliance. As the
Alliance shareholders own approximately 98% of the combined company,
Alliance was treated as having acquired American Rivers for accounting
purposes. Following reincorporation, New Alliance was renamed AROC Inc.
The historical financial statements prior to December 8, 1999 are those of
Alliance, which has been restated for the equivalent number of shares
received in the merger.
The assets and liabilities of American Rivers at the date of acquisition
are as follows:
Cash $ 853
Oil and gas properties 17,552
Other assets 3,237
Accounts payable (126,242)
------------
$ (104,600)
============
In addition, transaction costs of approximately $665,000 were incurred by
the Company and charged directly to equity. The consolidated condensed
statements of operations include the results of operations of American
Rivers from the date of the acquisition. Pro forma information giving
effect to the transaction is not presented because the operations of
American Rivers prior to the acquisition were nominal.
(b) Difco Limited and U.K. Interests
On October 30, 1998, the Company completed its acquisition of Difco Limited
("Difco"). The Company acquired all of the capital stock of Difco and,
indirectly, a contract to acquire 10% of Burlington Resources (Irish Sea)
Limited's ("Burlington") interest in the East Irish Sea Properties ("U.K.
Interests"). The Difco shareholders received 10,000,000 convertible shares
valued at $7,208,000. Such value was derived based on the value of the
underlying oil and gas reserves related to the U.K. Interests. The shares
issued represented approximately 8.7% of the outstanding shares of the
Company. The former Difco shareholders could receive up to approximately
27% of the outstanding shares of the Company based upon the production
from, or reserves attributable to, the U.K. Interests. The Company
acquired, through Difco, 10% of Burlington's interest in the East Irish Sea
Properties for cash consideration of approximately $17,800,000. Alliance
issued to its financial advisor 615,385 ordinary shares in payment of a fee
of $330,000 incurred in connection with the transactions. The total
acquisition cost, including transaction costs, was allocated to oil and gas
properties.
(c) LaTex
On May 1, 1997, Alliance completed its acquisition of LaTex, whereby a
newly formed wholly-owned subsidiary of Alliance merged with and into LaTex
with LaTex being the surviving corporation for accounting purposes. In
consideration the shareholders and warrant holders of LaTex received an
aggregate of 21,448,787 shares of Alliance (the "Alliance Shares") and
warrants to purchase an additional 1,927,908 Alliance Shares.
F-11
<PAGE>
AROC INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The purchase price of Alliance was arrived at as follows:
Value of 8,103,816 Alliance shares outstanding $ 4,039,339
Acquisition costs 871,000
-----------
$ 4,910,339
===========
The value of the Alliance shares outstanding was arrived at by using the
share price of LaTex at the time of announcement of the acquisition
adjusted by the exchange ratio. Transaction costs incurred by Alliance
reduced the fair value of Alliance's monetary assets and liabilities at the
date of the acquisition.
The fair value of the Alliance assets and liabilities of the acquired
business at the date of acquisition was as follows:
Cash $ 1,460,555
Other current assets 480,045
Other assets 202,253
Oil and gas assets 5,268,929
Other fixed assets 253,386
Debt (85,420)
Other liabilities and provisions (2,669,409)
-----------
$ 4,910,339
===========
In connection with the acquisition, Alliance issued to Bank of America, the
Company's principal lender, 156,250 Alliance Shares and convertible
subordinated unsecured loan notes convertible into 115,456 Alliance Shares
to settle fees of $203,000 and $150,000 payable upon restructuring of
LaTex's bank debt, respectively. In addition the Company issued 100,000
Shares to Rothschild Natural Resources, LLC in settlement of outstanding
fees of $150,000.
Alliance also issued 1,343,750 common shares, subordinated unsecured loan
notes convertible into 1,078,125 common shares and 1,210,938 warrants to
Bank of America in exchange for an overriding royalty interest in most of
LaTex's properties held by Bank of America.
The purchase price was allocated to oil and gas properties and has been
arrived at as follows:
Value of 1,343,750 ordinary shares and warrants $2,371,300
Value of convertible subordinated unsecured loan note 1,400,700
----------
$3,772,000
==========
(3) Impairment of U.K. Interests
As discussed in Note 1, the Company utilizes the full cost method of
accounting for its oil and gas operations and performs a "ceiling test."
The ceiling test limits the costs accumulated in respect of each cost pool
to net amounts that can be recovered from the estimated production of
proved reserves. The net amounts recovered are determined utilizing a 10%
discount factor and pricing and cost levels at the balance sheet date.
