<PAGE>
Filed pursuant to Rule 424(b)(3)
SEC File No. 333-19013
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 1997
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER : 0-13399
LATEX RESOURCES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 73-1405081
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
4200 EAST SKELLY DRIVE, SUITE 1000, TULSA, OKLAHOMA 74135
- --------------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
918-747-7000
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(Former name or former address, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934
during the preceding 12 months (or for such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes X No
--- ----
As of March 14, 1997, there were 19,805,495 shares of the Registrant's
single class of common stock issued and outstanding.
================================================================================
<PAGE>
LATEX RESOURCES, INC.
INDEX TO FORM 10-Q FOR THE QUARTERLY PERIOD
ENDED JANUARY 31, 1997
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Condensed Balance Sheets as of January 31, 1997 and July 31,
1996 ................................................................... 3
Consolidated Condensed Statements of Operations for the six months and
three months ended January 31, 1997 and 1996............................ 5
Consolidated Condensed Statements of Stockholders' Equity for the six
months ended January 31, 1997........................................... 6
Consolidated Condensed Statements of Cash Flows for the six months and
three months ended January 31, 1997 and 1996............................ 7
Notes to Consolidated Condensed Financial Statements..................... 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..................................................... 10
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.................................................. 18
The information called for by, Item 2. Changes in Securities, Item 3. Default
Upon Senior Securities, Item 4. Submission of Matters to a Vote of Security
Holders, Item 5. Other Information and Item 6. Exhibits and Reports on Form 8-K
has been omitted as either inapplicable or because the answer thereto is
negative.
SIGNATURES................................................................. 20
</TABLE>
2
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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.
3
<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.
4
<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.
5
<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.
6
<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
7
<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.
8
<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>
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
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 fourth 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.
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 0.85981 ordinary shares of Alliance for
each share of such common stock, the holders of the Company's Series A
Convertible Preferred Stock will receive 2.58201 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
6.17632 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.
DISPOSITION OF OIL AND GAS PROPERTIES
The Company closed two oil and gas property sales for approximately
$1,500,000 during the six months ended January 31, 1997. The sales proceeds
approximated net book value.
RESULTS OF OPERATIONS
The following is a discussion of the results of operations of the Company
for the three and six months ended January 31, 1997 after giving effect to the
restatement discussed in "Restatement of Prior Year". This discussion should
be read in conjunction with the Company's unaudited Consolidated Condensed
Financial Statements and the notes thereto included in Part I of this
Quarterly Report.
The Company follows the "successful efforts" method of accounting for its
oil and gas properties whereby costs of productive wells and productive leases
are capitalized and amortized on a unit-of-production basis over the life of
the remaining proved reserves. Amortization of capitalized costs is provided
on a lease-by-lease basis.
10
<PAGE>
Exploratory expenses, including geological and geophysical expenses and annual
delay rentals, are charged to expense as incurred. Exploratory drilling costs,
including the cost of stratigraphic test wells, are initially capitalized, but
charged to expense if and when the well is determined to be unsuccessful.
