<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 12,1997
REGISTRATION NO. 333-19013
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________________________________
AMENDMENT NO. 2 TO
FORM F-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_________________________________________________
ALLIANCE RESOURCES PLC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ENGLAND AND WALES 1311 None
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification
Number)
KINGSBURY HOUSE
15-17 KING STREET
LONDON SWIY 6QU
44 171 930 9337
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
JOHN A. KEENAN
1 HOUSTON CENTER
1221 MCKINNEY, SUITE 1814
HOUSTON, TEXAS 77010
(713) 650-0069
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
W. ALAN KAILER S. ERICKSON GRIMSHAW
JENKENS & GILCHRIST, PRAY, WALKER, JACKMAN,
A PROFESSIONAL CORPORATION WILLIAMSON & MARLAR
1445 ROSS AVENUE, SUITE 3200 100 WEST 5TH STREET
DALLAS, TEXAS 75202 TULSA, OKLAHOMA 74102-4218
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this registration statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
_____________________
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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Proposed Maximum Proposed Maximum
Title of Each Class of Amount to Offering Price Aggregate Amount of
Securities to be Registered be Registered (1) per Share (2) Offering Price (2) Registration Fee
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ordinary Shares 27,096,020 N/A $17,027,963 $5,160(3)
- ----------------------------------------------------------------------------------------------------------------
Warrants 3,116,558 N/A N/A N/A (4)
================================================================================================================
</TABLE>
(1) Number of shares to be issued in the transactions described herein estimated
solely for purposes of calculating the registration fee.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457 under the Securities Act of 1933, as amended. Based
on current market price of securities to be acquired by registrant, pursuant
to Rule 457(f).
(3) A registration fee of $5,152 was paid previously.
(4) No separate registration fee is required pursuant to Rule 457(g).
___________________________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
[LATEX LOGO] [LOGO OF ALLIANCE RESOURCES PLC APPEARS HERE]
MERGER PROPOSAL -- YOUR VOTE IS VERY IMPORTANT
The Boards of Directors of LaTex Resources, Inc. and Alliance Resources Plc
have agreed on a merger 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. The combined company will be named
Alliance Resources Plc; its executive office will be in London, England and its
principal U.S. offices will be in Tulsa, Oklahoma.
If the merger is completed, the Alliance Stock will be "reverse split" so
that each Alliance shareholder at the time of the merger will receive one New
Alliance Share for each 40 Existing Alliance Shares and each LaTex shareholder
at the time of the merger 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. The New Alliance Shares to be issued to LaTex
shareholders will represent approximately 72% of the outstanding stock of
Alliance after the merger. The New Alliance Shares held by Alliance shareholders
will represent approximately 28% of the outstanding stock of Alliance after the
merger. If Alliance also issues New Alliance Shares and Bank Warrants to LaTex's
bank in payment of certain fees and in exchange for an overriding royalty
interest held by the bank, as it has agreed in principle to do, the bank will
hold additional New Alliance Shares amounting to approximately 7.8% of
outstanding stock of Alliance and will hold warrants to purchase additional
shares amounting to approximately 3.5% of the then outstanding stock of
Alliance.
The merger cannot be completed unless the shareholders of both companies
approve it. This document is being furnished only to the LaTex shareholders,
however, as the Alliance shareholders are receiving a separate document prepared
under English law. Both LaTex and Alliance have scheduled special meetings for
their respective shareholders to vote on the merger. YOUR VOTE IS VERY
IMPORTANT.
The Board of Directors of LaTex Resources, Inc., by unanimous vote of the
Board and of the independent Directors, have approved the Merger Agreement and
authorized the Merger and unanimously recommend that you vote FOR the adoption
of the Merger Agreement and authorization of the Merger.
Whether or not you plan to attend the LaTex meeting, please take the time
to vote by completing and mailing the enclosed proxy card to us. If you sign,
date and mail your proxy card without indicating how you want to vote, your
proxy will be counted as a vote in favor of the merger. If you fail to return
your card, your proxy will be counted as a vote against the merger.
The date, time and place of the special meeting of the LaTex shareholders
is:
10 a.m., Local Time
April 18,1997
Doubletree Downtown Hotel
616 W. 7th
Tulsa, Oklahoma 74127 U.S.A.
This Proxy Statement provides you with detailed information about the
proposed merger. In addition, you may obtain information about both LaTex and
Alliance from documents that we have filed with the Securities and Exchange
Commission ("SEC"). We encourage you to read this entire document carefully.
Jeffrey T. Wilson John A. Keenan
Chairman of the Board and President, Managing Director
Resources, Inc. Alliance Resources Plc
Proxy Statement dated March 17, 1997, and first mailed to shareholders
on March 21, 1997.
<PAGE>
QUESTIONS AND ANSWERS
ABOUT THE ALLIANCE/LATEX MERGER
Q: WHY ARE THE TWO COMPANIES PROPOSING TO MERGE? HOW WILL I BENEFIT?
A: This merger has been approved by the Boards of both LaTex and Alliance as a
means to create an independent oil company that has a larger interest in
U.S. properties than either of the separate companies currently have,
which, with the potential improvements to cash flow and greater prospect
for financial leverage that this base provides, is anticipated to have a
greater ability to participate in additional domestic and international oil
and gas projects. We believe that the merger will allow the combined
companies to pursue opportunities that would otherwise be unavailable or
incapable of being exploited by either company separately. Management of
Alliance intends to focus particularly on opportunities in the United
States, the former Soviet Union and the Middle East, but will consider
opportunities throughout the world. Of course, there is no guarantee that
the combined companies will be successful in their efforts.
Q: WHAT DO I NEED TO DO NOW?
A: Mail your signed proxy card in the enclosed return envelope as soon as
possible, so that your shares may be represented at the LaTex special
meeting which will take place April 18, 1997. The Board of Directors
of LaTex unanimously recommends voting in favor of the proposed merger.
Q: PLEASE EXPLAIN THE EXCHANGE RATIO.
A: At the time of the merger, LaTex shareholders will receive 0.85981 of a New
Alliance Share for each share of LaTex Common Stock they hold, 2.58201 New
Alliance Shares for each share of LaTex Series A Stock they hold, 6.17632
New Alliance Shares for each share of LaTex Series B Stock they hold, 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 they hold. Fractional New
Alliance Shares will not be issued in the merger. Instead, the shares
issued to each holder will be rounded to the nearest whole number of New
Alliance shares. No cash will be paid for fractional shares not received.
Example: if you currently own 100 shares of LaTex Common Stock, then after
the merger you will be entitled to receive 86 New Alliance Shares.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: The Boards of Directors of both companies are working towards completing
the merger as quickly as possible. In addition to shareholder approvals,
we must also obtain regulatory approvals in both countries. We hope to
complete the merger as early as April 18, 1997.
Q: WHAT ARE THE TAX CONSEQUENCES TO LATEX SHAREHOLDERS OF THE MERGER?
A: The exchange of LaTex shares by LaTex shareholders in the merger into New
Alliance Shares will be taxable. The taxable income or loss each LaTex
shareholder must recognize will generally be equal to the amount that the
middle market quotation as derived from the Daily Official List of the
<PAGE>
London Stock Exchange of the New Alliance Shares held by a shareholder
immediately after the merger exceeds the shareholder's tax basis in the
LaTex Shares. To review the tax consequences to shareholders in greater
detail, see page 74.
Q: HOW ARE THE ALLIANCE SHARES BEING CHANGED?
A: As part of the merger, the Alliance shareholders are being asked to approve
a 40-to-1 reverse stock split of the Alliance stock. It is a condition to
the merger that this reverse stock split be approved by the Alliance
shareholders. Therefore, in connection with the merger, each 40 Existing
Alliance Shares held by an Alliance shareholder at the time of the merger
will be converted into one New Alliance Share. In this Proxy Statement,
all references to the New Alliance Shares mean the Alliance shares after
this reverse stock split.
Q: HOW DO I REVOKE MY PROXY IF I DECIDE TO DO SO?
A: You have the unconditional right to revoke your proxy at any time before
your shares are voted. You can revoke the proxy either by appearing in
person and notifying the officials at the special meeting that you wish to
revoke your proxy or by notifying LaTex in writing addressed to: 4200 East
Skelly Drive, Suite 1000, Tulsa, Oklahoma 74135, Attention: Stacey D.
Smethers, Secretary. Your revocation will not be effective unless it has
been received by the Secretary of LaTex before the day of the special
meeting or by the officials in charge of the special meeting before the
shares are voted.
Q: HOW DO I DISSENT AND SEEK AN APPRAISAL OF MY SHARES IF I WISH TO DO SO?
A: If you wish to dissent from the merger and receive the fair value of your
LaTex shares in cash, you must deliver to LaTex, before the special
meeting, a written demand for the appraisal of your LaTex Shares. This
demand must reasonably inform LaTex of your identity and that you intend to
demand the appraisal of your shares. You also must not vote in favor of
the merger. After the vote on the merger, you must then follow additional
steps to obtain the appraisal of your shares. See page 37 for additional
information concerning your dissent and appraisal rights and how to pursue
those rights.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. After the merger is completed, we will send you written instructions
for exchanging your share certificates.
<PAGE>
SUBJECT TO COMPLETION, DATED MARCH 12, 1997
ALLIANCE RESOURCES PLC
THIS DOCUMENT SERVES AS A PROSPECTUS FOR SHARES OF ALLIANCE RESOURCES PLC
AND ALSO AS A PROXY STATEMENT FOR A SPECIAL MEETING OF SHAREHOLDERS OF LATEX
RESOURCES, INC. TO BE HELD ON APRIL 18, 1997
This Proxy Statement relates to 21,448,787 ordinary shares of (Pounds)0.40
each (the "New Alliance Shares") in the capital of Alliance Resources Plc
("Alliance") that may be issued to the shareholders of LaTex Resources, Inc.
("LaTex") in exchange for the outstanding shares of its common and preferred
stock, par value $.01 per share (the "LaTex Shares"), pursuant to an Agreement
and Plan of Merger (the "Merger Agreement") providing for the merger (the
"Merger") of Alliance Resources (Delaware), Inc. ("Alliance Delaware"), a newly
formed wholly owned subsidiary of Alliance, into LaTex, and are being offered
subject to the approval of the shareholders of LaTex and subject to the
satisfaction of the other conditions set forth herein and in the Merger
Agreement. A copy of the Merger Agreement is attached as Appendix B to this
Proxy Statement. This Proxy Statement also relates to warrants (the "New
Warrants") to be issued by Alliance in the Merger to replace currently
outstanding warrants issued by LaTex to purchase 2,242,250 shares of LaTex
Common Stock, and to 1,927,908 New Alliance Shares issuable upon exercise of
those New Warrants. The Merger and the Merger Agreement are to be submitted to a
vote of the shareholders of LaTex at a special meeting to be held on
April 18, 1997. If the Merger is completed, the outstanding LaTex Shares
(other than shares, if any, held by LaTex in treasury and shares held by
dissenters) will be automatically canceled and LaTex shareholders will receive
New Alliance Shares at the rate provided in the Merger Agreement (the
"Conversion Rate"). See "The Merger--Terms of the Merger." This document also
serves as a Prospectus with respect to 2,530,675 New Alliance Shares and
warrants (the "Bank Warrants") to purchase an additional 1,188,650 New Alliance
Shares to be issued to the Bank of America NT&SA (the "Bank") as payment for
certain fees to the Bank and in exchange for an overriding royalty interest in
certain of LaTex's properties currently owned by the Bank, as well as the New
Alliance Shares issuable upon exercise of the Bank Warrants.
The currently outstanding Alliance shares (the "Existing Alliance Shares")
are traded on the London Stock Exchange under the symbol "ARS." In connection
with the Merger, the Existing Alliance Shares will be subject to a 40-to-1
reverse split, pursuant to which each 40 Existing Alliance Shares will be
consolidated into one New Alliance Share of (Pounds)0.40 each. In view of the
size of the Merger relative to Alliance, the London Stock Exchange, at
Alliance's request, has suspended trading in the Existing Alliance Shares until
the Merger is completed. LaTex's Common Stock is traded on the Nasdaq SmallCap
Market ("Nasdaq") under the symbol LATX. On August 9, 1996, the last trading day
before the announcement of the Merger Agreement, the middle market quotation (as
derived from the Daily Official List of the London Stock Exchange) for the
Existing Alliance Shares was (Pounds)0.02 ($0.032) per share (equivalent to
(Pounds)0.80 ($1.28) per New Alliance Share) and the last reported sale price
on Nasdaq for LaTex's Common Stock was $0.41 per share. On March 14, 1997, the
last reported sale price for LaTex's Common Stock as reported by Nasdaq was
$____ per share.
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
Application is being made to list the New Alliance Shares to be issued in
connection with the Merger on the London Stock Exchange.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Proxy Statement is March 17, 1997.
<PAGE>
Alliance has filed a registration statement with the Securities and
Exchange Commission (the "SEC" or the "Commission") for the New Alliance Shares
and New Warrants to which this Proxy Statement relates. See "Additional
Information." For information concerning the circumstances in which this Proxy
Statement may be used, see "The Merger--Registration and Resale."
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION ABOUT ALLIANCE, THE NEW ALLIANCE SHARES, THE NEW WARRANTS OR ANY
MATTER REFERRED TO IN THIS PROXY STATEMENT OTHER THAN THE INFORMATION AND
REPRESENTATIONS CONTAINED IN THIS PROXY STATEMENT. IF ANY OTHER INFORMATION OR
REPRESENTATION IS GIVEN OR MADE, THAT INFORMATION OR REPRESENTATION MAY NOT BE
RELIED UPON. NEITHER THE DELIVERY OF THIS PROXY STATEMENT NOR ANY DISTRIBUTION
OF THE NEW ALLIANCE SHARES OR NEW WARRANTS SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF LATEX OR
ALLIANCE SINCE THE DATE HEREOF. HOWEVER, IF ANY MATERIAL CHANGE IN THE AFFAIRS
OF LATEX OR ALLIANCE OCCURS AT ANY TIME WHEN THIS PROXY STATEMENT IS REQUIRED TO
BE DELIVERED, THE PROXY STATEMENT WILL BE AMENDED OR SUPPLEMENTED.
Until June 14, 1997 (90 days after the date of this Proxy Statement), all
dealers effecting transactions in the securities offered hereby, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligations of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
In this Proxy Statement, references to "dollar" and "$" are to United
States dollars, and the terms "U.S." and "United States" means the United States
of America, its states, its territories, its possessions and all areas subject
to its jurisdiction. All references to "pound," "sterling," or "(Pounds)" are to
United Kingdom currency, and the terms "United Kingdom," "U.K." and "UK" mean
the United Kingdom of Great Britain and Northern Ireland, its possessions and
all areas subject to its jurisdiction. Certain amounts stated in sterling herein
have been also stated in dollars solely for convenience, and should not be
construed as a representation that such sterling amounts actually represent such
dollar amounts or could be, or could have been, converted into dollars at the
rate indicated or at any other rate. Unless otherwise indicated, such dollar
amounts have been derived by converting from sterling to dollars at the rate of
(Pounds)1.00 equals $1.60, the New York foreign exchange selling rate applicable
to trading among banks in amounts of $ 1 million and more, as quoted at 4p.m.
Eastern time on March 7, 1997, as reported by the Wall Street Journal on March
10, 1997. This rate may differ from the actual rate that may have been available
at that time. Furthermore, such rate was not used by Alliance in the preparation
of its consolidated financial statements included in this Proxy Statement.
There are currently no UK decrees or regulations restricting the import or
export of capital or affecting the remittance of dividends or other payments to
holders of the Alliance shares who are non-residents of the UK.