The U.K. Interests consist of proven reserves and the current development
program is being conducted to produce these reserves. The Company does not
have contracts in place with purchasers and, accordingly, utilizes the spot
market price to value such interests. The utilization of these factors has
resulted in ceiling test
F-12
<PAGE>
AROC INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
write-downs of approximately $28,000,000 and $2,500,000 for the years ended
April 30, 1999 and 2000, respectively.
(4) Income Taxes
Income taxes differ from amounts computed by applying the U.S. federal tax
rate for the years ended April 30, 1998, 1999 and 2000, as a result of the
following (in thousands):
<TABLE>
1998 1999 2000
------- -------- -------
<S> <C> <C> <C>
Computed expected tax benefit $(1,608) $(11,718) $(3,731)
Increase in valuation allowance for 6,792 11,296 3,709
Deferred tax, assets
Net operating losses acquired (5,513) - -
Other 329 422 22
------- -------- -------
Actual income tax benefit $ - $ - $ -
======= ======== =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities as of April 30, 1999
and 2000 are presented below (in thousands):
<TABLE>
<S> <C> <C>
1999 2000
-------- -----------
Deferred tax assets:
Net operating and other loss carryovers $ 15,238 $ 22,113
Property and equipment 10,034 6,514
Investment write-downs 917 917
Percentage depletion carryforward 267 480
Accrued expenses not deductible until paid 85 226
-------- -----------
Total deferred tax assets 26,541 30,250
Valuation allowance (26,541) (30,250)
-------- -----------
Net deferred tax assets $ - $ -
======== ===========
</TABLE>
A valuation allowance is required when it is more likely than not that all
or a portion of the deferred tax assets will not be realized. The ultimate
realization of the deferred tax assets is dependent upon future
profitability. Accordingly, a valuation allowance has been established to
reduce the deferred tax assets to a level which, more likely than not, will
be realized.
The Company has net operating loss carryovers to offset future taxable
earnings of approximately $65 million, of which approximately $58 million
of losses are limited under Section 382 of the Internal Revenue Code. If
not previously utilized or limited, the net operating losses will expire in
varying amounts from 2004 to 2020.
F-13
<PAGE>
AROC INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5) Long-Term Debt
Long-term debt at April 30, 1999 and 2000 consists of the following:
<TABLE>
<CAPTION>
1999 2000
----------- -----------
<S> <C> <C>
BoA:
Tranche A $18,500,000 $20,682,330
Tranche B 16,330,348 24,919,521
Tranche C 5,000,000 5,000,000
EnCap 10,243,775 11,310,011
EnCap II - 6,733,528
----------- -----------
50,074,123 68,645,390
Less unamortized discount 6,897,502 5,588,790
----------- -----------
Long-term debt 43,176,621 63,056,600
Less current portion - -
----------- -----------
Long-term debt less current portion $43,176,621 $63,056,600
=========== ===========
</TABLE>
In connection with the Difco Acquisition (see Note 2), the Company entered
into agreements with Bank of America National Trust & Savings Association
(BoA), AROC's principal lender and EnCap Equity 1996 Limited Partnership,
and EnCap Capital Investment Company PLC (collectively EnCap) providing up
to $64,750,000 in debt, as follows:
BoA:
Tranche A $25,000,000
Tranche B 25,000,000
Tranche C 5,000,000
-----------
55,000,000
EnCap 9,750,000
-----------
$64,750,000
===========
Tranche A consists of a revolving credit facility secured by a first
priority lien and security interest in all of the oil and gas properties of
the Company. The Company's initial borrowing base was $18,500,000 and
redetermined semiannually on January 31 and July 31. Interest is at a rate
determined by the Company from time to time, of either (i) the greater of
BoA's reference rate and the federal funds effective rate plus 2.0%, or
(ii) 2.5% above the current London Interbank Offered Rate (7.4% and 8.9% at
April 30, 1999 and 2000, respectively). While any Tranche B loan is
outstanding, the preceding margins will be increased by an additional 0.5%
semi-annually on April 26 and on October 26 of each year. Interest is
payable quarterly and the principal is due in equal quarterly payments
beginning October 30, 2000 and ending on October 30, 2003.
Tranche B consists of a credit facility secured by a first priority lien
and security interest in all of the oil and gas properties of the Company.
Interest is at a rate determined by the Company from time to time, of (i)
BoA's Tranche B reference rate plus 2.0%, or (ii) 4.0% above the current
London Interbank Offered Rate (8.9% and 10.29% at April 30, 1999 and
2000, respectively). The margins for all Tranche B loans will be increased
by an additional 0.5% semi-annually on April 26 and on October 26 of each
year. Interest is payable quarterly and principal is due in full on July
31, 2001.