The factors which most significantly affect the Company's results of
operations are (i) the sale prices of crude oil and natural gas, (ii) the level
of total sales volumes, (iii) the level of lease operating expenses, and (iv)
the level of and interest rates on borrowings. Total sales volumes and the
level of borrowings are significantly impacted by the degree of success the
Company experiences in its efforts to acquire oil and gas properties and its
ability to maintain or increase production from its existing oil and gas
properties through its development activities. The following table reflects
certain historical operating data for the periods presented:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JANUARY 31,
-----------------
1997 1996
-------- --------
<S> <C> <C>
Net Sales Volumes:
Oil (Mbbls).......................................... 137 237
Natural gas (Mmcf)................................... 1178 1872
Oil equivalent (MBOE)................................ 333 549
Average Sales Prices:
Oil (per Bbl)........................................ $ 19.48 $ 12.56
Natural gas (per Mcf)................................ $ 2.18 $ 1.70
Operating Expense per BOE of Net Sales:
Lease operating...................................... $ 6.77 $ 5.74
Severance tax........................................ $ 0.90 $ 0.76
General and administrative........................... $ 8.10 $ 2.81
Depreciation, depletion and amortization............. $ 10.41 $ 4.73
</TABLE>
Average sales prices received by the Company for oil and gas have
historically fluctuated significantly from period to period. Fluctuations in
oil prices during these periods reflect market uncertainties as well as
concerns related to the global supply and demand for crude oil. Average gas
prices received by the Company fluctuate generally with changes in the spot
market price for gas. Spot market gas prices have generally declined in recent
years because of lower worldwide energy prices as well as excess
deliverability of natural gas in the United States. Relatively modest changes
in either oil or gas prices significantly impact the Company's results of
operations and cash flow and could significantly impact the Company's
borrowing capacity.
The Company entered into hedging arrangements in April 1995 designed to
offset fluctuations in oil and gas prices through financial instruments. For
the six months ended January 31, 1997 the Company has experienced a net loss
of $1,711,829 as a result of its hedging program.
The operating data table reflects the adoption of Financial Accounting
Standards No. 121, the issuance of restricted common stock to the employees
and the recognition of a gas balancing liability due to the Company's
overproduced status.
Three months ended January 31, 1997. Total revenues from the Company's
operations for the quarter ended January 31, 1997 were $1,428,058 compared to
$3,129,142 for the quarter ended January 31, 1996. Revenues decreased over the
comparable period a year earlier due to the negative effect of the product
hedges ($1,711,829), which was partially offset by higher product prices.
Depreciation, depletion and amortization decreased to $862,406 from
$1,351,353 a year earlier as a result of lower sales volumes and a reduced oil
and gas property base.
Lease operating expenses were $1,091,733 for the three-month period ending
January 31, 1997 compared to $1,909,659 for the period ending January 31,
1996. The decrease in lease operating expenses are due to the sale of non-
strategic oil and gas properties and shutting in various marginal operated
properties.
11
<PAGE>
General and administrative expenses increased from $798,105 during the
quarter ended January 31, 1996 to $802,691 for the period ending January 31,
1997. The increase is a result of legal fees associated with the Alliance
merger.
The net loss for common shareholders for the quarter ended January 31, 1997
was $1,973,952 ($.09 per share) compared to a net loss of $431,223 ($.02 per
share) for the previous year. The increase in the loss was a result of lower
sales volumes and increased hedging costs.
Six months ended January 31, 1997. Total revenues from the Company's
operations for the six months ended January 31, 1997 were $4,145,875 compared
to $6,588,470 for the six months ended January 31, 1996. Revenues decreased
over the comparable period a year earlier due to the negative effect of the
product hedge ($1,711,829) a gas imbalance adjustment ($231,327) and lower
sales volumes due to oil and gas property sales (499,439).
Depreciation, depletion and amortization increased to $3,469,957 from
$2,599,332 for the six months ended January 31, 1996 due to the first quarter
SFAS 121 impairment adjustment partially offset by second quarter reductions
in the oil and gas property base.
Lease operating expenses were $2,557,281 for the current six month period
compared to $3,471,175 for the same period a year earlier. The reduction is
principally due to a reduction in the property base as a result of the sale of
non-strategic oil and gas properties.
General and administrative expenses increased from $1,545,968 during the six
months ended January 31, 1996 to $2,697,435 for the same period in the current
fiscal year due to issuance of restricted stock to the employees and
additional legal fees associated with the Alliance merger.
The net loss for the six months ended January 31, 1997 was $5,929,463
compared to a loss of $1,406,473 for the same period a year earlier. The
increase in the loss was directly attributable to the asset impairments, the
issuance of restricted employee stock and the negative effect of the product
and interest rate hedge agreements between the Company and its principal
lender.