__________________
THIS PROXY STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, THE NEW ALLIANCE SHARES OR THE NEW WARRANTS IN
ANY STATE OR OTHER JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION.
<PAGE>
TABLE OF CONTENTS
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Page
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SUMMARY............................................................................................... 1
Summary Historical and Pro Forma Financial Data....................................................... 5
Summary Oil and Natural Gas Reserve Data.............................................................. 8
RISK FACTORS.......................................................................................... 9
Volatility of Oil and Gas Prices and Supplies.................................................. 9
Need to Replace Reserves....................................................................... 9
Drilling and Operating Risks................................................................... 9
Uncertainty of Estimates of Oil and Natural Gas Reserves....................................... 10
Acquisition Risks.............................................................................. 10
International Acquisitions and Operations...................................................... 11
Substantial Capital Requirements............................................................... 11
Dependence on Key Personnel.................................................................... 12
Competition.................................................................................... 12
Governmental and Environmental Regulation...................................................... 12
No Dividends................................................................................... 13
Credit Facility Covenants and Restrictions..................................................... 13
Dependence on Other Operators.................................................................. 14
Forward-looking Information.................................................................... 14
Trading Markets ............................................................................... 14
Enforceability of the U.S. Securities Laws..................................................... 14
THE MERGER............................................................................................ 15
Introduction................................................................................... 15
Background of the Merger....................................................................... 15
Reasons for the Merger......................................................................... 18
Opinion of LaTex's Financial Advisor........................................................... 20
Terms of the Merger............................................................................ 23
General................................................................................ 23
The Merger............................................................................. 23
Conversion Rate........................................................................ 23
Conduct of Business Prior to the Merger................................................ 24
Conditions to the Merger............................................................... 24
Termination............................................................................ 25
No Solicitation Covenants.............................................................. 25
Effective Time of the Merger................................................................... 26
Exchange of Certificates....................................................................... 26
Registration and Resale........................................................................ 26
Regulatory Matters............................................................................. 27
Interests of Certain Persons in the Merger..................................................... 27
Accounting Treatment........................................................................... 27
Summary Comparison of LaTex Common Stock and New Alliance Shares............................... 28
Restrictions on Resales by Affiliates.......................................................... 37
Appraisal Rights of Dissenting LaTex Shareholders.............................................. 37
PRICE RANGE OF STOCK AND DIVIDENDS.................................................................... 39
Exchange Rates................................................................................. 41
SPECIAL MEETING OF SHAREHOLDERS....................................................................... 41
Purpose of the Meeting......................................................................... 41
Quorum and Voting.............................................................................. 41
Recommendation................................................................................. 42
</TABLE>
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PRINCIPAL SHAREHOLDERS AND STOCK OWNERSHIP OF MANAGEMENT.............................................. 42
LATEX................................................................................................. 44
ALLIANCE.............................................................................................. 44
General........................................................................................ 44
Recent Developments............................................................................ 45
Oil and Gas Interests.......................................................................... 46
International.................................................................................. 48
Operations..................................................................................... 49
Drilling Activity.............................................................................. 52
Product Marketing.............................................................................. 53
Significant Oil and Natural Gas Purchasers..................................................... 53
Title to Properties............................................................................ 53
Employees...................................................................................... 53
Competition.................................................................................... 53
Regulation..................................................................................... 53
SELECTED CONSOLIDATED FINANCIAL INFORMATION OF ALLIANCE............................................... 57
UNAUDITED PRO FORMA FINANCIAL STATEMENTS OF ALLIANCE.................................................. 58
Notes to Unaudited Condensed Pro Forma Combined Financial Statements................................ 62
MANAGEMENT'S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS OF ALLIANCE...... 64
General........................................................................................ 64
Six Months ended October 31,1996 Compared with Six Months ended October 31,1995................ 64
1996 Compared with 1995........................................................................ 64
1995 Compared with 1994........................................................................ 65
Liquidity and Capital Resources................................................................ 66
MANAGEMENT............................................................................................ 68
Directors and Executive Officers of Alliance................................................... 68
Executive Compensation......................................................................... 70
DESCRIPTION OF ALLIANCE SHARES........................................................................ 72
Dividends...................................................................................... 72
Options........................................................................................ 72
Liquidation Rights............................................................................. 72
Voting Rights.................................................................................. 73
Pre-emptive Rights............................................................................. 73
Variation of Rights............................................................................ 73
Disclosure of Interests........................................................................ 73
Exchange Controls and Other Limitations Affecting Security Holders............................ 74
MATERIAL TAX CONSIDERATIONS........................................................................... 74
U.S. Tax Consequences of the Merger............................................................ 75
UK and US Tax Consequences of Ownership and Disposition of New Alliance Shares................. 76
Taxation of Dividends.................................................................. 76
Backup Withholding and Information Reporting........................................... 78
Taxation of Capital Gains.............................................................. 78
Estate and Gift Tax.................................................................... 78
Stamp Duty and Stamp Duty Reserve Tax.................................................. 79
Controlled Foreign Corporation Status.................................................. 79
Passive Foreign Investment Company Status.............................................. 79
CERTAIN LONDON STOCK EXCHANGE LISTING REQUIREMENTS.................................................... 81
EXPERTS............................................................................................... 82
U.K. LISTING PARTICULARS.............................................................................. 82
LEGAL MATTERS......................................................................................... 82
</TABLE>
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<TABLE>
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SHAREHOLDER PROPOSALS................................................................................. 82
ENFORCEABILITY OF CIVIL LIABILITIES UNDER UNITED STATES FEDERAL SECURITIES LAWS....................... 82
ADDITIONAL INFORMATION................................................................................ 83
REPORTS TO SHAREHOLDERS............................................................................... 85
ALLIANCE FINANCIAL STATEMENTS......................................................................... F-1
Appendix A - Definitions.............................................................................. A-1
Appendix B - Agreement and Plan of Merger as amended.................................................. B-1
Appendix C - Opinions of Wood Roberts LLC............................................................. C-1
Appendix D - Delaware General Corporation Law (S)262.................................................. D-1
LaTex Annual Report Form 10-K/A for the Year Ended July 31, 1996...................................... S-1
LaTex Quarterly Report on Form 10-Q/A for the Quarter Ended October 31, 1996.......................... S-
</TABLE>
<PAGE>
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SUMMARY
This summary highlights selected information from this document and may not
contain all of the information that is important to you. To understand the
Merger fully and for a more complete description of the legal terms of the
Merger Agreement, you should read carefully this entire document.
THE COMPANIES (SEE PAGE 44)
Alliance Resources Plc Alliance is a London-based holding company
Kingsbury House of a group whose principal activities are
15-17 King Street the exploration, development and
London SW1Y 6QU production of oil and gas in the United
England States. The group's existing producing oil
Telephone: 44 171 930 9337 and gas interests are located in the State
of Louisiana. Alliance is organized as a
public limited company under the laws of
England and Wales. After the Merger,
Alliance's principal United States
operating offices will be located at 4200
East Skelly Drive, Suite 1000, Tulsa,
Oklahoma 74135.
LaTex Resources, Inc. LaTex is an independent oil and gas
4200 East Skelly Drive, Suite 1000 exploration and production company located
Tulsa, Oklahoma 74135 in Tulsa, Oklahoma, primarily engaged in
U.S.A. the acquisition and exploitation of
Telephone: (918) 747-7000 producing oil and gas properties. LaTex
owns and operates producing oil and gas
properties located in 13 states with
reserves located primarily in the states
of Mississippi, Louisiana, Oklahoma, Texas
and Alabama. Additional information
concerning LaTex is included on LaTex's
Annual Report on Form 10-K for the Year
Ended July 31, 1996 and Quarterly Report
on Form 10-Q for the Quarter Ended October
31, 1996, which accompany this Proxy
Statement. LaTex is a Delaware
corporation.
OUR REASONS FOR THE MERGER (SEE PAGE 18)
The combined company will have a larger interest in U.S. properties than
either of the separate companies and, with the potential improvements to cash
flow and greater prospect for financial leverage that this base provides, is
anticipated to have a greater ability to participate in domestic and
international projects. In particular, the management and Boards of Directors
of both companies believe that the Merger will allow the combined company to
pursue development and acquisition projects that would otherwise be unavailable
or incapable of being exploited by either company separately. Following the
Merger, management of Alliance intends to focus particularly on opportunities in
the United States, the former Soviet Union and the Middle East, but will
consider acquisitions throughout the world. Of course, there is no guarantee
that the combined company will be successful in its efforts.
Management of both LaTex and Alliance are confident that the two companies
may be combined efficiently. The combined company's headquarters will be located
in Alliance's current London offices, which will provide greater access to
international opportunities, while LaTex's Tulsa office will become headquarters
for domestic operations by integrating Alliance's smaller U.S. operation. In
recommending the Merger to its shareholders, LaTex's Board of Directors
considered a number of factors, including (a) the strategic aspects of a merger
with Alliance; (b) the worsening financial condition of LaTex; (c) management's
unsuccessful attempts to secure additional debt and/or equity financing;(d) the
difficulties of continuing to operate as a
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1
<PAGE>
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small independent oil and gas company in the face of increasing competition for
domestic and international opportunities; and (e) the difficulty of
significantly increasing the company's assets, revenue or cash flow by pursuing
only domestic projects.
RECOMMENDATION TO LATEX SHAREHOLDERS (SEE PAGE 42)
The LaTex Board of Directors believes that the Merger is in your best
interest and unanimously recommends that you vote FOR the proposal to approve
and adopt the Merger Agreement and the Merger.
THE MERGER (SEE PAGE 23)
The Merger Agreement is attached as Appendix B to this Proxy Statement.
The LaTex Board of Directors encourages you to read the Merger Agreement as it
is the legal document that governs the Merger.
As part of the Merger, the Alliance shareholders are being asked to approve
a 40-to-1 reverse stock split of the Existing Alliance Shares. It is a
condition to the Merger that this reverse stock split be approved by the
Alliance shareholders. Therefore, in connection with the Merger, each 40
Existing Alliance Shares of (Pounds)0.01 each at the time of the Merger will be
consolidated into one New Alliance Share of (Pounds)0.40 each. In this Proxy
Statement, all of the references to the New Alliance Shares mean the Alliance
stock after this reverse stock split.
WHAT LATEX SHAREHOLDERS WILL RECEIVE (SEE PAGE 23)
Alliance will issue up to 21,448,787 New Alliance Shares to LaTex
shareholders in the Merger. At the time of the Merger, LaTex shareholders will
receive 0.85981 of a New Alliance Share for each share of LaTex Common Stock
they hold, 2.58201 New Alliance Shares for each share of LaTex Series A Stock
they hold, 6.17632 New Alliance Shares for each share of LaTex Series B Stock
they hold, and a New Warrant to purchase 0.85981 of a New Alliance Share for
each share of LaTex Common Stock subject to warrants issued by LaTex outstanding
at the time of the Merger. No fractional shares will be issued. Instead, the
shares issued to each holder will be rounded to the nearest whole number of New
Alliance Shares. No cash will be paid for fractional shares not received.
You should not send in your stock certificates until instructed to do so
after the Merger is completed.
OWNERSHIP OF THE NEW ALLIANCE FOLLOWING THE MERGER (SEE PAGE 42)
The New Alliance Shares issued to LaTex shareholders in the Merger will
constitute approximately 72% of the outstanding common stock of Alliance
immediately after the Merger. In addition, persons who hold warrants at the
time of the Merger to purchase LaTex Shares will receive New Warrants to
purchase 1,927,908 New Alliance Shares, or approximately 6.1% of the New
Alliance Shares outstanding after the Merger, and assuming exercise of all of
the New Warrants. If Alliance also issues New Alliance Shares and Bank Warrants
to LaTex's bank in payment of certain fees and in exchange for an overriding
royalty interest held by the bank, as it has agreed in principle to do, the bank
will hold additional New Alliance Shares amounting to approximately 7.8% of
outstanding stock of Alliance and will hold warrants to purchase additional
shares amounting to approximately 3.5% of the then outstanding stock of
Alliance.
BOARD OF DIRECTORS AND MANAGEMENT OF THE NEW ALLIANCE FOLLOWING THE MERGER (SEE
PAGE 68)
It is expected by the current management and the Board of Directors of both
companies that after the Merger is completed John A. Keenan will continue as
Managing Director of the new Alliance, Paul R. Fenemore will continue as
Director of Operations and Business Development of the new Alliance, and H.
Brian K. Williams will continue as Finance Director of the new Alliance. The
current Board of Directors of Alliance will comprise the Board of Directors of
the new Alliance with the addition of two LaTex members
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to a total of 10 members. Upon completion of the Merger, Jeffrey T. Wilson will
resign from his position as LaTex's Chief Executive Officer. Mr. Wilson and John
R. Martinson, both directors of LaTex, will become non-executive directors of
the new Alliance.
CONDITIONS TO THE MERGER (SEE PAGE 24)
The completion of the Merger depends upon meeting a number of conditions,
including the following:
(a) approvals by the holders of a majority of the voting stock of each of
Alliance and LaTex.
(b) the approval of governmental authorities and the London Stock
Exchange;
(c) the absence of any change in or affecting either of the companies that
causes a material adverse effect on either of them; and
(d) the number of LaTex shareholders demanding an appraisal of their
shares prior to the LaTex Special Meeting not exceeding 5% of any
class of the outstanding LaTex Shares.
The condition limiting the level of shareholders demanding an appraisal of
their LaTex Shares may be waived by both Alliance and LaTex.
TERMINATION OF THE MERGER AGREEMENT (SEE PAGE 25)
The Boards of Directors of either LaTex and Alliance have the right to
terminate the Merger Agreement without completing the Merger, and either party
can terminate the Merger Agreement if any of the following occurs:
(a) the Merger is not completed by April 30, 1997; or
(b) the approval of the holders of a majority of the stock of either
Alliance or LaTex is not received; or
(c) a court or other relevant governmental authority prohibits the Merger;
or
(d) the other party breaches or materially fails to comply with any of its
representations or warranties or obligations under the Merger
Agreement; or
(e) the Board of Directors of the other party either: (i) withdraws or
modifies in any adverse manner its approval or recommendation in favor
of the Merger, or (ii) approves or recommends a significant
transaction with a third party; or
(f) the business of the other party materially changes for the worse; or
(g) the Board of Directors of either company determines, under certain
circumstances, that the board's fiduciary obligations require
acceptance of an offer from a third party to enter into a significant
transaction.
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TERMINATION FEES (SEE PAGE 25)
The Merger Agreement requires Alliance or LaTex to pay to the other a
termination fee of $1 million, plus expenses, if the Merger terminates under
certain circumstances, including a determination by the Board of Directors of
Alliance or LaTex to accept an offer from a third party to enter into a
significant transaction with a third party.
OTHER INTERESTS OF OFFICERS AND DIRECTORS IN THE MERGER (SEE PAGE 27)
In considering the Board's recommendation that you vote in favor of the
Merger, you should be aware that Jeffrey T. Wilson, LaTex's Chief Executive
Officer, will have a consulting agreement with Alliance that will provide him
with interests in the Merger that are different from, or in addition to, yours.
In addition, John R. Martinson, a director of LaTex, is a principal in Wood
Roberts, LLC, which on completion of the Merger will receive a fee for rendering
an opinion regarding the fairness of the Merger.
ACCOUNTING TREATMENT (SEE PAGE 27)
The Board of Directors of LaTex expects the Merger to be treated as a
purchase for accounting and financial reporting purposes. For US GAAP purposes,
because LaTex is the larger company, this means that the transaction will be
treated as if LaTex had acquired and assumed the operations of Alliance at the
Effective Time of the Merger.
The combined company will adopt Alliance's year end, which is April 30.