Tranche C consists of a credit facility secured by a first priority lien
and security interest in all of the oil and gas properties of the Company.
Interest is at a rate determined by the Company from time to time, of
either (i) BoA's reference rate plus 5.0%, or (ii) 7.0% above the current
London Interbank Offered Rate (11.9% and
F-14
<PAGE>
AROC INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
13.29% at April 30, 1999 and 2000, respectively). Interest is payable
quarterly and principal is due in equal quarterly payments beginning
January 31, 2001 and ending on October 30, 2004. The BoA debt facility
contains various covenants, including, but not limited to, maintenance of
minimum current and interest coverage ratios, as defined in the agreement.
EnCap debt, which was in the amount of $18,043,539, including interest at
10%, was unsecured. Interest was payable quarterly and principal was due
in full on October 30, 2005. Until October 30, 2001, the Company had the
option, in lieu of paying cash, of increasing the principal amount of the
debt by the interest due.
The Company paid BoA a cash fee of $700,000 and granted BoA warrants to
purchase 3,275,000 ordinary shares at a price of 1p per share. The fair
value of the warrants ($1,335,000) attaching to the debt was treated as a
discount. In addition, the Company agreed to grant BoA an overriding
royalty interest, valued at the value of the underlying oil and gas
reserves, in the U.K. Interests of 0.3% beginning January 1, 2001. The
overriding royalty interest will entitle BoA to receive payment equal to
the specified percentage of the net revenues generated by the U.K.
Interests. In connection with obtaining the debt financing from BoA, the
Company was required to enter into commodity price risk management contract
on terms that are mutually agreeable to BoA and the Company with respect to
at least 50% of the Company's estimated producing reserves as of October
31, 1998. BoA also required the Company to enter into interest rate risk
management contracts providing for a maximum interest rate of 9.0% on the
notional amount projected to be outstanding on the revolving credit
facility until March 31, 2000 (see Note 13).
During 1998, in connection with the issuance of the EnCap debt, the Company
sold EnCap 15,000,000 common shares with a fair value of $6,360,000 for
cash consideration. The difference was treated as a discount on the debt.
The Company also issued EnCap Investments L.C. 545,454 shares in
consideration of a fee of $292,000.
On December 21, 1999, AROC acquired various properties by issuing three
separate notes currently held by EnCap and Picosa Creek Limited Partnership
(collectively EnCap II) for an aggregate of $6,500,000 at an interest rate
of 10% per annum. The notes were scheduled to mature on October 29, 2005
with interest payable on the last business day of each quarter. Until
January 1, 2003, the Company had the option, in lieu of paying cash, of
increasing the principal amount of the debt by the interest due.
As of April 30, 2000, the Company was not in compliance with certain
covenants of the BoA Credit Agreement, which included but were not limited
to the maintenance of minimum levels of working capital and interest
coverage. As a result of the replacement of the BoA Credit Agreement with
the Toronto Dominion Credit Agreement on May 2, 2000, these covenant
violations were no longer applicable. (See Note 15--for subsequent event
regarding refinancing and debt conversion to preferred stock.)
The Company capitalizes interest cost as a component of the North Sea U.K.
Interests development program. The following is a summary of interest cost
incurred:
<TABLE>
<CAPTION>
Year ended April 30
-----------------------------------------------
<S> <C> <C> <C>
1998 1999 2000
---------- ---------- ----------
Interest cost capitalized $ - $1,170,235 $ 624,602
Interest cost charged to income 2,573,646 3,354,627 7,530,474
---------- ---------- ----------
Total interest cost incurred $2,573,646 $4,524,862 $8,155,076
========== ========== ==========
</TABLE>
F-15
<PAGE>
AROC INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(6) Savings and Profit Sharing Plan
The Company maintains an employee savings and profit sharing plan (the
Plan) which covers substantially all of its employees. The Plan is
comprised of a 401(k) saving portion and a noncontributory defined
contribution portion. Employees are qualified to participate after
approximately 30 days of service. Participation in the 401(k) plan is
voluntary, and the Company matches contributions up to six percent of the
employees' salary at a rate of 50 percent of the employee's contribution.
The Company contributed $9,243, $17,523, and $30,835 to the Plan during the
years ended April 30, 1998, 1999, and 2000, respectively.
The noncontributory portion of the Plan allows the Company to share annual
profits with employees. Annual payments to the Plan are elective.
Management elected to make no contributions to the Plan for the years ended
April 30, 1998, 1999, and 2000. The Company is under no obligation to make
contributions to the Plan in the future.