CAPITAL RESOURCES AND LIQUIDITY
The Company's capital requirements relate primarily to the acquisition of
developed oil and gas properties and undeveloped leasehold acreage and
exploration and development activities. In general, because the Company's oil
and gas reserves are depleted by production, the success of its business
strategy is dependent upon a continuous acquisition and exploration and
development program.
Historically, the Company's operating needs and capital expenditures have
been funded by borrowings under its bank credit facilities and cash flow from
operations. As a result of significant capital expenditures since 1991, the
Company has experienced a decrease in its short-term liquidity and a decline
in its working capital. In connection with the Company's acquisition of
Germany Oil Company in April 1995, the Company's new credit facility provided
a source of long-term financing. As a result of the Germany acquisition, the
Company assumed approximately $4.3 million in liabilities and accounts payable
which created a significant working capital deficit. The Company immediately
began a program designed to reduce these liabilities through negotiated
reductions in amounts owed and term payments out of the Company's cash flow.
At January 31, 1997 the Company had current assets of $3.1 million and current
liabilities of $30.3 million which resulted in negative working capital of
$27.2 million.. The Company's working capital deficit is primarily due to the
current liability classification of all indebtedness of the Company to its
principal bank, and increases in royalty and vendor payables resulting from
the Company's inability to fund its current obligations due primarily to
product hedging losses. Subject to the availability of capital, the Company
intends to continue to pursue its program to achieve an orderly liquidation of
the Germany Oil indebtedness. Management plans to reduce the working capital
deficit include curtailment of the development of its undeveloped 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
12
<PAGE>
nonessential. Management plans also include consideration of alliances or
other partnership arrangements or potential merger opportunities. There can be
no assurance that, without an infusion of additional debt or equity capital,
the Company will be able to timely liquidate these liabilities. As part of the
Company's effort to reduce its working capital shortage, the Company has
entered into the proposed merger transaction with Alliance Resources Plc.
For the six months ended January 31, 1997, the Company's operating
activities resulted in positive cash flow of $905,645 compared to a negative
cash flow of $100,538 for the six months ended January 31, 1996. The
improvement in cash flow is due to additional cash provided by operating
activities through continued deferral of paying obligations of the Company
which resulted in increased accounts payable.
Investing activities of the Company provided $2,579,646 in net cash flow for
the six months ended January 31, 1997 to fund the Company's oil and gas
activities. Investing activities of the Company used $588,297 in net cash flow
for the six months ended January 31, 1996. The increase in investing
activities in fiscal 1997 was primarily due to property sales and the payoff
of the Okland Petroleum note receivable.
Financing activities used $3,476,958 in net cash flow for the six months
ended January 31, 1997 compared to $801,988 used in net cash flow for the six
months ended January 31, 1996. The decrease from 1996 was a result of the
monthly amortization of the Company's indebtedness to its principal bank, the
payoff of the Oakland note and accelerated principal payments due to property
sales. As a result of the Company's default under certain provisions of its
credit facility with Bank of America, the Company does not currently
anticipate being able to increase its level of borrowing under such credit
facility.
The domestic spot price for crude oil has ranged from $11.00 to $40.00 per
barrel over the past ten years. To the extent that crude oil prices continue
fluctuating in this manner, the Company expects material fluctuations in
revenues from quarter to quarter which, in turn, could adversely affect the
Company's ability to timely service its debt to its principal bank and fund
its ongoing operations and could, under certain circumstances, require a
write-down of the book value of the Company's oil and gas reserves.
