<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): May 1, 1997
Alliance Resources Plc
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
England and Wales 333-19013 None
- ------------------------------- -------------------- ---------------------
(State of other jurisdiction of (Commission File (IRS Employer
incorporation or organization) Number) Identification No.)
Kingsbury House, 15-17 King Street, London SW1Y 6QU
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 44 (171) 930-9337
================================================================================
<PAGE>
This Amendment No. 1 to the Current Report on Form 8-K is filed to
provide the financial information required by Item 7 of the Report.
ITEM 2. Acquisition or Disposition of Assets
- --------------------------------------------
Effective May 1, 1997, Alliance Resources Plc ("Alliance"), completed
its acquisition of LaTex Resources, Inc. ("LaTex"), in which a newly formed,
wholly owned subsidiary of Alliance merged (the "Merger") with and into LaTex,
with LaTex being the surviving corporation in the Merger. In consideration of
the Merger, the former shareholders of LaTex received an aggregate of 21,448,787
shares of Alliance, par value (pounds) 0.40 per share (the "New Alliance
Shares") and warrants to purchase an additional 1,927,908 New Alliance Shares.
As a result of the Merger, after giving effect to a 40-to-1 reverse
stock split of the Alliance ordinary shares, each LaTex shareholder at the close
of business on April 30, 1997, received 0.85981 of a New Alliance Share for each
share of LaTex Common Stock then held, 2.58201 New Alliance Shares for each
share of LaTex Series A stock then held, 6.17632 New Alliance Shares for each
share of LaTex Series B stock then held, and a warrant to purchase 0.85981 of a
New Alliance Share for each share of LaTex Common Stock subject to warrants
issued by LaTex then held.
Alliance has also issued 1,500,000 New Alliance Shares, convertible loan
notes and warrants to LaTex's bank in payment of certain fees and in exchange
for an overriding royalty interest held by the bank. As a result of the Merger
and related transactions, Alliance has outstanding approximately 31,052,603 New
Alliance Shares, warrants to purchase up to 3,138,946 New Alliance Shares and
convertible loan notes convertible into 1,078,125 New Alliance Shares.
After the close of business on April 30, 1997, no transfer of LaTex
shares will be effected. As soon as practicable, a letter of transmittal will be
mailed to all holders of LaTex shares to be used by those holders in
surrendering to the transfer agent of Alliance their stock certificates
representing LaTex shares and to receive in exchange certificates representing
New Alliance Shares. The New Alliance Shares will be listed on the London Stock
Exchange under the symbol "ARS." The consideration paid in the Merger and
related transactions was determined through arms-length negotiations.
The Merger and related transactions are intended to create an oil and
gas exploration, development and production company with greater opportunity for
growth through domestic acquisition and participation in foreign concessions
than either of the companies could achieve separately. Management of Alliance
intends to focus particularly on opportunities in the United States, the former
Soviet Union and the Middle East.
The Merger and the transactions related thereto are described in greater
detail in the joint Proxy Statement/Prospectus of Alliance and LaTex dated March
14, 1997, which is incorporated by reference as an exhibit to this report.
<PAGE>
Item 7. Financial Statements and Exhibits
- -----------------------------------------
(a) Financial statements of business acquired.
Alliance's audited historical statements as of and for the years ended
April 30, 1996, 1995 and 1994, and unaudited interim statement for the six
months ended October 31, 1996, as well as LaTex's audited historical financial
statements as of and for the years ended July 31, 1996, 1995 and 1994, and
unaudited interim statements for the six months ended January 31, 1997, are
included as exhibits to this report.
(b) Pro forma financial information.
The unaudited pro forma financial statements of Alliance as of October
31, 1996, giving effect to the Merger and concurrent transactions are included
as exhibits to this report.
(c) Exhibits.
The following exhibits are furnished in accordance with Item 601 of
Regulation S-K.
99.1 Press Release announcing completion of the Merger.
99.2 Proxy Statement/Prospectus of Alliance with respect to the
Merger dated March 14, 1997 (incorporated by reference to the
filings made pursuant to Rule 424(b)(3) on April 8 and April
11, 1997).
99.3 Audited financial statements of Alliance as of and for the
years ended April 30, 1996, 1995 and 1994.
99.4 Unaudited interim statement of Alliance for the six months
ended October 31, 1996.
99.5 Audited historical financial statements of LaTex as of and
for the years ended July 31, 1996, 1995 and 1994.
99.6 Unaudited interim statements of LaTex for the six months
ended January 31, 1997.
99.7 Unaudited pro forma financial statements of Alliance as of
October 31, 1996.
3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf of the
undersigned hereunto duly authorized.
ALLIANCE RESOURCES PLC
Date: June 13, 1997 By: /s/ JOHN A. KEENAN
-------------------------------------
Name: John A. Keenan
Title: Managing Director
<PAGE>
Exhibit 99.1
Alliance Resources Plc & LaTex Resources, Inc. Announce Completion of Merger
TULSA, Okla., April 30 -- Alliance Resources Plc, which is traded on the London
Stock Exchange, and LaTex Resources, Inc. (Nasdaq: LATX) today announced the
completion of the merger of LaTex with a wholly-owned subsidiary of Alliance.
As a result of the Merger, after giving effect to a 40-to-1 reverse stock split
of the Alliance shares, each LaTex shareholder at the close of business on
April 30, 1997, will receive 0.85981 of a new Alliance share for each share of
LaTex Common Stock then held, 2.58201 new Alliance shares for each share of
LaTex Series A stock then held, 6.17632 new Alliance shares for each share of
LaTex Series B stock then held, and a warrant to purchase 0.85981 of a new
Alliance share for each share of LaTex Common Stock subject to warrants issued
by LaTex then held.
Alliance has also issued new Alliance shares, convertible loan notes and
warrants to LaTex's bank in payment of certain fees and in exchange for an
overriding royalty interest held by the bank. As a result of the merger and
related transactions, Alliance has outstanding approximately 31,052,603 new
Alliance shares, warrants to purchase up to 3,138,946 new Alliance shares and
convertible loan notes convertible into 1,078,125 new Alliance shares.
After the close of business on April 30, 1997, no transfer of LaTex shares will
be effected. As soon as practicable, a letter of transmittal will be mailed to
all holders of Latex shares to be used by those holders in surrendering to the
transfer agent of Alliance their stock certificates representing LaTex shares
and to receive in exchange certificates representing new Alliance shares. The
new Alliance shares will be listed on the London Stock Exchange under the symbol
"ARS." Quotations for the new Alliance shares are anticipated to be available in
the daily US edition of the Financial Times. Investors may place orders for the
purchase or sale of the shares through most licensed broker dealers in the US.
The merger and related transactions are intended to create an oil and gas
exploration, development and production company with greater opportunity for
growth through domestic acquisitions and participation in foreign concessions
than either of the companies could achieve separately. Management of Alliance
intends to focus particularly on the opportunities in the United States, the
former Soviet Union and the Middle East.
SOURCE Latex Resources, Inc.
<PAGE>
EXHIBIT 99.3
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ALLIANCE
Report of Independent Auditors F-2
Statement of Directors' Responsibility for Consolidated Financial Statements F-3
Consolidated Statement of Income for the years ended April 30, 1996, 1995, 1994 F-4
Consolidated Balance Sheet as at April 30, 1996 and 1995 F-5
Consolidated Statement of Stockholders' Equity for the years ended April 30, 1996, 1995, 1994 F-6
Consolidated Statement of Total Recognized Gains and Losses for the years ended April 30,
1996, 1995 1994 F-7
Consolidated Statement of Cash Flows for the years ended April 30, 1996, 1995, 1994 F-8
Notes to the Financial Statements F-9
Supplemental Oil and Gas data (unaudited) F-31
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
ALLIANCE RESOURCES PLC
We have audited the consolidated financial statements of Alliance Resources Plc
and subsidiaries as listed in the accompanying index. These consolidated
financial statements are the responsibility of the company's directors. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United Kingdom, which are substantially in accordance with generally
accepted auditing standards in the United States. 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 the directors as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly in all material respects the financial position of Alliance Resources Plc
and subsidiaries as of April 30, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three year period
ended April 30, 1996 in conformity with generally accepted accounting principles
in the United Kingdom.
Generally accepted accounting principles in the United Kingdom vary in certain
significant respects from generally accepted accounting principles in the United
States. Application of generally accepted accounting principles in the United
States would have affected the results of operations and shareholders' equity as
at and for the years ended April 30, 1995 and 1996, to the extent summarized in
Note 29 to the consolidated financial statements.
London, England KPMG Audit Plc
October 16, 1996, except note 26 Chartered Accountants
which is as of February 19, 1997 Registered Auditor
F-2
<PAGE>
STATEMENT OF DIRECTORS' RESPONSIBILITY FOR CONSOLIDATED FINANCIAL STATEMENTS
UK company law requires the Directors to prepare financial statements for each
financial year which give a true and fair view of the state of affairs of the
Company and Group and of the profit or loss for that period. In preparing those
financial statements, the Directors are required to:
. select suitable accounting policies and then apply them consistently;
. make judgments and estimates that are reasonable and prudent;
. state whether applicable accounting standards have been followed, subject
to any material departures disclosed and explained in the financial
statements;
. prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the Group will continue in business.
The Directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
Company and to enable them to ensure that the financial statements comply with
the UK Companies Act of 1985. They have general responsibility for taking such
steps as are reasonably open to them to safeguard the assets of the Group and to
prevent and detect fraud and other irregularities.
F-3
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
---------------------------------------
1996 1995 1994
NOTES $ 000 $ 000 $ 000
----- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Oil and natural gas sales and other operating revenues (2) 3,686 1,483 837
-------- -------- --------
Costs and expenses: (5)
Exceptional amounts written off oil and gas interests (3) - (14,881) -
Exceptional costs arising from irregularities (4) (589) (1,787) -
Direct operating expenses (2,262) (933) (903)
Selling, general and administrative expenses (2,629) (1,637) (927)
Depreciation, depletion and amortization (1,668) (63) (128)
-------- --------- -------
OPERATING (LOSS) (6) (3,462) (17,818) (1,121)
Other income and deductions:
Interest (net) (8) 229 (114) (56)
Profit on sales of fixed asset investment - 183 -
Exceptional amounts written off investments (7) (201) (464) -
Foreign exchange losses (159) - -
-------- --------- --------
NET (LOSS) (3,593) (18,213) (1,177)
======== ========= ========
LOSS PER SHARE (CENTS) (10) (1.1) (13.0) (1.2)
======== ========= ========
</TABLE>
F-4
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AS AT
APRIL 30,
---------------------
ASSETS 1996 1995
NOTES $ 000 $ 000
----- -------- ---------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents 1,177 64
Receivables: (14)
Trade 736 626
Other 557 484
Prepaid expenses 64 88
Other current assets - 26
-------- ---------
Total current assets 2,534 1,288
-------- ---------
Net property, plant and equipment
(full cost method for oil and gas properties) (11) 7,311 8,047
-------- ---------
Total assets 9,845 9,335
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities: (15)
Bank loans and overdrafts 37 366
Development loans 5 2,356
Trade accounts payable 1,279 2,574
Accrued expenses - 1,262
Other 677 2,945
------- ---------
Total current liabilities 1,998 9,503
Long term debt, excluding current installments (16) 92 1,240
Other liabilities (16) - 30
------- ---------
Total liabilities 2,090 10,773
------- ---------
Stockholders' equity:
Ordinary shares, (Pounds)0.01 par value.
Authorized 465,000,000 shares; (17) 5,105 2,524
issued 324,152,633 in 1996 and 161,403,971 shares in 1995
Ordinary shares, (Pounds)0.01 par value to be issued (18) - 2,030
Share premium 20,157 7,922
Merger reserve 401 401
Special reserve (19) - 4,300
Retained earnings (17,908) (18,615)
------- ---------
Total stockholders' equity 7,755 (1,438)
------- ---------
Total liabilities and stockholders' equity 9,845 9,335
======= =========
</TABLE>
F-5
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ORDINARY ADDITIONAL TOTAL
ORDINARY SHARES TO PAID IN MERGER SPECIAL RETAINED STOCKHOLDERS'
SHARES BE ISSUED CAPITAL RESERVE RESERVE EARNINGS EQUITY
$ 000 $ 000 $ 000 $000 $ 000 $ 000 $ 000
------- --------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
As at April 30, 1993 3,678 - 5,808 - - (3,422) 6,064
Issues of shares 1,707 - 6,308 - - - 8,015
Goodwill arising on acquisition - - - - - (1,073) (1,073)
Retained loss for the year - - - - - (1,177) (1,177)
Foreign exchange translation - - - - - 460 460
------- --------- ------- ------- ------- -------- --------
As at April 30, 1994 5,385 - 12,116 - - (5,212) 12,289
Issues of shares 449 - 1,931 401 - - 2,781
Shares to be issued - 2,030 - - - - 2,030
Share issue costs - - (317) - - - (317)
Capital reduction (3,310) - (5,808) - 4,300 4,818 -
Retained loss for the year - - - - - (18,213) (18,213)
Foreign exchange translation - - - - - (8) (8)
------- --------- ------- ------- ------- -------- --------
As at April 30, 1995 2,524 2,030 7,922 401 4,300 (18,615) (1,438)
Issues of shares 2,581 (2,030) 12,678 - - - 13,229
Share issue costs - - (443) - - - (443)
Special reserve transfer - - - - (4,300) 4,300 -
Retained loss for the year - - - - - (3,593) (3,593)
------- --------- ------- ------- ------- -------- --------
As at April 30, 1996 5,105 - 20,157 401 - (17,908) 7,755
======= ========= ------- ======= ======= ======== ========
</TABLE>
F-6
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF TOTAL RECOGNIZED GAINS AND LOSSES
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30
--------------------------------------------------
1996 1995 1994
$000 $000 $000
---------- ------------- ---------------
<S> <C> <C> <C>
Loss for the year (3,593) (18,213) (1,177)
Foreign exchange translation - (8) 460
Total recognized gains and losses for the period (3,593) (18,221) (717)
</TABLE>
F-7
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-------------------------------------------------
1996 1995 1994
NOTES $ 000 $ 000 $ 000
----- --------- ---------- ------------
<S> <C> <C> <C> <C>
NET CASH (OUTFLOW)/INFLOW FROM OPERATING
ACTIVITIES (20) (5,399) 1,987 (1,597)
------- ------- -------
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest received 236 49 69
Interest paid (28) (163) (125)
------- ------- -------
NET CASH INFLOW/(OUTFLOW) FROM RETURNS ON
INVESTMENTS AND SERVICING OF FINANCE 208 (114) (56)
------- ------- -------
INVESTING ACTIVITIES
Payments to acquire tangible fixed assets (3,270) (3,413) (3,476)
Payments to acquire investments (59) (165) (402)
Purchases of subsidiaries (23) - (941) 416
Receipts from sale of investments 77 474 -
Receipts from sales of tangible fixed assets 740 - -
------- ------- -------
NET CASH OUTFLOW FROM INVESTING ACTIVITIES (2,512) (4,045) (3,462)
------- ------- -------
NET CASH OUTFLOW BEFORE FINANCING (7,703) (2,172) (5,115)
------- ------- -------
FINANCING (21)
Proceeds from issue of shares 12,087 - 6,031
Share issue costs (443) (317) (512)
(Decrease)/increase in bank borrowings (904) (269) 260
Repayment of notes payable - - (483)
(Repayment)/proceeds from development loans (1,351) 2,351 -
(Repayment)/acquisitions of other loans (528) 620 -
------- ------- -------
NET CASH INFLOW FROM FINANCING 8,861 2,385 5,296
------- ------- -------
INCREASE IN CASH AND CASH EQUIVALENTS (22) 1,158 213 181
======= ======= =======
</TABLE>
F-8
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - ACCOUNTING POLICIES
Basis of preparation
At the time of drawing up the 1995 financial statements, the Company was in the
process of investigating significant irregularities in the Group's affairs
during the period in which Mr. O'Brien was Chief Executive and a forensic
investigation had uncovered a number of matters which required significant
adjustments to the books and records of the Group. In addition to the forensic
investigation, the Company instructed Ryder Scott Company, a firm of independent
petroleum reservoir engineers, to carry out an evaluation of the oil and gas
reserves attributable to the Group. As the result of both the investigation
which had at that time not been concluded and the Ryder Scott Company reserve
review, exceptional write downs of $16,668,000 relating to the Group's oil and
gas reserves and $464,000 relating to fixed asset investments, were charged to
the profit and loss account. It was not possible to properly allocate these
charges between items relating to the irregularities and the evaluation of the
Group's oil and gas reserves at that time.
The forensic investigation has been concluded and a settlement with Mr. O'Brien
has been agreed. Consequently, $1,787,000 which had originally been capitalized
and provided for in the 1995 accounts as part of the $16,668,000 exceptional
write down of the Group's oil and gas fixed assets, has since been identified as
the estimated loss to the Group arising from the alleged fraudulent activities
and has now been reclassified as a separate item (see note 4). The exceptional
write down relating to oil and gas assets has accordingly been restated as
$14,881,000. The accumulated cost and depletion of oil and gas interests at 1
May 1995 have been reduced by $1,787,000. In addition $285,000 of payments made
to acquire tangible fixed assets have been similarly classified to operating
cash flow.
The accounting policies set out below have been used by the Company in the
preparation of the financial statements.
Accounting convention
The financial statements have been prepared under the historical cost convention
and in accordance with applicable accounting standards in the United Kingdom.
Basis of consolidation
The consolidated financial statements comprise the financial statements of the
Company and its subsidiaries.
Goodwill
Goodwill relating to businesses purchased by the Group, where arising, is set
off immediately against reserves.
Reporting currency
The Group's current operations are in the oil and gas industry in the United
States and are conducted through its subsidiaries, Alliance Resources (USA),
Inc. and Source Petroleum, Inc. Transactions are conducted primarily in US
dollars. As a result, the directors consider that the US dollar is the
functional currency of the Group and the Group's financial statements have been
prepared in US dollars. The Company's share capital is denominated in sterling
and for the purposes of the financial statements, is translated into US dollars
at the rate of exchange at the time of its issue.
Foreign currency translation
The accounts of companies of the Group whose functional currency is not US
dollars are translated for consolidation purposes at the rate of exchange ruling
at the balance sheet date. Exchange differences arising on the retranslation of
opening net assets are taken directly to reserves.
F-9
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
For those companies whose functional currency is not US dollars, transactions
with third parties are translated into US dollars at the exchange rate
prevailing at the date of each transaction. Monetary assets and liabilities
denominated in foreign currencies are translated into US dollars at the exchange
rate prevailing at the balance sheet date. Any exchange gain or loss is dealt
with through the profit and loss account.
Abandonment
Provision is made for abandonment costs net of estimated salvage values, on a
unit-of-production basis, where appropriate.
Turnover
Turnover represents income from production and delivery of oil and gas, recorded
net of royalties and fees for the provision of technical services. All turnover
arises from activities within the United States.
Oil and gas interests
The Group 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 and geophysical costs, the costs of drilling both productive
and non-productive wells, 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 proved net reserve volumes. Reserve volumes are
combined into equivalent units using 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 with any overall deficit or surplus being recognized in the profit and
loss account.
The Group 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.
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 reduce the cost of assets,
net of estimated residual values, over their estimated useful lives as follows:
Fixtures and equipment - 3 to 7 years
Freehold buildings - 30 years
No depreciation is provided on freehold land.
Deferred taxation
Deferred taxation, calculated using the liability method, is provided only where
it is probable that a liability will crystallize.
F-10
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Joint ventures
The Group's exploration, development and production activities are generally
conducted in joint ventures with other companies. The financial statements
reflect the relevant proportions of turnover, production, capital expenditure
and operating costs applicable to the Group's interests.
Fixed asset investments
Fixed asset investments are stated at cost less any provisions required for
permanent diminutions in value.
Leases
Rentals under operating leases are charged to the profit and loss account on a
straight line basis over the lease term.
Cash equivalents
Deposits with original terms of maturity of 90 days or less are considered to be
cash equivalents.
NOTE 2 - SEGMENTAL REPORTING
The Group's current operating activities are principally conducted in the United
States of America and relate to the oil and gas exploration and production
business and the provision of oil and gas services to this business. All
turnover arises from activities within the United States of America, with
turnover by destination not materially different from turnover by origin.
NOTE 3 - EXCEPTIONAL AMOUNTS WRITTEN OFF OIL AND GAS INTERESTS
The proved oil and gas reserves of the Group and the net recoverable amount
arising therefrom were estimated as at April 30, 1995 by Ryder Scott Company, a
firm of independent petroleum engineers following the discovery that Valentine
#14 well was not capable of commercial production and that the Group had
relinquished title to its undeveloped acreage in the Valentine field.
The amount of $14,881,000 (see note 1) written off in the year to April 30, 1995
represents the write down relating to the carrying value of the Group's oil and
gas interests as restated after the reclassification of $1,787,000 as a separate
exceptional item (see note 4). The net book value of the oil and gas interests
as at April 30, 1995 is included in the balance sheet at that date at the
estimated net amount recoverable through production.