(7) Capital Stock
On December 8, 1999, AROC acquired a majority of the shares of Alliance on
the basis of one share of AROC common stock for each ordinary share of
Alliance, with the result that the former shareholders of Alliance then
held approximately 98% of the outstanding share of AROC. Therefore,
Alliance is deemed to have acquired AROC for accounting purposes. The
historical financial information for all financial periods prior to
December 8, 1999, reflects the results of operations and assets and
liabilities of Alliance. The Alliance shares have been retroactively
restated for the equivalent number of shares received in the merger.
The Company issued convertible restricted stock in connection with the
Difco acquisition (see Note 2). Each convertible restricted share is
entitle to one-half vote on all matters in which the common shares are
entitled to vote and have rights identical to the common shares except for
certain restrictions on transfer. In addition, the holders of the
convertible restricted shares have contingent right to acquire up to
20,000,000 common shares prior to 2003. The number of common shares
actually issued is a result of this contingent right will depend on the
sales production actually achieved, or the estimated value attributable to
the U.K. Interests. The convertible restricted shareholders will receive
only 5,000,000 common shares if none of the production targets or reserve
values are achieved.
(8) Stock and Incentive Plan
During the year ended April 30, 2000, the Company adopted the 2000 Omnibus
Stock and Incentive Plan (the Stock Plan). This plan is intended to
provide additional incentives through the award of options, stock
appreciation rights, shares of restricted stock, and performance awards to
directors, officers, key employees and consultants.
During the year ended April 30, 2000, the Company granted 6,600,000 shares
of restricted stock to the directors, officers and certain key employees.
Under the Stock Plan, the shares vest in equal increments in April 2001,
2002, and 2003 or upon a change in control of the Company as defined in the
Stock Plan. The estimated market value of shares awarded was $858,000.
This amount was recorded as unearned compensation-restricted stock and is
shown as a separate component of stockholders' equity. Unearned
compensation will be amortized to expense over the three year vesting
period.
As of April 30, 1999, there were options to subscribe to 3,102,500 shares
with a weighted average service price of 17.2p which were cancelled in
December 1999.
F-16
<PAGE>
AROC INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) Warrants
During the year ended April 30, 2000, the Company issued warrants to
subscribe for 5,079,149 common shares with various strike prices in
exchange for the then outstanding warrants to subscribe for ordinary shares
in Alliance.
The following is a summary of warrants outstanding as of April 30, 2000:
<TABLE>
<CAPTION>
Warrant series Strike price Last date for exercise Shares
<S> <C> <C> <C>
Series "D" $0.86 March 31, 2001 287,119
Series "E" $0.86 October 31, 2001 30,953
Series "F" $1.38 December 16, 2002 275,139
Series "G" $1.60 April 30, 2007 1,210,938
Series "H" $0.01 October 30, 2008 3,275,000
Series "I" $0.01 April 30, 2007 1,193,581
---------
Total Warrants 6,272,730
=========
</TABLE>
At April 30, 1999, 5,079,149 warrants to subscribe for Alliance ordinary
shares were outstanding.
(10) Convertible Subordinated Unsecured Loan Notes
At April 30, 1999, the Company had outstanding loan notes of $1,550,000
convertible into 1,193,581 common shares (see Note 2). The loan notes,
which were non-interest bearing, were convertible by the holders (on the
payment of a nominal cash consideration) any time up to ten years following
their date of issue. They were convertible in the following six months on
like terms at the option of the Company. Any loan notes not converted prior
to the date ten years and six months from issue were to be repaid on that
date at an amount equal to twice the amount paid up on the notes. In
connection with the American Rivers acquisition (see Note 2), all
outstanding loan notes were converted into warrants to subscribe to
1,193,581 common shares at a price of $0.01 per share
(11) Contingencies and Commitments
The Company is a named defendant in lawsuits, and is subject to claims of
third parties from time to time arising in the ordinary course of business.
While the outcome of lawsuits or other proceedings and claims against the
Company cannot be predicted with certainty, management does not believe the
outcome of these lawsuits will have material adverse effect on the
financial position, results of operations or liquidity of the Company.
The Company leases office space and certain property and equipment under
various lease agreements. As of April 30, 2000, future minimum lease
commitments were approximately as follows:
<TABLE>
<CAPTION>
Year Ending April 30
--------------------
<S> <C>
2001 $193,701
2002 196,905
2003 200,098
2004 16,964
</TABLE>
F-17
<PAGE>
AROC INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Rent expense under all operating leases was $252,627, $251,447, and
$225,041 during the years ended April 30, 1998, 1999, and 2000,
respectively.