OPINION OF FINANCIAL ADVISOR (SEE PAGE 20)
In deciding to approve the Merger, the LaTex Board of Directors considered
opinions provided by LaTex's financial advisor, Wood Roberts, LLC. ("Wood
Roberts"), as to the fairness to the LaTex shareholders of the terms of the
Merger from a financial point of view. These opinions are attached as Appendix C
to this Proxy Statement. We encourage you to read these opinions. The payment
of Wood Roberts' fees for rendering the fairness opinion and other matters in
connection with the Merger is contingent upon completion of the Merger.
In connection with delivering these opinions, Wood Roberts performed a
variety of analyses. These included comparing the relative oil and gas reserve
values and net assets of Alliance and LaTex and comparing the financial results
and historical stock prices of LaTex and Alliance to those of other selected oil
and gas companies traded on the London Stock Exchange.
MATERIAL TAX CONSIDERATIONS (SEE PAGE 74)
The exchange of LaTex Shares by LaTex shareholders in the Merger into New
Alliance Shares will be taxable under United States tax law. The taxable income
or loss each LaTex shareholder must recognize will generally be equal to the
amount by which the market value of the New Alliance Shares held by a
shareholder immediately after the Merger differs from the shareholder's basis in
the LaTex Shares.
RESTRICTIONS ON RESALES (SEE PAGE 37)
There are certain restrictions on resales of New Alliance Shares to be
received by affiliates of LaTex in the Merger.
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DISSENT AND APPRAISAL RIGHTS (SEE PAGE 37)
Under Delaware law, any LaTex shareholder will have the right to demand an
appraisal of, and a cash payment for the fair value of, his LaTex Shares by
delivering to LaTex before the Special Meeting a written demand for appraisal.
This demand must reasonably inform LaTex of the shareholder's identity and that
the shareholder intends to demand the appraisal of his shares. The shareholder
must then follow the other requirements for demanding an appraisal.
COMPARATIVE PER SHARE MARKET PRICE INFORMATION (SEE PAGE 39)
The Existing Alliance Shares are traded on the London Stock Exchange and
are not traded in the United States. On August 9, 1996, the last full trading
day on the London Stock Exchange prior to the public announcement of the Merger
Agreement, Alliance stock closed at (Pounds)0.02 ($0.032) per Existing Alliance
Share (equivalent to (Pounds)0.80 ($1.28) per New Alliance Share). At the
request of Alliance, the London Stock Exchange has suspended the Existing
Alliance Shares from trading since the announcement of the Merger.
LaTex Common Stock is traded and quoted on the Nasdaq SmallCap Market. On
August 9, 1996, LaTex Common Stock closed at $0.41 per share on Nasdaq. On
March 14, 1997, LaTex Common Stock closed at $____ on Nasdaq.
LISTING OF ALLIANCE SHARES (SEE PAGE 39)
Based on their knowledge of the prices and share trading activity of small
independent oil and gas companies on the London Stock Exchange, Alliance and
LaTex believe that the trading market for small independent oil and gas
companies is generally more favorable in London than in the U.S. This belief is
supported by the analysis of Wood Roberts described in detail under "The Merger-
Opinion of LaTex's Financial Advisor." Furthermore, the sponsorship and support
that is being and will be provided by Alliance's financial advisor and
stockbroker is expected to be positive for trading in the New Alliance Shares,
whereas currently LaTex does not have any support for trading in its shares.
Therefore, Alliance is applying for listing on the London Stock Exchange of the
New Alliance Shares to be issued in connection with the Merger. See "The Merger-
Opinion of LaTex's Financial Advisor." Of course, there is no assurance that the
trading market for New Alliance Shares on the London Stock Exchange will be more
favorable than the current market for LaTex Common Stock in the U.S. Alliance
does not intend to list the New Alliance Shares on any United States stock
exchange or the Nasdaq National Market System or SmallCap Market, but
anticipates that the New Alliance Shares may be traded from time to time over
the counter. Quotations for shares listed on the London Stock Exchange are not
generally readily available in newspapers or other publications in the United
States, but are available in the daily U.S. edition of the Financial Times.
However, investors may place orders for the purchase or sale of shares traded on
the London Stock Exchange through most licensed broker dealers in the United
States. Under current U.K. law, the transfer of New Alliance Shares will
generally give rise to a liability to U.K. stamp duty, normally at the rate of
50p for every (Pounds)100 (or part thereof) of the actual consideration paid.
SUMMARY SELECTED HISTORICAL AND UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL AND RESERVE INFORMATION
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The summary selected historical financial information presented in the
tables below has been derived from the audited consolidated financial statements
of Alliance for each of the five years ended April 30, 1996, the audited
consolidated financial statements of LaTex for each of the five years ended July
31, 1996, the unaudited interim results of Alliance for the six months ended
October 31, 1996 and the unaudited Form 10-Q of LaTex for the three months ended
October 31, 1996. The summary historical financial data is qualified in its
entirety and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Alliance,"
Alliance's "Consolidated Financial Statements" on page F-1, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Consolidated Financial Statements and Notes" of LaTex included in the LaTex
Form 10-K and "Part I-Financial Information" of LaTex included in the LaTex
Form 10-Q.
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Alliance(1)
<TABLE>
<CAPTION>
AS OF AND FOR THE AS OF AND FOR THE YEAR ENDED APRIL 30,
-----------------------------------------------
SIX MONTHS ENDED
OCTOBER 31,
-------------------
1996 1995 1996 1995(2) 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
(in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED INCOME STATEMENT DATA
Amounts in accordance with UK GAAP
Total revenues.................................. 1,998 1,551 3,686 1,483 837 631 972
Depletion, depreciation and amortization........ 820 1,175 1,668 14,944 128 278 347
(Loss) from continuing operations before
and after income taxes........................ (987) (2,388) (3,593) (18,213) (1,177) (1,627) (818)
Approximate amounts in accordance with US GAAP
Net (loss) (679) (2,118) (3,428) (21,641)
(Loss) per Existing Alliance Share (cents) (0.2) (0.7) (1.1) (15.4)
SELECTED BALANCE SHEET INFORMATION
Amounts in accordance with UK GAAP
Working capital (deficiency).................... 2,523 536 (8,215) (1,478) (2,022) (2,364)
Net property, plant and equipment............... 4,368 7,311 8,047 14,484 10,594 10,064
Long-term debt, net of current liabilities...... 88 92 1,240 925 1,203 -
Total assets.................................... 8,794 9,845 9,335 16,334 11,132 10,358
Total liabilities............................... 1,991 2,090 10,773 4,045 5,068 2,667
Shareholders' equity............................ 6,803 7,755 (1,438) 12,289 6,064 7,691
Approximate amounts in accordance with US GAAP
Total assets.................................... 6,816 7,582 6,907
Long term debt, net of current liabilities...... 88 92 1,240
</TABLE>
__________________________
(1) All figures are denominated in U.S. currency.
(2) The 1995 figures have been restated, as explained in Note 1 to Alliance's
Consolidated Financial Statements.
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LaTex
<TABLE>
<CAPTION>
AS OF AND FOR THE AS OF AND FOR THE YEAR ENDED JULY 31,
THREE MONTHS ENDED -----------------------------------------------
OCTOBER 31,
----------------------
1996 1995 1996 1995 1994 1993 1992
----------- --------- ------- ------ ------ ------ -------
(restated) (1)
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED INCOME STATEMENT INFORMATION
Total revenues.......................................... 2,718 3,459 13,531 10,443 12,085 11,477 7,549
Depletion, depreciation and amortization................ 2,608 1,248 4,706 2,711 2,214 2,899 1,724
(Loss) from continuing operations before income taxes... (3,789) (839) (8,420) (2,456) (423) (355) (462)
Net (loss) from continuing operations..................... (3,789) (839) (8,420) (2,491) (423) (190) (303)
Income (loss) per common share............................. (0.20) (0.05) (0.60) (0.15) (0.02) (0.06) (0.10)
SELECTED BALANCE SHEET INFORMATION
Working capital (deficit)............................... (28,041) (27,805) (7,119) (1,111) (2,117) (10,353)
Net property, plant and equipment....................... 29,549 31,945 37,709 13,077 12,440 12,304
Total assets............................................ 35,817 38,966 47,923 21,259 21,246 35,399
Long-term debt, net of current liabilities.............. 0 0 20,635 4,467 4,868 2,544
Total liabilities....................................... 32,760 32,648 31,922 10,979 13,030 32,760
Shareholders' equity.................................... 3,057 6,318 16,001 10,280 8,216 2,639
</TABLE>
_________________________________
(1) The 1995 figures have been restated, as explained in Note 16 to LaTex's
Consolidated Financial Statements, included in the LaTex Form 10-K.
Pro Forma Combined
<TABLE>
<CAPTION>
FOR THE AS OF AND FOR THE SIX
YEAR ENDED MONTHS ENDED
APRIL 30, 1996 OCTOBER 31, 1996
-------------- ---------------------
<S> <C> <C>
SELECTED INCOME STATEMENT INFORMATION
Total revenues................................................. 17,804 6,962
Depletion, depreciation and amortization....................... 7,637 4,802
(Loss) before income taxes..................................... (12,961) (14,556)
Net (loss)..................................................... (12,961) (14,556)
SELECTED BALANCE SHEET INFORMATION
Working capital (deficiency)................................... (28,313)
Net property, plant and equipment.............................. 42,262
Total assets................................................... 52,661
Long-term debt, net of current maturities...................... 88
Total liabilities.............................................. 37,251
Shareholders' equity........................................... 15,410
</TABLE>
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SUMMARY OIL AND NATURAL GAS RESERVE INFORMATION
The net proved oil and natural gas reserve estimates as of April 30, 1996
with respect to approximately 70% in value of Alliance's properties have been
prepared by Ryder Scott Company, independent petroleum engineers, with the
estimates for the remainder of Alliance's properties having been prepared by
internal engineers. The net proved oil and natural gas reserve estimates as of
July 31, 1996, for LaTex have been prepared by Lee Keeling and Associates, Inc.,
independent petroleum engineers.
Additional information about Alliance's and LaTex's oil and natural gas
reserves is discussed in "Risk Factors--Uncertainty of Estimates of Oil and
Natural Gas Reserves," "Alliance--Oil and Gas Properties," Note 11 to the
Consolidated Financial Statements of Alliance, "Supplemental Oil and Gas Data"
and "Item 1 and Item 2. Business and Properties" and Note 20 to the Consolidated
Financial Statements of LaTex in the LaTex Form 10-K included with this Proxy
Statement.
<TABLE>
<CAPTION>
As of and for the year ended
---------------------------------------
April 30, 1996 July 31, 1996
Alliance (1) LaTex
-------- --- -----
<S> <C>
Estimated Proved Reserves: <C>
Oil (Mbbls) 628 6,353
Natural gas (Mmcf) 2,384 28,172
Oil equivalent (MBOE) 1,026 11,048
Present value of estimated future
net revenues (thousands) (2) 8,897(3) 40,448(4)
Average Oil Price Used $ 22.34 $ 19.74
Average Gas Price Used $ 2.68 $ 2.66
Production
Oil (bbls) 125,000 405,000
Natural Gas (Mcf) 602,000 3,481,000
</TABLE>
____________________
(1) Subsequent to April 30, 1996, Alliance has sold substantial properties.
See "Alliance - Recent Developments." The disposals represented
approximately 25% of Alliance's estimated future net revenue discounted at
10% per annum as at April 30, 1996.
(2) Present value determined based on period-end unescalated prices and costs
in accordance with the guidelines of the Commission, discounted at 10% per
annum.
(3) Computed before taxes.
(4) Computed after taxes.
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RISK FACTORS
VOLATILITY OF OIL AND GAS PRICES AND SUPPLIES
The revenues, profitability and future rates of growth of both Alliance and
LaTex are substantially dependent upon the price of, and demand for, oil,
natural gas and natural gas liquids. Historically the markets for oil and
natural gas have been volatile and are likely to continue to be volatile in the
future. Prices for oil and natural gas are subject to wide fluctuations in
response to relatively minor changes in the supply of and demand for oil and
natural gas, market uncertainty and a variety of additional factors that are
beyond the control of the companies. These factors include the level of
consumer product demand, weather conditions, availability of alternative fuels,
political conditions in the Middle East and other petroleum producing areas, the
foreign supply of oil and natural gas, the price of foreign imports and overall
economic conditions and domestic and foreign government negotiations. It is
therefore impossible to predict future oil and natural gas price movements with
any certainty. Declines in oil and natural gas prices would not only reduce the
combined company's cash flow, liquidity and profitability, but could also reduce
the combined amount of oil and natural gas that can be produced economically and
could, therefore, have a material adverse effect on the combined company's
financial condition, results of operations and reserves. Although it is the
intention of Alliance management to hedge a substantial portion of the commodity
price risk associated with the combined company's production of oil and natural
gas to achieve some level of constant commodity pricing, the hedging policy for
the combined group has not yet been determined. Alliance does not currently
engage in any hedging activity. Therefore, its operations are fully exposed to
future changes in oil and gas prices.
The availability of a ready market for oil and natural gas production also
depends on a number of factors, including the demand for and supply of oil and
natural gas and the proximity of reserves to, and the capacity of, oil and
natural gas gathering systems, pipelines or trucking and terminal facilities.
Wells may be temporarily shut in for lack of a market or due to inadequacy or
unavailability of pipeline or gathering system capacity.
NEED TO REPLACE RESERVES
The combined company's future success depends on its ability to find,
develop or acquire additional oil and natural gas reserves that are recoverable
on an attractive economic basis. Unless Alliance successfully replaces the
reserves that it produces (through development, exploration or acquisitions),
its proved reserves will decline. Approximately 29.3% of the combined company's
total proved reserves at July 31, 1996 on a pro forma basis were either proved
undeveloped or proved developed non-producing. Recovery of such reserves will
require significant capital expenditures and successful drilling operations, and
there can be no assurance that Alliance will be successful in its effort to
develop or replace its proved reserves or that the combined company will have
success adding reserves at low finding and development costs. Furthermore,
although the combined company's reserves may increase if oil and natural gas
prices increase, the combined company's finding costs for additional reserves
could also increase.
DRILLING AND OPERATING RISKS
Drilling activities are subject to many risks, including the risk that no
commercially productive reservoirs will be encountered. There can be no
assurance that new wells drilled by Alliance will be productive or that the
combined company will recover all or any portion of its investment. Drilling
for oil and natural gas may involve unprofitable efforts, not only from dry
wells but from wells that are productive but do not produce sufficient net
revenues to return a profit after drilling, operating and other costs. The cost
of drilling, completing and operating wells is often uncertain. In addition,
the combined company's drilling operations may be curtailed, delayed or canceled
as a result of numerous factors, many of which are beyond
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<PAGE>
the combined company's control, including title problems, weather conditions,
compliance with governmental requirements and shortages or delays in the
delivery of equipment and services.
Alliance's operations are and will continue to be subject to all of the
risks normally incident to the operation and development of oil and natural gas
properties and the drilling of oil and natural gas wells, including encountering
unexpected formations or pressures, blow-outs, the release of contaminants into
the environment, cratering and fires, all of which could result in personal
injuries, loss of life, damage to property of Alliance and others, and the
imposition of fines and penalties pursuant to environmental legislation. See
"Governmental and Environmental Regulation." The combined company is not and
will not be fully insured against all of these risks, nor are all such risks
insurable, although Alliance maintains liability insurance in the amount of
$3,000,000, which it considers to be sufficient to cover reasonably foreseeable
occurrences. However, the nature of these risks is such that liabilities could
exceed policy limits or, as in the case of environmental fines and penalties, be
uninsurable, in which event the combined company could incur significant costs
that could have a material adverse effect upon its financial condition. Alliance
believes that it has proper procedures in place and that its operating staff
carries out their work in a manner designed to mitigate these risks.