NOTE 4 - EXCEPTIONAL COSTS ARISING FROM IRREGULARITIES
During the year ended April 30, 1996, following the discovery that Mr. O'Brien
appeared to have been fraudulently misrepresenting the position at the Valentine
field relating to the #14 well, the Company undertook (with the assistance of
external advisers) an investigation into the involvement of Mr. O'Brien in the
affairs of the Company.
This investigation has revealed that the Group has suffered a financial loss as
the result of a number of transactions involving Mr. O'Brien or parties now
known to have been connected with him.
F-11
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
The resulting exceptional charge comprises:
<TABLE>
<CAPTION>
1996 1995
$ 000 $ 000
----- ------
<S> <C> <C>
Loss arising from transactions with certain companies related to Mr. O'Brien 73 1,787
Professional fees 788 -
Estimated proceeds resulting from the settlement with Mr. O'Brien (272) -
----- ------
589 1,787
===== ======
</TABLE>
Loss arising from transactions with certain companies related to Mr. O'Brien
The loss of $73,000 relates to an improper payment on the June 19, 1995 of
(Pounds)48,750 to Jasmine Consultants Limited. Jasmine Consultants Limited is an
off-shore company beneficially owned by Mr. O'Brien.
The loss of $1,787,000 arises from a number of transactions with certain
companies related to Mr. O'Brien in the year to April 30, 1995 as set out below:
. On August 10, 1994, the Company issued 7,500,000 ordinary shares to Progas
Holdings Limited, a company in which Mr. O'Brien now admits to have an
interest and which is incorporated in Delaware, USA. This issue of shares
was in consideration for a 5.75% working interest in the Valentine field.
It has subsequently been discovered that Progas Holdings Limited acquired
this interest in the Valentine field from its previous owners on 21 July
1994 at a price of $255,000.
. On January 15, 1995 the Group entered into a loan agreement with Progas
Holdings Limited to record the terms of a loan of which $1,129,000 had been
advanced by Progas Holdings Limited between July 28, 1994 and December 16,
1994. The principal terms of the loan were:
. a facility of $1,400,000 to be drawn down solely for the purpose of
drilling and developing the Valentine #14 well;
. if the well was successful in proving commercially recoverable
quantities of oil and gas the amount drawn down together with a 100%
premium would be payable to Progas Holdings Limited from commencement
of production to July 30, 1995 at the latest, with the Group reserving
a right of early settlement in full;
. if the well was abandoned within six months of the date of the
agreement the amount drawn down was repayable immediately.
. On February 22, 1995, on the basis of representations from Mr. O'Brien
that Valentine #14 well was successful, it was agreed that 10,351,966
ordinary shares of the Company would be issued to Progas Holdings
Limited at 6p per share in satisfaction of $1,000,000 of the debt with
the remaining $1,258,000 to be repaid in cash.
. On May 10, 1995, 10,351,966 ordinary shares were so issued and the
aggregate sum of (Pounds)794,000 was paid to Progas Holdings Limited
to satisfy the liability of $1,258,000. The premium paid of $1,129,000
was not justified.
. On April 5, 1995, the Group made a payment of $ 175,000 to Progas
Holdings Limited for no apparent commercial reason.
F-12
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
. Between August 26, 1993 and September 1, 1993, the Group acquired a
1.375% overriding royalty interest in the Valentine field from Royalty
Investments Limited (a company which Mr. O'Brien now admits he owns),
for $185,000. Royalty had acquired a 0.125% overriding royalty
interest in the Valentine field from an unrelated third party on
August 23, 1993 for $7,500. The Company believes the interest
purchased to have been overvalued by $102,000.
Professional fees
The exceptional cost of $788,000 in the year to 30 April 1996 relates to the
estimated cost of professional assistance obtained by the directors in relation
to actions taken arising from the alleged fraudulent activities in the period in
which Mr. O'Brien was Chief Executive.
Estimated proceeds resulting from the settlement with Mr. O'Brien
The Company has reached a settlement with Mr. O'Brien. One of the terms of the
settlement requires the disposal of 10,351,966 shares in the Company held in the
name of Progas Holdings Limited and the payment of the proceeds of sale of those
shares to the Company. These shares are currently in the custody of an
independent third party, pending their sale. Mr. J. A. Keenan, the Managing
Director of Alliance, has a proxy over the voting rights attaching to these
shares and to certain other shares in the Company held by Mr. O'Brien, Diamond
Securities Limited and Havensworth Limited, the latter two being companies
beneficially owned by Mr. O'Brien, pending their sale by Mr. O'Brien and these
companies as required by the settlement. The exceptional credit of $272,000
relates to the expected proceeds resulting from the sale of the shares in the
name of Progas Holdings Limited calculated using the market price prior to
suspension of the Company's shares.
NOTE 5 - OPERATING COSTS
<TABLE>
<CAPTION>
1996 1995 1994
$000 $000 $000
-------- -------- --------
<S> <C> <C> <C>
Total operating costs were: 7,148 19,301 1,958
====== ======== =====
Made up as follows:
Cost of sales
Exceptional amounts written off oil and gas interests (note 3) - 14,881 -
Exceptional costs arising from irregularities (note 4) - 1,787 -
Operating costs and production taxes 2,318 996 903
Depletion of oil and gas interests 1,612 - 125
3,930 17,664 1,028
====== ======== =====
Administrative expenses
Exceptional professional fees net of expected settlement proceeds (note 4) 589 - -
Administrative expenses 2,629 1,637 930
------ -------- -----
3,218 1,637 930
====== ======== =====
The gross (loss)/profit was: (244) (16,181) 191
====== ======== =====
</TABLE>
F-13
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - OPERATING LOSS
The operating loss has been arrived at after charging the following:
<TABLE>
<CAPTION>
1996 1995 1994
$000 $000 $000
------- ------- ------
<S> <C> <C> <C>
Auditors' remuneration - audit 188 48 30
Auditors' remuneration - non-audit services 41 68 103
Depreciation, depletion and amortization of tangible fixed assets 56 63 3
(excluding oil and gas assets)
Depreciation, depletion and amortization of oil and gas fixed assets 1,612 14,881 125
(including ceiling test write-down)
Lease costs on buildings 35 62 41
Hire of plant and equipment 78 4 42
------ ------- ----
</TABLE>
In the year ended April 30, 1995, in addition to the $68,000 charged to the
profit and loss account , $129,000 of fees paid to KPMG were charged to the
share premium account in connection with the placing and open offer which was
completed on May 9, 1995.
NOTE 7 - EXCEPTIONAL AMOUNTS WRITTEN OFF INVESTMENTS
Following the removal of Mr. O'Brien, the Group reviewed its portfolio of
investments, unlisted investments and joint venture interests. It was
considered unlikely that significant amounts would be recovered from the
Tatarstan investment or from the Geos joint venture. Accordingly, charges have
been made to the profit and loss account in the years ended April 30, 1995 and
1996 in respect of costs incurred in relation to these investments.
NOTE 8 - INTEREST (NET)
<TABLE>
<CAPTION>
1996 1995 1994
$000 $000 $000
-------- -------- --------
<S> <C> <C> <C>
Interest receivable 257 49 69
Interest payable on bank loans and overdrafts wholly repayable within
five years (28) (163) (125)
----- ----- ----
229 (114) (56)
===== ===== ====
</TABLE>
NOTE 9 - TAXATION
No material charge to UK corporation tax or US federal income tax arises on the
results for the year to April 30, 1996 (1995:$nil, 1994:$nil) due to the
availability of substantial losses for taxation purposes.
Deferred taxation has not been provided as at April 30, 1996 as sufficient
losses exist to extinguish potential deferred liabilities (1995: $nil; 1994:
$nil).
NOTE 10 - LOSS PER SHARE
The calculation of loss per share is based upon the following:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------ ------------
<S> <C> <C> <C>
Loss for the period ($000) 3,593 18,213 1,177
============ ============ ===========
Weighted average number of shares 317,175,674 140,416,616 99,598,313
============ ============ ===========
</TABLE>
F-14
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - NET PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
FREEHOLD
LAND AND OIL AND GAS FIXTURES &
BUILDINGS INTERESTS EQUIPMENT TOTAL
$000 $000 $000 $000
------------ ------------ ----------- -------
<S> <C> <C> <C> <C>
COST
At May 1, 1994 - 16,150 55 16,205
Additions - 6,220 49 6,269
Acquisitions 104 2,012 148 2,264
Disposals - - (29) (29)
------------ ------------ ----------- -------
At May 1, 1995 104 24,382 223 24,709
Additions - 1,657 15 1,672
Disposals - (735) (125) (860)
------------ ------------ ----------- -------
At April 30, 1996 104 25,304 113 25,521
============ ============ =========== =======
DEPRECIATION, DEPLETION AND
AMORTIZATION
At May 1, 1994 - 1,704 17 1,721
Charge for the year 1 - 62 63
Exceptional charge - 14,881 - 14,881
Transfer to current assets - - (3) (3)
------------ ------------ ----------- -------
At May 1, 1995 1 16,585 76 16,662
Charge for the year 3 1,612 53 1,668
Disposals - - (120) (120)
------------ ------------ ----------- -------
At April 30, 1996 4 18,197 9 18,210
============ ============ =========== =======
NET BOOK VALUE
At April 30, 1996 100 7,107 104 7,311
============ ============ =========== =======
At April 30, 1995 103 7,797 147 8,047
============ ============ =========== =======
</TABLE>
A substantial portion of the Group's oil and gas exploration, development and
production activities are conducted jointly with others.
All of the Group's producing oil and gas interests are located in one onshore US
oil and gas pool.
As at April 30, 1995 the Group had an interest in the Donkerbroek field, a non-
producing pre-development field located off-shore The Netherlands which had not
been included in the full cost pool and had not been subject to depletion. On
June 5, 1995, the Group sold this interest for consideration after associated
costs of $398,000. On July 12, 1995, the Group sold its oil and gas interests
in Colorado, USA for net consideration of $283,000.
Freehold land of $25,000 is not depreciated.
F-15
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 - INVESTMENTS
<TABLE>
<CAPTION>
$ 000
-----
<S> <C>
Cost and net book value
At May 1, 1994
Additions 590
Amounts written off 165
Disposal (464)
(291)
-----
At May 1, 1995
Additions -
Amounts written off 201
Disposal (201)
-
-----
At April 30, 1996
-
=====
</TABLE>
As explained in note 7, an exceptional charge of $201,000 (1995: $464,000) was
made in the year ended April 30, 1996 relating to the investment in Tatarstan
and Geos joint venture.
F-16
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 - PRINCIPAL SUBSIDIARIES
The principal subsidiaries of the Company all of which were wholly owned at
April 30, 1996, were as follows:-
<TABLE>
<CAPTION>
ISSUED AND
PLACE OF FULLY PAID %
REGISTRATION SHARE CAPITAL OWNED NATURE OF BUSINESS
<S> <C> <C> <C> <C>
Alliance Resources (USA) Inc. USA 2,000 100 Oil and gas
common exploration and
shares US$1 production
each
Manx Petroleum Plc* England 2,585,705 100 Oil services
ordinary
shares of 5p
each and
1,300,000
non-voting
deferred
shares of 95p
each
Celtic Basin Oil England 621,110 100 Oil and gas
Exploration Ltd ordinary exploration and
shares of (Pounds)1 production
each
Source Petroleum Inc. USA 100 common 100 Oil and gas
shares of exploration and
US$1 each production
Alliance Resources Group Inc.* USA 100 common 100 Investment
shares of
US$1 each
ARNO Inc. USA 100 common 100 Oil and gas
shares of no exploration and
par value production
ARCOL Inc. USA 100 common 100 Oil and gas
shares of no exploration and
par value production
</TABLE>
* owned directly by the Company.
The place of registration of each subsidiary undertaking is also
its principal country of operation.
F-17
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 - ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
1996 1995
$ 000 $ 000
------- -------
<S> <C> <C>
Due within one year:
Trade debtors 736 626
Other debtors 557 484
Prepayments and accrued income 64 88
------- -------
1,357 1,198
======= =======
</TABLE>
NOTE 15 - CURRENT LIABILITIES
<TABLE>
<CAPTION>
1996 1995
$ 000 $ 000
------- -------
<S> <C> <C>
Bank loans (secured) 37 321
Bank overdrafts - 45
Trade creditors 1,279 2,574
Other creditors including taxation and social security 677 2,945
Development loans and other loans 5 2,356
Accruals - 1,262
------- -------
1,998 9,503
======= =======
</TABLE>
Development loans represented specific loans granted during the year ended April
30, 1995 to provide funds for drilling and developing the Valentine #14 well.
F-18
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOTE 16 - LONG-TERM DEBT AND OTHER LIABILITIES
<TABLE>
<CAPTION>
1996 1995
$ 000 $ 000
----- -------
<S> <C> <C>
Bank loans (secured) - 620
Trade creditors - 30
Other loans (secured) 92 620
----- -------
92 1,270
===== =======
Bank loans and overdrafts were repayable as follows:
<CAPTION>
1996 1995
$ 000 $ 000
----- -------
<S> <C> <C>
Less than one year (see note 15) 37 366
Between one and two years - 311
Between two and five years - 309
37 986
Less: amounts included in current liabilities (37) (366)
----- -------
Amounts due after more than one year - 620
===== =======
Development loans and other loans were repayable as follows:
<CAPTION>
1996 1995
$ 000 $ 000
----- -------
<S> <C> <C>
Less than one year (see note 15) 5 2,356
Between one and two years 6 560
Between two and five years 21 42
After five years 65 18
----- -------
97 2,976
Less: amounts included in current liabilities (5) (2,356)
----- -------
Amounts due after more than one year 92 620
===== =======
</TABLE>
The bank loan as at April 30, 1995, of $620,000 falling due after more than one
year and $308,000 falling due within one year, was repayable in equal monthly
instalments by June 6, 1998 at a fixed rate of interest of 8% and was secured by
a $3,000,000 collateral mortgage and security interests in certain mineral
leases of the Group. This loan was repaid after April 30, 1995 from the
proceeds of the placing and open offer which was completed on May 9, 1995.
Other loans as at April 30, 1996 and April 30, 1995 comprised a $92,000
(1995:$95,000) loan repayable in instalments, bearing interest at 9% per annum,
which was secured on the Group's freehold land and buildings. Also included in
other loans at April 30, 1995 a $525,000 loan which was free of interest and
secured upon certain mineral leases of the Group.
Further information in relation to development loans is set out in note 25.
F-19
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOTE 17 - SHARE CAPITAL
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Authorized
- - ordinary shares of 1p each 465,000,000 216,000,000
============ ============
Allotted, called up and fully paid
- - ordinary shares of 1p each 324,152,633 161,403,971
============ ============
1996 1995
Amount in SterlinG (Pounds)000 (Pounds)000
------------ ------------
Authorized
- - ordinary shares of 1p each 4,650 2,160
------------ ------------
Allotted, called up and fully paid
- - ordinary shares of 1p each 3,242 1,614
============ ============
1996 1995
Amount in US dollars $ 000 $ 000
------------ ------------
Allotted, called up and fully paid
- - ordinary shares of 1p each 5,105 2,524
============ ============
</TABLE>
AUTHORIZED SHARE CAPITAL
On May 4, 1995, the authorized share capital of the Company was increased to
465,000,000 ordinary shares of 1p nominal value by the creation of an additional
249,000,000 ordinary shares of 1p each, ranking pari passu with the existing
ordinary shares.
ISSUE OF SHARES
The following 1p ordinary shares were issued in the year to April 30, 1996:
(i) on May 9, 1995, 18,426,500 ordinary shares were issued in part
consideration for the acquisition of a portfolio of oil and gas assets in
the US from North American Gas Investment Trust PLC that had been made
during the year ended 30 April 1995;
(ii) on May 10, 1995, 127,470,196 ordinary shares were issued at 6p per share
by way of a placing and open offer which raised net proceeds of
US$11,663,000 after share issue costs of US$443,000;
(iii) on May 9, 1995, 10,351,966 ordinary shares were issued at 6p in part
repayment of a development loan from Progas Holdings Limited;
(iv) on July 19, 1995, 1,500,000 ordinary shares were issued in consideration
for the acquisition of all the issued 'A' ordinary share capital of
Geological Forecast Technology Limited;
(v) on November 27, 1995, 5,000,000 ordinary shares were issued as final
consideration for the repayment of a development loan from North American
Gas Investment Trust PLC that had been made during the year ended April
30, 1995.
F-20
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
SHARE OPTIONS
On June 15, 1995, the following share options were granted pursuant to Alliance
Resources Plc Share Option Scheme (No. 1) to directors and employees of the
Company, exercisable at 6p per share.
John X F O'Brien 2,500,000 options
Nicholas C Gray 1,500,000 options
Other employees 1,325,000 options
At April 30, 1996 all options had ceased to be exercisable and have subsequently
lapsed.
At the time of issue of the 1996 financial statements, there were no options
granted under the schemes but the Board has resolved that the following share
options be granted to the following executive directors:
John A Keenan 6,000,000 options
H Brian K Williams 2,500,000 options
Paul R Fenemore 1,000,000 options
Such options were to be granted at an appropriate time and at a price to be
determined in accordance with the provisions of the Company's Share Option
Scheme.
By an agreement dated March 31, 1994, the Company granted to John Duncan and Co
Limited an option to subscribe for 2,000,000 ordinary shares at 7.25p per share
in consideration for professional services. The option is exercisable in whole
or in part at any time from January 1, 1998 up to and including December 31,
2001.
NOTE 18 - SHARES TO BE ISSUED
Shares to be issued at April 30, 1995 represent the remainder of the
consideration payable on the acquisition of a portfolio of oil and gas assets in
the US from North American Gas Investment Trust PLC, made during the year to
April 30, 1995 and consideration payable in repayment of a development loan from
North American Gas Investment Trust PLC.
<TABLE>
<CAPTION>
$000
----
<S> <C>
Shares in respect of acquisition (issued on May 9, 1995) 1,780
Shares in respect of loan repayment (issued on November 27, 1995) 250
-----
2,030
=====
</TABLE>
Consideration given on May 9, 1995 and November 27, 1995 was made up of
18,426,500 and 5,000,000 ordinary shares of 1p each respectively issued at a
premium. Aggregate increases in share capital and share premium were as
follows:
<TABLE>
<CAPTION>
<S> <C> <C>
$000 $000
---- ----
Share capital issued on May 9, 1995 297
Share capital issued on November 27, 1995 80
-----
377
Premium on shares issued on May 9, 1995 1,483
Premium on shares issued on November 27, 1995 170
-----
1,653
-----
2,030
=====
</TABLE>
F-21
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOTE 19 - SPECIAL RESERVE
The special reserve of $4,300,000 at April 30, 1995 was set up as a result of a
reduction of share capital and share premium account approved by the High Court
on October 5, 1994 and was subject to restrictions imposed by the Court. These
restrictions were to become inoperative when new consideration of an equivalent
amount was received on shares issued after October 6, 1994. This occurred on
May 9, 1995 and, accordingly, the reserve has been transferred to the
accumulated profit and loss account.
NOTE 20 - RECONCILIATION OF OPERATING LOSS TO NET CASH (OUTFLOW)/INFLOW FROM
OPERATING ACTIVITIES
<TABLE>
<CAPTION>
1996 1995 1994
$ 000 $ 000 $ 000
------- ------- -------
<S> <C> <C> <C>
Operating loss (3,462) (17,818) (1,121)
Exceptional amounts written off - 14,881 -
Profit on sale of investments (51) - -
Depreciation, depletion and amortization of oil and gas interests 1,612 - 125
Depreciation of non-oil and gas interests 56 63 3
(Increase)/decrease in debtors (138) 114 601
(Decrease)/increase in creditors (3,416) 4,747 (1,205)
------- ------- ------
Net cash (outflow)/inflow from operating activities (5,399) 1,987 (1,597)
======= ======= ======
</TABLE>
F-22
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOTE 21 - ANALYSIS OF CHANGES IN FINANCING
<TABLE>
<CAPTION>
NOTES OTHER BANK SHARE
PAYABLE LOANS LOANS CAPITAL
$ 000 $ 000 $ 000 $ 000
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Balance at May 1, 1993 483 - 965 9,486
Issues of shares for non-cash consideration - - - 2,496
Proceeds from issue of shares - - - 6,031
Share issue cost - - - (512)
Repayment of notes payable (483) - - -
Exchange gain - - (15) -
Bank borrowings - - 260 -
----- ------- ------- -------
Balance at April 30, 1994 - - 1,210 17,501
Issue of shares for non-cash consideration - - - 2,781
Shares to be issued for non-cash consideration - - - 2,030
Share issue costs - - - (317)
Non-cash share capital reduction - - - (4,818)
Repayment of bank borrowings - - (269) -
Proceeds from development loans - 2,351 - -
Loans in connection with Source acquisition - 625 - -
----- ------- ------- -------
Balance at April 30, 1995 - 2,976 941 17,177
Issue of shares for non-cash consideration - (1,000) - 1,142
Proceeds from issue of shares - - - 12,087
Share issue costs - - - (443)
Non-cash transfer of special reserve - - - (4,300)
Repayment of bank borrowings - - (904) -
Repayment of development loans - (1,351) - -
Repayment of other loans - (528) - -
----- ------- ------- -------
Balance at April 30, 1996 - 97 37 25,663
===== ======= ======= =======
</TABLE>
Other loans include development loans and other loans disclosed in notes 15 and
16.