(12) Related Party Transactions
During the year ended April 30, 1998, the Company received $123,000 of
proceeds from the sale of 10,351,966 shares in the Company which had
previously been owned by the former Managing Director of Alliance. The
right to receive the proceeds from the sale of the shares arose from a
settlement agreed between the Company and Mr. O'Brien following the
discovery that the Company had suffered a financial loss as a result of a
number of transactions involving Mr. O'Brien or parties connected with him.
The Company currently has entered into several energy derivative
transactions with El Paso Merchant Energy, a subsidiary of El Paso Energy
(El Paso). Affiliates of El Paso are also significant stockholders of the
Company (see Note 13).
(13) Financial Instruments and Derivatives
The Company uses oil and gas floor and cap contracts and interest rate
protection agreements to reduce its exposure to fluctuations and in the
prices of crude oil and natural gas and in interest rates. Derivative
instruments give rise to credit risk due to possible non-performance by the
counterparties. However, through ongoing controls, AROC maintains the
credit worthiness of its counterparties.
(a) Oil and Gas
Effective May 15, 1997, the Company terminated a previously existing oil
and gas pricing derivative at a cost of $1,128,000 settled by an increase
in the BoA credit facility. The loss relating to the buy-out was recognized
in its entirety during the year ended April 30, 1998.
On October 23, 1997, the Company entered into commodity price hedge
agreements to protect against price declines which may be associated with
the volatility in oil and gas spot prices. The commodity price hedges were
achieved through the purchase of put options (floors) by the Company, and
the associated premium cost ($385,680) was funded by additional drawdowns
under the BoA credit facility. The commodity price hedges covered 32,000
bbls and 100,000 MMBTUs per month for the year ended October 31, 1998
(covered in excess of 90% of the Company's current monthly sales volumes).
The floors equated to approximately $18.50/bbl NYMEX WTI contract and
$2.20/MMBTU NYMEX Natural Gas contract. On October 31, 1998, the Company's
commodity price hedge agreements expired.
During February 1999, the Company completed a transaction with El Paso
Merchant Energy to hedge approximately 65% of its existing monthly gas
production by installing a floor of $1.60/MMBTU and a cap of $2.07/MMBTU
(NYMEX Natural Gas). In Addition, during April 1999, the Company completed
a transaction with El Paso Merchant Energy to hedge approximately 40% of
its existing monthly oil production by installing a floor of $12.00/barrel
(NYMEX WTI). These commodity price hedge agreements expired on October 31,
1999.
Between September 8, 1999 and February 10, 2000, the Company completed
several transactions with El Paso Merchant Energy to hedge approximately
30%-40% of its existing monthly oil production by installing a floor of
$19.00/barrel (NYMEX WTI) and caps between $24.00/barrel and $26.65/barrel
(NYMEX WTI). These commodity price hedge arrangements will expire on
December 31, 2000.
F-18
<PAGE>
AROC INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
On August 30, 1999, the Company completed a transaction with El Paso
Merchant Energy to hedge approximately 50% of its existing monthly U.S. gas
production by installing a floor of $2.40/MMBTU (NYMEX Natural Gas) and a
cap of $3.00. This commodity price hedge agreement will expire on October
31, 2000. On March 31, 2000, the Company completed a transaction with El
Paso to hedge approximately 50% of its existing monthly U.K. gas production
by installing a floor of 10.5 pence/therm (IPE) and a cap of 12.55
pence/therm. This commodity price hedge agreement will expire on September
30, 2000.
(b) Interest
The Company was required, by agreement with BoA (see Note 5) to participate
in an interest rate protection program (swaps), for interest on the debt
payable to BoA until March 31, 2000. Interest was hedged to achieve a
fixed rate of 7.49% calculated on a monthly basis based on the related
debt fixed amortization schedule. Hedging gains/losses are included in
interest expense.
(c) Fair Value of Financial and Commodity Instruments
The following methods and assumptions were used by the Company in
estimating the fair value of its financial and commodity instruments. The
reported amounts of cash equivalents, accounts receivable and payable
approximate fair value due to their short-term maturity. The carrying
value of the Company's floating rate debt approximated fair value and the
value of the fixed rate debt is estimated based on comparable debt rates.
The fair value of commodity derivatives are based on quoted market prices.