Since the Company is engaged in the business of acquiring producing oil and
gas properties, from time to time it acquires certain non-strategic and
marginal properties in some of its purchases. A portion of the Company's on-
going profitability is related to the disposition of these non-strategic
properties on a regular basis. The Company expects to continue to pursue sales
of these types of properties in the future. In most cases the revenue from
these properties is insignificant and in many cases does not exceed the lease
operating expense. As a result, a portion of the Company's capital resources
are generated by the sale of oil and gas properties. Sales of non-strategic
and minor interest oil and gas properties accounted for $106,520 of gains in
the first six months. The Company expects to pursue a more aggressive policy
of disposition of oil and gas properties in fiscal 1997.
CAPITAL EXPENDITURES
The timing of most of the Company's capital expenditures is discretionary.
Currently there are no material long-term commitments associated with the
Company's capital expenditure plans. Consequently, the Company has a
significant degree of flexibility to adjust the level of such expenditures as
circumstances warrant. The Company primarily uses internally generated cash
flow and proceeds from the sale of oil and gas properties to fund capital
expenditures, other than significant acquisitions, and to fund its working
capital deficit. If the Company's internally generated cash flows should be
insufficient to meet its debt service or other obligations, the Company may
reduce the level of discretionary capital expenditures or increase the sale of
non-strategic oil and gas properties in order to meet such obligations. The
level of the Company's capital expenditures will vary in future periods
depending on energy market conditions and other related economic factors. The
Company anticipates that its cash flow will not be sufficient to fund its
domestic operations and debt service at their current levels for the next
year. As a result, the Company anticipates that it will be necessary to
increase the level of sales of the Company's oil and gas properties or seek
additional equity capital, of which there can be no assurance. As a result, it
is likely that capital expenditures will exceed cash provided by operating
activities in
13
<PAGE>
years where significant growth occurs in the Company's oil and gas reserve
base. In such cases, additional external financing is likely to be required.
The Company's proposed merger with Alliance Resources Plc, if completed, would
be a source of such equity capital.
Exclusive of potential acquisitions and subject to the availability of
capital, the Company presently anticipates capital expenditures in fiscal 1997
of approximately $800,000 for oil and gas property enhancement activities.
FINANCING ARRANGEMENTS
Since July 31, 1991, the Company has made 12 acquisitions of oil and gas
properties. These acquisitions have been financed primarily through borrowings
under the Company's bank credit facilities and through internal cash flow. The
Company's acquisition of Germany Oil Company, including the cash portion of
the purchase price paid by the Company for the volumetric production payments
and overriding interests acquired from ENRON Reserve Acquisition Corp. and the
cash portion of the consideration paid by the Company pursuant to the exchange
offer, were financed through borrowings by the Company under a credit facility
pursuant to a Credit Agreement dated as of March 31, 1995 (the "Credit
Agreement") between Bank of America, NT and SA ("Bank") and the Company's
wholly-owned subsidiaries, LaTex Petroleum, Germany Oil and LaTex/GOC
Acquisition ("Borrowers"). In addition, under the new credit facility the
Company and the Borrowers refinanced the Company's then existing indebtedness
to the Company's former principal lender. The Company and its wholly owned
subsidiary, ENPRO, have guaranteed the obligations of the Borrowers under the
Credit Agreement.
Under the Credit Agreement, the Bank agreed to make loans to the Borrowers
(i) in the amount of $23,000,000 (the "Acquisition Loan") for the purposes of
refinancing the Borrower's then existing indebtedness, partially funding the
acquisition of Germany Oil and for working capital, and (ii) in the amount of
$2,000,000 (the "Development Loan") for additional approved development
drilling, workover or recompletion work on oil and gas properties mortgaged by
the Borrowers to the bank as security for the loans under the Credit
Agreement. On January 31, 1997, the outstanding balance of the loan was
$18,751,482.
Advances under the Credit Agreement maintained from time to time as a "Base
Rate Loan" bear interest, payable monthly, at a fluctuating rate equal to the
higher of (i) the rate of interest announced from time to time by the Bank as
its "reference rate", plus 1%, or (ii) the "Federal Funds Rate" (as defined in
the Credit Agreement) plus 1 1/2%.