Share capital includes shares to be issued, share premium, merger reserve and
special reserve.
NOTE 22 - ANALYSIS OF CHANGES IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
$ 000
-------
<S> <C>
Balance at May 1, 1993 (375)
Net cash inflow 181
-------
Balance at May 1, 1994 (194)
Net cash inflow 213
-------
Balance at April 30, 1995 19
Net cash inflow 1,158
-------
Balance at April 30, 1996 1,177
=======
</TABLE>
F-23
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Analysis of the balances of cash and cash equivalents as shown on the
consolidated balance sheets:
<TABLE>
<CAPTION>
1996 1995 1994
$ 000 $ 000 $ 000
------- ------- -------
<S> <C> <C> <C>
Cash and cash equivalents 1,177 64 288
Bank overdrafts - (45) (482)
------- ------- -------
1,177 19 (194)
======= ======= =======
</TABLE>
NOTE 23 - ACQUISITIONS.
On January 25, 1995 the Group acquired Source Petroleum Inc. ("Source"), an oil
and gas exploration and production company. The acquisition has been accounted
for using the acquisition method of accounting. The following summarizes the
fair value ascribed at the date of acquisition:
<TABLE>
<CAPTION>
Net assets acquired: $ 000
-------
<S> <C>
Tangible fixed assets 2,264
Debtors 340
Bank overdraft (28)
Creditors (1,210)
-------
1,366
=======
Acquisition cost:
Shares allotted 453
Cash 913
-------
1,366
=======
</TABLE>
The consideration for the acquisition was satisfied by the issue of 3,205,128
ordinary shares and cash of $800,000. $113,000 was expended in costs connected
with the acquisition.
The amounts attributed to the assets and liabilities of Source represent
estimates of fair market values at the date of acquisition. These amounts were
the same as the book values at acquisition, except that the net book value of
tangible fixed assets was $1,871,000 with the fair value uplift being $393,000
and the net book value of creditors was $1,611,000 with the fair value
attributed being $1,210,000.
The effect of the acquisition on the Group's results for the year to April 30,
1995 was to increase the loss for the financial year by $20,000. Unaudited
financial statements of Source for the five month period ended April 30, 1995
showed a loss for the period of $20,000.
F-24
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOTE 24 - EMPLOYEES
<TABLE>
<CAPTION>
1996 1995 1994
$ 000 $ 000 $ 000
----- ----- -----
<S> <C> <C> <C>
Staff costs (including Executive Directors)
Salaries and wages 661 443 215
Social security costs 82 16 6
Termination costs 178 - -
Other pension costs 7 - -
----- ----- -----
928 459 221
===== ===== =====
1996 1995 1994
$ 000 $ 000 $ 000
----- ----- -----
Aggregate directors' emoluments (including
pension contributions) were:
as directors 46 9 7
for management services
salaries 341 216 137
benefits-in-kind 4 - -
pension contributions 7 - -
fees to third parties 26 - -
Payments to former directors in respect of
termination of contracts 156 - -
----- ----- -----
580 225 144
===== ===== =====
</TABLE>
The average number of persons employed by the Group, including Executive
Directors, was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
$ 000 $ 000 $ 000
----- ----- -----
<S> <C> <C> <C>
Management and administration 8 9 5
Technical and operational 7 11 -
----- ----- -----
15 20 5
===== ===== =====
</TABLE>
F-25
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOTE 25 - DIRECTORS' AND RELATED PARTY TRANSACTIONS
Transactions related with parties now known to be connected with Mr. O'Brien are
dealt with in note 4.
The following related party transactions occurred with North American Gas
Investment Trust PLC (NAGIT) which on May 9, 1995 became a substantial
shareholder of the Company:
(i) July 29, 1994, the Group had entered into a loan agreement with NAGIT.
The main terms of the interest free loan were:
. a facility of $250,000 to be drawn down solely for the purpose of
drilling the Valentine #14 well;
. if the well was successful in improving commercially recoverable
quantities of oil and gas, the capital drawn down together with a 100%
premium would be payable to NAGIT from production at 30% of gross
production revenues for the first 125 days, 50% of gross production
thereafter to 365 days after which settlement of the remaining balance
would be made in shares;
. if the well was abandoned, NAGIT was entitled to repayment in shares
to the lesser of 5,000,000 ordinary shares of 1p each and the number
of ordinary shares of 1p each to the value of $250,000;
. if drilling was suspended for more than 30 days due to lack of funds,
NAGIT was entitled to repayment in shares to the value of $250,000.
The full amount of the facility was drawn down.
As Mr. O'Brien appeared to have fraudulently misrepresented that the
Valentine #14 well was successful, on various dates between June 6, 1995
and July 19, 1995 $347,307 in aggregate was originally paid to NAGIT
representing payments from production volumes. Subsequent to the discovery
of the fraudulent misrepresentation concerning the Valentine #14 well, this
amount was off-set against the $1,300,000 cash element of the purchase and
sale agreement with NAGIT (see(ii) below).
At April 30, 1995 $250,000 was included as shares to be issued in respect
of this agreement. These shares were issued on November 27, 1995 as
discussed in note 17.
(ii) on January 25, 1995, NAGIT lent the Group $1,200,000 bearing interest at 7%
per annum for assistance in the financing of the acquisition of Source
Petroleum Inc and to provide additional working capital. At April 30, 1995,
$1,200,000 was outstanding and included in development loans and this
amount was repaid from the proceeds of the placing and open offer on May 9,
1995;
(iii) on April 10, 1995, the Group entered into a purchase and sale agreement
with NAGIT.
The main terms of the agreement were:
. the Group would purchase a portfolio of producing properties located
in the US with an effective date of January 1, 1995;
. consideration for the acquisition would comprise $1,300,000 in cash
and the issue of 18,426,500 ordinary shares;
F-26
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
The 18,426,500 ordinary shares are included as shares to be issued at April
30, 1995 at $1,780,000. The 18,426,500 ordinary shares were issued to NAGIT
on May 9, 1995. At April 30, 1995 $1,300,000 was included in other
creditors. This was settled by the payment on various dates of an aggregate
amount of $347,307 and a payment on November 1, 1995 of $906,000.
NOTE 26 - SUBSEQUENT EVENTS
On August 13, 1996 the Company announced that it had entered into a conditional
agreement to effect a merger ("Merger") with LaTex Resources, Inc. ("LaTex"), a
company listed on the NASDAQ. As a result of the Merger, the Company will issue
to the LaTex shareholders shares of the Company which will equal approximately
72% of the Company's issued shares after the Merger. The Company's shareholders
will own approximately 28% of the issued shares after the Merger. As a
condition of the Merger, the Company will effect a share consolidation, with the
result that each 40 shares that the Company's shareholders currently own will
be converted into one share of the Company; the shares issued to the LaTex
shareholders will be adjusted to take this consolidation into account. At the
Company's request, The London Stock Exchange has suspended the listing of the
Company's shares pending further details of the reorganization of the Company.
Alliance's directors have reached agreement in principle with LaTex's lenders
that LaTex's current facility will be amended with the principal effect that
capital repayments will be suspended until 18 months following completion of the
Merger. The directors consider that the amended facility will provide a sound
financial base for the enlarged group. The Merger is conditional upon a suitable
facility being finalized.
On August 13, 1996, the Company also announced that it has agreed terms to stay
its current litigation against Mr. John O'Brien, its former Chief Executive and
other companies beneficially owned by Mr. O'Brien. Mr. O'Brien has also
withdrawn a counterclaim made against the Company (see note 4).
Other transactions occurred subsequent to April 30, 1996 as follows:
(i) On May 13, 1996 the Group announced that one of its US subsidiaries ARNO
Inc had reached agreement on the sale of its interest in four leases
comprising the McPac field, Matagorda Island, offshore Texas to Louisiana
Land and Exploration Company for a cash consideration of $525,000. The
Group's interest in these blocks varied between 4.2% and 6.3% and its
interest in the McPac platform was 6.3%. On May 30, 1996, the Group
completed this transaction and the gross consideration was adjusted to
reflect the impact of the effective date of January 1, 1996 and a gas
overlift imbalance. This resulted in a net cash consideration of $432,000,
which has been taken as a credit against the carrying cost of the Group's
oil and gas assets in the year to April 30, 1997.
(ii) On August 15, 1996 the Group disposed of its interest in 4 leases
comprising the Provident City field, Lavaca County, onshore Texas to Shana
Petroleum for a net cash consideration of $435,000. The Groups' working
interest in these blocks varied between 17.7% and 42.4%. The proceeds of
the sale have been taken as a credit against the carrying cost of the
Group's oil and gas assets in the year to April 30, 1997.
(iii) In August 1996 the Company transferred its interest in Geological Forecast
Technology Ltd by transferring its 50 'A' shares to Geos Seismology
Limited as part of a final settlement of an action brought by the latter.
(iv) On October 3, 1996, the Group announced that one of its US subsidiaries
ARNO Inc had reached agreement for the sale of its interests in three US
oil and gas fields to BWAB Incorporated for a cash consideration of
$1,425,000. The disposal covered the Group's interests in the Frost,
Gilmer South and Mocane Laverne fields, which are located in Texas and
Oklahoma and had combined remaining reserves of 25,920 barrels of oil and
1,720 million cubic feet of gas as at May 1, 1996, representing
approximately 16% of the Group's total proved and probable reserves. The
interests comprised 26 wells and the working interests in those wells
varied between 5% and 28%. The proceeds of the sale have been taken as a
credit against the carrying cost of the Group's oil and gas assets in the
year to April 30, 1997.
F-27
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOTE 27 - LITIGATION AND CONTINGENCIES
The Group is party to the following litigation:
(i) the Group is seeking to recover $1,300,000 of unpaid drilling costs from
Drexco Inc, with Drexco Inc and H Huizenga claiming unspecified damages in
respect of conduct, and removal of Alliance Resources (USA) Inc as
operator of the Valentine field. The Group has obtained legal advice and
will vigorously prosecute its claim against Drexco Inc. The Group denies
the counter claim and will vigorously defend the matter;
(ii) the Group has received, on September 12, 1996, a writ from Best Royalties
Plc claiming $186,368 and a declaration that they are entitled to a sum
equal to 40% of Alliance (USA) Inc's net cash proceeds received from the
Arrowhead well (and payment of the said sum), alternatively damages, plus
interest thereon. The Group denies the claim and will vigorously defend
this matter;
(iii) Ernest M Closuit et al. have asserted a claim against the Group for
alleged underpayment of amounts due for Closuit et al.'s interest in the
Buller No. 2 well in the South Elton field and have further claimed an
interest in past and future production from certain other wells in the
field. Total claims amount to approximately $1,200,000. Discovery has just
begun. The Group denies all allegations and claims and will vigorously
defend this matter;
(iv) the directors have not been notified and do not expect to be notified of
any claims arising from the alleged fraudulent activities of Mr. O'Brien.
NOTE 28 - CAPITAL COMMITMENTS
The capital commitments in respect of drilling costs for the forthcoming year
which are authorized but not contracted are as follows:
<TABLE>
<CAPTION>
APRIL 30, 1994 APRIL 30, 1995 APRIL 30, 1996
$ 000 $ 000 $ 000
-------------- -------------- --------------
<S> <C> <C> <C>
Capital commitments 6,037 5,300 -
====== ====== =====
</TABLE>
NOTE 29 - SIGNIFICANT DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES GENERALLY
ACCEPTED IN THE UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
The Company's accounting policies conform with United Kingdom generally accepted
accounting principles ("UK GAAP") which differ in certain respects from United
States generally accepted accounting principles ("US GAAP"). Differences which
have a significant effect on the consolidated profit after tax (net income) and
shareholders' equity of the Group are set out below.
(a) Ceiling tests
A ceiling test has been carried out, in accordance with UK GAAP on an annual
basis, to determine the maximum net book amount of expenditure within the cost
pool of oil and gas assets which may be recognized. The ceiling test is based
on the Company's best estimate of the future cash flows from the underlying
properties. Under US GAAP, SEC regulations require ceiling tests to be computed
at current prices discounted to present value at 10%.
Under UK GAAP a ceiling test deficit should be written off to expense only if it
indicated a permanent diminution in value. Under US GAAP any deficit should be
charged immediately to the profit and loss account.
F-28
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(b) Goodwill
Under UK GAAP goodwill arising on acquisitions has been set off directly against
reserves. Under US GAAP, goodwill arising from acquisitions is capitalized and
amortized over its estimated useful life. However, following irregularities
mentioned above, US GAAP requires the balance to be written of in 1995.
(c) Estimated proceeds of Alliance shares
As set out in note 4, the Company has recognized an exceptional credit of
$272,000 relating to the right to receive the proceeds of the sale of Alliance
shares resulting from the settlement with Mr. O'Brien under UK GAAP. Under US
GAAP, such proceeds are recognized only on receipt.
(d) Statements of cash flows
The Company has adopted United Kingdom Financial Reporting Standard No. 1 "Cash
Flow Statements" ("FRS 1"). Its objectives and principles are similar to those
set out in the US Statement of Financial Standards No. 95 "Statement of Cash
Flows" ("SFAS 95"). The principal difference between the standards relates to
classification. Under FRS 1, the Company presents its cash flows from (a)
operating activities; (b) returns on investments and servicing of finance; (c)
taxation; (d) investing activities; and (e) financing activities. SFAS 95
requires only three categories of cash flow activity: (a) operating; (b)
investing; and (c) financing. Cash flows and taxation and returns on investments
and servicing of finance shown under FRS 1 would, with the exception of
dividends paid, be included as operating activities under SFAS 95. The payment
of dividends would be included as a financing activity under SFAS 95.
For purposes of reporting cash flows, all cash at bank and in hand and bank
overdrafts repayable on demand are considered cash equivalents.
F-29
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
EFFECT ON PROFIT AFTER TAX OF SIGNIFICANT DIFFERENCES BETWEEN UK GAAP AND US
GAAP:
<TABLE>
<CAPTION>
REFERENCE
TO NOTE
ABOVE YEAR ENDED APRIL 30
---------- --------------------
1996 1995
$000 $000
------- --------
<S> <C> <C> <C>
(Loss) after tax under UK GAAP (3,593) (18,213)
Adjustments:
Ceiling test a) - (2,428)
Resulting adjustment to depletion
of oil and gas interests 437 -
Goodwill b) - (1,000)
Estimated proceeds of Alliance
shares c) (272) -
------- ----------
Approximate (loss) after tax,
adjusted for US GAAP (3,428) (21,641)
======= ==========
Approximate (loss) per Ordinary
Share (primary), adjusted for US
GAAP (cents) (1.1) (15.4)
======= ==========
(Loss) per Ordinary Share, UK
GAAP (cents) (1.1) (13.0)
======= ==========
</TABLE>
EFFECT ON STOCKHOLDERS' EQUITY OF SIGNIFICANT DIFFERENCES BETWEEN UK GAAP AND US
GAAP:
<TABLE>
<CAPTION>
REFERENCE
TO NOTE
ABOVE YEAR ENDED APRIL 30
---------- --------------------
1996 1995
------- --------
$ 000 $ 000
<S> <C> <C> <C>
Stockholders' equity under UK GAAP 7,755 (1,438)
Adjustments:
Ceiling test a) (1,991) (2,428)
Estimated proceeds of Alliance shares c) (272) -
------- --------
Approximate stockholders' equity in
accordance with US GAAP 5,492 (3,866)
======= ========
</TABLE>
F-30
<PAGE>
ALLIANCE RESOURCES PLC
SUPPLEMENTAL OIL AND GAS DATA - (UNAUDITED)
The following supplemental information on oil and gas exploration and production
activities of the group is presented in accordance with Statement of Financial
Accounting Standards No. 69 "Disclosures about Oil and Gas Producing Activities"
("FAS 69").
ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES
The Group's estimated proved developed and undeveloped reserves of oil and gas
and changes thereto for the years 1994, 1995 and 1996 and proved developed
reserves of oil and gas at each year end are set forth in the following table.
Ryder Scott Company, an independent firm of petroleum engineers, carried out an
evaluation of approximately 71% of the Group's proved reserves for the year
ended April 30, 1996 and 100% of the Group's reserves as of April 30, 1995. The
reserves estimated as of April 30, 1994 are based on an evaluation carried out
by Metrovest, an independent firm of petroleum engineers, as of January 1, 1994,
flexed for production to April 30, 1994.
Proved reserves are reserves of crude oil, condensate, natural gas and natural
gas liquids and are estimated quantities as of a specific date, which geological
and engineering data demonstrate with reasonable certainty to be recoverable in
the future from known reservoirs under existing economic and operating
conditions.
Due to the inherent uncertainties and the limited nature of reservoir data,
estimates of reserve quantities are subject to change over time as additional
information becomes available.
<TABLE>
<CAPTION>
1996 1995 1994
--------------- ----------------- ---------------
OIL GAS OIL GAS OIL GAS
----- ------ ------- -------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Proved developed and undeveloped
reserves:
Beginning of year 468 3,058 1,475 47,673 1,220 5,919
Revisions of previous estimates 274 (72) (1,441) (47,607) - -
Improved recovery 114 - - - - -
Purchases of minerals in place - - 481 3,230 - -
Sales of minerals in place (103) - - - - -
Extensions and discoveries - - - - 282 41,909
Production (125) (602) (47) (238) (27) (153)
---- ----- ------ ------- ----- ------
End of year 628 2,384 468 3,058 1,475 47,675
==== ===== ====== ======= ===== ======
Proved developed reserves:
Beginning of year 303 2,083 232 314 356 127
==== ===== ====== ======= ===== ======
End of year 628 2,384 303 2,083 232 314
==== ===== ====== ======= ===== ======
</TABLE>
Oil reserves, which include condensate and natural gas liquids, are stated in
thousands of barrels and gas reserves are stated in millions of cubic feet.
Subsequent to April 30, 1996, Alliance has sold substantial properties. See
"Alliance-Recent Developments". The reserves attributable to those properties
accounted for approximately 25% of Alliance's proved reserves at April 30, 1996.
F-31
<PAGE>
ALLIANCE RESOURCES PLC
SUPPLEMENTAL OIL AND GAS DATA - (UNAUDITED)
CAPITALIZED COSTS RELATED TO OIL AND GAS PRODUCING ACTIVITIES
The following table summarizes capitalized costs for oil and gas exploration and
production activities and the related accumulated depreciation, depletion and
amortization under UK GAAP.
<TABLE>
<CAPTION>
1996 1995
-------- --------
($000) ($000)
<S> <C> <C>
At April 30
Unproved properties 118 398
Proved properties 25,186 23,984
------- -------
Total before depreciation, depletion and amortization 25,304 24,382
Accumulated depreciation, depletion and amortization (18,197) (16,585)
------- -------
Net capitalized costs 7,107 7,797
======= =======
</TABLE>
COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION, EXPLORATION AND DEVELOPMENT
ACTIVITIES
The following table sets forth costs incurred in oil and gas property
acquisition, exploration and development activities under UK GAAP.
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
$ 000 $ 000 $ 000
<S> <C> <C> <C>
Property acquisitions
unproved 118 - -
proved 794 5,092 506
Exploration and appraisal - 20 -
Development 745 3,120 3,500
------ ------ ------
Total costs incurred 1,657 8,232 4,006
====== ====== ======
</TABLE>
F-32
<PAGE>
ALLIANCE RESOURCES PLC
SUPPLEMENTAL OIL AND GAS DATA - (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, 1994, 1995 and 1996 under UK GAAP. All of the Company's oil and gas
producing activities are located within the United States.
<TABLE>
<CAPTION>
1996 1995 1994
$ 000 $ 000 $ 000
------- -------- -----
<S> <C> <C> <C>
Revenues 3,330 1,169 837
Production Costs (1,770) (756) (454)
Gross production taxes (311) (94) (67)
Depreciation depletion and amortization (1,612) - (125)
Write-down of oil and gas properties - (14,881) -
======= ======== =====
Results of operations before income taxes (363) (14,562) 191
Income tax expense - - -
------- -------- -----
Results of operations (excluding corporate
overhead and interest costs) (363) (14,562) 191
======= ======== =====
</TABLE>
STANDARD MEASURE OF DISCONTINUED FUTURE NET CASH FLOWS RELATING TO PROVED CRUDE
OIL & GAS RESERVES QUANTITIES
The standardized measure of discounted future net cash flows related to proved
crude oil and natural gas reserves is calculated in accordance with the
requirements of SFAS 69 and uses reserve definitions as prescribed by the
Financial Accounting Standards Board. Estimated future cash flows from
production are computed by applying year end prices for crude oil and natural
gas and year-end exchange rates to year end quantities of estimated net proved
reserves. Future price changes are limited to those provided by contractual
arrangements in existence at the end of the reporting year. Future development
and production costs are those estimated future expenditures necessary to
develop and produce year end estimated proved reserves based on year-end price
levels and assuming the continuance of year end economic conditions. Future
production costs include estimated abandonment liabilities. Discounted future
net cash flows are calculated using 10% mid-period discount factors.