UNCERTAINTY OF ESTIMATES OF OIL AND NATURAL GAS RESERVES
Estimates of proved developed oil and natural gas reserves and future net
revenues therefrom appearing elsewhere herein are based on reserve reports
prepared by independent petroleum engineers. The estimation of reserves requires
substantial judgment on the part of the petroleum engineers, resulting in
imprecise determinations, particularly with respect to new discoveries.
Different reserve engineers may make different estimates of reserve quantities
and revenues attributable thereto based on the same data. The accuracy of any
reserve estimate depends on the quality of available data as well as engineering
and geological interpretation and judgment. Results of drilling, testing and
production or price changes subsequent to the date of the estimate may result in
revisions to such estimates.
The discounted future net cash flows referred to in this document should
not be construed as the current market value of the estimated oil and natural
gas reserves attributable to either company's properties. In accordance with
applicable requirements of the SEC, the estimated discounted future net cash
flows from proved reserves are based on prices and costs as of the date of the
estimate, whereas actual future prices and costs may be materially higher or
lower. Actual future net cash flows will also be affected by factors such as
the amount and timing of actual production, supply and demand for oil and
natural gas, curtailments or increases in consumption by natural gas purchasers
and changes in governmental regulations or taxation. The timing of actual future
net cash flows from proved reserves, and thus their actual present value, will
be affected by the timing of both the production and the incurrence of expenses
in connection with development and production of oil and natural gas properties.
In addition, the 10% discount factor, which is required by the SEC to be used to
calculate discounted future net cash flows for reporting purposes, is not
necessarily the most appropriate discount factor based on interest rates in
effect from time to time and risks associated with either company or the oil and
natural gas industry in general.
ACQUISITION RISKS
After the Merger, Alliance intends to pursue acquisition opportunities on
terms management considers favorable. There can be no assurance that suitable
acquisition candidates will be identified in the future, nor that they will be
integrated successfully into the combined company's operations or successful in
achieving desired profitability objectives. In addition, Alliance will compete
against other companies for acquisitions, and there can be no assurance that it
will be successful in the acquisition of any material property interests.
10
<PAGE>
The successful acquisition of producing properties requires an assessment
of recoverable reserves, exploration potential, future oil and natural gas
prices, operating costs, potential environmental and other liabilities and other
factors beyond Alliance's control. In connection with such an assessment, the
combined company will review the subject properties in a manner that it believes
to be generally consistent with industry practices. Nonetheless, the resulting
assessments are necessarily inexact and their accuracy inherently uncertain, and
such a review may not reveal all existing or potential problems, nor will it
necessarily permit a buyer to become sufficiently familiar with the properties
to fully assess their merits and deficiencies. Inspections may not always be
performed on every platform or well, and structural and environmental problems
are not necessarily observable even when an inspection is undertaken.
Additionally, significant acquisitions can change the nature of the
operations and business of Alliance depending upon the character of the acquired
properties, which may be substantially different in operating and geologic
characteristics or geographic location than existing properties. While it is
Alliance's current intent to concentrate on acquiring producing properties with
development and exploration potential, there is no assurance that Alliance will
not pursue acquisitions or properties with differing characteristics.
INTERNATIONAL ACQUISITIONS AND OPERATIONS
Although Alliance's operations are currently conducted in the United
States, it is the intention of management after the Merger to explore and
develop projects both domestically and internationally, particularly in the
former Soviet Union and the Middle East. Such international operations are
subject to political, economic and other uncertainties, including, among others,
risk of war, revolution, border disputes, expropriation, renegotiation or
modification of existing contracts, import, export and transportation
regulations and tariffs, taxation policies, including royalty and tax increases
and retroactive tax claims, exchange controls, currency fluctuations and other
uncertainties arising out of foreign government sovereignty over the combined
company's potential operations. Alliance's proposed international operations may
also be adversely affected by laws and policies of the United States affecting
foreign trade, taxation and investment. Furthermore, in the event of a dispute
arising from international operations, Alliance may be subject to the exclusive
jurisdiction of foreign courts or may not be successful in subjecting foreign
persons to the jurisdiction of courts in the United States or Great Britain.
SUBSTANTIAL CAPITAL REQUIREMENTS
In the future, Alliance will require additional funds to develop, maintain
and acquire additional interests in existing or newly-acquired properties.
Historically, Alliance and LaTex have financed these expenditures primarily with
proceeds from debt and equity financings, cash provided by operating activities,
asset sales and sales of partial interests in international and domestic
concessions. Alliance currently plans to increase capital expenditures from
approximately US$1.7 million in fiscal 1996 to approximately US$2.7 million in
fiscal 1997 principally for remedial and developmental capital expenditures for
the combined company's assets in Alabama, Mississippi and Louisiana. Management
believes that, after debt service, it will have sufficient cash provided by
operating activities, availability under the Alliance Credit Agreement, and
asset sales to fund planned capital expenditures in 1997. Alliance anticipates
that cash from operating activities and property sales will provide sufficient
funds to meet debt service requirements under the Alliance Credit Agreement with
Bank of America. See "Alliance--Financing." In addition, based on its
knowledge of the market for oil and gas properties and its recent property
sales, Alliance believes that it will be able to sell certain non-strategic
properties for up to $4.8 million during 1997. Alliance intends to use the
proceeds of these sales to reinvest in the purchase and development of non-
producing properties and to reduce negative working capital.
There can be no assurance that additional capital will always be available
to Alliance in the future or that it will be available on terms that are
acceptable to Alliance. Should outside capital resources be limited,
11
<PAGE>
the rate of growth would be adversely affected, and there can also be no
assurance that Alliance would be able to increase its oil and natural gas
production or oil and natural gas reserves. If revenues decrease as a result of
lower oil and natural gas prices or otherwise, Alliance may have limited ability
to expend the capital necessary to replace its reserves or to maintain
production at current levels, resulting in a decrease in production over time.
NON-MAJORITY OWNERSHIP OF PROPERTIES
As with many independent oil and gas companies, Alliance is not the
majority owner in all of its oil and gas properties. The combined company will
be the operator for only a small portion of the properties it owns. Therefore,
it may have no control over the timing or amount of capital expenditures
associated with these properties. If Alliance is unable to fund its pro rata
share of capital expenditures, the company's interests in its properties may be
reduced or forfeited. If Alliance's cash flow from operations is not sufficient
to satisfy its capital expenditure requirements, there can be no assurance that
additional debt or equity financing, asset sales or sales of partial interests
will be available to meet these requirements.
DEPENDENCE ON OTHER OPERATORS
With respect to wells not operated by LaTex and Alliance in which they own
a working interest, the independent operators are, in some cases, privately-held
companies which may have limited financial resources. If a third party operator
experiences financial difficulty and fails to pay for materials and services in
a timely manner, the wells operated by such third party operators could be
subject to material and workmen's liens. In such event, the combined company
would occur costs in discharging such liens.
DEPENDENCE ON KEY PERSONNEL
Alliance believes that the continued success of the combined company will
depend to a significant extent upon the abilities and continued efforts of its
Board of Directors and its senior management, particularly John A. Keenan, its
Managing Director. The loss of the services from any of its key personnel could
have a material adverse effect on its results of operations. Alliance does not
maintain key-man insurance on any individual at this time. The success of
Alliance will also depend, in part, upon its ability to find, hire and retain
additional key management personnel who are also being sought by other
businesses. The inability to find, hire and retain such personnel could have a
material adverse effect upon Alliance's results of operations. See "Management-
- -Directors and Executive Officers."
COMPETITION
Alliance operates in a highly competitive environment. It competes with
major integrated and independent energy companies for the acquisition of
desirable oil and natural gas properties, as well as for the equipment and labor
required to develop and operate such properties. Many of these competitors have
financial and other resources substantially greater than those of the combined
company. See "Business and Properties--Competition."
GOVERNMENTAL AND ENVIRONMENTAL REGULATION
The production of oil and natural gas is subject to regulation under a wide
range of international and United States federal and state statutes, rules,
orders and regulations. In the United States, state and federal statutes and
regulations require permits for drilling, reworking and recompletion operations,
drilling bonds and reports concerning operations. Most states in which the
combined company will own and operate
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properties have regulations governing conservation matters, including provisions
for the unitization or pooling of oil and natural gas properties, the
establishment of maximum rates of production from oil and natural gas wells and
the regulation of the spacing, plugging and abandonment of wells. Many states
also restrict production to the market demand for oil and natural gas and
several states have indicated interest in revising applicable regulations in
light of the persistent oversupply and low prices for oil and natural gas
production. These regulations may limit the rate at which oil and natural gas
could otherwise be produced from properties. Some states have also enacted
statutes prescribing ceiling prices for natural gas sold within the state.
Various federal, state and local laws and regulations relating to the
protection of the environment may affect Alliance's operations and costs. In
particular, Alliance's production operations, its salt water disposal operations
and its use of facilities for treating, processing or otherwise handling
hydrocarbons and wastes therefrom are subject to stringent environmental
regulation. Although compliance with these regulations increases the cost of
operations, such compliance has not had a material effect on Alliance's capital
expenditures, earnings or competitive position. Environmental regulations have
historically been subject to frequent change by regulatory authorities and
Alliance is unable to predict the ongoing cost of complying with these laws and
regulations or the future impact of such regulations on its operations.
Alliance's general liability coverage of $3,000,000 applies to certain, but not
all, environmental liabilities. A significant discharge of hydrocarbons into the
environment could, to the extent such event is not insured, subject Alliance to
substantial expense.
NO DIVIDENDS
Neither Alliance nor LaTex have paid any dividends on their outstanding
ordinary or common shares, nor does Alliance intend to do so in the foreseeable
future. In addition, Alliance is precluded from paying dividends until such time
as its retained loss is cleared and will further be restricted from paying
dividends under the credit facility it will have with Bank of America after the
Merger. The combined company currently intends to retain its cash for the
operation and expansion of its business, including exploration, development and
acquisition activities. Accordingly, Alliance's ability to pay dividends will
depend upon such restrictions and the company's results of operations, financial
condition, capital requirements and other facts deemed relevant by the Board of
Directors.
CREDIT FACILITY COVENANTS AND RESTRICTIONS
LaTex currently owes approximately $19,385,496 under the LaTex Credit
Agreement with the Bank of America. The interest rate on the indebtedness is,
at the option of LaTex, either the lending bank's base interest rate plus 1% or
up to 2% (based on the principal balance outstanding) over the rate for
borrowing dollars by the lending bank in the London Interbank (LIBOR) market.
The principal must be amortized at the rate of $322,500 per month with the
entire outstanding balance due March 31, 2000. The credit facility is secured by
first mortgages on all of LaTex's oil and gas properties. The LaTex Credit
Agreement contains various affirmative and negative covenants including, among
others, the requirements that LaTex maintain certain ratios of current assets to
current liabilities, minimum tangible net worth, restrictions on selling,
general and administrative expenses and the payment of dividends. Material
breaches of these or other covenants which are not cured or waived could result
in a default under the LaTex Credit Agreement resulting in this indebtedness
becoming immediately due and payable and empowering the lender to foreclose
against the collateral for the loan. LaTex has been in default under various
affirmative and negative covenants of the LaTex Credit Agreement with respect to
which the Bank of America has agreed to not take any action before April 30,
1997.
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On March __, 1997, Alliance entered into a Credit Agreement (the
"Alliance Credit Agreement") with the Bank of America, amending and restating
the LaTex Credit Agreement in order to restructure LaTex's indebtedness to the
Bank. The Alliance Credit Agreement will become effective on the date of the
Merger. The terms of the Alliance Credit Agreement are similar to those of the
LaTex Credit Agreement, except that principal payments will be suspended until
July 31, 1998 following completion of the Merger. This suspension of payments
will not include cash flows generated by the combined company that are in excess
of those agreed between the Bank and Alliance. Alliance believes that it will
be in compliance with all representations and covenants under the Alliance
Credit Agreement at the date of the Merger and anticipates that it will be able
to remain in compliance with those covenants after that date.
FORWARD-LOOKING INFORMATION
All statements other than statements of historical fact contained in this
Proxy Statement, including statements in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Alliance," or contained
in LaTex's Form 10-K, including statements in "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and " Business," are
accompanied by words such as "anticipate," "believe," "estimate," "project" or
"expect" or similar statements and are "forward-looking statements" as defined
in U.S. securities laws. Although Alliance and LaTex believe that the
expectations reflected in such forward-looking statements are reasonable, no
assurance can be given that such expectations will prove correct. Factors that
could cause actual results to differ materially from the results discussed in
such forward-looking statements include the risks described under "Risk Factors"
above, such as the fluctuations of the prices received or demand for oil and
natural gas, the uncertainty of drilling results and reserve estimates,
operating hazards, acquisition risks, requirements for capital, general economic
conditions, the competition from other exploration, development and production
companies and the effects of governmental and environmental regulation. All
forward-looking statements in this Proxy Statement and LaTex's Form 10-K and
Form 10-Q are expressly qualified in their entirety by the cautionary statements
in this paragraph.
TRADING MARKETS
The LaTex Common Stock is presently quoted on Nasdaq. Until September 4,
1996, the LaTex Common Stock was also listed on the Pacific Stock Exchange at
which time it was delisted due to a lack of adequate trading volume. Based on
their knowledge of the prices and volumes of trading of small independent oil
and gas companies on the London Stock Exchange, as reflected in the analysis of
Wood Roberts, Alliance and LaTex believe that the trading market for small
independent oil and gas companies is generally more favorable in London than in
the U.S. at this time, Alliance is applying for listing on the London Stock
Exchange of the New Alliance Shares to be issued to LaTex shareholders in the
Merger. See "The Merger-Opinion of LaTex's Financial Advisor." Of course, there
is no assurance that the trading market for New Alliance Shares on the London
Stock Exchange will be more favorable than the current market for LaTex Common
Stock in the U.S. Alliance does not intend to list the New Alliance Shares on
any U.S. stock exchange or Nasdaq. Quotations for shares listed on the London
Stock Exchange are not generally readily available in newspapers or other
publications in the United States, but are available in the daily U.S. edition
of the Financial Times. However, investors may place orders for the purchase or
sale of shares traded on the London Stock Exchange through most licensed broker
dealers in the United States. As a result, a shareholder may find it more
difficult to dispose of, or to obtain accurate quotations as to the market value
of, the New Alliance Shares to be received in the Merger. Under current U.K.
law, the transfer of New Alliance Shares will generally give rise to a liability
to U.K. stamp duty, normally at the rate of 50p for every (Pounds)100 (or part
thereof) of the actual consideration paid.
ENFORCEABILITY OF THE U.S. SECURITIES LAWS
Alliance is organized under the laws of England. Six of its ten directors
after completion of the Merger are not subject to the jurisdiction of the U.S.
because they are neither citizens nor residents of the U.S. Alliance has been
advised by its English solicitors that there is doubt as to the enforceability
in the U.K. against Alliance or any of its subsidiaries or any of their
respective directors, controlling persons or executive officers or any of the
experts named in this Proxy Statement in actions for enforcement of judgments of
U.S. courts of liabilities predicated upon, or in original actions
predicated
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solely upon, U.S. federal or state securities laws. Nevertheless, Alliance has
irrevocably agreed that, after the Merger is completed, it may be served with
process with respect to actions based on the offer and sale of the New Alliance
Shares made by this Proxy Statement by serving Alliance at its principal U.S.
operations office: Attention: President, 4200 East Skelly Drive, Suite 1000,
Tulsa, Oklahoma 74135.