Advances under the Credit Agreement maintained from time to time as a "LIBO
Rate Loan" bear interest, payable on the last day of each applicable interest
period (as defined in the Credit Agreement), at a fluctuating rate equal to
the LIBO Rate (Reserve Adjusted) (as defined in the Credit Agreement) plus 2%.
As of January 31, 1997, all advances to the Company under the Credit Agreement
are maintained as LIBO Rate Loans which currently bear interest at the annual
rate of 7.4375%.
Principal on any loans under the Credit Agreement is currently repayable in
monthly installments of $322,500 (net of Oakland Petroleum's monthly principal
payment of $42,500) plus an additional payment equal to the positive
difference, if any, between the net proceeds from Borrower's oil and gas
production (as defined in the Credit Agreement) times a variable dedicated
percentage (as defined in the Credit Agreement) and the minimum monthly
payment. All unpaid principal and accrued interest under the Credit Agreement
is due March 31, 2000. The Oakland Petroleum portion of the debt was paid off
December 4, 1996.
The Company's indebtedness to the Bank under the Credit Agreement is secured
by mortgages on all of the Company's producing oil and gas properties and
pledges of the stock of the Company's subsidiaries, LaTex Petroleum, Germany
Oil Company, LaTex/GOC Acquisition and ENPRO. On a semi-annual basis, the
value of the oil and gas properties securing loans under the Credit Agreement
is redetermined by the Bank based upon its review of the Company's oil and gas
reserves. To the extent that the aggregate principal amount of all loans
14
<PAGE>
under the Credit Agreement exceeds the collateral value as determined by the
Bank, the Company must either pay the Bank an amount sufficient to eliminate
such excess, or provide additional oil and gas properties as security for the
loans having a value satisfactory to the Bank.
Under the Credit Agreement, the Company has also granted an affiliate of the
Bank an overriding royalty interest in all of the Company's existing producing
oil and gas properties, other than those situated in the State of Oklahoma
(the "Bank ORRI"). The Bank ORRI is 6.3% of Company's net revenue interest in
each property. The Bank is not entitled to the Bank ORRI on any property
acquired after closing of the financing. On the later to occur of (i) March
31, 1998 or (ii) at such time as the Bank has received a 15% internal rate of
return on the $25,000,000 commitment amount under the Credit Agreement, the
Bank ORRI will be adjusted downward to 2.1%.
As a condition to the Bank making the loans under the Credit Agreement, the
Company's subsidiary, LaTex Petroleum, has entered into hedging agreements
designed to enable the Company to obtain agreed upon net realized prices for
the Company's oil and gas production and designed to protect the Company
against fluctuations in interest rates with respect to the principal amounts
of all loans under the Credit Agreement. Under the current hedging
arrangements with the Bank, the Company presold certain volumes of its gas
production for a three year period beginning April 1, 1995 at a fixed price of
$1.806 per MMBTU. The dedicated annual volumes for gas average 2,605,384 Mmcf
in fiscal 1996, 1,948,592 Mmcf in fiscal 1997 and 1,115,296 Mmcf in fiscal
1998. In addition, the Company placed a price "collar" on certain volumes of
its oil production between $16.50 per barrel and $19.82 per barrel. The
dedicated annual volumes for oil average 324,228 Bbls in fiscal 1996, 279,828
Bbls in fiscal 1997 and 170,344 Bbls in fiscal 1998. Interest rate protection
was provided based on an interest rate swap at 7.47%. The effect of these
hedging arrangements has been to reduce the Company's working capital in
fiscal 1997 and 1996 by $1,967,141 and $1,979,956 respectively, as a result of
additional payments to the Bank above scheduled principal and interest
payments.