F-33
<PAGE>
ALLIANCE RESOURCES PLC
SUPPLEMENTAL OIL AND GAS DATA - (UNAUDITED)
The information provided below does not represent management's estimate of the
Company's expected future cash flows or value of proved reserves. Estimates of
proved reserve quantities are imprecise and change over time as new information
becomes available and in particular, probable and possible reserves, which may
become proved reserves in 1997 or later, are excluded from the calculations.
Also, assumptions have been required 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 year will continue. Other different but equally valid assumptions
might lead to significantly different final results. Although calculated in
accordance with SFAS 69, the Company therefore cautions against the placing of
unwarranted reliance on this information in view of the highly arbitrary nature
of the assumptions on which it is based.
<TABLE>
<CAPTION>
1996 1995
$ 000 $ 000
------- -------
<S> <C> <C>
Future cash inflows 18,402 14,475
Future development and production costs (6,622) (6,909)
------- -------
Undiscounted future cash flows before income taxes 11,780 7,566
10% discount (2,883) (2,500)
------- -------
Standardized measure of discounted future net cash
flows before income taxes 8,897 5,066
======= =======
</TABLE>
Alliance Resources Plc is a UK listed company which was not required to present
standardized measure information. Consequently no such information is available
as of April 30, 1994 and the information available as of April 30, 1996 and 1995
is only available on a before tax basis. The table above has been produced on
the basis of all available information.
F-34
<PAGE>
ALLIANCE RESOURCES PLC
SUPPLEMENTAL OIL AND GAS DATA - (UNAUDITED)
CHANGES IN STANDARDIZED MEASURE DISCOUNTED FUTURE NET CASH FLOWS
<TABLE>
<CAPTION>
$ 000
-------
<S> <C>
Present value at May 1, 1995 5,066
-------
Sales of crude oil & natural gas produced, net of
production costs (1,249)
Net changes in prices and production costs 1,382
Development costs incurred 734
Changes in future development costs 3
Revisions of previous quantity estimates 3,346
Sales of minerals in place (917)
Accretion of discount 532
Net change for the year 3,831
-------
Present value at April 30, 1996 8,897
=======
</TABLE>
F-35
<PAGE>
EXHIBIT 99.4
ALLIANCE RESOURCES PLC
UNAUDITED INTERIM STATEMENT FOR THE SIX MONTHS ENDED OCTOBER 31, 1996
CONSOLIDATED PROFIT AND LOSS ACCOUNT
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31 APRIL 30,
1996 1995 1996
UNAUDITED UNAUDITED AUDITED
------------ ----------- -----------
$ 000 $ 000 $ 000
<S> <C> <C> <C>
REVENUES 1,998 1,551 3,686
------- ------- -------
COSTS AND EXPENSES:
Exceptional costs arising from irregularities (120) (499) (589)
Other operating costs (2,952) (3,672) (6,559)
------- ------- -------
(3,072) (4,171) (7,148)
------- ------- -------
OPERATING LOSS (1,074) (2,620) (3,462)
Other income and deductions:
Interest (net) 31 232 229
Exceptional amounts written off investments - - (201)
Foreign exchange 56 - (159)
NET LOSS (987) (2,388) (3,593)
LOSS PER SHARE (CENTS) (0.3) (0.8) (1.1)
</TABLE>
CONSOLIDATED STATEMENT OF TOTAL RECOGNIZED GAINS AND LOSSES
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, APRIL 30,
1996 1995 1996
UNAUDITED UNAUDITED AUDITED
------------ ------------ -----------
$ 000 $ 000 $ 000
<S> <C> <C> <C>
Loss for the financial period (987) (2,388) (3,593)
Foreign exchange translation 35 (31) -
----- ------- ----------
Total recognized gains and losses for the period (952) (2,419) (3,593)
----- ------- ----------
</TABLE>
F-36
<PAGE>
ALLIANCE RESOURCES PLC
UNAUDITED INTERIM STATEMENT FOR THE SIX MONTHS ENDED OCTOBER 31, 1996
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AS AT AS AT
OCTOBER 31, 1996 APRIL 30, 1996
UNAUDITED AUDITED
$ 000 $ 000
-------- --------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents 2,515 1,177
Receivables 1,911 1,357
-------- --------
Total current assets 4,426 2,534
Net property, plant and equipment 4,368 7,311
-------- --------
Total assets 8,794 9,845
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities 1,903 1,998
Long term debt, excluding current installments 88 92
-------- --------
Total liabilities 1,991 2,090
======== ========
Stockholders' equity
Ordinary shares 5,105 5,105
Share premiums 20,157 20,157
Merge reserve 401 401
Retained earnings (18,860) (17,908)
-------- --------
Total stockholders' equity 6,803 7,755
-------- --------
8,794 9,845
======== ========
</TABLE>
F-37
<PAGE>
ALLIANCE RESOURCES PLC
UNAUDITED INTERIM STATEMENT FOR THE SIX MONTHS ENDED OCTOBER 31, 1996
CONSOLIDATED CASH FLOW STATEMENT
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
ENDED SIX MONTHS ENDED APRIL 30,
OCTOBER 31, 1996 OCTOBER 31, 1995 1996
UNAUDITED UNAUDITED AUDITED
----------------- ----------------- -----------
US $000S US $000S US $000S
<S> <C> <C> <C>
NET CASH (OUTFLOW) FROM OPERATING ACTIVITIES (529) (4,766) (5,399)
----- ------ ------
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest received 35 232 236
Interest paid (4) (31) (28)
----- ------ ------
NET CASH INFLOW FROM RETURNS ON INVESTMENTS AND
SERVICING OF FINANCE 31 201 208
----- ------ ------
INVESTING ACTIVITIES
Payments to acquire tangible fixed assets (114) (1,500) (3,270)
Payments to acquire investments - - (59)
Payments associated with Merger expenses (246) - -
Receipts from sale of investments - - 77
Receipts from sales of tangible fixed assets 2,227 696 740
----- ------ ------
NET CASH INFLOW / (OUTFLOW) FROM INVESTING ACTIVITIES 1,867 (804) (2,512)
----- ------ ------
NET CASH / INFLOW (OUTFLOW) BEFORE FINANCING 1,369 (5,369) (7,703)
----- ------ ------
FINANCING
Proceeds from issue of shares - 12,087 12,087
Share issue costs - (439) (443)
(Decrease) in bank borrowings (27) (941) (904)
(Repayment) of development loans - (1,351) (1,351)
(Repayment) of other loans (4) (525) (528)
----- ------ ------
NET CASH (OUTFLOW) / INFLOW FROM FINANCING (31) 8,831 8,861
----- ------ ------
INCREASE IN CASH AND CASH EQUIVALENTS 1,338 3,462 1,158
===== ====== ======
</TABLE>
NOTES
1. The comparative figures for the financial year ended April 30, 1996 are not
the Group's statutory accounts for that year. Those accounts have been
reported on by the Group's auditors and delivered to the Registrar of
Companies. The report of the auditors was unqualified but included a
statement regarding the adequacy of the Group's accounting records pending
completion of the investigations into the activities of Mr. O'Brien, the
former Chief Executive.
2. The interim financial information for the six months ended October 31, 1996
is unaudited and has been prepared in accordance with the accounting
policies adopted in the statutory financial statements for the year ended
April 30, 1996. The interim results reflect all adjustments which are, in
the opinion of the directors, necessary for a fair presentation of the
results for the interim periods presented and should be read in conjunction
with the Consolidated Financial Statements presented elsewhere in this
Proxy Statement. The interim results have been prepared in accordance with
UK GAAP which differ in certain significant respects from US GAAP (see
below).
F-38
<PAGE>
ALLIANCE RESOURCES PLC
UNAUDITED INTERIM STATEMENT FOR THE SIX MONTHS ENDED OCTOBER 31, 1996
3. The comparative figures for the six months ended October 31, 1995 have been
extracted from the unaudited interim financial information dated on
February 28, 1996.
4. During the six months to October 31, 1996, the Group completed its review
of non-core assets and disposed of the non-operated properties owned by the
wholly-owned subsidiary ARNO Inc. After depletion, the gross profit
attributable to the properties disposed of in the period to October 31,
1996 was insignificant.
5. The exceptional costs arising from irregularities of $120,000 charged in
the six month period ended October 31, 1996 relate largely to legal fees
incurred in connection with the earlier proceedings against Mr. O'Brien and
the subsequent settlement announced on August 13, 1996.
6. Included in debtors of $1,911,000 is an amount of $650,000 relating to
professional fees incurred to date on the LaTex merger. It should be noted
that this is an interim accounting treatment only and that on completion of
the proposed transaction, the expenses relating to the merger itself will
be capitalized as part of the cost of acquisition and the expenses relating
to the issue of shares will be offset against the share premium account in
accordance with the requirements of companies legislation.
7. Loss per share is based on the loss for the six months ended October 31,
1996 and on the weighted average of 324,152,633 ordinary shares of 1p each
in issue during the period.
8. The directors do not propose to recommend the payment of an interim
dividend.
SIGNIFICANT DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE
UNITED KINGDOM AND THE UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.
The Company's accounting policies conform with United Kingdom generally accepted
accounting principles ("UK GAAP") which differ in certain respects from United
States generally accepted accounting principles ("US GAAP"). Differences which
have a significant effect on the consolidated profit after tax (net income) and
shareholders' equity of the Group are set out below.
(a) Ceiling tests
A ceiling test has been carried out, in accordance with UK GAAP on an annual
basis, to determine the maximum net book amount of expenditure within the cost
pool of oil and gas assets which may be recognized. The ceiling test is based
on the Company's best estimate of the future cash flows from the underlying
properties. Under US GAAP, SEC regulations require ceiling tests to be computed
at current prices discounted to present value at 10%.
Under UK GAAP a ceiling test deficit should be written off to expense only if it
indicated a permanent diminution in value. Under US GAAP any deficit should be
charged immediately to the profit and loss account.
(b) Goodwill
Under UK GAAP goodwill arising on acquisitions has been set off directly against
reserves. Under US GAAP, goodwill arising from acquisitions is capitalized and
amortized over its estimated useful life. However, following irregularities
mentioned above, US GAAP requires the balance to be written off in 1995.
(c) Estimated proceeds of Alliance shares
As set out in note 4, the Company has recognized an exceptional credit of
$272,000 relating to the right to receive the proceeds of the sale of Alliance
shares resulting from the settlement with Mr. O'Brien under UK GAAP. Under US
GAAP, such proceeds are recognized only on receipt.
F-39
<PAGE>
ALLIANCE RESOURCES PLC
UNAUDITED INTERIM STATEMENT FOR THE SIX MONTHS ENDED OCTOBER 31, 1996
(d) Statements of cash flows
The Company has adopted United Kingdom Financial Reporting Standard No. 1 "Cash
Flow Statements" ("FRS 1"). Its objectives and principles are similar to those
set out in the US Statement of Financial Standards No. 95 "Statement of Cash
Flows" ("SFAS 95"). The principal difference between the standards relates to
classification. Under FRS 1, the Company presents its cash flows from (a)
operating activities; (b) returns on investments and servicing of finance; (c)
taxation; (d) investing activities; and (e) financing activities. SFAS 95
requires only three categories of cash flow activity: (a) operating; (b)
investing; and (c) financing. Cash flows and taxation and returns on investments
and servicing of finance shown under FRS 1 would, with the exception of
dividends paid, be included as operating activities under SFAS 95. The payment
of dividends would be included as a financing activity under SFAS 95.
For purposes of reporting cash flows, all cash at bank and in hand and bank
overdrafts repayable on demand are considered cash equivalents.
EFFECT OF PROFIT AFTER TAX OF SIGNIFICANT DIFFERENCES BETWEEN UNITED KINGDOM
GAAP AND UNITED STATES GAAP:
<TABLE>
<CAPTION>
REFERENCE TO
NOTE ABOVE SIX MONTHS ENDED OCTOBER 31
------------ -----------------------------
1996 1995
---- ----
$000 $000
<S> <C> <C> <C>
(Loss) after tax under UK GAAP (987) (2,388)
Adjustment to depletion consequent upon ceiling
test adjustment a) 308 270
----- -------
Approximate (loss) after tax adjusted for US GAAP (679) (2,118)
===== =======
Approximate (loss) per Ordinary Share (primary)
adjusted for US GAAP (cents) (0.2) (0.7)
(Loss) per Ordinary Share, UK GAAP (cents) (0.3) (0.8)
</TABLE>
EFFECT ON STOCKHOLDERS' EQUITY OF SIGNIFICANT DIFFERENCES BETWEEN UNITED KINGDOM
GAAP AND UNITED STATES GAAP:
<TABLE>
<CAPTION>
REFERENCE TO
NOTE ABOVE AS AT OCTOBER
------------ -----------------------------
1996 1995
---- ----
$000 $000
<S> <C> <C> <C>
Stockholders' equity under UK GAAP 6,803 8,933
Ceiling test and consequent depletion adjustment a) (1,683) (2,158)
Estimated proceeds of Alliance shares c) (295) -
------- -------
Approximate stockholders' equity in accordance with
US GAAP 4,825 6,775
======= =======
</TABLE>
F-40
<PAGE>
EXHIBIT 99.5
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors
LaTex Resources, Inc.
Tulsa, Oklahoma
We have audited the accompanying consolidated balance sheets of LaTex Resources,
Inc. and subsidiaries (the "Company") as of July 31, 1996 and 1995 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years ended July 31, 1996, 1995, and 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company at
July 31, 1996 and 1995 and the results of the Company's operations and its cash
flows for the years ended July 31, 1996, 1995, and 1994, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company has incurred a significant
net loss for the year ended July 31, 1996 and has working capital deficiencies
and consolidated tangible net worth deficiencies. As discussed in Notes 1 and 5
to the consolidated financial statements, the Company was not in compliance with
certain financial covenants of its credit agreement with its primary lender at
July 31, 1996. These factors raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty and do not include any adjustments to the classification of assets
and liabilities that might result should the Company be unable to continue as a
going concern.
F-1
<PAGE>
As discussed in Note 16, the consolidated financial statements as of and for the
year ended July 31, 1995 have been restated to correct the accounting for the
acquisition of Germany Oil Company.
/s/ Briscoe & Burke
BRISCOE & BURKE
Certified Public Accountants
November 6, 1996 except as to
information presented in Notes 1
and 5, for which the date is
November 30, 1996
Tulsa, Oklahoma
F-2
<PAGE>
LaTex RESOURCES, INC.
Consolidated Balance Sheets
July 31, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
------------ -------------
(Restated)
<S> <C> <C>
Current assets:
Cash $ 19,337 $ 314,229
Accounts receivable - net of
allowance for doubtful
accounts of $0 in 1996
and $135,000 in 1995 3,324,309 2,836,596
Accounts and notes receivable -
other (Note 3) 515,820 696,688
Inventories 175,493 90,976
Other current assets 27,587 84,791
Assets held for sale 164,792 144,990
------------ ------------
Total current assets 4,227,338 4,168,270
------------ ------------
Property and equipment, at cost
Oil and gas properties (using
successful efforts method) 41,264,573 39,638,656
Exploration prospects in progress - 3,363,000
Other depreciable assets 854,259 954,415
------------ ------------
42,118,832 43,956,071
Accumulated depreciation and
depletion 10,173,524 6,247,190
------------ ------------
Net property and equipment 31,945,308 37,708,881
------------ ------------
Other assets:
Notes receivable, net of
current portion (Note 3) 757,500 -
Deposits and other assets 130,734 137,559
Accounts and notes receivable -
related parties (Note 3) 392,297 590,605
Investments in and advances
to affiliates (Note 3) - 3,647,480
Intangible assets, net of
amortization 1,512,899 1,670,384
------------ ------------
Total other assets 2,793,430 6,046,028
------------ ------------
TOTAL ASSETS $ 38,966,076 $ 47,923,179
============ ============
<CAPTION>
LIABILITIES and STOCKHOLDERS' EQUITY 1996 1995
------------ ------------
(Restated)
<S> <C> <C>
Current liabilities:
Accounts payable $ 9,057,707 $ 4,544,406
Accounts payable - other 132,000 2,959,284
Accrued expenses payable 607,055 139,113
Current portion of long-term debt
(Note 5) 22,235,867 3,644,723
------------ ------------
Total current liabilities 32,032,629 11,287,526
------------ ------------
Long-term debt, net of current portion
(Note 5) - 20,634,809
Other liabilities (Note 11) 615,000 -
------------ ------------
Total liabilities 32,647,629 31,922,335
------------ ------------
Stockholders' equity
Preferred stock - par value $0.01;
5,000,000 shares authorized:
Series A convertible preferred stock
($10 liquidation preference),
449,828 and 441,018 issued and
outstanding, at July 31, 1996 4,498 4,410
and 1995 respectively (Note 10)
Series B convertible preferred stock
($10 liquidation preference),
480,025 and 381,100 issued and
outstanding, at July 31, 1996 and 1995
respectively (Note 10) 4,800 3,811
Common stock - par value $.01,
50,000,000 authorized; issued and
outstanding 19,123,995
18,880,195, at July 31, 1996 and 1995
respectively 191,240 188,802
Additional paid-in capital 18,355,134 17,149,383
Treasury stock 1,008,500 and 958,000
shares, respectively (489,365) (399,106)
Accumulated deficit (11,747,860) (946,456)
------------ ------------
Total stockholders' equity 6,318,447 16,000,844
------------ ------------
Commitments and contingencies (Note 11)
TOTAL LIABILITIES and
STOCKHOLDERS' EQUITY $ 38,966,076 $ 47,923,179
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
LaTex RESOURCES, INC.
Consolidated Statements of Operations
Years Ended July 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- -----------
(Restated)
<S> <C> <C> <C>
Revenues:
Oil and gas revenue (Note 15) $ 11,979,982 $ 8,585,453 $ 8,703,100
Crude oil and gas marketing 540,156 1,223,188 2,780,543
Lease operations and management fees 1,011,025 634,038 601,723
------------ ----------- -----------
Total operating income 13,531,163 10,442,679 12,085,366
------------ ----------- -----------
Operating expenses:
Lease operating expense 6,608,089 5,264,858 4,840,638
Cost of crude oil and gas marketing 133,455 743,610 2,216,294
Dry hole costs and abandonments (Note 6) 3,586,037 104,179 112,772
General and administrative 2,893,146 2,736,267 2,496,567
Depreciation, depletion, and amortization 4,705,912 2,710,574 2,213,823
------------ ----------- -----------
Total operating expense 17,926,639 11,559,488 11,880,094
------------ ----------- -----------
Net operating income (loss) (4,395,476) (1,116,809) 205,272
Other income (expense):
Equity in losses and write-offs of investments in affiliates (4,184,881) (298,839) (439,916)
Gain on sale of assets 2,365,807 127,926 392,592
Interest expense (Note 15) (2,556,856) (1,291,064) (598,335)
Interest income 351,005 122,540 17,046
------------ ----------- -----------
Net loss from continuing operations before income taxes (8,420,401) (2,456,246) (423,341)
Income tax expense - 35,096 -
------------ ----------- -----------
Net loss from continuing operations (8,420,401) (2,491,342) (423,341)
Loss on disposal of subsidiary, net of income taxes (Note 1) (1,810,382) - -
------------ ----------- -----------
Net loss (10,230,783) (2,491,342) (423,341)
Preferred stock dividends 570,621 132,800 -
------------ ----------- -----------
Net loss for common shareholders $(10,801,404) $(2,624,142) $ (423,341)
============ =========== ===========
Loss per share from continuing operations $ (.50) $ (.15) $ (.02)
============ =========== ===========
Loss per share for common shareholders $ (.60) $ (.15) $ (.02)
============ =========== ===========
Weighted average number of shares outstanding 18,011,826 17,661,428 17,434,159
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
LaTex RESOURCES, INC.