THE MERGER
INTRODUCTION
At the Special Meeting, the shareholders of LaTex will consider and take
action with respect to the Merger Agreement pursuant to which Alliance Resources
(Delaware) Inc., a wholly owned subsidiary of Alliance, will be merged with and
into LaTex. As a result of the Merger, each outstanding LaTex Share (other than
LaTex Shares, if any, held by LaTex in treasury and LaTex Shares held by a
shareholder who has properly exercised his dissent and appraisal rights) will
automatically be canceled and LaTex shareholders will receive New Alliance
Shares at the Conversion Rate. The Board of Directors of LaTex has unanimously
approved the Merger Agreement as being in the best interests of LaTex and its
shareholders and directed that the Merger Agreement be submitted to LaTex's
shareholders for approval.
BACKGROUND OF THE MERGER
Upon completion by LaTex of the acquisition of Germany Oil Company in April
1995, management of LaTex engaged the investment banking firm of Rauscher,
Pierce & Clark ("RP&C") for the purpose of assisting LaTex in seeking new equity
or convertible debt financing. Management's view was that additional financing
was necessary to provide new growth opportunities through acquisitions and
further development of its oil and gas properties. During the summer of 1995,
RP&C reviewed oil and gas reserve and cash flow information provided by LaTex.
During meetings conducted in Tulsa, Oklahoma in September LaTex management
concluded that any efforts to raise convertible debt financing through RP&C's
efforts in Europe were possible only at a conversion price of $0.35 - 0.50 per
share of LaTex Common Stock, which would have been significantly dilutive to
LaTex shareholders. LaTex's management therefore decided not to seek additional
funds through a convertible debt offering.
Following this conclusion, LaTex management determined that additional
financing might be available through a combination of LaTex and another oil and
gas company, and LaTex, through RP&C, initiated merger discussions with Harken
Energy Inc. Although Harken and LaTex discussed a combination of the two
companies, the discussions did not result in either a letter of intent or
definitive merger agreement. Discussions with Harken terminated in March 1996.
LaTex representatives also met with TideWest, Inc. in November 1995, Kelloil,
Inc. in December 1995 and CoHo Resources in February 1996 to discuss possible
business combinations or equity infusions. All of these discussions were
unsuccessful.
The hedging arrangement between LaTex and Bank of America had the effect of
reducing LaTex's working capital in fiscal 1996 by $1,979,956 as a result of
additional payments to the bank above scheduled principal and interest payments.
At July 31, 1996 the future impact of this hedging arrangement was anticipated
to result in additional losses of $3,649,287 based on the then prevailing
commodity prices and interest rate. As a result of the negative impact on cash
flow of LaTex's hedge arrangement with the bank, and the bank's requirement that
substantially all of the proceeds from the sale of non-strategic properties be
applied to prepay borrowings, management became convinced that under the likely
future oil and gas price environment, substantial equity or new financing was
required to stabilize LaTex's deteriorating financial condition.
Therefore, while continuing its policy to package and sell non-strategic
oil and gas properties and attempting to obtain approval of its principal bank
for the use of a portion of the sale proceeds for working capital, management of
LaTex continued to seek both merger partners and/or debt financing.
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LaTex met with and provided information to the Strategica Group of Miami,
Florida in an effort to obtain either supplemental financing or a re-financing
of its bank debt. Strategica submitted a written proposal in April 1996 to loan
LaTex $2-3 million for development activities in exchange for certain collateral
guarantees, a financial advisor retainer fee and stock and warrants that would
ultimately comprise some 20-30% of the equity of LaTex. As a result of the
dilutive nature of this offer and due to the discussions having been initiated
on March 17, 1996, with Alliance, as discussed below, management rejected the
Strategica offer.
During early April 1996, LaTex, through RP&C, met with National Energy
Group at their offices in Dallas, Texas. These discussions did not result in
any further action by either party. In late June 1996, LaTex received an
unsolicited inquiry from Gothic Energy of Tulsa, Oklahoma. Gothic subsequently
made a written offer to exchange shares of its common and preferred stock with
LaTex's shareholders such that the consideration to be received by LaTex's
shareholders would have approximated the then current $0.35 market price of
LaTex Common Stock, payable in Gothic stock. The Gothic offer was rejected by
management as significantly deficient to the offer from Alliance which had, in
the meantime, been accepted by LaTex's Board. The Gothic offer was considered
deficient primarily because it was based on the current stock market values of
Gothic and LaTex as opposed to the proposed Alliance transaction which was based
on net asset values of the two companies, which imputed a higher value to LaTex
than did the Gothic offer. No further discussions with Gothic resulted.
In its effort to refinance its senior debt in light of the proposed merger
with Alliance, LaTex's management through Wood Roberts held discussions with
Midland Bank Plc and Union Bank of California during the period from August to
October 1996. Neither initiative resulted in a financing proposal.
John A. Keenan, the chief executive of Alliance, is an attorney who has
been involved in oil and gas transactions and has been an officer of oil and gas
companies in Houston for several years. John Martinson, a director of LaTex, is
also located in Houston and has been involved in numerous transactions with oil
and gas companies. Messrs. Keenan and Martinson have had a business acquaintance
for several years. In February 1996, they had a telephone discussion regarding
Mr. Keenan's recent involvement with Alliance, prior to his appointment as the
chief executive, as an advisor and non-executive director. The telephone
conversation consisted mainly of Mr. Keenan's description of the state of
Alliance's operations and the acquisition strategy that the company had adopted.
Mr. Martinson then indicated that LaTex might be interested in a potential
combination with Alliance.
Several phone conversations between Messrs. Keenan and Martinson ensued
regarding a potential combination between Alliance and LaTex which resulted in a
meeting between the two men on March 11, 1996. At the meeting, Mr. Keenan gave
Mr. Martinson an update on Alliance, including some discussion of Alliance's
current activities, potential ventures in the former Soviet Union as well as
background on Alliance's largest shareholder, Trans Arabian Energy Limited
("Trans Arabian"). Both men agreed to engage in further discussions after
briefing management at their respective companies.
On March 12, 1996, LaTex held a board of directors meeting at which the
possibility of a merger with Alliance was discussed and in which the LaTex Board
noted that a merger with Alliance could enhance the ability of the combined
company to raise equity capital. At this meeting the LaTex board authorized
management to discuss with representatives of Alliance a possible merger of the
two companies. This was followed by a meeting in Houston on March 17, 1996 by
and among Mr. Keenan, Mr. Martinson and Jeffrey T. Wilson, the Chairman and CEO
of LaTex. The meeting was general in nature and included discussions of both
companies and the relative merits of a combination. Mr. Wilson indicated LaTex's
concern that a combined company retain key employees of LaTex, other than
Messrs. Wilson and Henley. Mr. Keenan related that he would discuss a potential
combination with Rothschild Natural Resources, L.L.C. ("Rothschild"), financial
advisers to Alliance, and Messrs. Martinson and Wilson agreed to discuss same
with Bank of America, LaTex's principal lender.
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Subsequent discussions with those parties elicited positive responses,
which led to a meeting in LaTex's offices in Tulsa, Oklahoma on April 9, 1996,
where Mr. Keenan met with the members of LaTex Board of Directors and senior
management. At this meeting, the parties discussed a number of issues that would
need to be resolved in connection with a combination, including a disposition of
LaTex's interests in Wexford Technology, Inc. ("Wexford") and Imperial
Petroleum, Inc. ("Imperial") as well as its international operations, the fair
treatment for holders of LaTex's two classes of preferred stock and warrants,
the required approval by the Bank of America, and the future role of Mr. Wilson
as a consultant to the combined company. Mr. Keenan stated that as a condition
to any transaction, Alliance would require the disposition of both Wexford and
Imperial in order to allow the combined company to focus its efforts and
available resources on its core oil and gas business. In addition, the parties
discussed their mutual preference that the common stock of the combined company
be traded on the London Stock Exchange rather than Nasdaq and their desire that
LaTex's non-strategic properties be sold before the merger if possible.
On April 23, 1996, a conference call involving Messrs. Keenan, Martinson
and Wilson led to the creation of a list of the key issues discussed in the
April 9 meeting being agreed. At this time, LaTex drafted a letter of intent
which was circulated internally for discussion purposes.
Mr. Martinson met Mr. Keenan and Mr. Christopher Samuelson, a non-executive
director of Alliance, on April 26, 1996, to discuss the potential merger of
LaTex and Alliance. Mr. Samuelson discussed potential international
opportunities that might be available to the combined companies after a merger
and indicated a desire to proceed with discussions. By a memorandum dated May
1, 1996, Mr. Martinson recommended a merger with Alliance to fellow board
members of LaTex.
On May 6th, Mr. Martinson held separate discussions with Mr. Keenan and Mr.
Wilson concerning the merger, which culminated in Mr. Wilson agreeing to provide
Alliance with a copy of the Lee Keeling oil and gas reserve analysis prepared
for LaTex and a decision by Messrs. Wilson and Martinson and Mr. Philip Wade, an
outside director and significant shareholder of LaTex, to travel to London the
week of May 22, 1996, to discuss the potential merger between Alliance and LaTex
and to meet members of Alliance's board. On May 13, 1996, Messrs. Martinson and
Keenan met in Houston to review the status of the discussions. At the meeting,
Mr. Keenan indicated that he was to be named as Managing Director of Alliance
and discussed Alliance's future business strategy. This meeting led to the
Board of LaTex agreeing to allow Mr. Wilson to enter into formal discussions
with Alliance regarding a merger of the two companies.
Prior to arrival in London, Mr. Keenan held telephone conversations with
Mr. Wilson and Mr. Martinson and Mr. Keenan agreed to supply to LaTex a copy of
Alliance's oil and gas reserve analysis. A list of discussion items was also
agreed, as well as an agenda. On May 22nd, Messrs. Wilson, Martinson and Wade
met in London with representatives of Alliance to discuss the method of the
merger, advisors, regulatory requirements and general structuring.
Meetings were held all day on May 23rd, at which the participants discussed
the value of each company and the relative portion of the combined company that
should be held by each group of shareholders. The participants also discussed
various United Kingdom brokers who might act as sponsors of the transaction in
the United Kingdom, the need for Alliance to effect a reverse split of its
shares, and the disposition of LaTex's interests in Wexford and Imperial as well
as its international operations. The parties agreed to hold further meetings
with their respective Boards of Directors to explore the discussions and agreed
that Mr. Keenan and Mr. Wilson would determine the next steps, if any.
On June 3rd, the members of the LaTex Board of Directors discussed the
transaction by telephone. In particular, the Board reviewed the matters
discussed at the recent meetings in London and discussed the strategic reasons
for the merger, the future plans of Alliance, including possible future
acquisitions, none of which were seriously pursued, Alliance's management,
the potential value of the combined company and the new proposal of Alliance
that Holders of LaTex shares would receive 72% of the shares of the combined
company and the holders of Alliance shares would retain the balance of 28% of
the shares of the combined company. This meeting led to the transmittal of a
letter of intent from LaTex to Alliance on June 4th. The LaTex Board of
Directors also discussed the continued engagement of Wood Roberts as its
financial advisor in connection with the discussions and any transaction. On
June 6th, Mr. Martinson and Mr. Keenan met in London to discuss the letter of
intent. Further discussions among the parties took place over the next week
leading to a meeting on June 17,
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1996 in London among Messrs. Martinson, Keenan and Mr. Michael Humphries of
Rothschild. All facets of the proposed merger were discussed, including the
management of the combined company, updates of the financial condition of both
parties, and the oil and gas reserves of both parties. Mr. Wilson was briefed by
Mr. Martinson following the meeting.
Various meetings in London followed over the next week concerning the
details of the proposed merger which led to a revised draft letter of intent
from LaTex to Alliance dated June 24, 1996. On June 25th, Alliance forwarded a
revised form of a draft letter of intent to LaTex which led to further
discussions by the parties. A revised letter of intent dated June 28, 1996, was
executed by both parties.
During July, both companies conducted due diligence, Williams de Broe
indicated that it would continue as Alliance's broker, Alliance delivered an
initial draft of the Merger Agreement to LaTex, LaTex undertook a review of the
legal and tax implications of the Merger, and the parties engaged in
negotiations concerning the definitive merger agreement. On July 31, 1996, the
Board of Directors of LaTex met to review the status of the merger discussions,
review and approve the sale of assets excluded from the Merger and request a
fairness opinion from Wood Roberts. This culminated with a meeting of the LaTex
Board of Directors on August 9, 1996, at which time, after receiving a report
from Wood Roberts concerning the fairness of the Merger from a financial point
of view to the shareholders of LaTex (included in Appendix C), the LaTex board
unanimously resolved to accept the Merger Agreement as previously negotiated.
On August 12, 1996, the parties executed the Merger Agreement.
As originally executed, the Merger Agreement provided that certain actions
were to take place before September 15, 1996. On September 16, 1996, both
companies executed a letter agreement providing that those actions could take
place at any time before September 27, 1996. The Merger Agreement also
contained a condition to closing that Alliance deliver to LaTex an opinion of
counsel that the Merger would not result in the shareholders of LaTex
recognizing taxable income or loss as a result of the Merger. If Alliance were
to be unable to deliver such an opinion, it could elect at its option to
restructure the Merger so that LaTex would be the surviving entity and the
existing shareholders of Alliance would receive shares of LaTex Common Stock in
exchange for the Existing Alliance Shares in an amount that would result in the
same percentage ownership of the resulting entity as in the Merger. After
execution of the Merger Agreement, Alliance determined that it would in fact not
be able to deliver the indicated tax opinion. In addition, after further
discussions, the Boards of Directors of both parties concluded that, in the
opinion of each, the New Alliance Shares to be issued in the Merger would be
likely to trade at a more attractive price on the London Stock Exchange than on
a U.S. market and that the shares of a U.K. public limited company would be
likely to trade at a more attractive price on the London Stock Exchange than the
shares of a U.S. corporation. Therefore, the parties agreed to amend the Merger
Agreement to eliminate the condition regarding the delivery of the tax opinion.
This amendment was executed effective September 27, 1996.
As originally approved by the LaTex Board of Directors, the Merger
Agreement provided that the New Alliance Shares would be allocated to the LaTex
Series A Stock and the Series B Stock on the basis of the number of shares of
LaTex Common Stock into which the LaTex Series A Stock and LaTex Series B Stock
are convertible. Each share of LaTex Series A Stock is convertible into
approximately three shares of LaTex Common Stock and each share of LaTex Series
B Stock is convertible into approximately 6.67 shares of LaTex Common
Stock.
By the terms of the LaTex Series A Stock and the LaTex Series B Stock,
LaTex is permitted, under certain circumstances, to pay accrued dividends on
those shares in additional shares of the same series rather than in cash.
Effective December 31, 1996, and again effective March 31, 1997, the LaTex Board
of Directors determined to pay the dividends in kind. Because the negotiations
with Alliance had resulted in the agreement that the shareholders of LaTex, as a
whole, would hold 72% of the outstanding shares of the combined company and the
shareholders of Alliance would hold 28% of the outstanding shares of the
combined company, the payment of dividends in kind did not increase the total
number of New Alliance Shares to be issued in the Merger, but increased the
number of New Alliance Shares that would be issued to the holders of the LaTex
Series A Stock and LaTex Series B Stock, and correspondingly decreased the
number of New Alliance Shares to be issued to the holders of the LaTex Common
Stock.
In January 1997, Enron Reserve Acquisition Corp. ("Enron"), which owns all
of the LaTex Series B Stock, notified LaTex that it did not believe the
allocation of New Alliance Shares between the LaTex Common Stock and the LaTex
Series B Stock was appropriate.
On February 4, 1997, representatives of Enron, LaTex and Alliance met to
discuss the allocation. On February 6, 1997, the Board of Directors of LaTex met
to discuss the allocation issues and requested Wood Roberts to advise it whether
the allocation was appropriate. On February 17, 1997, Wood Roberts advised the
LaTex Board of Directors that, in Wood Roberts' view, the allocation should be
adjusted so that the holders of the LaTex Series B Stock would receive a greater
portion of the New Alliance Shares.