The carrying value and fair value of certain financial instruments as of
April 30, 1999 and 2000 are shown as assets and liabilities in the table
below:
<TABLE>
<CAPTION>
April 30
--------------------------------------------------------------------------------------
1999 2000
-------------------------------------- ---------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----------------- ------------- ----------------- --------------
(in thousands)
<S> <C> <C> <C> <C>
Fixed rate long-term debt $(10,244) (10,244) $(18,044) (18,044)
Interest Rate Swaps - (249) - -
Commodity Floor/Caps - (128) - (131)
</TABLE>
The estimated fair value of long-term debt is based primarily on comparable
market rates for the same or similar issues as advised by the noteholders
(see Note 5). The fair value of forward exchange and currency option
contracts is based on current market rates of comparable instruments.
(14) Disposition of Oil and Gas Properties
During the years ended April 30, 1998, 1999, and 2000, the Company sold oil
and gas properties for approximately $5,600,000, $1,742,000, and $ 411,000,
respectively. Proceeds of such sales were credited to the full cost pool.
(15) Subsequent Events
Effective May 1, 2000, AROC designated 2,200,000 shares of its authorized
preferred stock as Series A Preferred Stock. The Series A Preferred Stock
accrues cumulative dividends at the rate of $5.00 per share per year,
payable semiannually. Until May 1, 2002, dividends are payable in kind
through the issuance of additional shares of preferred stock at a price
equal to the fair market value of the preferred stock at the time of
F-19
<PAGE>
AROC INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
the payment. The preferred stock has a liquidation preference of $50.00 per
share and may be redeemable at $50.00 per share at either the Company's or
the holder's option upon the occurrence of certain events. Each share of
preferred stock is convertible at any time into 384.6 shares of the
Company's common stock and has the right to vote in all matters on the same
basis as if the preferred stock had been converted into common stock. The
terms of the preferred stock prohibit the Company from taking certain
actions without the consent of the holders of the preferred stock.
On May 2, 2000, the Company sold to BoA, EnCap Equity 1996 Limited
Partnership ("EnCap 1996 LP"), Energy Capital Investment Company PLC
("ECIC"), El Paso Capital Investments, L.L.C. (El Paso), EF-II Holdings,
LLC (EF-II), Picosa Creek Limited Partnership (Picosa) and EnCap
Investments, L.L.C. (EnCap Investments) 850,163 shares of the Company's
newly created Series A Preferred Stock for a total consideration of
approximately $42.5 million, received in satisfaction of outstanding
obligations to those parties and in consideration of cash (approximately
$2,700,000) and the purchase of an oil and gas property interest (valued at
approximately $2,500,000).
Also on May 2, 2000, pursuant to four separate Purchase and Sale Agreements
by and between (i) EnCap Equity 1994 Limited Partnership (EnCap 1994 LP),
(ii) ECIC and ECIC Corporation, (iii) EnCap 1996 LP, and (iv) Mountaineer
Limited Partnership, and the Company, the Company also acquired direct or
indirect ownership of oil and gas properties having a net present value,
discounted at 10%, of approximately $62 million at May 1, 2000, using non-
escalated prices of $2.50 per mcf of gas and $22.00 per barrel of oil. The
properties include approximately 280 wells located in Texas, Louisiana, New
Mexico, and Wyoming. The properties were acquired in exchange for the
issuance to the sellers of an aggregate of 930,140 shares of the Company's
Series A Preferred Stock.
In addition, on May 2, 2000, the Company entered into a Purchase Agreement
providing for the sale to EnCap 1996 LP, ECIC and El Paso of a total of
$17,000,000 in subordinated notes in exchange for cash in that amount. The
subordinated notes bear interest at the rate of 12% per year, payable
semiannually. Principal is due May 1, 2007. Until May 1, 2002, interest
is payable in kind by increasing the principal amount of the debt.
Additionally, the Company also issued to EnCap 1996 LP, ECIC and El Paso
warrants to purchase a total of 39,541,233 shares of the Company's common
stock at a price of $0.01 per share at any time until April 30, 2007
pursuant to such Purchase Agreement.
As a result of these transactions, the Company has outstanding 55,278,837
shares of common stock, 10,000,000 convertible restricted voting shares,
warrants to purchase 45,813,963 shares of common stock, and 1,780,303
shares of Series A Preferred Stock that are convertible into an aggregate
of 684,731,923 shares of common stock. EnCap 1996 LP, EnCap 1994 LP, ECIC,
EnCap Investments, Picosa, EF-II and El Paso have the right to vote in the
aggregate approximately 80% of the Company's voting securities and Bank of
America and its affiliates have the right to vote approximately 11.6% of
the Company's voting securities.