Consolidated Statements of Stockholders' Equity
Years Ended July 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
Common Stock Additional
Preferred -------------------------- Paid-in Retained
Stock Shares Par Value Capital Earnings
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance July 31, 1993 $ - 16,345,195 $ 163,452 $ 6,226,613 $ 2,101,027
Issued for acquisition of stock of
Wexford Technology, Inc. (Note 6) - 100,000 1,000 330,350 -
Issued pursuant to private placement (Note 1) - 2,000,000 20,000 1,995,843 -
Issued for consulting services - 35,000 350 139,650 -
Net loss - - - - (423,341)
------------ ------------ ------------ ------------ ------------
Balance July 31, 1994 - 18,480,195 184,802 8,692,456 1,677,686
Issued for debt - 150,000 1,500 96,938 -
Issued for acquisition of
Germany Oil Company (Note 1) 8,088 250,000 2,500 8,227,322 -
Purchase of Treasury Stock - - - - -
Issued for dividends 133 - - 132,667 (132,800)
Net loss (Restated) - - - - (2,491,342)
------------ ------------ ------------ ------------ ------------
Balance July 31, 1995 (Restated) 8,221 18,880,195 188,802 17,149,383 (946,456)
------------ ------------ ------------ ------------ ------------
Issued for services - 100,000 1,000 77,125 -
Issued for debt of affiliate - 143,800 1,438 59,082 -
Issued for legal settlement (Note 11) 500 - - 499,500 -
Purchase of Treasury Stock - - - - -
Issued for dividends 577 - - 570,044 (570,621)
Net loss - - - - (10,230,783)
------------ ------------ ------------ ------------ ------------
Balance July 31, 1996 $ 9,298 $ 19,123,995 $ 191,240 $ 18,355,134 $(11,747,860)
============ ============ ============ ============ ============
<CAPTION>
Total
Treasury Stockholders'
Stock Equity
------------- --------------
<S> <C> <C>
Balance July 31, 1993 $ (275,000) $ 8,216,092
Issued for acquisition of stock of
Wexford Technology, Inc. (Note 6) - 331,350
Issued pursuant to private placement (Note 1)
Issued for consulting services - 2,015,843
Net loss - 140,000
- (423,341)
------------ ------------
Balance July 31, 1994 (275,000) 10,279,944
Issued for debt - 98,438
Issued for acquisition of
Germany Oil Company (Note 1) - 8,237,910
Purchase of Treasury Stock (124,106) (124,106)
Issued for dividends - -
Net loss (Restated) - (2,491,342)
------------ ------------
Balance July 31, 1995 (Restated) (399,106) 16,000,844
------------ ------------
Issued for services - 78,125
Issued for debt of affiliate - 60,520
Issued for legal settlement (Note 11) - 500,000
Purchase of Treasury Stock (90,259) (90,259)
Issued for dividends - -
Net loss - (10,230,783)
------------ ------------
Balance July 31, 1996 $ (489,365) $ 6,318,447
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
LaTex RESOURCES, INC.
Consolidated Statements of Cash Flows
Years Ended July 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
(Restated)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(10,230,783) $ (2,491,342) $ (423,341)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation, amortization, and depletion 4,705,912 2,710,574 2,213,823
Gain on sale of assets (2,365,807) (127,926) (392,592)
Equity in losses and write-offs of investments in affilates 4,184,881 298,839 439,916
Dry hole costs and abandonments 3,586,037 104,179 112,772
Interest income (150,467) (64,231) -
Loss on disposal of subsidiary 1,810,382 - -
Changes in assets and liabilities, net of effects from acquisition:
Accounts receivable (17,248) 1,073,004 787,602
Accounts receivable - related party 198,288 (76,591) 82,208
Accrued expenses payable 467,942 (34,017) (363,271)
Accounts payable 596,038 390,146 (1,518,425)
Other assets 44,227 (170,979) (127,334)
Other liabilities 615,000 - -
Inventories (84,517) 130,967 139,643
------------ ------------ ------------
Net cash provided by operating activities 3,359,885 1,742,623 951,001
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of investments - - 136,218
Proceeds from sale of property and equipment 3,984,491 357,445 736,200
Purchases of property and equipment (3,774,264) (4,815,409) (4,257,229)
Increase in accounts and notes receivable-other (2,300,000) - -
Decrease in accounts and notes receivable-other 1,032,500 - -
Reorganization cost - - (66,558)
Acquisition of Germany Oil Company, net of cash acquired - (10,592,292) -
Advances to unconsolidated affiliates and notes receivable (326,394) (1,575,820) (99,703)
Purchases of Treasury stock (90,259) (124,106) -
------------ ------------ ------------
Net cash used for investing activities $ (1,473,926) $(16,750,182) $ (3,551,072)
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
LaTex RESOURCES, INC.
Consolidated Statements of Cash Flows
Years Ended July 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
(Restated)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred loan costs $ (137,186) $(1,483,143) $ (15,344)
Proceeds from notes payable 6,233,192 26,837,059 2,585,000
Payments on notes payable (8,276,857) (10,100,527) (3,060,000)
Proceeds from notes payable - shareholder - - 490,000
Payments on notes payable - shareholder - (140,000) (350,000)
Proceeds from the issuance of common stock - - 2,015,843
----------- ----------- -----------
Net cash provided by (used for) by financing activities (2,180,851) 15,113,389 1,665,499
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (294,892) 105,830 (934,572)
Cash and cash equivalents beginning of year 314,229 208,399 1,142,971
----------- ----------- -----------
Cash and cash equivalents end of year $ 19,337 $ 314,229 $ 208,399
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 2,403,158 $ 1,307,264 $ 598,335
Income taxes 5,275 7,739 200,648
=========== =========== ===========
Supplemental schedules of noncash investing and financing activities:
Note receivable in exchange for property $ - $ - $ 1,342,506
Common stock issued to acquire stock of Wexford Technology, Inc. - - 331,350
Common stock issued for services 78,125 98,438 140,000
Common stock issued to acquire Germany Oil Company - 144,530 -
Preferred stock issued to acquire Germany Oil Company - 8,093,380 -
Preferred stock issued for legal settlement 500,000 - -
Common stock issued to pay off debt of unconsolidated affiliate 60,520 - -
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
1. ORGANIZATION, FINANCIAL CONDITION AND BUSINESS COMBINATIONS
Organization - LaTex Resources, Inc. (the Company) is an oil and gas
------------
company engaged in the acquisition of and enhancements to producing oil and
gas properties. The Company's principal oil and gas production operations
are conducted in Oklahoma, Texas, Louisiana, Mississippi and Alabama. The
Company, until the fourth quarter of fiscal 1996, was also involved in the
exploration and development of oil and gas prospects located in Tunisia and
Kazakhstan, C. I. S.
Financial Condition - The Company's aggressive policy of oil and gas
-------------------
property acquisitions, unsuccessful foreign oil and gas exploration and
unsuccessful investments in their unconsolidated affiliates, along with
substantial operating losses for the current and preceding two years, has
resulted in a working capital deficit and non-compliance with certain loan
covenants at July 31, 1996. (See Note 5)
The items of non-compliance have not been waived by the lender for the year
ended July 31, 1996 and the Company was operating under a "forbearance"
agreement. The "forbearance period" was from July 26, 1996 to November 29,
1996. The Company is currently seeking an extension of the forbearance
agreement until such time as the proposed Alliance Resources Plc merger
(See Note 17) can be consummated.
The Company's financial statements for the year ended July 31, 1996 have
been prepared on a going concern basis which contemplates the realization
of assets and the settlement of liabilities and commitments in the normal
course of business. The Company incurred a net loss of $10,230,783 for the
year ended July 31, 1996 and as of July 31, 1996 has an accumulated deficit
of $11,747,860 and a deficit working capital of $27,805,291.
Management plans to reduce the working capital deficit include curtailment
of the development of its undeveleloped properties, strategic sales of
certain of its oil and gas properties and the aggressive reduction of
administrative and such other costs that have been determined to be non
essential. Management plans also include consideration of alliances or
other partnership arrangements or potential merger opportunities.
The Company has retained investment banking counsel to advise it on the
possible sale of equity securities as well as to introduce and assist in
the evaluation of potential merger and partnering opportunities. Management
expects that these efforts will result in the introduction of other parties
with interests and resources which may be compatible with that of the
Company (See Note 17).
There can be no assurance that the Company will be able to successfully
execute the foregoing plans.
F-8
<PAGE>
LaTex RESOURCES, INC.
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
1. ORGANIZATION, FINANCIAL CONDITION AND BUSINESS COMBINATIONS (continued)
Disposition of Panda Resources, Inc. and Its Wholly Owned Subsidiary
--------------------------------------------------------------------
Richfield Natural Gas, Inc., July 1993
--------------------------------------
In July 1993 the Company sold its wholly owned subsidiary, Panda Resources,
Inc., and Panda's wholly owned subsidiary, Richfield Natural Gas, Inc.
Final post closing adjustments were in dispute until December 1995 when a
settlement agreement by the various parties resulted in a judgment against
LaTex Resources, Inc. in the amount of $1,810,382. This amount is reflected
in the 1996 consolidated financial statement as a loss on disposal of
discontinued subsidiaries.
Proceeds from Private Placement
-------------------------------
On January 26, 1994, pursuant to a private placement, the Company issued
2,000,000 newly issued shares of common stock.
Proceeds from this offering were as follows:
<TABLE>
<S> <C>
Gross proceeds $ 2,200,061
Less: Commissions 165,000
Legal fees 10,000
Other expenses 9,218
------------
Net proceeds $ 2,015,843
============
</TABLE>
Acquisition of Germany Oil Company
----------------------------------
Effective March 31, 1995 through a series of transactions, the Company
acquired all of the issued and outstanding stock of Germany Oil Company
("Germany") in exchange for 250,000 and 11,800 of the Company's common and
Series A Convertible Preferred Stock, respectively. The ratio of the number
of shares received by the stockholders of Germany was determined through
arms length negotiations between the Chairman of the Board and President of
the Company and the President of Germany. The Company also issued 370,000
shares of the Series B Convertible Preferred Stock and $8,900,000 in cash
to retire a volumetric production payment and acquire all of the related
contract rights mortgages, vendor liens and security interests. In
addition, the Company paid $1,742,294 in cash, issued 427,038 shares of its
Series A Convertible Preferred Stock and $87,998 in notes payable to
acquire and retire certain indebtedness of Germany. The transaction was
accounted for as a purchase. The fair value of assets and liabilities of
Germany at date of acquisition follows:
<TABLE>
<S> <C>
Current assets $ 773,088
Current liabilities (4,309,479)
Oil and gas properties 22,504,593
-------------
$ 18,968,202
=============
</TABLE>
The consolidated statements of operations include the results of operations
of Germany Oil Company since the acquisition date. The following is a
statement of pro forma revenues, loss before income taxes, net loss, and
net loss per share for the years ended July 31, 1995 and 1994 based upon
the assumption that Germany Oil Company was acquired at the beginning of
each of the periods:
<TABLE>
<CAPTION>
1995 1994
---- ----
(in thousands
except per share data
<S> <C> <C>
Revenues $ 16,358 $ 19,957
========= =========
Loss before income tax $ (3,307) $ (1,795)
========= =========
Net loss $ (3,382) $ (1,795)
========= =========
Net loss per share $ .19) $ (.10)
========= =========
</TABLE>
F-9
<PAGE>
LaTex RESOURCES, INC.
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
2. SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying consolidated financial statements is as
follows.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts
have been eliminated in consolidation.
Inventories
-----------
Included in inventories at July 31, 1996 and 1995 are crude oil inventories
at market value of $175,493 and $90,976, respectively.
Accounting Estimates
--------------------
The presentation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Financial Instruments
---------------------
The fair value of current assets and current liabilities are assumed to be
equal to their reported carrying amounts due to the short maturities of
these financial instruments. Due to the Company's financial position, it is
not practicable to estimate the fair value of the Company's long-term debt;
additional information pertinent to its value is provided in Note 5 to the
consolidated financial statements.
The Company is required, by agreement with its primary lender (Bank of
America), to participate in various hedging programs, executed by Bank of
America, to protect against fluctuations in oil gas prices and interest
rates. See Note 15 for discussion of the fair market value of these
contracts.
The carrying value of all other financial instruments approximates fair
value.
F-10
<PAGE>
LaTex RESOURCES, INC.
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
2. SUMMARY OF ACCOUNTING POLICIES (continued)
Concentrations of Credit Risk
-----------------------------
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments and
accounts receivable. The Company places its cash investments with high
quality financial institutions and limits the amount of exposure to any one
institution. In the case of default of any one financial institution, no
cash investments exist that are not covered by the FDIC. The Company's
revenues are derived principally from uncollateralized sales to customers
in the oil and gas industry. The concentration of credit risk in a single
industry affects the Company's overall exposure to credit risk because
customers may be similarly affected by changes in economic and other
conditions. The Company has not experienced significant credit losses on
such receivables. The Company performs periodic evaluations of its
customers' financial condition and generally does not require collateral.
Revenue Recognition
-------------------
The Company recognizes oil and gas revenue in the month of production.
Crude oil and gas marketing revenue is recognized in the month of delivery.
Property, Equipment, Depreciation and Depletion
-----------------------------------------------
The Company uses the successful efforts method to account for costs in the
acquisition and exploration of oil and natural gas reserves. Costs to
acquire mineral interests in proved reserves, and to drill and equip
development wells are capitalized. Geological and geophysical costs and
costs to drill exploratory wells which do not find proved reserves are
expensed. Undeveloped oil and gas properties which are individually
significant are periodically assessed for impairment of value and a loss is
recognized at the time of impairment by providing an impairment allowance.
The remaining unproved oil and gas properties are aggregated and an overall
impairment allowance is provided based on Company experience. Depletion and
depreciation are calculated on the units of production method based upon
current estimates of oil and gas reserves provided by management. Upon
sale, retirement or abandonment of proved and unproved properties the cost
and related accumulated depreciation and depletion are eliminated from the
respective accounts and the resulting gain or loss is included in current
earnings.
Non oil and gas property and equipment are stated at cost. Depreciation is
computed by the straight-line method over the estimated useful lives of non
oil and gas assets. Expenditures which significantly increase values or
extend useful lives are capitalized. Expenditures for maintenance and
repairs are charged to expenses as incurred. Upon sale or retirement, the
cost and related accumulated depreciation are eliminated from the
respective accounts and the resulting gain or loss is included in current
earnings.
Intangible Assets
-----------------
Intangible assets consist primarily of debt issuance costs. Debt issuance
costs are amortized over the term of the related debt.
F-11
<PAGE>
LaTex RESOURCES, INC.
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
2. SUMMARY OF ACCOUNTING POLICIES (continued)
Income Taxes
------------
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 income
in the period that includes the enactment date.
Gas Balancing
-------------
The Company follows the sales method of accounting for gas imbalances. A
liability is recorded only if the Company's excess takes of natural gas
volumes exceed its estimated remaining recoverable reserves. No receivables
are recorded for those wells when the Company has taken less than its
ownership share of gas production.
Earnings Per Common Share
-------------------------
Earnings per common share is computed based upon the weighted average
common shares outstanding. Outstanding stock options and warrants of LaTex
Resources are excluded from the weighted average shares outstanding since
their effect on the earnings per share calculation is immaterial or
antidilutive.
FASB Accounting Standards
-------------------------
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 119 (SFAS 119), Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments. This
Statement generally requires disclosures about amounts, nature, and terms
of derivative financial instruments. The Company has adopted SFAS 119 for
the fiscal year ended July 31, 1996.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 121 (SFAS 121), Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of. This
Statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. If the sum of the undiscounted
future cash flows is less than the carrying amount of the asset, an
impairment loss is recognized. This Statement is effective for financial
statements for fiscal years beginning after December 15, 1995. The Company
intends to adopt SFAS 121 for the fiscal year ending July 31, 1997. The
Company expects the adoption of SFAS 121 will not have a material effect on
its financial statements.
F-12
<PAGE>
LaTex RESOURCES, INC.
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
2. SUMMARY OF ACCOUNTING POLICIES (continued)
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based
Compensation. This Statement establishes financial accounting and reporting
standards for stock-based employee compensation plans. This Statement
defines a fair value based method of accounting for an employee stock
option or similar equity instrument plan. Under the fair value based
method, compensation cost is measured at the grant date based on the value
of the award and is recognized over the service period, which is usually
the vesting period. This Statement is effective for transactions entered
into in fiscal years that begin after December 15, 1995. The Company
intends to adopt the disclosure requirements of SFAS 123 for the fiscal
year ending July 31, 1997.
Reclassification
----------------
Certain amounts in the 1995 and 1994 consolidated financial statements have
been reclassified to conform with the 1996 presentation.
3. ACCOUNTS AND NOTES RECEIVABLE AND INVESTMENTS IN AND ADVANCES TO AFFILIATES
<TABLE>
<CAPTION>
Accounts and Notes Receivable - Related Parties
-----------------------------------------------
1996 1995
----------- ----------
(Restated)
<S> <C> <C>
Accounts receivable - officers,
directors and employees $ 100,481 $ 354,261
Note receivable - officers,
directors, shareholders
and employees (See Note 12) 291,816 236,344
---------- ----------
Total $ 392,297 $ 590,605
========== ==========
Accounts and Notes Receivable - Other
-------------------------------------
1996 1995
---------- ----------
(Restated)
Oakland Petroleum Operating Company, Inc. $1,267,500 $ -
Panda Resources, Inc. - 584,172
Other accounts receivable from
third parties 5,820 112,516
---------- ----------
Less current maturities 515,820 696,688
---------- ----------
Total $ 757,500 $ -
========== ==========
</TABLE>
F-13
<PAGE>
LaTex RESOURCES, INC.
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
3. ACCOUNTS AND NOTES RECEIVABLE AND INVESTMENTS IN AND ADVANCES TO AFFILIATES
The non-interest bearing note receivable from Oakland Petroleum Operating,
Inc. (Oakland) represents the balance due to the Company for a loan entered
into with the Company's primary lender for a joint purchase of property.
The original amount was approximately $2,300,000 of which $1,267,500 was
still outstanding at July 31, 1996. The note receivable is offset by a
comparable amount included in the Company's long-term debt. Oakland pays
all principal and interest payments directly to the Company's primary
lender. The Company has a collateral interest in the Oakland properties.
Interest income has been imputed at the Company's borrowing rate with its
primary lender.
Investments in and Advances to Affiliates
-----------------------------------------
Investments in and advances to affiliates includes the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
(Restated)
<S> <C> <C>
Wexford Technology, Inc. $ - $ 1,987,898
Imperial Petroleum, Inc. - 1,640,609
Others - 18,973
----------- -----------
Total $ - $ 3,647,480
=========== ===========
</TABLE>
See Note 6 - WRITE OFFS.
4. INCOME TAXES
The provisions for income taxes are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(Restated)
(in thousands)
<S> <C> <C> <C>
Current:
State $ - $ 35 $ -
======== ======== ========
</TABLE>
F-14
<PAGE>
LATEX RESOURCES, INC.
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
4. INCOME TAXES (continued)
Income taxes differed from the amounts computed by applying the U.S.
federal tax rate of 34% as a result of the following:
<TABLE>
<CAPTION>
1996 1995 1994
--------- ---------- ---------
(Restated)
(in thousands)
<S> <C> <C> <C>
Computed "expected" tax benefit $(3,478) $ (835) $ (144)
State income taxes net of federal
benefit (1) 12 -
Increase in valuation allowance
for deferred tax assets 3,844 294 93
Equity in net losses of affiliates - 102 72
Excess statutory depletion (152) 237 3
Other (213) 225 (24)
------- -------- ---------
Actual income tax expense $ - $ 35 $ -
======== ======== ========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ---------- --------
(Restated)
(in thousands)
<S> <C> <C> <C>
Deferred tax liabilities:
Property, plant and equipment $ 1,574 $1,390 $ 401
------- ------ -------
Total deferred tax liabilities 1,574 1,390 401
------- ------ -------
Deferred tax assets:
Net operating losses 4,300 1,521 350
Investment write-downs 917 - -
Percentage depletion carryforward 392 240 133
Accrued expenses not deductible
until paid 180 - -
Other 5 5 -
------- ------ -------
Total deferred tax assets 5,794 1,766 483
------- ------ -------
Valuation allowance (4,220) (376) (82)
------- ------ -------
Net deferred tax assets 1,574 1,390 401
------- ------ -------
Net deferred tax
asset (liability) $ - $ - $ -
======= ======= =======
</TABLE>
F-15
<PAGE>
LaTex RESOURCES, INC.
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
4. INCOME TAXES (continued)
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 (NOL) carryforward to offset its
earnings of approximately $11,390,000. Additionally, approximately
$10,490,000 of NOL carryforwards are available to offset the future
separate company earnings of Germany. If not previously utilized, the net
operating losses will expire in varying amounts from 2006 to 2011.
5. NOTES PAYABLE
<TABLE>
<CAPTION>
1996 1995
------------ ------------
(Restated)
<S> <C> <C>
Bank note (A) $ 22,206,707 $ 24,210,000
Other 29,160 69,532
------------ ------------
Total 22,235,867 24,279,532
Less - current maturities 22,235,867 3,644,723
------------ ------------
Long-term debt, net $ - $ 20,634,809
============ ============
</TABLE>
(A) Note payable dated April 18, 1995, for $23,000,000 with option of an
additional $2,000,000 for six months for approved workovers,
recompletions and development drilling of specified reserves.