On March 7 and March 10, 1997, Jeffrey T. Wilson and representatives of
Enron had further discussions, as a result of which Mr. Wilson recommended to
the LaTex Board of Directors that the allocation be adjusted so that each share
of LaTex Series B Stock would be allocated the same number of New Alliance
Shares as would be allocated to approximately 7.18 shares of LaTex Common Stock.
Because this allocation was not contemplated in the Merger Agreement, Mr.
Wilson's recommendation required an amendment of the Merger Agreement.
Also during January and February, 1997, representatives of Alliance
discussed with Bank of America NT & SA the possibility that the Bank would
accept New Alliance Shares as payment for the $200,000 fee previously agreed to
be paid to the Bank upon the assumption by Alliance of the LaTex Credit
Agreement and in consideration for the transfer to Alliance of an overriding
royalty interest (the "ORRI") held by the Bank that burdened certain of LaTex's
oil and gas properties. On March __, 1997, Alliance and the Bank agreed in
principle that the Bank would receive 153,374 New Alliance Shares in payment of
$200,000 fee and, in exchange for the ORRI, would receive 2,377,301 New Alliance
Shares and warrants to purchase 1,188,650 New Alliance Shares at a price of
(Pounds)1.00 per share. Because the issuance of New Alliance Shares and warrants
to the Bank was not contemplated in the Merger Agreement, particularly in the
agreement of the parties that ownership of the combined company would be divided
72% to the former LaTex Shareholders and 28% to the holders of Existing Alliance
Shares, the agreement in principle with the Bank required an amendment to the
Merger Agreement.
On March 12, 1997, the LaTex Board of Directors met to consider the various
matters that required amendments to the Merger Agreement. At this meeting, the
Board of Directors of LaTex received an opinion of Wood Roberts concluding that
the financial terms of the Merger are fair to the holders of each class of LaTex
Shares. This opinion is included in Appendix C. After discussion, the LaTex
Board of Directors unanimously approved an amendment to the Merger Agreement
revising the allocation of New Alliance Shares to be as reflected in this Proxy
Statement and extending the date after which the Merger Agreement may be
terminated by either party to April 30, 1997.
REASONS FOR THE MERGER
In considering the merits of a potential merger with Alliance, the LaTex
Board of Directors considered a number of factors and issues, including: (1) the
financial condition of both LaTex and Alliance; (2) the strategic aspects of a
merger with Alliance; (3) management's unsuccessful attempts to secure
additional debt and or equity financing; (4) management's prior discussions with
other potential merger candidates; (5) the stock market implications to LaTex
shareholders; (6) the tax consequences to LaTex shareholders; (7) the social
issues with respect to LaTex's management and staff and (8) the relationship
between Alliance and its principal shareholder.
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In considering the financial condition of Alliance and its suitability as a
merger partner, it was important to LaTex management to determine the level of
financing or cash that would be available to LaTex following a merger. LaTex
evaluated the oil and gas assets of Alliance, including computations of future
cash flow, reviewed the public filings of Alliance to determine its working
capital position and assessed the likely impact of Alliance's legal action
against its former chief executive. Based on its internal evaluation, LaTex
determined that as a result of Alliance's negotiations with LaTex's senior
lender, the combined company will have sufficient additional borrowing capacity
in conjunction with abatement of principal payments until July 31, 1998 and cash
to stabilize the financial condition of the combined company. LaTex management
determined that Alliance's properties would likely be able to support additional
debt or equity financing in excess of $3 million and most likely in the $5
million range. In addition, LaTex determined that Alliance's actions against
its former chief executive would require resolution prior to the execution of a
merger agreement between the companies.
The ability of LaTex to execute its strategy of acquiring additional oil
and gas assets had been hampered as a result of its financial condition and
limitations in the LaTex Credit Agreement. Based on LaTex's review of Alliance
and the improved financial condition of LaTex after the Merger, which would
allow refinancing of its senior debt, the Board of Directors of LaTex viewed the
potential Merger with Alliance as a strategic step to allow LaTex to become
active again in the acquisition and exploitation of oil and gas properties.
Additionally, because of LaTex's historical attempts to access and participate
in significant international ventures and because of Alliance's intentions to
pursue such ventures, the Board of Directors of LaTex deemed the overall
strategies of the companies to be consistent.
Because the share price of LaTex's Common Stock remained around $0.40 per
share and as a result of the terms of the proposed merger with Alliance whereby
the common shareholders would receive between .8 and .9 of a share of Alliance
which, after giving effect to its reverse split, was trading on the London Stock
Market at $1.24 per share, the Board viewed the exchange of shares with Alliance
as likely to result in an increase in the share value of the combined
company.
While the LaTex Board acknowledged the potential for an increased cost to
its shareholders and a likelihood that initially certain of its shareholders may
find it more difficult to both follow and trade the combined company's stock on
the London Stock Exchange, the LaTex Board deemed the possibility of a
significant share price increase and the financial and strategic benefits of the
Merger as more important. Of equal importance to the Board was the consideration
of market support for the combined company after completion of the Merger.
Initially, the LaTex Board had included as a condition of the Merger that
the transaction be tax-free to LaTex's shareholders. However, after it became
apparent that Alliance would be unable to accomplish a tax-free structure in the
time available, the LaTex Board re-evaluated its position. After reviewing the
tax implications of the Merger and discussions with its own advisors, the LaTex
Board determined that the taxable nature of the transaction would likely affect
two groups of its shareholders most: (i) insiders and (ii) shareholders who have
purchased the stock at its present price. Although the preferred position of
the Board was to effect a tax-free transaction, it was determined that the
personal tax considerations of these groups of shareholders could not be known
with certainty, and that the financial and strategic considerations for LaTex
were significant enough to proceed with the Merger under a taxable structure.
Because Trans Arabian had recently acquired a significant position in
Alliance and had obtained two of eight board seats, management of LaTex
investigated the potential motives and ramifications of Trans Arabian's
involvement. Alliance had suggested that in the future it may consider
acquiring assets from
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corporations affiliated with Trans Arabian. LaTex's major concern was to ensure
that any future transactions with related parties would occur for value and in a
manner deemed appropriate. After reviewing the corporate governance requirements
for companies domiciled in the UK and, after discussions with members of the
Board of Alliance nominated by Trans Arabian, LaTex determined that these issues
could best be resolved by requiring equal representation on Alliance's Board
with the Trans Arabian group. As a result, LaTex included as a condition of the
Merger the expansion of the Alliance Board to ten members and the nomination of
Messrs. Wilson and Martinson to the Board of Alliance.
As a result of the limited staff of Alliance, LaTex viewed Alliance as a
preferable merger partner when considering the livelihood of its employees.
LaTex's staff has been proficient at its core business through the years and the
Board deemed its preservation as an important benefit to the Merger and future
growth of LaTex. In addition, Mr. Wilson agreed to enter into a consulting
agreement concurrent with the Merger to provide a minimum of six months of
transition and to assist the combined company in the acquisition of oil and gas
properties.
OPINION OF LATEX'S FINANCIAL ADVISOR
Wood Roberts was engaged by LaTex to examine the terms of the proposed
Merger and to render an opinion as to the fairness of such terms from a
financial standpoint to the shareholders of LaTex. On August 8, 1996, Wood
Roberts delivered its written opinion, along with related documentation, to the
Board of Directors of LaTex to the effect that the terms of the proposed Merger
were fair from a financial standpoint to the shareholders of LaTex.
On September 30, 1996, LaTex asked Wood Roberts to examine the proposed
amendment to the terms of the Merger whereby the exchange of LaTex Shares and
warrants for Alliance shares and warrants ceased to be a tax-free
reorganization, and to render an opinion as to the fairness of such amendment
from a financial standpoint to the shareholders of LaTex. On October 1, 1996,
Wood Roberts delivered its second written opinion, along with related
documentation, to the Board of Directors of LaTex to the effect that the amended
terms of the proposed Merger remained fair from a financial standpoint to the
shareholders of LaTex.
On March 11, 1997 Wood Roberts delivered its third opinion to the effect
that the allocation of New Alliance Shares among the three classes of LaTex
Shares was fair to holders of each class.
The text of the written opinions, which set forth the assumptions made,
matters considered, limitations to and scope of the review undertaken by Wood
Roberts in rendering its opinions are attached as Appendix C to this Proxy
Statement and are incorporated herein by reference.
In arriving at its opinions, Wood Roberts reviewed the Merger Agreement and
the amendment thereto, information provided by the management of LaTex and
Alliance and by certain of their professional advisors, as well as information
in the public domain. In addition, Wood Roberts met with the management of
LaTex and Alliance to discuss the historical and current business of each
company, their prospects as stand-alone entities and the potential short-term
and medium-term strategic and financial benefits of the proposed Merger.
Wood Roberts' review of the terms of the Merger was undertaken with
reference to, among other things: the relative net asset value, financial
condition and debt ratios; earnings, cash flow and ability to develop or re-work
assets of both LaTex and Alliance; and the pro forma financial position of the
merged company and its ability to obtain debt or equity funding. Wood Roberts
analyzed certain financial, industry and market-related information and data and
examined data indicative of the relative merits of LaTex shareholders exchanging
their shares for shares listed for trading on the London Stock Exchange. Wood
Roberts was not asked to undertake an independent analysis of comparable
transactions but reviewed certain published data in this regard.
In rendering its opinions, Wood Roberts did not independently verify any of
the foregoing information and, in using such information in its review of the
Merger, relied upon it being complete and accurate in all
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material respects. Furthermore, Wood Roberts assumed that the appropriate
regulatory and governmental approvals to the Merger would be forthcoming and
that no restriction would be imposed that would have a material adverse effect
on the contemplated benefits of the Merger. Wood Roberts was not asked to
examine in detail the terms of the disposal of certain assets of LaTex.
Wood Roberts rendered its opinions on the basis of its knowledge of the
circumstances disclosed to it as of the date of the opinions.
Analysis of Exchange Ratio (Relative Contribution Analysis). Wood Roberts
performed a relative contribution analysis to examine the relationship between
the percentage ownership of the combined company that the shareholders of LaTex
and the shareholders of Alliance would have following the Merger. In making this
analysis, Wood Roberts considered (i) the percentage of the merged company's
outstanding stock that the shareholders of each of LaTex and Alliance would hold
following the Merger, (ii) the relative reserve values of each company, adjusted
by Wood Roberts to the extent it deemed appropriate, and (iii) the net asset
value of each company, taking into account bank debt and payables. Based on
this analysis, Wood Roberts calculated that LaTex was contributing 71.67% of the
pro forma assets of the combined company. Under the terms of the Merger, LaTex
shareholders will receive 72% of the stock in the combined company, without
taking into account the New Alliance Shares and Bank Warrants to be issued to
the Bank or the ORRI to be acquired from the Bank.
Comparable Public Company Analysis in Relation to Valuation on the London
Stock Exchange. Wood Roberts also compared certain financial results and assets
of LaTex, Alliance and selected companies whose shares are traded on the London
Stock Exchange and that LaTex and Wood Roberts deemed to possess certain
characteristics similar to those the combined company would have (the
"Comparable Public Companies"). The Comparable Public Companies selected by
LaTex included Great Western Resources Inc., Aminex PLC, Aviva Petroleum Inc.,
Dominion Energy PLC, Tuskar Resources PLC and United Energy PLC.
The primary purpose of this analysis was to assess the public market
valuations of the Comparable Public Companies on the London Stock Exchange
relative to the current public market valuation of LaTex on Nasdaq and, on the
same basis, to estimate an indicated value for the shares of the combined
company. The two primary ratios used in this comparison were net assets and cash
flow relative to share price. Based on this analysis, Wood Roberts calculated
an approximate indicated value of the shares of the combined company on the
London Stock Exchange of $1.11 to $1.22 per share, compared to a pro forma net
asset value calculated by Wood Roberts of approximately $1.41 per share. Wood
Roberts stated that such indicated value is not a forecasting tool as the actual
price at which the shares will trade will depend upon many factors.
Other Matters. Certain other matters were considered by Wood Roberts in
rendering its opinion that the terms of the Merger were fair to the shareholders
of LaTex. These additional matters included, but were not limited to, the
determination by Wood Roberts that it was more likely than not:
(i) That the Merger would improve the ability of the combined
company to refinance the current LaTex bank debt and payables because Alliance
has no debt and has a positive working capital balance; LaTex has significant
debt and working capital deficit; the Merger reduces the debt ratio
(liabilities/assets) from 44% to a more manageable 35%; Wood Roberts had
proposed to other banks that they refinance LaTex's debt, but the banks declined
to do so; and Bank of America will not refinance LaTex's debt in the absence of
the Merger;
(ii) That the liquidity of and market for the shares of the combined
company on the London Stock Exchange would be greater than the current market
for LaTex shares because the combined company will have the support of a major
merchant bank, its U.S. natural resource subsidiary and a good quality
stockbroker, the involvement of which should be expected to have the effect of
causing institutional investors in the U.K. and the U.S. to consider the
combined company as a potential
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investment, to offer the likelihood of placing larger blocks of shares with such
institutional investors, to provide investor research coverage and to have the
overall effect of increasing international and private investor awareness and,
currently, LaTex does not have any such support;
(iii) That, in the absence of the Merger, LaTex would be unable to
raise new equity capital without significant dilution to the LaTex shareholders
at a price that reflects the asset value of LaTex because the price of LaTex
Common Stock is at an all-time low; LaTex has a weak balance sheet; LaTex is in
default in its loan obligations to Bank of America, to its suppliers and to its
royalty owners; and consequently, in such a situation it is unlikely that new
equity could be raised at anywhere near the estimated net asset value per share
of $1.41. In comparison, by Alliance merging with LaTex, Alliance is in effect
providing new equity at a price estimated to be the equivalent of $1.43 per
share;
(iv) That the management would be stronger as a result of the Merger
because the management of Alliance brings broad domestic and international
experience in technical, financial and corporate management and the managing
director has extensive experience working with lending banks; and
(v) That the Merger would increase the ability of the LaTex
shareholders to benefit from growth by acquisition because in its current
financial state LaTex was unlikely to be able to issue shares for an
acquisition at a price that would be acceptable to the owners of the target
company without diluting the current shareholders significantly; a potential
target company is expected to be more likely to agree to be acquired by the
combined company, with its lower debt ratio and stronger management, than by
LaTex; and LaTex is expected to be unable to take on more debt in view of its
financial position and its default with Bank of America.
Wood Roberts did not weight or quantify their consideration of these
factors, but viewed all of them as contributing to their opinion.
There is no assurance that any of the results anticipated in the Wood
Roberts analysis will actually occur. These determinations were made by Wood
Roberts solely for the purpose of analyzing the financial terms of the
Merger.
The summary set forth above is not a complete description of Wood Roberts'
analysis of the terms of the Merger or consideration of the fairness of such
terms to the shareholders of LaTex. Such analysis included the consideration of
many factors and assumptions with respect to the energy industry as a whole,
general business and economic conditions, the subjective market valuations
placed on the stock of companies traded on the London Stock Exchange and other
matters, many of which are or may be beyond the control of the combined company
and its management.
Estimates made by Wood Roberts in its opinions are not necessarily
indicative of actual values and share prices imputed by the analysis performed
by Wood Roberts may not necessarily reflect the actual price placed upon the
shares of the merged company. As such analysis and estimates are inherently
subject to uncertainty, none of Wood Roberts, LaTex or Alliance assume
responsibility for their accuracy.