Pursuant to a Credit Agreement dated as of May 1, 2000, among AROC, Toronto
Dominion (Texas), Inc., individually and as Agent, and the lenders named in
that agreement (the TD Credit Agreement), the Company obtained a new
$35,000,000 credit facility. The credit facility is secured by a first
lien on substantially all of the Company's assets and the credit facility
imposes certain restrictions on the Company's activities, including the
payment of dividends and purchases of stock. The credit facility provides
for a revolving line of credit for three years. Borrowings under the
credit facility bear interest at either the LIBOR rate plus from 1.75% to
3.0% or the agent's prime rate plus from .25% to 1.5%, at the Company's
election. Interest is payable quarterly beginning July 31, 2000.
Principal is payable in full on the third anniversary of the closing of the
credit facility. The borrowing base for the credit facility will typically
be redetermined semiannually, although the lenders and borrowers have the
right to make a redetermination at any time.
F-20
<PAGE>
AROC INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
A portion of the proceeds of the cash received from the credit facility and
the sale of the subordinated debt were used to satisfy the Company's
obligations under its previous credit facility with BoA and the remainder
will be used for working capital.
(16) Supplemental Financial Information for Oil and Gas Producing Activities
(Unaudited)
Results of Operations from Oil and Gas Producing Activities
The following sets forth certain information with respect to the Company's
results of operations from oil and gas producing activities for the years
ended April 30, 1998, 1999, and 2000 (in thousands):
<TABLE>
<CAPTION>
United States United Kingdom
----------------------------------- ----------------
<S> <C> <C> <C> <C>
1998 1999 2000 2000
---------------------------------- ----------------
Revenues $10,210 $ 6,234 $ 8,967 $ 3,538
Production costs (4,849) (2,770) (4,843) (1,529)
Gross production taxes (657) (326) (512) -
Depreciation, depletion and impairments (2,571) (29,931) (1,921) (3,707)
Loss on termination of derivative contract (1,128) - - -
------- -------- ------- --------
Income (loss) from operations before income taxes 1,005 (26,793) 1,691 (1,698)
Income tax expense - - - -
------- -------- ------- --------
Results of operations (excluding corporate $ 1,005 $(26,793) $ 1,691 $(1,698)
overhead and interest costs) ======= ======== ======= ========
</TABLE>
All of the Company's oil and gas producing activities are located within
the United States and the United Kingdom.
F-21
<PAGE>
AROC INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Capitalized Costs and Cost Incurred Relating to Oil and Gas Activities
<TABLE>
<S> <C> <C> <C>
1998 1999 2000
(in thousands) (in thousands) (in thousands)
-------------------- -------------------- -------------------
United States $43,200 $42,902 $49,339
United Kingdom - 31,054 39,632
------- ------- -------
Total capitalized costs 43,200 73,956 88,971
Less:
Accumulated depreciation and 13,571 15,582 17,032
depletion--U.S.
Accumulated depreciation, depletion, and - 28,260 31,967
impairment--U.K. ------- ------- -------
Net capitalized costs $29,629 $30,114 $39,972
======= ======= =======
Costs incurred during the year:
Exploration costs:
United States $ - $ - $ -
United Kingdom - - -
------- ------- -------
$ - $ - $ -
======= ======= =======
Development costs:
United States $ 1,821 $ 974 $ 683
United Kingdom 276 3,535 7,953
------- ------- -------
$ 2,097 $ 4,509 $ 8,636
======= ======= =======
Purchase of minerals in place:
United States $ 9,041 $ 125 $ 6,500
United Kingdom - 29,625 -
------- ------- -------
$ 9,041 $29,750 $ 6,500
======= ======= =======
</TABLE>
Estimated Quantities of Proved Oil and Gas Reserves
The estimates of proved oil and gas reserves were prepared by independent
petroleum engineers. The Company emphasizes that reserve estimates are
inherently imprecise. Accordingly, the estimates are expected to change as
more current information becomes available. In addition, a portion of the
Company's proved reserves are undeveloped, which increases the imprecision
inherent in estimating reserves which may ultimately be produced.
Proved reserves are estimated quantities of crude oil, natural gas, and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions. Proved
developed reserves are those which are expected to be recovered through
existing wells with existing equipment and operating methods.
F-22
<PAGE>
AROC INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The following is an analysis of the Company's proved oil and gas reserves.