Principal due monthly of $365,000 including Oakland Petroleum Co.
payment of $42,500 monthly. Interest due monthly at the higher of a
Base Rate (the higher of the Bank of America Reference Rate and the
Federal Fund Rate plus .5% per annum) plus 1% per annum and the London
Interbank Offered Rate plus 2%. The current rate at July 31, 1996 was
7.469%. Matures March 30, 2000. Amounts outstanding are secured by
mortgages which cover certain of the Company's oil and gas properties.
The Company's existing debt agreements contain certain covenants, including
maintaining a positive current ratio of 1.0, excluding current portion of
long-term debt, maintaining a minimum tangible net worth of $10,000,000,
maintaining a minimum cash or cash equivalents balance of $500,000,
maintaining working capital of at least $500,000, the negative covenant
related to permitted investments, and the covenant relating to default on
other indebtedness in excess of $50,000.
F-16
<PAGE>
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
5. NOTES PAYABLE (continued)
The Company was not in compliance with the current ratio, cash equivalent,
minimum tangible net worth, and working capital covenants at July 31, 1995.
The items of non-compliance were subsequently waived by the lender for the
year ended July 31, 1995 and through January 31, 1996. The Company was not
in compliance with the above noted covenants at July 31, 1996 and was
operating under a "forbearance" agreement discussed in Note 1 to the
financial statements. The "forbearance" agreement expired on November 29,
1996 and the bank has not extended the agreement. The debt agreement
contains various acceleration provisions of the due date in the event of
non-compliance. Accordingly, the entire unpaid balance has been classified
as a current liability at July 31, 1996.
6. WRITE OFFS
Investments
-----------
During the fourth quarter of fiscal 1996, the Company wrote off its
investments in Wexford Technology, Incorporated (Wexford) and Imperial
Petroleum, Inc. (Imperial). The Company has not been able to obtain
reliable current financial information, accordingly, summarized financial
information is not presented.
The Company acquired 32.3% of Wexford through a series of transactions
culminating in May 1994. During the fourth quarter of fiscal 1996, the
Company recorded a charge to earnings of $2,372,452 to write off its
investment. Wexford is presently in default on its bridge debt and has
received numerous written demands for payment and correspondence
threatening litigation. Included in the write off was $1,462,765 in notes
receivable.
The Company owns 12% of the common stock of Imperial and certain officers,
directors and employees of the Company own 28.8%. During the fourth quarter
of fiscal 1996, the Company recorded a charge to earnings of $1,812,429 to
write off this investment. Imperial is currently in default on its bank
debt. Included in the write off of the Company's investment was $722,603 in
notes receivable.
Wexford and Imperial are both development stage enterprises that are
seeking capital infusion to complete their facilities and achieve
commercial operations. Neither Wexford nor Imperial have been able to raise
additional debt or equity capital. Further, there can be no assurance,
assuming Wexford and Imperial successfully raise additional funds or enter
into a business alliance, that they will achieve commercial operations or
positive cash flow. The Company is not a guarantor of any debt incurred by
Wexford or Imperial.
Exploration Prospects
---------------------
During the fourth quarter of fiscal year 1996, the Company recorded a
charge to earnings of $955,496 to write off costs incurred in connection
with a venture in Kazakhstan C.I.S. Subsequent to July 31, 1996, the
Company received written notice that the Company may be in breach of its
agreements related to the venture. The Company believes it is in
substantial compliance with the operating agreement governing the project.
In addition, the Company has been notified that Uzenmunaigaz, the regional
production association for the Middle Caspian Basin, may seek to further
alter the terms of a contract in a manner which the Company believes would
be detrimental to the project's viability.
F-17
<PAGE>
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
6. WRITE OFFS (continued)
During fiscal 1993 the Company, through a subsidiary, acquired an interest
in a permit granted by the Republic of Tunisia for the exploration and
production of oil and gas from a 4,936 square kilometer (1,220,000 acres)
area located in north-central Tunisia. Initial seismic acquisition
activities began in 1994. The first exploratory well was spudded in fiscal
1995. This well was drilled and temporarily abandoned prior to reaching the
objective depth.
In fiscal 1996, the operator of the project, in response to a request from
the Tunisian government, permanently plugged the well and restored the well
site. The Company has insufficient capital to continue the project and, due
to the limited time remaining on the exploration permit, decided to abandon
the project and write off its investment of $2,491,299.
7. 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) savings portion and a noncontributory defined
contribution portion. Employees are qualified to participate after
approximately one year of service. Participation in the 401(k) plan is
voluntary, and the Company matches contributions up to four percent of the
employees' salary at a rate of 33 1/3 percent of the employee's
contribution. Employees are allowed to contribute the maximum amount
allowed by the Internal Revenue Code each year, subject to
nondiscrimination rules.
The noncontributory defined contribution 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
1996, 1995, or 1994. The Company is under no obligation to make
contributions to the Plan in the future.
8. STOCK OPTIONS
Stock Option Plan
-----------------
The 1993 Incentive Stock Plan (the "Plan") was effective December 8, 1993.
The Plan is administered by a Compensation Committee consisting of not less
than three members of the Board of Directors and a special committee
appointed by the Board of Directors, as necessary.
The aggregate number of shares of the Company's Common Stock issuable under
the Plan is 2,000,000. Such stock will be made available from the Company's
authorized but unissued Common Stock or from Stock held as Treasury Stock.
F-18
<PAGE>
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
8. STOCK OPTIONS (continued)
Options and Appreciation Rights
-------------------------------
This Plan authorizes the Committee to grant to key employees options to
purchase the Company's Common Stock which may be in the form of incentive
stock options ("ISO's"), or in the form of non-statutory options ("Non-
Statutory Options"). The term of each option shall be for such period as
the Committee determines but no longer than ten years from the date of
grant or five years to an individual who is a 10% stockholder of the
Company.
The aggregate fair market value exercisable by an individual optionee
during any calendar year under all stock option plans of the Company may
not exceed $100,000. The exercise price per share for the Common Stock
covered by any Options shall be determined by the Committee and, provided
that in the case of an ISO and the per share exercise price shall be not
less than the fair market value (or in the case of an ISO granted to an
individual who at the time is a 10% Stockholder, 110% of the fair market
value) of one share of Common Stock. Options to purchase 1,690,000 shares
of common stock were granted under the Plan.
Stock option activity during the periods indicated is as follows:
Weighted
Average
Number of Exercise
Shares Price
------------ ------------
Balance at July 31, 1993 - $ -
Granted 619,000 0.875
-------
Balance at July 31, 1994 619,000 0.875
Forfeited (12,000) 0.875
------------
Balance at July 31, 1995 607,000 0.875
Granted 1,448,000 0.448
Forfeited (365,000) 0.764
------------
Balance at July 31, 1996 1,690,000 $ 0.533
============
At July 31, 1996, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $0.4375 to $0.875 and
3.77 years, respectively. (See Note 17)
Restricted Stock Awards
-----------------------
The Plan authorizes the Committee to grant restricted Common Stock
("Restricted Stock") to key employees. The Committee may designate a
restriction period with respect to such shares of not less than one year
but not more than five years (the "Restriction Period") during which an
employee will not be permitted to sell, transfer, pledge or assign shares
of Restricted Stock awarded to him, provided that within such limitations,
the Committee may provide for the lapse of such restrictions installments
where deemed appropriate. Upon termination of employment during the
Restriction Period for any reason, all shares of Restricted Stock with
respect to which restrictions have not yet expired will be forfeited by the
employee and returned to the Company.
The Plan also authorizes the Committee to award tax gross-up rights which
entitle the grantee to cash payments from the Company at such time as
income and/or excise tax liabilities arise with respect to grants under the
Plan. Tax gross-up rights may be granted coincident with or after the date
of grant of the related Option or Restricted Stock awards. No restricted
shares have been issued at July 31, 1996. (See Note 17)
9. WARRANTS
As of July 31, 1996, the Company, in connection with the sale of previously
unissued common stock, has 2,700,000 Warrants outstanding. The sale
included 2,587,500 of the Warrants which were detachable from the
Stock/Warrant Units upon issuance and trade separately from the Units and
Common Stock. Unless exercised, the 2,587,500 Warrants automatically expire
on November 19, 1997. Pursuant to the terms of the Warrants, the Board of
Directors of the Company may reduce the exercise price, $4.25, of the
Warrants and may also extend the period during which the Warrants may be
exercised. The Warrants may be redeemed by the Company at a price of $0.01
per Warrant with 30 days prior written notice by the Company.
F-19
<PAGE>
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
9. WARRANTS (continued)
In addition, the Company issued Warrants to the underwriter of the offering
for $.01 per Warrant (underwriter Warrants) to purchase up to 112,500 units
for $4.44 per unit. These Warrants are exercisable, in part or whole, until
November 16, 1997. The Company also has agreed to register, at its sole
cost and expense, all or a portion of the underwriter Warrants and/or the
shares issuable, upon the exercise of the Warrants during the period
November 10, 1993 to November 16, 1997.
The Company issued 1,080,000 Warrants in connection with private placements
of its common stock. The Company during 1995 issued 536,000 Warrants to a
related party (See Note 12), of which, 100,000 were exercised.
At July 31, 1996, the range of exercise prices of outstanding Warrants was
$.75 to $4.44. These Warrants expire at various dates from January 1997 to
October 2001. It is the intent that the Warrants will be converted into
Alliance Resources Plc (See Note 17) Warrants at a ratio of .8806 for 1.
Stock Warrant activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
Date Number of Convertible Stock Price
Issued Warrants Shares at Issuance
------ --------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at
July 31, 1993 3,700,000 2,518,750
Issued 1/26/94 80,000 80,000 $1.813
--------- -----------
Balance at
July 31, 1994 3,780,000 2,598,750
Issued 6/12/95 500,000 500,000 0.469
Exercised (100,000) (100,000)
--------- -----------
Balance at
July 31, 1995 4,180,000 2,998,750
Issued 11/30/95 36,000 36,000 0.469
--------- -----------
Balance at
July 31, 1996 4,216,000 3,034,750
========= =========
</TABLE>
10. PREFERRED STOCK
The Board of Directors has the authority to issue 5,000,000 shares of
Preferred Stock, in one or more series, and to fix the rights, preferences,
qualifications, privileges, limitations or restrictions of each such series
without any further vote or action by the shareholders, including the
dividend rights, dividend rate, conversion rights, voting rights, terms of
redemption (including sinking fund provisions), redemption price or prices,
liquidation preferences and the number of shares constituting any series or
the designations of such series.
The Company's Series A Convertible Preferred Stock (i) pays annual
dividends at the rate of $0.20 per share payable quarterly in cash (or, if
payment of cash dividends is prohibited by the Company's senior lender,
payable in additional shares of Series A Convertible Preferred Stock), (ii)
has no voting rights except as otherwise required under Delaware law, (iii)
has a liquidation preference over shares of the Company's common stock of
$10.00 per share plus accrued and unpaid dividends, (iv) is redeemable at
the option of the Company at a redemption price of $10.00 per share plus
accrued and unpaid dividends, (v) is convertible by the holder into shares
of the Company's common stock at a conversion price of $3.33 per share, and
(vi) has piggyback registration rights in the event the Company seeks to
make a registered public offering of its common stock. The aggregate
liquidation preference of the Series A Convertible Preferred Stock at July
31, 1996 and 1995 is $4,498,280 and $4,410,180, respectively.
The Series B Convertible Preferred Stock (i) pays annual dividends at the
rate of $1.20 per share payable quarterly in cash (or, if payment of cash
dividends is prohibited by the Company's senior lender, payable in
additional shares of Series B Convertible Preferred Stock), (ii) has no
voting rights except as otherwise required under Delaware law, (iii) has a
liquidation preference over shares of the Company's Series A Convertible
Preferred Stock and the Company's common stock of $10.00 per share plus
accrued and unpaid dividends, (iv) is redeemable at the option of the
Company at a redemption price of $10.00 per share plus accrued and unpaid
dividends, and (v) is convertible by the holder into shares of the
Company's common stock at an initial conversion price of $1.50 per share,
subject to adjustment from time to time to prevent dilution. By separate
agreement, the Company has granted certain demand registration rights and
piggyback registration rights in the event the Company seeks to make a
registered public offering of its common stock. The aggregate liquidation
preference of the Series B Convertible Preferred Stock at July 31, 1996 and
1995 is $4,800,250 and $3,811,000.
Preferred stock, by class, is as follows:
<TABLE>
<CAPTION>
Class A Class B
------- -------
<S> <C> <C>
Balance July 31, 1993 - -
------- -------
Balance July 31, 1994 - -
------- -------
Issued for acquisition of Germany
Oil Company 438,838 370,000
Issued for dividends 2,180 11,100
------- -------
Balance July 31, 1995 441,018 381,100
Issued for legal settlement - 50,000
Issued for dividends 8,810 48,925
------- -------
Balance July 31, 1996 449,828 480,025
======= =======
</TABLE>
F-20
<PAGE>
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
11. LITIGATION, COMMITMENTS AND CONTINGENCIES
Litigation
----------
On October 7, 1994, Northern Natural Gas Company ("Northern") filed a
lawsuit against the Company alleging that the Company had breached two firm
transportation Service Agreements dated December 1, 1990, between Northern
and Panda Resources, Inc. ("Panda"), a former wholly-owned subsidiary of
the Company. On June 6, 1996, Northern and the Company entered into a
Settlement Agreement pursuant to which (a) the Company issued to Northern
50,000 shares of the Company's Series B Senior Convertible Preferred Stock
which are convertible (subject to adjustment) into 333,333 shares of the
Company's common stock, and (b) the Company agreed to pay Northern $465,000
in installments of $50,000 by June 21, 1996, $150,000 by May 1, 1997,
$125,000 by May 1, 1998, and $140,000 May 1, 1999. An agreed judgment was
entered in the case, but Northern has agreed not to seek to enforce the
judgment unless the Company defaults in its payment obligations. Once the
required payments have been made, Northern has agreed to execute a release
of the judgment. These amounts have been reflected in the Company's
consolidated financial statements at July 31, 1996.
On November 17, 1994, Associated Storage Corporation ("Associated") filed a
lawsuit against the Company alleging that the Company had breached a July
21, 1993 agreement between Associated and the Company. Associated seeks
actual damages in the amount of $150,000, prejudgment interest, court
costs, and attorneys' fees. Associated has filed a motion for summary
adjuration which was denied by the court. The Company has asked Associated
to submit to mediation.
In connection with the sale of Panda, the Company became a party in
disputes between Torch Energy Marketing, Inc. ("Torch"), NUEVO Liquids, Inc
("NUEVO") and Panda. On December 7, 1995, the Company entered into a
Settlement Agreement (the "Settlement") to settle all matters related to
the sale of its former wholly owned subsidiaries, Panda and Richfield
Natural Gas, Inc. Pursuant to the Settlement, the Company agreed to pay to
the plaintiffs (a) $20,000 on December 7, 1995, and an additional $30,000
over the course of 90 days following execution of the Settlement, and (b)
to pay $50,000 within one year of the Settlement, an additional $50,000
within two years of the Settlement, and an additional $150,000 within three
years of the Settlement, together with interest in the amount of $36,000.
The Company has accrued the costs associated with this settlement agreement
and has made all required payments under the agreement. To secure its
obligation under the Settlement, the Company stipulated in an agreed
judgment that it would be liable in the amount of $1,000,000 (less any
amounts paid pursuant to the Settlement) upon the Company's default of its
obligations under the Settlement. In addition, the Company agreed to assume
and indemnify the plaintiffs against all obligations and amounts owed under
a May 2, 1989 agreement between Panda and Northern relating to the
transportation of natural gas through a facility located in Dewey County,
Oklahoma. Pursuant to this indemnification, the Company has been asked to
indemnify one of the plaintiffs with respect to claims brought against it
by Northern in a lawsuit filed March 7, 1996, as more fully discussed
below.
On March 7, 1996, Northern Natural Gas Company ("Northern") filed a lawsuit
against Torch Energy Advisors, Inc. ("Torch") for alleged breach of a May
2, 1989 agreement (the "Dewey County Contract") between Torch, Panda and
Northern relating to the transportation of natural gas through a facility
located in Dewey County, Oklahoma. The Company has assumed the defense of
this matter pursuant to the indemnification agreement entered into as part
of the December 7, 1995, settlement among Torch, Panda and the Company
discussed above. Northern contends that Panda failed to transport the
required volumes and that the deficiency resulted in a requirement that
Panda pay a total of $973,000, representing the percentage of the costs of
constructing the facilities calculated under the contract formula. Northern
sued Torch under a written guaranty agreement and has claimed, in addition,
that Torch denuded the assets of Panda and is therefore liable for the
debts of Panda. The Company maintains that, if litigation is unsuccessfull
to the Company, Northern would only be entitled to the amount of the
contractually required volumes.
Germany Oil Company is a named defendant in three wrongful death actions
involving an accident which occurred at a heater-treatment unit on the
Blowhorn Creek Millerella Oil Unit lease in Lamar County, Alabama. Each
plaintiff seeks damages in the amount of $25 million. The three matters are
in the initial stages of discovery and have been referred to Germany Oil
Company's insurance carrier. Germany has an approximate 10% ownership
interest of the property. Management believes that liability insurance
coverage is adequate to cover any potential loss.
F-21
<PAGE>
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
11. LITIGATION, COMMITMENTS AND CONTINGENCIES (continued)
Contingencies
-------------
In addition to the foregoing litigation, the Company is named defendant in
lawsuits, is a party in governmental proceedings, 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
expect these additional matters to have a material adverse effect on the
financial position of the Company.
Commitments
-----------
The Company leases office space and certain property and equipment under
various lease agreements. As of July 31, 1996, future lease commitments
were approximately as follows:
Year Ending
July 31,
-----------
1997 $ 168,000
1998 142,000
------------
Total minimum payments $ 310,000
============
F-22
<PAGE>
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
12. RELATED PARTY TRANSACTIONS
In regard to the modification and cancellation of the non-compete
agreements with the two previous majority shareholders of Panda, Mr.
Jeffrey T. Wilson, an officer and director of the Company, assumed the
notes receivable due the Company by two former shareholders in the amount
of $339,650 plus accrued interest. The Board has voted to forgive $380,624,
representing the total notes and accrued interest, due from Mr. Wilson. The
Board has also voted to forgive $58,138 due to the Company from Mr. Malcolm
W. Henley, an officer and director of the Company.
Since January 1993 the Company has leased a condominium located in Tulsa,
Oklahoma owned by Jeffrey T. Wilson. Under terms of the oral lease
agreement, the Company pays Mr. Wilson approximately $1,100 per month. At
July 31, 1996, the Company owed Mr. Wilson approximately $8,000 for unpaid
rent.
The Company has entered into an agreement to sell its interests in its
wholly owned subsidiaries, LaTex Resources International, Inc. and Phoenix
Metals, Inc., and its investments in Wexford Technology, Inc. and Imperial
Petroleum, Inc. (See Note 17). Mr. Wilson is a major stockholder of
Imperial Petroleum, Inc.
The Company was previously a party to an agreement with Wood Roberts, Inc.
("WRI"), a company controlled by John R. Martinson, a Director of the
Company, pursuant to which WRI acted as a financial advisor to the Company.
Under the agreement, the Company paid WRI a monthly fee of $4,000 and
agreed to pay WRI a success fee in connection with any merger or
acquisition involving a party introduced to the Company by WRI, and any
financing facility arranged by WRI. Through July 31, 1996, the Company paid
WRI cash retainer and success fees of $55,000. In addition, the Company has
issued to WRI six year common stock purchase warrants to purchase 536,000
shares at $.75 per share, of which WRI has exercised and purchased 100,000
shares (See Note 8). As of March 4, 1996, the financial advisor agreement
between the Company and WRI was terminated by agreement of the parties. By
separate agreement, the Company agreed to pay Wood Roberts, LLC. a fee of
$240,000 upon completion of the proposed merger with Alliance Resources Plc
and a fee equal to 0.5% of the amount of any credit facility obtained by
the Company from a bank or other financial institution introduced to the
Company by Wood Roberts in order to refinance its indebtedness to Bank of
America.
The Company from time to time, has made loans to certain officers,
directors and stockholders. The loans are evidenced by demand notes payable
due on or before December 31, 1996, bearing interest at various rates.
13. BUSINESS SEGMENTS
The Company's operations involve oil and gas exploration, production and
lease operations. Additionally, crude oil and crude oil by-products are
marketed through a wholly owned subsidiary. Intersegment sales are made at
prices prevailing in the industry at the time of sale. The following table
sets forth information with respect to the industry segments of the
Company.
<TABLE>
<CAPTION>
1996 1995 1994
---------- --------- ---------
(Restated)
(in thousands)
<S> <C> <C> <C>
Revenues:
Oil and gas
production and
lease operations $12,991 $ 9,220 $ 9,305
Marketing 540 1,223 2,780
------- ------- -------
Total revenues 13,531 10,443 12,085
Intersegment 3,658 3,023 2,884
------- ------- -------
$17,189 $13,466 $14,969
======= ======= =======
Operating income (loss):
Oil and gas
production and
lease operations $(4,477) $(1,440) $ (187)
Marketing 78 231 317
Other 4 93 75
------- ------- -------
Net operating income
(loss) $(4,395) $(1,116) $ 205
======= ======= =======
</TABLE>
The Company sold 16% of its consolidated oil and gas revenue to Enron Reserve
Acquisition Corporation for the year ended July 31, 1996. The Company had no
other purchasers in excess of 10% of consolidated oil and gas revenue.