Wood Roberts is an investment banking firm and as part of its investment
banking business is regularly engaged in the valuation of businesses and
securities in connection with mergers, acquisitions and other corporate
relationships. LaTex selected Wood Roberts to render a fairness opinion in
connection with the Merger because of Wood Roberts' expertise in the oil and gas
industry and its experience in transactions similar to the Merger, as well as
Wood Roberts' prior relationship and familiarity with LaTex. From time to time,
since August 1994, Wood Roberts has provided investment banking services to
LaTex and has acted as financial adviser in matters
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unrelated to the Merger. Wood Roberts has received customary compensation for
such services. As compensation for initiating the Merger, rendering the fairness
opinion and other services in connection with the Merger, LaTex has agreed to
pay Wood Roberts a fee of $240,000. LaTex has also agreed to reimburse Wood
Roberts for its reasonable expenses in relation to its services and to indemnify
Wood Roberts for any liability arising from its engagement as financial advisor
to LaTex. LaTex has also agreed to pay Wood Roberts a fee of 100,000 shares of
LaTex Common Stock upon the successful restructuring of the LaTex Credit
Agreement. Because the LaTex Credit Agreement will be restructured in connection
with the Merger, Wood Roberts will receive 85,981 New Alliance Shares in payment
of this fee upon completion of the Merger. In addition, Wood Roberts and its
affiliates hold warrants to purchase 756,000 shares of LaTex Common Stock at
exercise prices of $0.75 to $1.20 per share.
John R. Martinson, a director of LaTex, is a principal of Wood Roberts and
will be a director of Alliance after the Merger. Mr. Martinson recused himself
from consideration of the terms of the Merger for the purpose of the fairness
opinions.
TERMS OF THE MERGER
General. The detailed terms and conditions of the Merger are contained or
described in the Merger Agreement, which is included in this Proxy Statement as
Appendix B. The Merger Agreement sets forth the representations and warranties
of the parties, certain agreements between the parties pending the Merger, the
conditions precedent to the Merger, the terms of the Merger, the method of
effecting the Merger, the manner of converting LaTex Shares into New Alliance
Shares and certain other provisions. The statements made in this Proxy Statement
with respect to the terms of the Merger are qualified in their entirety by, and
made subject to, the more complete information contained in the Merger
Agreement.
The Merger Agreement was entered into between LaTex and Alliance on August
12, 1996. Pursuant to the terms of the Merger Agreement, LaTex will acquire
Alliance through the merger of Alliance into LaTex.
The Merger. Under the DGCL, the affirmative vote of the holders of a
majority of the outstanding shares of LaTex's Common Stock is required to
approve and adopt the Merger Agreement.
The Merger is also subject to certain conditions, some of which are beyond
the control of any of the parties to the Merger Agreement. See "Conditions to
the Merger." Consequently, there can be no assurance that the Merger will take
place, even though the Merger Agreement contains the agreement of each of the
parties thereto to use their best efforts to complete the Merger.
Immediately after approval and adoption of the Merger Agreement by the
requisite votes of LaTex's and Alliance's shareholders and the satisfaction or
waiver of the conditions to the Merger described below, the parties will conduct
a closing for purposes of executing and delivering such documents and
certificates as may be required under the Merger Agreement (the date of such
closing being referred to hereinafter as the "Closing Date"). The Merger will
become effective upon the filing of a Certificate of Merger with the Secretary
of State of the State of Delaware (the "Effective Time of the Merger"). It is
presently contemplated that the Effective Time of the Merger will, subject to
the terms and conditions of the Merger Agreement, occur either the same day as
the Special Meeting or the following business day. At and after the Effective
Time of the Merger, the surviving company will be a wholly owned subsidiary of
Alliance.
At the Effective Time of the Merger, by virtue of the Merger and without
any further action on the part of the holder thereof, each then outstanding
LaTex Share (other than LaTex Shares, if any, held by LaTex in treasury and
shares held by a shareholder who has properly exercised his dissent and
appraisal rights) will automatically be canceled and LaTex shareholders will
receive New Alliance Shares at the Conversion Rate. Each LaTex Share held by
LaTex in treasury will be canceled. No fractional New Alliance Shares will be
issued in connection with the Merger. Instead, the shares issued to each holder
will be rounded to the nearest whole number of New Alliance Shares. No cash will
be paid for fractional shares not received.
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The surrender of certificates representing LaTex's stock for certificates
representing New Alliance Shares will be effected pursuant to documents that
will be sent to shareholders as promptly as practicable after the Effective Time
of the Merger. See "Exchange of Certificates."
Conversion Rate. If the Merger Agreement is approved and the Merger is
completed, each holder of LaTex Shares will be entitled to receive the number of
New Alliance Shares determined by multiplying the number of LaTex Shares held by
the holder by the Conversion Rate. The Conversion Rate will be 0.85981 of a New
Alliance Share for each share of LaTex Common Stock, 2.58201 New Alliance Shares
for each share of LaTex Series A Stock, 6.17632 New Alliance Shares for each
share of LaTex Series B Stock, and a New Warrant to subscribe 0.85981 of a New
Alliance Share for each share of LaTex Common Stock subject to warrants issued
by LaTex. Fractional New Alliance Shares will not be issued in the Merger.
Instead, the shares issued to each holder will be rounded to the nearest whole
number of New Alliance Shares. No cash will be paid for fractional shares not
received.
Conduct of Business Prior to the Merger. Both parties have agreed in the
Merger Agreement that, from the date of the Merger Agreement until the Effective
Time of the Merger, except as expressly contemplated by the Merger Agreement,
each will carry on business in the usual, regular and ordinary course in
substantially the same manner as previously conducted and use all reasonable
efforts to (i) preserve intact its present business organization, (ii) keep
available the services of its present officers and key employees, (iii) preserve
its relationships with customers, suppliers and any others having business
dealings with them, and (iv) comply with all laws applicable to them and their
respective properties, operations, business and employees that if not complied
with would result in a material adverse effect to the party. In particular, the
Merger Agreement provides that, prior to the Effective Time of the Merger,
unless consented to by the other party, neither party will (a) engage in any of
certain restricted acts set forth in the Merger Agreement, (b) enter into any
transaction other than in the ordinary course of business, or (c) amend its
respective organizational or governing documents.
Conditions to the Merger. The obligation of LaTex to consummate the
Merger is subject to the following: (i) the shareholders of Alliance shall have
approved the Merger, the issue of the New Alliance Shares and the 40-to-1
reverse stock split of the Existing Alliance Shares; (ii) all of the terms,
covenants and conditions of the Merger Agreement to be complied with or
performed by Alliance at or before the Effective Time of the Merger shall have
been complied with and performed in all material respects; (iii) all
representations and warranties of Alliance in the Merger Agreement shall be true
in all material respects as of the Effective Time of the Merger and LaTex shall
have received a certificate to that effect; (iv) all consents, waivers,
approvals, licenses, authorizations of, or filings or declarations with third
parties or governmental entities required to be obtained by Alliance in order to
permit the Merger to be consummated in accordance with governmental laws, rules,
regulations and agreements shall have been obtained; (v) LaTex shall have
received a customary opinion from counsel to Alliance with respect to corporate
organization, capitalization, authority to complete the Merger, necessary
consents from third parties and litigation relating to Alliance; (vi) all
actions, proceedings, instruments and documents in connection with the Merger
shall have been approved in form and substance by counsel to LaTex; (vii)
Alliance shall have furnished such certificates of its officers and others to
evidence compliance with the conditions of the Merger, as may be reasonably
requested by LaTex or its counsel; (viii) there shall not have been any material
loss resulting from destruction of the assets of the Alliance due to acts of
God, fire, explosion or other casualty which is not reimbursable in all material
respects under policies of insurance maintained by or for the benefit of
Alliance; (ix) no material information or data provided or made available to
LaTex by or on behalf of Alliance shall be incorrect in any material respect;
and (x) the New Alliance Shares to be issued pursuant to the Merger shall have
been approved for listing on the London Stock Exchange and the listing shall
have become effective in accordance with the listing rules of the London Stock
Exchange.
The obligation of Alliance to consummate the Merger is subject to the
following: (i) holders of LaTex's common stock shall have approved the Merger;
(ii) all of the terms, covenants and conditions of the
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Merger Agreement to be complied with or performed by LaTex at or before the
Effective Time of the Merger shall have been complied with and performed in all
material respects; (iii) all representations and warranties of LaTex set forth
in the Merger Agreement shall be true in all material respects as of the
Effective Time of the Merger and Alliance shall have received a certificate to
such effect; (iv) all consents, waivers, approvals, licenses, authorizations of,
or filings or declarations with third parties or governmental entities required
to be obtained by LaTex in order to permit the transactions contemplated by the
Merger Agreement to be consummated in accordance with governmental laws, rules,
regulations and agreements shall have been obtained; (v) LaTex shall have
delivered to Alliance an agreement executed by each of LaTex's Affiliates
regarding his or its investment in the Alliance Shares; (vi) Alliance shall have
received a customary opinion of counsel to LaTex with respect to corporate
organization, capitalization, authority to complete the Merger, necessary
consents from third parties and litigation relating to LaTex; (vii) the
aggregate number of each class of LaTex's stock held by LaTex's shareholders who
have delivered and not withdrawn a written demand for appraisal of their shares
shall not exceed five percent of that class of capital stock outstanding and
entitled to vote at the meeting of LaTex's shareholders; (viii) all actions,
proceedings, instruments and documents in connection with the completion of the
Merger shall have been approved in form and substance by counsel to Alliance;
(ix) LaTex shall have furnished such certificates to evidence compliance with
the conditions set forth in the Merger Agreement as may be reasonably requested
by Alliance or its counsel; (x) there shall not have been any material loss
resulting from destruction of the assets of LaTex due to acts of God, fire,
explosion or other casualty which is not reimbursable in all material respects
under policies of insurance maintained by or for the benefit of LaTex; (xi) no
material information or data provided or made available to Alliance by or on
behalf of LaTex shall be incorrect in any material respect; (xiii) LaTex shall
have sold or otherwise disposed of its interests in certain entities; and (xiv)
the New Alliance Shares to be issued to LaTex's shareholders pursuant to the
Merger shall have been approved for listing on the London Stock Exchange and the
listing shall have become effective in accordance with the listing rules of the
London Stock Exchange.
Disposition of Certain Assets. LaTex is required to dispose of its
interests in its unconsolidated affiliates Wexford and 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, LaTex has written off its $2,372,452 investment in
Wexford, its $1,797,378 investment in Imperial, and its $3,446,795 investment in
LaTex Resources International (which includes $2,491,299 in dry hole costs and
$955,496 in abandonments relating to LaTex's investments in Tunisia and
Kazakhstan, respectively). Effective July 31, 1994, LaTex wrote off its $22,918
investment in Phoenix Metals. LaTex has entered into a Purchase Agreement with
Imperial pursuant to which LaTex will sell its interests in Wexford, Imperial,
LaTex Resources International and Phoenix Metals to Imperial for 100,000 shares
of LaTex Common Stock.
Termination. Notwithstanding approval of the Merger by LaTex's
shareholders, the Merger Agreement may be terminated at any time prior to the
Effective Time of the Merger by the mutual written consent authorized by the
Boards of Directors of LaTex and Alliance. In addition, the Merger Agreement
may be terminated by either party if the Merger is not completed by April 30,
1997. The Merger Agreement may also be terminated by Alliance prior to the
Effective Time of the Merger if (i) any representation, warranty or covenant
made in the Merger Agreement for the benefit of Alliance is untrue in any
material respect and such breach is not cured within ten days of notice thereof;
(ii) all of the conditions to Alliance's obligation to complete the Merger shall
not have been satisfied or waived by Alliance prior to the Closing Date; or
(iii) completion of the Merger would violate any nonappealable final order,
decree or judgment of any court or governmental body having competent
jurisdiction. The Merger Agreement may be terminated by LaTex if (i) Alliance
has materially breached the representations and warranties contained in the
Merger Agreement or has failed to comply in any material respect with its
covenants and agreements set forth in the Merger Agreement and Alliance shall
not have cured such breach or failure within 10 business days of receipt of
notice thereof from LaTex, (ii) all of the conditions to LaTex's obligation to
complete the Merger shall have
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not been satisfied or waived by LaTex prior to the Closing Date; or (iii)
completion of the Merger would violate any nonappealable final order, decree or
judgment of any court or governmental body having competent jurisdiction. If
either party receives an unsolicited offer from another person to enter into a
merger, sale or similar transaction at a time when the party has not breached
the Merger Agreement and determines to accept the offer, the party may terminate
the Merger Agreement by paying the other party a termination fee of $1,000,000
plus the other party's expenses. Similarly, if a party receives an offer from
another person to enter into a merger, sale or similar transaction and the party
accepts the offer or has knowingly breached the Merger Agreement, then the other
party may terminate the Merger Agreement and receive from the first party a
termination fee of $1,000,000 plus expenses.
No Solicitation Covenants. LaTex and Alliance have entered into certain
mutual covenants and agreements in the Merger Agreement, including covenants
that provide that neither party will (and will cause each of the executive
officers, directors, employees, representatives or agents not to) directly or
indirectly solicit, initiate or knowingly encourage the initiation of inquiries
or proposals from, or provide any confidential information to, or enter into any
agreement with any person or entity concerning any sale of their assets or
shares of capital stock or any merger, consolidation, business combination,
liquidation or similar transaction involving the respective company. However, if
either company receives an unsolicited offer from a third party that, in the
exercise of its fiduciary duty after consideration of advice from its legal and
financial advisors, the Board of Directors of the company determines is likely
to be more beneficial to its shareholders than the Merger, the respective Board
of Directors may respond to the offer, but will promptly communicate to the
other party to the Merger the terms of any proposal that it may receive in
respect of any such transaction and will keep the other party informed as to the
status of any actions, including negotiations or discussions.
EFFECTIVE TIME OF THE MERGER
It is currently anticipated that if all conditions to the Merger are
satisfied or waived by that time, the Effective Time of the Merger will occur on
either the same day as the Special Meeting or the following business day.
EXCHANGE OF CERTIFICATES
At and after the Effective Time of the Merger, no transfer of LaTex Shares
outstanding prior to the Effective Time of the Merger will be made on the stock
transfer books of LaTex. As soon as practicable after the Effective Time of the
Merger, a letter of transmittal (the "Letter of Transmittal") will be mailed to
all holders of record of the LaTex Shares at the close of business on the date
of the Effective Time of the Merger to be used by such holders in surrendering
to the transfer agent of Alliance (the "Transfer Agent") certificates that,
prior to the Merger, represented LaTex Shares. The Letter of Transmittal will
contain instructions concerning the surrender of such certificates. CERTIFICATES
FOR LATEX SHARES SHOULD NOT BE SURRENDERED UNTIL THE LETTER OF TRANSMITTAL IS
RECEIVED BY THE SHAREHOLDER.
Following the surrender of certificates formerly representing LaTex Shares,
shareholders will receive in exchange therefor certificates representing the
whole number of New Alliance Shares to which the holder is entitled. After the
Effective Time of the Merger and until so surrendered, each certificate that
prior to the Effective Time of the Merger represented outstanding LaTex Shares
shall be deemed for all corporate purposes to represent and evidence ownership
of the proportional number of New Alliance Shares, except that no dividends or
other distributions payable by Alliance will be paid with respect to such
certificates and no voting rights will accrue to the holders thereof until
surrendered. Such dividends and distributions, if any, will be accumulated and,
at the time of such surrender, all such unpaid dividends or distributions will
be paid, without interest. If a certificate for New Alliance Shares is to be
issued to a person other than the person in whose name the certificates
representing LaTex Shares is registered, it will be a condition of exchange that
the LaTex Shares certificate so surrendered be properly endorsed or otherwise in
proper form for transfer and that the person requesting the exchange will pay
any transfer or other taxes required by reason of the issuance of the Alliance
certificate to a person other than the registered holder of the LaTex
certificate surrendered or establish to the satisfaction of Alliance that such
tax has been paid or is not applicable. The Transfer Agent will issue
certificates representing New Alliance Shares attributable to any certificate
that has been lost or
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destroyed only upon receipt of satisfactory evidence of ownership of the shares
represented thereby and after appropriate indemnification.