<TABLE>
<CAPTION>
United States United Kingdom
-------------------------------------- --------------------
Oil (Mbbls) Gas (MMcf) Gas (MMcf)
------------------- ----------------- --------------------
<S> <C> <C> <C>
Proved reserves at April 30, 1997 6,580.7 25,955 -
Revisions of previous estimates (735.5) 2,149 -
Production (396.2) (1,689) -
Purchases of reserves-in-place 1,335.7 4,173 -
Sales of reserves-in-place (290.4) (4,266) -
------------------- ----------------- --------------------
Proved reserves at April 30, 1998 6,494.3 26,322 -
Purchase of reserves-in-place - - 73,870
Revisions of previous estimates 2,624.7 (1,125) (64,137)
Production (278.1) (1,402) -
Sales of reserves-in-place (133.6) (943) -
------------------- ----------------- --------------------
Proved reserves at April 30, 1999 8,707.3 22,852 9,733
Purchase of reserves-in-place 339.7 18,846 -
Revisions of previous estimates (57.6) (2,285) 55,538
Production (279.4) (1,564) (1,842)
Sales of reserves-in-place (47.5) (534) -
------------------- ----------------- --------------------
Proved reserves at April 30, 2000 8,662.5 37,315 63,429
=================== ================= ====================
Proved developed reserves at:
April 30, 1998 3,773.7 22,632 -
=================== ================= ====================
April 30, 1999 6,000.7 19,519 -
=================== ================= ====================
April 30, 2000 6,711.9 21,007 7,256
=================== ================= ====================
</TABLE>
United Kingdom Revisions of previous estimates amounts, noted above, are
attributable to several fields being considered uneconomic based on prices
at April 30, 1999. With the increase in prices during the year ended April
30, 2000, these fields were considered economic at April 30, 2000.
Discounted Future Net Cash Flows
In accordance with Statement of Financial Accounting Standards No. 69,
estimates of the standardized measure of discounted future cash flows were
determined by applying period-end prices, adjusted for fixed and
determinable escalations, to the estimated future production of year-end
proved reserves. Future cash inflows were reduced by the estimated future
production and development costs based on period-end costs to determine
pre-tax cash inflows over the Company's tax basis in the associated proved
oil and gas properties. Net operating losses, credits and permanent
differences were also considered in the future income tax calculation.
Future net cash inflows after income taxes were discounted using a 10%
annual discount rate to arrive at the Standardized Measure.
Future income tax expenses are estimated using the statutory tax rate of
34% and 30% in the United States and United Kingdom, respectively.
Estimates for future general and administrative and interest expense have
not been considered.
F-23
<PAGE>
AROC INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The estimated standardized measure of discounted future cash flows for the
years ended April 30, 1998, 1999 and 2000 (in thousands) follows:
<TABLE>
<CAPTION>
United States United Kingdom
------------------------------------- ---------------------
<S> <C> <C> <C> <C> <C>
1998 1999 2000 1999 2000
-------- -------- --------- -------- --------
Future cash inflows $131,858 $167,154 $ 275,302 $ 13,981 $117,756
Future production and (48,683) (73,970) (125,706) (10,055) (68,583)
development costs -------- -------- --------- -------- --------
Future net cash inflows before 83,175 93,184 149,596 3,926 49,173
income tax expense
Future income tax expense (10,444) (18,416) (30,179) - (1,200)
-------- -------- --------- -------- --------
Future net cash flows 72,731 74,768 119,417 3,926 47,973
10% annual discount for estimated (27,625) (39,899) (61,727) (1,132) (32,546)
timing of cash flows -------- -------- --------- -------- --------
Standardized measure of $ 45,106 $ 34,869 $ 57,690 $ 2,794 $ 15,427
discounted future net cash flows ======== ======== ========= ======== ========
</TABLE>
The changes in standardized measure of discounted future net cash flows (in
thousands) follows:
<TABLE>
<CAPTION>
United States United Kingdom
------------------------------------ ---------------------------
<S> <C> <C> <C> <C> <C>
1998 1999 2000 1999 2000
-------- -------- ------- -------- --------
Beginning of period $ 35,368 $ 45,106 $34,869 $ - $ 2,794
Increases (decreases)
Sales, net of production costs (4,338) (2,765) (6,522) - (1,973)
Net change in sales prices, net 7,671 (1,903) 19,178 (10,205) 3,372
of production costs
Changes in estimated future (1,161) (924) 543 (134) (11,235)
development costs
Revisions of previous quantity (1,778) 12,115 (2,426) (4,254) 26,349
estimates
Accretion of discount 3,963 4,856 4,384 827 279
Net change income taxes 813 (2,700) (4,714) - (261)
Purchases of reserves-in-place 12,720 - 16,155 16,560 -
Sales of reserves-in-place (4,975) (1,875) (571) - -
Changes of production rates (3,177) (17,041) (3,206) - (3,898)
(timing) and other -------- -------- ------- -------- --------
End of period $ 45,106 $ 34,869 $57,690 $ 2,794 $ 15,427
======== ======== ======= ======== ========
</TABLE>
F-24