F-23
<PAGE>
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
13. BUSINESS SEGMENTS (continued)
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(Restated)
(In thousands)
<S> <C> <C> <C>
Identifiable assets:
Oil and gas production $31,830 $37,371 $12,677
Marketing 429 606 620
Other 6,707 9,946 7,962
------- ------- -------
$38,966 $47,923 $21,259
======= ======= =======
Depreciation, depletion,
and amortization:
Oil and gas production $ 4,210 $ 2,403 $ 1,984
Marketing 3 5 7
Other 493 303 223
------- ------- -------
$ 4,706 $ 2,711 $ 2,214
======= ======= =======
Capital expenditures:
Oil and gas production $ 3,759 $ 4,759 $ 4,205
Marketing - - -
Other 15 56 52
------- ------- -------
$ 3,774 $ 4,815 $ 4,257
======= ======= =======
</TABLE>
14. SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
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 July 31, 1996, 1995 and 1994. All of the Company's oil and gas
producing activities are located within the United States. The dry hole
costs include $2,491,299 related to the Tunisia project.
F-24
<PAGE>
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
14. SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
(continued)
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
(Restated)
(In thousands)
<S> <C> <C> <C>
Revenues $ 11,980 $ 8,585 $ 8,703
Production costs 5,737 4,693 4,312
Gross production taxes 871 572 529
Dry hole costs and
abandonments 3,586 104 113
Depreciation and depletion 4,210 2,403 1,984
---------- ---------- ----------
Results of operations
before income taxes (2,424) 813 1,765
Income tax expense - - 671
---------- ---------- ----------
Results of operations
(excluding corporate
overhead and interest
costs) $ (2,424) $ 813 $ 1,094
========== ========== ==========
</TABLE>
<TABLE>
Capitalized Costs and Costs Incurred Relating to Oil and Gas Producing Activities
---------------------------------------------------------------------------------
<CAPTION>
1996 1995 1994
---------- ---------- ----------
(Restated)
(In thousands)
<S> <C> <C> <C>
Proven properties $ 40,316 $ 38,690 $ 16,208
Unproven properties 949 4,312 -
---------- ---------- ----------
Total capitalized costs 41,265 43,002 16,208
Less - accumulated
depreciation and
depletion 9,435 5,631 3,555
---------- ---------- ----------
Net capitalized costs $ 31,830 $ 37,371 $ 12,653
========== ========== ==========
Costs incurred during
the year:
Property acquisition
costs $ - $ - $ -
Exploration costs 2,631 104 113
Development costs 1,480 763 787
Purchase of minerals
in place 2,800 22,613 1,740
</TABLE>
F-25
<PAGE>
LaTex RESOURCES, INC.
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
14. SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
(continued)
Estimated Quantities of Proved Oil and Gas Reserves (Unaudited)
---------------------------------------------------------------
The estimates of proved oil and gas reserves utilized in the preparation of
the consolidated financial statements were prepared by independent
petroleum engineers at July 31, 1996. Such estimates are in accordance with
guidelines established by the Securities and Exchange Commission and the
Financial Accounting Standards Board, which require that reserve reports be
prepared under existing economic and operating conditions with no provision
for price and cost escalations except by contractual arrangements. The
Company's reserves are located onshore in the United States.
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. The following
is an analysis of the Company's proved oil and gas reserves.
<TABLE>
<CAPTION>
Oil (MBbls) Gas (MMcf)
----------- ----------
<S> <C> <C>
Proved reserves at July 31, 1993 2,455.3 9,391
Revisions of previous estimates 423.3 346
Extensions, discoveries and other additions 2,075.9 2,215
Production (335.3) (2,107)
Purchases of reserves-in-place 112.4 1,924
Sales of reserves-in-place (211.7) (836)
----------- ----------
Proved reserves at July 31, 1994 4,519.9 10,933
Revisions of previous estimates (1,686.8) (1,793)
Extensions, discoveries and other additions - -
Production (359.0) (2,612)
Purchases of reserves-in-place 1,562.3 21,202
Sales of reserves-in-place - -
----------- ----------
Proved reserves at July 31, 1995 (Restated) 4,036.4 27,730
</TABLE>
F-26
<PAGE>
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
14. SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
(continued)
<TABLE>
<CAPTION>
Oil (MBbls) Gas (MMcf)
----------- ----------
<S> <C> <C>
Revisions of previous estimates 2,566.8 3,888
Extensions, discoveries and other additions - -
Production (405.0) (3,481)
Purchases of reserves-in-place 248.7 2,190
Sales of reserves-in-place (93.9) (2,155)
----------- ----------
Proved reserves at July 31, 1996 6,353.0 28,172
=========== ==========
<CAPTION>
Oil (MBbls) Gas (MMcf)
----------- ----------
<S> <C> <C>
Proved developed reserves at
July 31, 1993 2,217.0 8,858
July 31, 1994 3,843.0 9,495
July 31, 1995 (Restated) 4,036.4 27,730
July 31, 1996 4,952.9 27,757
</TABLE>
Subsequent to year end, the Company has entered into letters of intent with
two parties to sell oil and gas properties for approximately $1,500,000.
The Company chose not to include those properties in its reserve appraisal
at July 31, 1996.
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
---------------------------------------------------------------------------
Oil and Gas Reserves (Unaudited)
--------------------------------
The "Standardized Measure of Discounted Future Net Cash Flows Relating to
Proved Oil and Gas Reserves" (Standardized Measure) is a disclosure
requirement under SFAS No. 69. The Standardized Measure does not purport to
present the fair market value of proved oil and gas reserves. This would
require consideration of expected future economic and operating conditions,
which are not taken into account in calculating the Standardized Measure.
Under the Standardized Measure, future cash inflows were estimated by
applying year-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 year-end costs to determine pre-tax cash inflows. Future
income taxes were computed by applying the statutory tax rate to the excess
of pre-tax cash inflows over the Company's tax basis in the associated
proved oil and gas properties. Tax 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.
F-27
<PAGE>
LaTex RESOURCES, INC.
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
14. SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
(continued)
<TABLE>
<CAPTION>
Year Ended
-------------------------------------------
July 31, 1994 July 31, 1995 July 31, 1996
------------- ------------- -------------
(Restated)
(In thousands)
<S> <C> <C> <C>
Future cash inflows $ 87,093 $ 99,585 $ 181,566
Future costs - future production
and development costs 49,490 43,794 79,763
------------- ------------- -------------
Future net cash inflows before
income tax expense 37,603 55,791 101,803
Future income tax expense 9,151 8,705 25,486
------------- ------------- -------------
Future net cash flows 28,452 47,086 76,317
10% annual discount for estimated
timing of cash flows 14,175 22,130 35,869
------------- ------------- -------------
Standardarized Measure of
discounted future net cash
flows $ 14,277 $ 24,956 $ 40,448
============= ============= =============
</TABLE>
Changes in Standardized Measure of Discounted Future Net Cash Flows
-------------------------------------------------------------------
Relating to Proved Oil and Gas Reserves (Unaudited)
---------------------------------------------------
The following is an analysis of the changes in the Standardized Measure
during the periods presented:
<TABLE>
<CAPTION>
Year Ended
-------------------------------------------
July 31, 1994 July 31, 1995 July 31, 1996
------------- ------------- -------------
(Restated)
(In thousands)
<S> <C> <C> <C>
Standardized Measure -
beginning of year $ 9,993 $ 14,277 $ 24,956
Increases (Decreases)
Sales, net of production costs (3,799) (3,800) (5,779)
Net change in sales prices,
net of production costs 2,600 (9,108) 20,712
Discoveries and extensions,
net of related future
development production costs 4,762 - -
Changes in estimated future
development costs (1,521) 1,182 (2,889)
Revisions of previous
quantity estimates 225 (4,260) 11,260
Accretion of discount - 1,428 2,181
Net change in income taxes - 236 (8,944)
Purchases of reserves-in-place 2,459 20,700 2,093
Sales of reserves-in-place (974) - (3,142)
Timing of production of
reserves and other 532 4,301 -
------------- ------------- -------------
Standardized Measure - end of year $ 14,277 $ 24,956 $ 40,448
============= ============= =============
</TABLE>
F-28
<PAGE>
Note to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
15. HEDGING
Oil and Gas - The Company is required, by agreement with its primary lender
-----------
(Bank of America), to participate in a price protection program, executed
by Bank of America, for a majority of its gas sales for a 36 month period
until March 31, 1998. Oil is hedged at a floor of $16.50/Bbl and a ceiling
of $19.82/Bbl based on projected monthly production. Gas is hedged at
$1.806/MMBtu based on projected monthly production. The production rates
were calculated by Bank of America from reserve report data and are fixed
by Bank of America. The monthly hedge amount is calculated by Bank of
America from published market rates. The current hedging agreement does not
allow for full benefit from prices above the ceiling amount.
The hedging gains or losses for the years ended July 31, 1996 and 1995 are
as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
(Restated)
<S> <C> <C>
Oil $ (200,447) $ (4,397)
Gas (1,275,206) 161,698
----------- ---------
Net hedging income (loss) $(1,475,653) $ 157,301
=========== =========
</TABLE>
The hedging gains and losses are included in oil and gas revenue for the
years indicated.
Interest - The Company is required, by agreement with its primary lender
--------
(Bank of America), to participate in an interest rate protection program,
executed by Bank of America, until February 29, 2000, for its debt to its
primary lender. Interest is hedged to achieve a fixed rate of 7.49% based
on a fixed amortization schedule determined at loan origination. The
hedging losses for the year ended July 31, 1996 and 1995 are $504,303 and
$80,151, respectively, and are included in interest expense for the years
indicated.
The off-balance sheet liability for all future hedging commitments based on
current year end prices and rates are as follows:
<TABLE>
<S> <C>
Oil $ 669,405
Gas 1,688,202
Interest 1,291,680
-----------
Net liability $ 3,649,287
===========
</TABLE>
F-29
<PAGE>
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
16. RESTATEMENT OF PRIOR YEAR
Effective March 31, 1995 the Company acquired Germany Oil Company
("Germany") in a purchase transaction. The net assets acquired consisted
primarily of oil and gas properties. In connection with the transaction the
Company failed to allocate the purchase price to all assets acquired as
required by generally accepted accounting principles. During fiscal 1996
the Company, based on the reports of independent petroleum engineers,
reallocated the adjusted purchase price as of the date of acquisition.
Accordingly, the previously reported 1995 amounts have been restated as
follows:
<TABLE>
<CAPTION>
Statement of
Asset Liability Operations
Increase (Increase) (Increase)
(Decrease) Decrease Decrease
----------- ----------- -----------
<S> <C> <C> <C>
Oil and gas properties $ 7,859,993 $ - $ -
Goodwill (9,929,199) - -
Deferred loan cost 871,270 - -
Accounts payable 1,197,936
Goodwill amortization (220,650) - 220,650
Depletion expense (49,283) - 49,283
Amortization expense 58,085 - (58,085)
----------- ----------- -----------
Total $(1,409,784) $ 1,197,936 $ 211,848
=========== =========== ===========
As a result of the restatement, loss per share decreased by $0.01 per
share.
</TABLE>
17. SUBSEQUENT EVENTS
Proposed Merger With Alliance Resources Plc - As a result of the demands
-------------------------------------------
placed upon the Company by its primary lender, the Company's continuing
working capital deficit, its deteriorating financial condition and the
inability of the Company to raise additional debt or equity capital,
management of the Company, in the forth quarter of fiscal 1996, determined
to seek an equity infusion through a strategic merger with a suitable
merger candidate. Management's primary objective in seeking a merger
partner was to solve the working capital deficit of the Company through an
equity infusion while minimizing dilution to the shareholders. Although the
Company considered several potential transactions. Alliance Resources Plc
("Alliance") emerged as the candidate most likely to meet the objectives of
the Company. The Company has entered into an Agreement and Plan of Merger
("Alliance Merger Agreement") dated August 12, 1996 with Alliance Resources
Plc, a company organized under the laws of the United Kingdom ("Alliance"),
Pursuant to which the Company will merge ("Alliance Merger") with a wholly-
owned U.S. subsidiary of Alliance.
F-30
<PAGE>
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
17. SUBSEQUENT EVENTS (continued)
Under the terms of the Alliance Merger Agreement and after giving effect to
a 1 for 40 reverse stock split to be completed by Alliance, the holders of
the Company's common stock will receive 0.8806 ordinary shares of Alliance
for each share of such common stock, the holders of the Company's Series A
Convertible Preferred Stock will receive 2.6445 ordinary shares of Alliance
for each share of such Series A Convertible Preferred Stock, and the
holders of the Company's Series B Senior Convertible Preferred Stock will
receive 5.8709 ordinary shares of Alliance for each share of such Series B
Senior Convertible Preferred Stock. Following the Alliance Merger, the
holders of the Company's common and preferred stock will own, as a group,
approximately 72% of the issued and outstanding ordinary shares of Alliance
and the Company will become a wholly-owned subsidiary of Alliance. Holders
of outstanding warrants to purchase shares of the Company's common stock
will receive from Alliance replacement warrants to purchase shares of
Alliance ordinary shares on substantially the same terms.
It is anticipated that the merger will provide the Company with sufficient
capital resources to eliminate its existing working capital deficit,
refinance the Company's senior debt and eliminate the hedging agreements,
and provide development capital for exploration of the Company's oil and
gas properties. In addition, the Company believes that the combination of
the two companies provides strategic benefits to the Company important to
its long-term growth and the enhancement of shareholder value. Although
Alliance's domestic oil and gas operations are significantly smaller than
the Company's, the Company believes that the merger will enhance the
overall financial strength of the Company and provide a stable platform
from which future growth can be achieved. The strategic objectives of the
combined Company will be to continue a policy of structured and stable
growth in the domestic U.S. oil and gas sector while implementing projects
in Western Europe, the Middle East and the former Soviet Union.
Under the terms of the Alliance Merger Agreement, the Company is required
to dispose of its interests in its unconsolidated affiliates, Wexford
Technology, Inc. ("Wexford") and Imperial Petroleum, Inc. ("Imperial"), and
its interests in its wholly-owned subsidiaries LaTex Resources
International, Inc. ("LaTex Resources International") and Phoenix Metals,
Inc. ("Phoenix Metals"). Effective July 31, 1996, the Company has written
off its $1,812,429 investment in Imperial, its $2,372,452 investment in
Wexford, and its $955,496 Investment in LaTex Resources International. The
Company has entered into a Purchase Agreement with Imperial pursuant to
which the Company will sell its interests in Wexford, Imperial, LaTex
Resources International and Phoenix Metals to Imperial for 100,000 shares
of the Company's common stock. Imperial is controlled by the Company's
President and largest stockholder, Jeffrey T. Wilson. Prior to the
completion of the sale, the Company intends to obtain an opinion from an
independent investment banking firm as to the fairness of the transaction
to the Company's stockholders.
F-31
<PAGE>
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
17. SUBSEQUENT EVENTS(continued)
Effective October 21, 1996, each holder of options granted under the
Company's 1993 Incentive Stock Plan agreed to terminate all options held
and receive grants of restricted common stock of the Company. 1,690,000
options were canceled and 1,690,000 shares of restricted common stock were
granted. The terms of the Restricted Shares provide that a holder may not
sell, transfer, or otherwise dispose of any Restricted Shares as long as
the Company has the right to a forfeiture of the Shares. The terms of the
Restricted Stock provide that in the event that a holder's employment with
the Company shall terminate for any reason other than death or total
disability prior to the earlier of (a) February 1, 1997, or (b) a change
in control occurs with respect to the Company, the holder shall
immediately forfeit any right to the shares of Restricted Stock for which
the restrictions have not otherwise lapsed. Compensation expense of
$528,125, reflecting the market value of the Company's publicly traded
stock on the date of grant, was recorded on that date. It is the intent
that the holders of the restricted stock will convert their shares to
Alliance ordinary shares on substantially the same basis as the Company's
common stockholders. The Company did not grant any tax gross-up rights in
connection with the issuance of the restricted stock.
Disposition of Oil and Gas Properties - Subsequent to year end, the
-------------------------------------
Company has entered into letters of intent with two parties to sell oil
and gas properties for approximately $1,500,000. The Company chose not to
include those properties in its reserve appraisal at July 31, 1996. The
Company does not expect the transaction to have a significant impact on
the results of operations.
F-32
<PAGE>
EXHIBIT 99.6
LATEX RESOURCES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31, 1997 JULY 31, 1996
ASSETS (UNAUDITED) (AUDITED)
------ ---------------- -------------
<S> <C> <C>
Current assets:
Cash...................... $ 27,670 $ 19,337
Accounts receivable-net... 2,680,488 3,324,309
Accounts and notes receiv-
able-other............... 3,884 515,820
Inventories............... 175,493 175,493
Other current assets...... 58,245 27,587
Assets held for resale.... 164,792 164,792
----------- -----------
Total current assets.... $ 3,110,572 $ 4,227,338
----------- -----------
Property, plant, and equip-
ment:
Oil and gas properties--at
cost..................... $35,379,541 $41,264,573
Other depreciable assets.. 855,513 854,259
----------- -----------
$36,235,054 $42,118,832
Less accumulated deprecia-
tion and depletion....... 8,826,463 10,173,524
----------- -----------
Net property, plant and
equipment................ $27,408,591 $31,945,308
----------- -----------
Other assets:
Notes receivable-net of
current portion.......... $ -- $ 757,500
Deposits and other assets. 123,839 130,734
Accounts and notes receiv-
able-related parties..... -- 392,297
Intangible assets, net of
amortization............. 1,357,592 1,512,899
----------- -----------
Total other assets...... 1,481,431 2,793,430
----------- -----------
Total assets................ $32,000,594 $38,966,076
=========== ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
1
<PAGE>
LATEX RESOURCES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS(CONTINUED)
<TABLE>
<CAPTION>
JANUARY 31, 1997 JULY 31, 1996
LIABILITIES AND STOCKHOLDERS EQUITY (UNAUDITED) (AUDITED)
----------------------------------- ---------------- -------------
<S> <C> <C>
Current liabilities:
Accounts payable.................................. $ 10,018,608 $ 9,057,707
Accounts payable-other............................ 880,424 132,000
Accrued expenses payable.......................... 523,584 607,055
Current portion long-term debt.................... $ 18,758,909 22,235,867
------------ ------------
Total current liabilities....................... 30,181,525 32,032,629
------------ ------------
Other liabilities................................... $ 565,000 $ 615,000
------------ ------------
Total liabilities............................... $ 30,746,525 $ 32,647,629
------------ ------------
Stockholders' equity:
Preferred stock--par value $0.01; 5,000,000 shares
authorized:
Series A convertible preferred stock ($10.00
liquidation preference), 454,290 and 449,828
issued and outstanding at January 31, 1997 and
July 31, 1996, respectively.................... $ 4,543 $ 4,498
Series B convertible preferred stock ($10.00
liquidation preference), 509,259 and 480,025
issued and outstanding at January 31, 1997 and
July 31, 1996, respectively.................... 5,093 4,800
Common stock--par value $.01; 50,000,000 shares
authorized; 20,813,995 and 19,123,995 issued and
outstanding at January 31, 1997 and July 31,
1996, respectively............................... 208,140 191,240
Additional paid-in capital........................ 19,202,981 18,355,134
Accumulated deficit............................... (17,677,323) (11,747,860)
Treasury stock 1,008,500 common shares at cost.... (489,365) (489,365)
------------ ------------
Total stockholders' equity...................... $ 1,254,069 $ 6,318,447
------------ ------------
Total liabilities and stockholders' equity.......... $ 32,000,594 $ 38,966,076
============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
2
<PAGE>
LATEX RESOURCES, INC.