The Credit Agreement contains affirmative and negative covenants which
impose certain restrictions and requirements on the Company, including:
limitations on the amount of additional indebtedness the Company may incur;
prohibition against payment by the Company of cash dividends; requirements
that the Company maintains a current ratio (current assets to current
liabilities) of at least 1.0 to 1.0, tangible net worth of at least $5.0
million, no less than $500,000 in cash equivalent investments on hand at any
given time, and no less than $500,000 in working capital; limitations on the
ability of the Company to sell assets or to merge or consolidate with or into
any other person; and requirements that the Company maintain a consolidated
current ratio of at least 1.0 to 1.0 and consolidated tangible net worth of at
least $10 million.
During the year ended July 31, 1996, the Company was in violation of various
provisions of the Credit Agreement. The Company has acknowledged to the Bank
these events of default and, pursuant to a Forbearance Agreement between the
Company and the Bank dated July 23, 1996, as amended, the Bank agreed to delay
enforcement of its rights under the Credit Agreement and related loan
documents as a result of these events of default until the earlier of November
29,1996, the occurrence of any default by the Company under the Credit
Agreement, or the Company's cure of the defaults. The Forbearance Agreement
has been amended to extend the Bank's agreement to forbear any action on the
Company's default through March 31, 1997. Under the terms of the Forbearance
Agreement, the Company agreed to (a) obtain promissory notes from Imperial
Petroleum, Inc. ("Imperial"), Wexford Technology, Inc. ("Wexford"), and LaTex
Resources International evidencing their indebtedness to the Company at August
16, 1996 in the amounts of $677,705, $1,372,799 and $3,363,000, respectively,
(b) obtain from Imperial a lien on and security interest in certain of
Imperial's assets (subject to existing perfected liens and security interests)
to secure Imperial's indebtedness to the Company, and (c) pay all unpaid
overriding royalties due LaSalle Street National Resources Corporation in
three monthly installments, beginning August 1, 1996, with interest at the
Bank's prime rate plus two percent. The Company is currently in compliance
with all conditions required by the Bank for adherence to the Forebearance
Agreement.
In addition, in accordance with the requirements of the Forbearance
Agreement, the Company and Bank entered into Amendment No. 2 to Amended and
Restated Credit Agreement dated as of August 16, 1996
15
<PAGE>
("Amendment No. 2") pursuant to which each of the Borrowers and Guarantors
under the Credit Agreement granted Bank a security interest in substantially
all of their assets which had not otherwise been previously pledged to the
Bank under the Credit Agreement. In addition, the Company granted to the Bank
a security interest in the indebtedness owed to the Company by Imperial,
Wexford and LaTex, together with a security interest in the collateral pledged
to the Company by Imperial to secure Imperial's indebtedness to the Company,
which consists primarily of unpatented mining claims in the states of Arizona
and Montana. In addition, the Company granted the Bank a security interest in
the shares of common stock Wexford and Imperial owned by the Company.
The Company has dedicated a significant portion of its available revenues
and cash flows to remaining current in its payment obligations to the Bank. In
addition, proceeds from sales of oil and gas properties by the Company have
been used to further reduce the Company's indebtedness to the Bank, with only
limited amounts of such proceeds being made available to fund the Company's
working capital needs. As a result, the Company continues to fall further
behind in making required payments to royalty owners and vendors. The effect
of the continuation of this policy, over the long term, will be to increase
the Company's accounts payable while reducing its debt to the Bank. Because
the level of required payments to the Bank remains constant over the terms of
the Credit Agreement, the rate at which the Company's accounts payable deficit
increases will become greater with time and, ultimately may jeopardize certain
of the Company's oil and gas leases.
The Company believes that its cash flow from operations will be insufficient
to meet its anticipated capital requirements for the foreseeable future. As a
result, the Company will be required to increase the level of sales of its oil
and gas properties, seek additional equity capital, or restructure its
existing Credit Agreement with the Bank, none of which can be assured.
However, because future cash flows and the availability of debt or equity
financing are subject to a number of variables, such as the level of
production and the prices of oil and gas, there can be no assurance that the
Company's capital resources will be sufficient to maintain current operations
or planned levels of capital expenditures.