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED THREE MONTHS ENDED SIX MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, 1997 JANUARY 31, 1996 JANUARY 31, 1997 JANUARY 31, 1996
(UNAUDITED) (RESTATED, UNAUDITED) (UNAUDITED) (RESTATED, UNAUDITED)
---------------- --------------------- ---------------- ---------------------
<S> <C> <C> <C> <C>
Revenue:
Oil and gas sales..... $ 1,180,445 $2,848,059 $ 3,558,146 $ 5,882,811
Crude oil and gas
marketing............ 42,228 114,737 132,455 303,580
Lease operations and
management fees...... 205,385 166,346 455,274 402,079
------------ ---------- ------------ ------------
Total operating
income............. $ 1,428,058 $3,129,142 $ 4,145,875 $ 6,588,470
Operating expenses:
Lease operating
expense.............. $ 1,091,733 $1,909,659 $ 2,557,281 $ 3,471,175
Cost of crude oil &
gas marketing........ 5,605 31,491 22,876 115,674
General &
administrative
expense.............. 802,691 798,105 2,697,435 1,545,968
Depreciation,
depletion and
amortization......... 862,406 1,351,353 3,469,957 2,599,332
Dry hole costs and
abandonments......... (5,672) 27,775 16,441 101,068
------------ ---------- ------------ ------------
Total operating
expenses $ 2,756,763 $4,118,383 $ 8,763,990 $ 7,833,217
------------ ---------- ------------ ------------
Net operating loss...... $ (1,328,705) $ (989,241) $ (4,618,115) $ (1,244,747)
Other income:
Equity in losses and
writeoffs of
investments in
affiliates........... $ (16,746) $ (30,500) $ (16,746) $ (72,000)
Gain on sale of
assets............... 38,487 1,292,279 106,520 1,292,279
Interest Income....... 1,688 4,842 33,622 43,495
Interest Expense...... (497,966) (568,843) (1,097,784) (1,149,510)
------------ ---------- ------------ ------------
Net loss................ $ (1,803,242) $ (291,463) $ (5,592,503) $ (1,130,483)
Preferred stock
dividends.............. $ 170,710 $ 139,760 $ 336,960 $ 275,990
------------ ---------- ------------ ------------
Net loss for common
shareholders........... $ (1,973,952) $ (431,223) $ (5,929,463) $ (1,406,473)
============ ========== ============ ============
Loss per share for
common shareholders.... $ (0.09) $ (0.02) $ (0.29) $ (0.08)
============ ========== ============ ============
Weighted average number
of shares outstanding.. 20,813,995 18,022,195 20,069,940 17,986,325
============ ========== ============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE>
LATEX RESOURCES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JANUARY 31, 1997
<TABLE>
<CAPTION>
PREFERRED STOCK ADDITIONAL TOTAL
----------------- COMMON PAID-IN ACCUMULATED TREASURY STOCKHOLDERS
CLASS A CLASS B STOCK CAPITAL DEFICIT STOCK EQUITY
-------- -------- ------- ---------- ----------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance July 31, 1996... $ 4,498 4,800 191,240 18,355,134 (11,747,860) (489,365) 6,318,447
Issued 4,462 shares of
Class A and 29,234
shares of Class B in
lieu of cash dividends. 45 293 -- 336,622 (336,960) -- --
Issued 1,690,000 shares
for employee bonus..... -- -- 16,900 511,225 -- -- 528,125
Net loss................ -- -- -- -- (5,592,503) -- (5,592,503)
-------- ------- ------- ---------- ----------- -------- ----------
Balance January 31,
1997................... $ 4,543 5,093 208,140 19,202,981 (17,677,323) (489,365) 1,254,069
======== ======= ======= ========== =========== ======== ==========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
LATEX RESOURCES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, 1997 JANUARY 31, 1996
(UNAUDITED) (UNAUDITED) (RESTATED)
---------------- ----------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................. $ (5,592,503) $ (1,130,483)
Adjustments to reconcile net loss to
net cash provided by (used in) oper-
ating activities: -- --
Depreciation, amortization and
depletion......................... 3,469,957 2,599,332
Gain on sale of assets............. (106,520) (1,292,279)
Equity in losses and writeoffs of
investments in affiliates......... 16,746 72,000
Dryhole costs and abandonments..... 16,441 101,068
Employee bonus..................... 528,125 --
Forgiveness of debt................ 384,744 --
Changes in assets and liabilities:
Accounts receivable.............. 643,821 (84,604)
Accounts and notes receivable-
related parties................. (7,257)
Inventories...................... -- (129,446)
Other assets..................... (23,763) 1,160
Prepaid expenses................. -- (97,235)
Accrued expenses payable......... (83,471) (87,916)
Accounts payable................. 1,709,325 (52,135)
Other liabilities................ (50,000) --
------------ ------------
Net cash provided by (used in)
operating activities.................. 905,645 (100,538)
------------ ------------
Cash flows from investing activities:
Proceeds from sale of property and
equipment........................... 1,573,625 2,885,320
Purchases of property and equipment.. (261,479) (2,297,023)
Collections on notes receivable...... 1,267,500 --
------------ ------------
Net cash provided by (used for)
investing activities.................. 2,579,646 588,297
------------ ------------
</TABLE>
See accompanying notes to consolidated condensed financial statements
5
<PAGE>
LATEX RESOURCES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS(CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, 1997 JANUARY 31, 1996
(UNAUDITED) (UNAUDITED) (RESTATED)
---------------- ----------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Payments on notes payable............ (3,476,958) (801,988)
----------- ----------
Net cash used for financing
activities.......................... (3,476,958) (801,988)
----------- ----------
Net increase (decrease) in cash and
cash equivalents.................... 8,333 (314,229)
Cash and cash equivalents beginning
of period........................... $ 19,337 $ 314,229
----------- ----------
Cash and cash equivalents end of
period.............................. $ 27,670 $ --
=========== ==========
Supplemental disclosures of cash flow
information:
Cash paid during the period for
interest............................ $ 1,097,784 $1,149,510
=========== ==========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
6
<PAGE>
LATEX RESOURCES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM REPORTING
The interim consolidated condensed financial statements reflect all
adjustments which, in the opinion of management, are necessary for a fair
presentation of the results for the interim periods presented. All such
adjustments are of a normal recurring nature. Due to the seasonal nature of
the business, the results of operations for the six months ended January 31,
1997 are not necessarily indicative of the results that may be expected for
the year ended July 31, 1997. For further information refer to the
consolidated fianancial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended July 31, 1996.
RECLASSIFICATION
Certain amounts in the January 1996 consolidated condensed financial
statements have been reclassified to conform with the January 1997
presentation.
ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 121
Effective August 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of, which requires
impairment losses to be recognized for long-lived assets when indicators of
impairment are present and the undiscounted cash flows are not sufficient to
recover the assets carrying amount. The impairment loss is measured by
comparing the fair value of the asset to its carrying amount. Fair values are
based on discounted future cash flows or information provided by sales and
purchases of similar assets. Under SFAS No. 121. the Company now evaluates
impairment of production assets on a well by well basis rather than using a
total company basis for its proved properties. As a result, the Company
recognized a pre-tax impairment loss of $1.4 million in the three months ended
October 31, 1996. Such a loss is included in depreciation, depletion and
amortization expense.
RESTATEMENT OF PRIOR YEAR
Effective March 31, 1995 the Company acquired Germany Oil Company
("Germany") in a purchase transaction. The net assets acquired consisted
primarily of oil and gas properties. In connection with the transaction the
Company failed to allocate the purchase price to all assets acquired as
required by generally accepted accounting principles. During fiscal 1996 the
Company, based on the reports of independent petroleum engineers, reallocated
the adjusted purchase price as of the date of acquisition. Accordingly, the
previously reported 1995 amounts have been restated as follows:
<TABLE>
<CAPTION>
STATEMENT OF
ASSET LIABILITY OPERATIONS
INCREASE (INCREASE) (INCREASE)
(DECREASE) DECREASE DECREASE
----------- ---------- ------------
<S> <C> <C> <C>
Oil and gas properties..................... $ 7,859,993 $ -- $ --
Goodwill................................... (9,929,199) -- --
Deferred loan cost......................... 871,270 -- --
Accounts payable........................... -- 1,197,936 --
Goodwill amortization...................... (220,650) -- 220,650
Depletion expense.......................... (49,283) -- 49,283
Amortization expense....................... 58,085 -- (58,085)
----------- ---------- --------
Total.................................... $(1,409,784) $1,197,936 $211,848
=========== ========== ========
</TABLE>
7
<PAGE>
EXHIBIT 99.7
UNAUDITED PRO FORMA
FINANCIAL STATEMENTS OF ALLIANCE
The following unaudited condensed pro forma combined balance sheet and
unaudited condensed pro forma combined statement of income for Alliance
(collectively, the "unaudited pro forma financial statements") have been
prepared to illustrate the estimated effect of the proposed combination of
Alliance and LaTex pursuant to the Merger and the acquisition of the Bank of
America Overriding Royalty Interest and are based upon the assumptions set forth
below and in the notes to such statements. The respective historical
consolidated financial statements of Alliance and LaTex are included elsewhere
in this Proxy Statement.
The merger will be treated as a purchase and, as a result of the LaTex
shareholders owning approximately 73% of the combined company prior to issuance
of New Alliance Shares, Bank Notes and Bank Warrants to the Bank, LaTex will be
treated as having acquired Alliance. Accordingly, in the unaudited pro forma
financial statements, it is the assets and liabilities of Alliance that are
recorded at fair value while the assets of LaTex are recorded at historical
cost.
The unaudited pro forma financial statements include the unaudited condensed
pro forma combined balance sheet at October 31, 1996, giving effect to the
Merger and the purchase of the Bank of America Overriding Royalty Interest as if
these were consummated on that date. Also presented is the unaudited condensed
pro forma combined statement of income for the year ended April 30, 1996 and the
unaudited condensed pro forma combined statement of income for the six months
ended October 31, 1996 after giving effect to the Merger and the purchase of the
Bank of America Overriding Royalty Interest as if these were consummated on May
1, 1995.
The unaudited pro forma financial statements are prepared in accordance with
US GAAP. The financial statements of Alliance have been prepared in accordance
with UK GAAP and the financial statements of LaTex have been prepared in
accordance with US GAAP. Included are relevant adjustments to the Alliance
financial statements to state these in accordance with US GAAP.
The unaudited pro forma financial statements and accompanying notes, which are
an integral part of such statements, should be read in conjunction with the
respective historical financial statements, including the notes thereto, and
other financial information of Alliance and LaTex included elsewhere in this
Proxy Statement. The unaudited pro forma financial statements are provided for
illustrative purposes only and do not purport to represent what the financial
position or results of operations of Alliance and LaTex would actually have been
if the Merger and the purchase of the Bank of America Overriding Royalty
Interest had in fact occurred on the dates indicated or to project the financial
position or results of operations for any future date or period.
1
<PAGE>
CONDENSED PRO FORMA COMBINED BALANCE SHEET
AS OF OCTOBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
ALLIANCE
LATEX UK US GAAP ALLIANCE US PRO FORMA PRO
HISTORICAL GAAP ADJUSTMENTS GAAP ADJUSTMENTS FORMA
----------- --------- ------------ ------------ ------------------ ---------
$000 $000 $000 $000 $000 $000
<S> <C> <C> <C> <C> <C> <C>
Assets:
Current assets:
Cash and cash equivalents 20 2,515 - 2,515 - 2,535
Receivables:
Trade 3,209 673 - 673 - 3,882
Other 513 554 (a) (295) 259 - 772
Prepaid expenses - 684 - 684 - 684
Inventory 175 - - - - 175
Other current assets 22 - - - - 22
Assets held for sale 165 - - - 165
-------- -------- ----------- ------- ------ --------
Total current assets 4,104 4,426 (295) 4,131 - 8,235
-------- -------- ----------- ------- -------- --------
Net property, plant and
equipment 29,549 4,368 (b) (1,683) 2,685 (c) 6,228 42,262
(h) 3,800
Other assets:
Notes receivable, net of current 630 - - - - 630
portion
Deposits and other assets 124 - - - - 124
Accounts and notes receivable - related
parties 2 - - - - 2
Intangible assets net of
amortization 1,408 - - - - 1,408
-------- ----------- ------ -------- ------ --------
Total assets 35,817 8,794 (1,978) 6,816 10,028 52,661
======== =========== ====== ======== ======== ========
Liabilities and stockholders'
equity
Current liabilities:
Bank loans and overdrafts - 10 - 10 - 10
Trade accounts payable 9,991 1,043 - 1,043 - 11,034
Accrued expenses 593 383 - 383 (d) 2,300 3,276
Current portion of long term
debt 21,127 6 - 6 (g) (21,127) 6
Other 434 461 - 461 - 895
-------- -------- ----------- ------- -------- --------
Total current liabilities 32,145 1,903 - 1,903 (18,827) 15,221
Long-term debt, excluding current
installments - 88 - 88 (g) 21,127 22,653
(h) 1,438
Other liabilities 615 - - - - 615
-------- -------- ----------- ------- -------- --------
Total liabilities 32,760 1,991 - 1,991 3,738 38,489
-------- -------- ----------- ------- -------- --------
Stockholders' equity:
Ordinary shares, (Pounds)0.01
par value; issued
324,152,633 (Alliance) - 5,105 - 5,105 (e) (5,105) -
Common stock, $0.01 par value (LaTex) 208 - - - (f) (208) -
Ordinary shares, (Pounds)0.40
par value issued
31,052,603 shares issued - - - - (e) 5,105 20,404
(d) 104
(f) 14,299
(h) 896
Series A convertible preferred
stock 4 - - - (f) (4) -
Series B convertible preferred
stock 5 - - - (f) (5) -
Additional paid in capital 19,032 - - - (c) 6,228 9,471
(d) (2,404)
(e) (280)
(f) (14,571)
(h) 1,466
Treasury stock (489) - - - (f) 489 -
Share premium - 20,157 - 20,157 (e) (20,157) -
Merger reserve - 401 - 401 (c) (401) -
Accumulated deficit (15,703) (18,860) (a) (295) (20,838) (e) 20,838 (15,703)
-------- -------- ------- --------- ------
(b) (1,683)
Total stockholders' equity 3,057 6,803 (1,978) 4,825 6,290 14,172
-------- -------- ----------- ------- -------- --------
Total liabilities and
stockholders' equity 35,817 8,794 (1,978) 6,816 10,028 52,661
======== ========= ========== ======== ======= ========
</TABLE>
2
<PAGE>
3
<PAGE>
CONDENSED PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED APRIL 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
LATEX
HISTORICAL
YEAR ENDED ALLIANCE US
JULY 31, UK GAAP ALLIANCE US PRO FORMA PRO
1996 GAAP ADJUSTMENTS GAAP ADJUSTMENTS FORMA
---------- ---------- --------------- ----------- ------------ ------------
$000 $000 $000 $000 $000 $000
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Oil and natural gas sales and
other operating revenues 13,531 3,686 - 3,686 (f) 587 17,804
------- ------- ----------- ------ -------- ------
Costs and expenses:
Exceptional amounts written off
oil and gas interests - - - - -
Exceptional costs arising from
irregularities - (589) (a) (272) (861) - (861)
Direct operating expenses (6,608) (2,262) - (2,262) - (8,870)
Dry hole costs and abandonments (3,586) - - - - (3,586)
Selling, general and
administrative expenses (3,027) (2,629) - (2,629) - (5,656)
Depreciation, depletion and
amortization (4,706) (1,668) (b) 437 (1,231) (c)(1,113) (7,637)
------- ------- ------ ------- -------
(f) (587)
-------
Operating (loss) (4,396) (3,462) 165 (3,297) (1,113) (8,806)
Other income and deductions
Interest (net) (2,205) 229 - 229 - (1,976)
Profit on sale of fixed assets 2,366 - - - - 2,366
Equity losses and asset
write-offs of joint
ventures and affiliates (4,185) (201) - (201) - (4,386)
Foreign exchange losses - (159) - (159) - (159)
------- ------- ----------- ------ ------- --------
Net (loss) from continuing
operations (8,420) (3,593) 165 (3,428) (1,113) (12,961)
======= ======= =========== ======= ======= ========
Loss per share from continuing
operations (cents) (d) (45.3) (d) (43.2) (42.0)
Weighted average number of shares
outstanding (d) 7,929,391 (d) 7,929,391 30,878,178
========= ========== ==========
</TABLE>
4
<PAGE>
CONDENSED PRO FORMA COMBINED STATEMENT OF INCOME
SIX MONTHS ENDED OCTOBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
ALLIANCE
LATEX UK US GAAP ALLIANCE US PRO FORMA PRO
HISTORICAL GAAP ADJUSTMENTS GAAP ADJUSTMENTS FORMA
---------- ------ ------------ ----- ------------ ------
$000 $000 $000 $000 $000 $000
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Oil and natural gas sales and
other operating revenues 4,690 1,998 - 1,998 (f) 274 6,962
----- ------- ------- ----- ----- -----
Costs and expenses:
Exceptional amounts written off
oil and gas interests (1,548) - - - - (1,548)
Exceptional costs arising from
irregularities - (120) - (120) - (120)
Direct operating expenses (2,697) (816) - (816) - (3,513)
Dry hole costs and abandonments (3,608) - - - - (3,608)
Selling, general and
administrative expenses (2,711) (1,315) - (1,315) - (4,026)
Depreciation, depletion and
amortization (1,871) (821) (b) 308 (513) (c) (596) (3,254)
-------- ------- ---- ------- --------
(f) (274)
-----
Operating (loss) (7,745) (1,074) 308 (766) (596) (9,107)
Other income and deductions
Interest (net) (1,512) 31 - 31 - (1,481)
Profit on sale of fixed assets 614 - - - (e) (542) 72
Equity losses and asset write-offs
of joint ventures and affiliates (4,096) - - - - (4,096)
Foreign exchange gains - 56 - 56 - 56
-------- ------- ----- ------- ------ --------
Net (loss) from continuing
operations (12,739) (987) 308 (679) (1,138) (14,556)
======== ==== ===== ======= ====== ========
Loss per share from continuing
operations (cents) (d) (12.2) (d) (8.4) (46.9)
Weighted average number of
shares outstanding (d) 8,103,816 (d) 8,103,816 31,052,603
========= ========= ==========
</TABLE>
5
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The unaudited pro forma financial statements include the following adjustments:
CONDENSED PRO FORMA COMBINED BALANCE SHEET
Alliance US GAAP adjustments:
(a) To eliminate from 'other receivables' an amount recognized as a receivable,
under UK GAAP, relating to the right to receive the proceeds of the sale of
Alliance shares resulting from the settlement with Mr. O'Brien. Under US
GAAP, such proceeds are recognized only on receipt.
(b) To adjust the oil and gas properties as at October 31, 1996 to reflect the
cumulative effect of the ceiling test write down made in the year ended
April 30, 1995 under US GAAP. Under US GAAP ceiling tests are computed at
current prices discounted to present value at 10%; under UK GAAP, a ceiling
test is based on the company's best estimate of the future cash flows from
the underlying properties.
Pro forma adjustments:
(c) To record the Alliance oil and gas properties at their fair values under US
GAAP.
The purchase price has been derived from Alliance's market capitalization
at the date of the announcement of the merger based on a price of 2 pence
per share and 324,152,640 shares in issue. This has been converted to U.S.
dollars at a rate of US$1.5511:(Pounds)1. The costs of the acquisition have
also been included to arrive at a total consideration of $11,053,000 which
has been allocated as follows:
$000
------
Fixed assets 8,913
Cash 2,515
Other net current assets and liabilities (281)
Debt (94)
------
11,053
======
(d) To record an accrual for the expenses of the merger and the share issue
(including the restructuring fee payable to Bank of America of $200,000
which is to be settled by the issue of 156,250 shares).
(e) To eliminate the existing capital and reserves of Alliance (other than the
par value of the Ordinary shares) from the condensed pro forma combined
balance sheet.
(f) To record the par value of the New Alliance shares to be issued as a
consequence of the Merger and their exchange for the whole of the issued
share capital of LaTex. This represents 21,448,787 shares of 40p each at an
exchange rate of $1.6667:(Pounds)1.
(g) To record the revised maturity of LaTex's bank borrowing following the
renegotiation referred to under "Alliance-Financing" in this Proxy
Statement.
6
<PAGE>
(h) To record the issue of 1,343,750 shares of 40p each, Loan notes convertible
into up to 1,078,125 New Alliance Shares and 1,210,938 warrants to acquire
shares at an option price of (Pound)1.00 per share to Bank of America in
exchange for the Overriding Royalty Interest.
CONDENSED PRO FORMA COMBINED STATEMENTS OF INCOME
Alliance US GAAP adjustments:
(a) To eliminate income recognized under UK GAAP, relating to the right to
receive proceeds from the sale of Alliance shares resulting from the
settlement with Mr. O'Brien. Under US GAAP, such proceeds are recognized
only on receipt.
(b) To adjust the depreciation, depletion and amortization charge to reflect
the ceiling test write down adjustment made in the condensed pro forma
combined balance sheet described above.
Pro forma adjustments:
(c) To adjust the depreciation, depletion and amortization charge to reflect
the adjustments made to Alliance's oil and gas properties restated at their
fair value under US GAAP using LaTex accounting policies. LaTex uses the
successful efforts method of accounting for oil and gas properties whereas
Alliance uses the full cost method.
(d) The weighted average number of shares outstanding and the loss per share
have been calculated after giving retroactive effect to the proposed 40:1
reverse stock split.
(e) To reflect the sale of oil and gas properties by Alliance under LaTex's
accounting policies. Alliance uses the full cost method under which
(generally) the proceeds of the sale of oil and gas properties reduces the
carrying value of the full cost pool. Under the successful efforts method
used by LaTex the profit or loss on disposal of each property is recognized
in the income statement at the time of sale.
(f) To reflect the acquisition of the Overriding Royalty Interest.
7