SEASONALITY
The results of operations of the Company are somewhat seasonal due to
seasonal fluctuations in the price for crude oil and natural gas. Recently,
crude oil prices have been generally higher in the third calendar quarter and
natural gas prices have been generally higher in the first calendar quarter.
Due to these seasonal fluctuations, results of operations for individual
quarterly periods may not be indicative of results which may be realized on an
annual basis.
INFLATION AND PRICES
In recent years, inflation has not had a significant impact on the Company's
operations or financial condition. The generally downward pressure on oil and
gas prices during most of such periods has been accompanied by a corresponding
downward pressure on costs incurred to acquire, develop and operate oil and
gas properties as well as the costs of drilling and completing wells on
properties.
In connection with the execution of the Credit Agreement with the Bank, the
Company has entered into a crude oil and natural gas hedging arrangement
designed to enable the Company to receive a net realized price of not less
than $1.81 per MMBtu of natural gas and $16.50 per barrel of crude oil on sale
of the volumes of crude oil and natural gas set forth in the Credit Agreement.
16
<PAGE>
Prices obtained for oil and gas production depend upon numerous factors that
are beyond the control of the Company, including the extent of domestic and
foreign production, imports of foreign oil, market demand, domestic and world-
wide economic and political conditions, and government regulations and tax
laws. Prices for both oil and gas have fluctuated significantly in 1996 and
1995. The following table sets forth the average price received by the Company
for each of the three periods listed and the effects of the hedging
arrangement described below.
<TABLE>
<CAPTION>
OIL OIL GAS GAS
(EXCLUDING (INCLUDING (EXCLUDING (INCLUDING
THE EFFECTS THE EFFECTS THE EFFECTS THE EFFECTS
OF HEDGING OF HEDGING OF HEDGING OF HEDGING
TRANSACTIONS) TRANSACTIONS) TRANSACTIONS) TRANSACTIONS)
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Six Months Ended July
31, 1997............... $19.48 $14.90 $2.18 $1.26
Year Ended July 31,
1996................... $15.73 $15.24 $2.03 $1.67
Year Ended July 31,
1995................... $12.86 $12.86 $1.48 $1.48
</TABLE>
The Company has entered into a master agreement to hedge the price of its
oil and natural gas. The purpose of the hedging arrangement is to provide
protection against price drops and to produce a measure of stability in the
volatile environment of oil and natural gas spot pricing.
17
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In addition to the litigation set forth in the Company's annual report in
the Company's form 10-K, the Company is a 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 to 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.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION TO MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
SEC
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
(2) Plan of Acquisition, Reorganization, Arrangement Liquidation or
Succession
Not Applicable.
(4) Instruments Defining the Rights of Security Holders, Including
Indentures
Not Applicable.
(10) Material Contacts
Not Applicable.
(11) Statement re Computation of Per-Share Earnings
Not Applicable
(15) Letter re Unaudited Interim Financial Information
Not Applicable.
(18) Letter re Change in Accounting Principles
Not Applicable.
(19) Report Furnished to Security Holders
Not Applicable.
(22) Published Report Regarding Matter submitted to Vote of Security
Holders
Not Applicable.
(23) Consents of Experts and Counsel
Not Applicable.
(24) Power of Attorney
Not Applicable.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
SEC
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
(27) Financial Data Schedule
*27.1 Financial Data Schedule of LaTex Resources, Inc.
(99) Additional Exhibits
Not Applicable.
</TABLE>
- --------
* Filed Herewith.
(b) Reports on Form 8-K
Not Applicable.
19
<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 by the
undersigned thereunto duly authorized.
LaTex Resources, Inc.
/s/ John L. Cox
By:__________________________________
John L. Cox, Vice President
and Chief Financial Officer
Date: March 14, 1997
20