REGISTRATION AND RESALE
Pursuant to the Registration Statement of which this Proxy Statement is a
part, Alliance has registered under the Securities Act of 1933, as amended, and
the rules and regulations thereunder (the "Act") the 21,448,787 New Alliance
Shares to be issued in the Merger, the New Warrants to be issued by Alliance in
the Merger to replace currently outstanding warrants issued by LaTex, the
1,927,908 New Alliance Shares issuable on exercise of the New Warrants, the
2,530,675 New Alliance Shares and the Bank Warrants with respect to 1,188,650
New Alliance Shares to be issued to the Bank as payment for certain fees to the
Bank and in exchange for an overriding royalty interest in certain of LaTex's
properties currently owned by the Bank, as well as the 1,188,650 New Alliance
Shares issuable upon exercise of the Bank Warrants.
This Proxy Statement may be used in connection with the following
transactions:
(i) the issuance by Alliance of 21,448,787 New Alliance Shares in
connection with the Merger, and the resale of any of such Shares by any
person who may be deemed to be an underwriter thereof;
(ii) the issuance of the New Warrants by Alliance in the Merger to
replace currently outstanding warrants issued by LaTex, and the resale of
any of such New Warrants by any person who may be deemed to be an
underwriter thereof;
(iii) the issuance by Alliance of up to 1,927,908 New Alliance Shares
issuable on exercise of the New Warrants;
(iv) the issuance by Alliance of 2,530,675 New Alliance Shares to
the Bank, and the resale of any such shares by any person who may be deemed
to be an underwriter thereof;
(v) the issuance of the Bank Warrants by Alliance, and the resale
of any of the Bank Warrants by any person who may be deemed to be an
underwriter thereof; and
(vi) the issuance by Alliance of up to 1,188,650 New Alliance Shares
issuable on exercise of the Bank Warrants.
In connection with any resales or transfers of any of the New Alliance
Shares, New Warrants, Bank Shares or Bank Warrants by any person who may be
deemed to be an underwriter of such securities, such person will be obligated to
provide to the purchaser or transferee a copy of the Proxy Statement containing
current information with respect to Alliance and all of the matters described
herein and will be subject to all of the provisions of the Act which relate to
statutory underwriters. Alliance is not aware that, except as otherwise
disclosed in this Proxy Statement, any of such persons has, as of the date
hereof, a specific plan for the sale, transfer or other distribution of any of
such securities. Such sales, transfers or other distributions may, from time to
time, include sales in any market for such securities, including the London
Stock Exchange, privately negotiated transactions or transactions executed with
or through the facilities of one or more brokers or dealers.
REGULATORY MATTERS
No federal, state or other regulatory approvals are required to be
obtained, nor any regulatory requirements complied with, by any party to the
Merger Agreement, except for the requirements of the DGCL in connection with the
approval of LaTex's shareholders and completion of the Merger, and the
requirements of applicable federal and state securities laws.
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INTERESTS OF CERTAIN PERSONS IN THE MERGER.
In the Merger Agreement, the parties agreed that, as a condition to the
Merger, Alliance would enter into an agreement with Jeffrey T. Wilson, Chairman
and President of LaTex, satisfactory to both parties, pursuant to which Mr.
Wilson will provide certain consulting services to Alliance relating to
acquisitions in the energy industry for Alliance subsequent to the Merger.
Alliance and Mr. Wilson have tentatively agreed that the consulting agreement
will be for a period of six months, will provide for a monthly fee to Mr. Wilson
of $10,000 and will permit Mr. Wilson to invest on the same terms as Alliance
may invest in any transactions presented to Alliance by Mr. Wilson.
As compensation for initiating the Merger, rendering the fairness opinion
and other services in connection with the Merger, LaTex has agreed to pay Wood
Roberts a fee of $240,000 upon completion of the Merger. LaTex has also agreed
to reimburse Wood Roberts for its reasonable expenses in relation to its
services and to indemnify Wood Roberts for any liability arising from its
engagement as financial advisor to LaTex. LaTex has also agreed to pay Wood
Roberts a fee of 100,000 shares of LaTex Common Stock upon the successful
restructuring of the LaTex Credit Agreement. Because the LaTex Credit Agreement
will be restructured in connection with the Merger, Wood Roberts will receive
85,981 New Alliance Shares in payment of this fee upon completion of the Merger.
In addition, Wood Roberts and its affiliates hold warrants to purchase 756,000
shares of LaTex Common Stock at exercise prices of $0.75 to $1.20 per share.
John R. Martinson, a director of LaTex, is a principal of Wood Roberts and will
be a director of Alliance after the Merger. Mr. Martinson recused himself from
consideration of the terms of the Merger for the purpose of the fairness
opinion.
ACCOUNTING TREATMENT
LaTex expects the Merger will be treated as a purchase for accounting and
financial reporting purposes. Because LaTex is the larger company, this means
that the transaction will be treated as if LaTex had acquired and assumed the
operations of Alliance on the Effective Time of the Merger.
SUMMARY COMPARISON OF LATEX COMMON STOCK AND NEW ALLIANCE SHARES
Because LaTex is incorporated under the laws of Delaware while Alliance is
a public limited company organized under the laws of England, there are a number
of differences between the attributes of the LaTex Common Stock and the New
Alliance Shares, as well as the rights and privileges the holders of each of
them. The following summary compares a number of the principal differences. The
attributes of the New Alliance Shares described below reflect an amendment to
Alliance's Articles of Association that is to be adopted concurrently with the
Merger.
LATEX COMMON STOCK NEW ALLIANCE SHARES
------------------ -------------------
Right to Call Meetings and Submit Proposals
As permitted by the DGCL, LaTex's Under English law, notwithstanding
Bylaws provide that the holders of any provision to the contrary in a
at least 51% of the outstanding company's articles of association,
shares may request, in writing, a an extraordinary general meeting of
special meeting of shareholders at shareholders may be called by a
any time and for any lawful purpose, request of shareholders holding not
specifying the matter or matters less than one-tenth of the paid-
(that are appropriate for action at up capital of the company having
a special meeting) proposed to be voting rights at general meetings.
presented to the meeting. Each
special meeting will be held at such
place as the person or persons
calling the meeting shall fix.
Conduct of Shareholder Meetings
Under the DGCL, all matters required An ordinary resolution requires 14
to be approved by shareholders must clear days' notice and requires a
be approved by the majority vote of those present
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affirmative vote of the holders of and voting. An extraordinary resolu-
at least a majority of the out- tion requires 14 clear days' notice
standing shares of LaTex Common and a three-quarters majority vote
Stock. Written notice of a meeting of those present and voting. A
of shareholders must be given, special resolution requires 21 clear
personally or by mail, not fewer days' notice and a three-quarters
than ten nor more than sixty days majority vote of those present and
before the meeting (unless otherwise voting. An annual general meeting
required by law) to each shareholder requires 21 clear days' notice
entitled to vote at such meeting. regardless of the type of resolution
This notice must state the place, to be proposed. The term "clear days'
date and hour of the meeting and notice" means calendar days and
the purpose or purposes for which excludes the day of mailing, the
the meeting is called and the name deemed date of receipt of such notice
or names of the persons who have (normally the day following such
directed the calling of the meeting. mailing, if sent by first class mail)
and the date of the meeting itself.
"Extraordinary resolutions" are
limited to certain matters out of
the ordinary course of business,
such as a proposal to wind up the
affairs of the company. Proposals
that are the subject of "special
resolutions" include proposals to
change the name of a company,
proposals to alter a company's
capital structure (but not to
increase an existing class of share
capital), proposals to change or
amend the rights of shareholders,
proposals to amend a company's
objects (purpose clause) and
Articles of Association and proposals
to carry out certain other matters
where either a company's Articles
of Association or the Companies Act
require a "special resolution." Most
other proposals relating to the
ordinary course of a company's
business, such as the election of
directors, are the subject of an
ordinary resolution. Notice of any
type of meeting must state the place,
date and hour of the meeting and the
general nature of the business to be
transacted at the meeting.
Right to Shareholder Lists
Shareholders of LaTex have the right, The register of shareholders and index
in person or by attorney or other of shareholders' names of an English
agent, upon written demand stating company may, in general, be inspected
the purpose thereof, during usual by a shareholder during business hours
business hours, to inspect for any without charge, and by other persons
proper purpose a list of the names, upon payment of a charge. Any person
addresses and shares held by may request to be supplied with a copy
shareholders. of the whole or part of the register
upon payment of a charge.
Right to Inspection of Books and Records
Under the DGCL, any shareholder of A shareholder of any English company
LaTex, upon written request stating may inspect the minutes of shareholder
the purpose of the inspection, has meetings and obtain copies (within 7
the right to inspect for any proper days) upon payment of a charge.
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purpose LaTex's books and records, Shareholders are not entitled to
and to make copies of those records. inspect the accounting records of a
company or minutes of directors'
meetings. However, the Secretary of
State of Trade and Industry may, on
the application of at least 200
shareholders or of shareholders
holding not less than 10% of the
issued share capital of a company,
appoint inspectors to investigate the
affairs of the company and inspect
all documents relating of or to the
company.
Certain registers required to be
kept by a company are open to public
inspection including, the Register
of Directors and Secretaries,
Register of Directors' Interests in
Shares and Debentures, Register of
Charges, the Register of Debenture
Holders and the Register of Interests
in Shares. Service contracts of
directors of the company are available
for inspection in certain circumstances
and at certain times. Copies of
instruments creating charges that are
registrable with the Registrar of
Companies together with any other
charges in the Register of Charges of
the company must be kept and be made
available for inspection by share-
holders and creditors without charge.
Voting Rights
The DGCL provides that, unless Under English law, the voting rights
otherwise provided in a company's of shareholders are governed by the
certificate of incorporation, each Companies Act, as amended, and by a
shareholder is entitled to one vote company's articles of association.
for each share of stock held by such Shareholders have the statutory right
shareholder, on each matter to demand a poll (a vote by the number
submitted to a vote of shareholders of shares held rather than by a show
of the company. LaTex's Certificate of hands) at a general meeting in
of Incorporation provides that a certain circumstances. Under Alliance's
shareholder is entitled to one vote Articles of Association, a poll may be
for each share of LaTex Common Stock demanded at any general meeting by
held by such shareholder. (i) the chairman of the meeting, (ii)
at least three shareholders present in
As permitted by its Certificate of person or by proxy and having the right
Incorporation, LaTex has filed a to vote at the meeting, (iii) a share-
Certificate of Designation providing holder or shareholders present in
for the issuance of preferred stock. person or by proxy representing not
Holders of LaTex's preferred stock less than 10% of the total voting
are not given any voting rights. rights of all the shareholders having
the right to vote at the meetings or
Under the DGCL, voting by shareholders (iv) a shareholder or shareholders
for directors is noncumulative unless present in person or by proxy holding
provided otherwise in the certificate shares conferring a right to vote at
of incorporation. LaTex's Certificate the meeting, being shares on which an
of Incorporation does not provide for aggregate sum has been paid-up equal
cumulative voting. Therefore, LaTex to, but not less than 10%
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currently employs noncumulative of the total sum paid-up on all the
voting. Under noncumulative voting, shares conferring that right.
each shareholder entitled to vote
for directors may vote, for each Cumulative voting is essentially
director, the number of votes equal unknown under English law. Two
to the number of shares held by the shareholders present in person
shareholder. Since voting is constitute a quorum for purposes of a
noncumulative, the holders of a meeting unless a company's articles of
majority of the voting stock may association specify otherwise.
elect all of the Directors. Alliance's Articles of Association
specify that two persons entitled to vote
on the business to be transacted, each
being a shareholder or a proxy for a
shareholder or a duly authorized
representative of a corporation that is a
shareholder, shall constitute a quorum.
Subject to any special rights or
restrictions attached to any shares, on
the show of hands, every shareholder who
(being an individual) is present in
person or (being a corporation) is
present by a duly authorized
representative at any meeting by proxy
and is entitled to vote shall have one
vote, and on a poll every shareholder who
is present either personally or by proxy
and is entitled to vote shall have one
vote for every ordinary share held by
him. Although a proxy is normally only
valid for the meeting therein mentioned,
it is also valid for any adjournment of
the meeting. To be valid, the proxy must
be in writing and be deposited in
accordance with Alliance's Articles of
Association, which generally requires the
proxy to be delivered to Alliance no
later than the last time at which an
instrument of proxy should have been
delivered in order to be valid for use at
that meeting.
If there is a failure by a shareholder
within 14 days to comply with a request
made by Alliance to disclose certain
information regarding his shares under
Section 212 of the Act, the Board may
suspend the shareholder's voting rights
in relation to such shares and, where his
shareholding represents one-quarter of
one percent or more of the issued shares
of any class of shares, may direct that
Alliance retain dividends or other moneys
payable upon such shares and/or that no
transfer, other than an "approved
transfer" as defined in the Articles of
Association, of any such shares shall be
registered.
Should all the members entitled to vote
at a general meeting sign written
resolutions in lieu of a vote at such
meeting, such written resolutions shall
be valid and effective as resolutions
passed at a general meeting.
For as long as the Bank or its affiliate
is a holder of New Alliance Shares, it
will not be entitled to vote more than
4.99% of the total votes normally
exercisable by holders of New Alliance
Shares and will not be entitled to vote
on any resolution to alter this
restriction. Upon a transfer of any New
Alliance Shares by the Bank or its
affiliate to any other person, this
restriction will cease to apply to those
New Alliance Shares. This restriction
will apply only to the Bank or its
affiliate and will not apply to any other
holder of New Alliance Shares.
Distributions and Dividends
LaTex has not paid any dividends on Holders of New Alliance Shares will be
its outstanding common shares during entitled to receive such dividends as
the last five may be declared by the
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years. In addition, LaTex is Board of Directors of Alliance. All of
restricted from paying cash LaTex's outstanding preferred shares will
dividends under the LaTex Credit be converted into New Alliance Shares in
Agreement. LaTex's Bylaws provide the Merger. In the Merger, Alliance will
that the Board of Directors, at be assuming LaTex's obligations under the
any regular or special meeting LaTex Credit Agreement, which will
thereof, may declare dividends upon continue to prohibit Alliance from paying
the issued and outstanding shares dividends. In addition, Alliance is
of LaTex's Common Stock, subject to precluded from paying dividends until
the prior payment of dividends upon such time as its retained loss is cleared
any series of preferred stock or canceled by court order. Alliance has
outstanding. The holders of Series not paid any dividends on its outstanding
B Senior Convertible Preferred Stock ordinary shares during the last five
are paid cumulative cash dividends years and currently intends to retain its
at the annual rate of $1.20 per cash for the continued expansion of its
share. Subject to the prior and business, including exploration,
superior rights of the holders of development and acquisition activities.
any series of LaTex's preferred
stock ranking prior and superior to
the shares of Series A Convertible
Preferred Stock, including the prior
and superior rights of the holders
of LaTex's Series B Senior Convertible
Preferred Stock, the holders of
Series A Convertible Preferred Stock
will be paid cumulative cash
dividends at the annual rate of $.20
per share. In lieu of paying cash
dividends on the LaTex Series A
Stock and LaTex Series B Stock,
LaTex may pay such dividends in the
form of additional shares of such
preferred stock.
The ability of LaTex's Board of
Directors to declare dividends for
holders of the common stock is
limited by the rights and priority
of holders of LaTex's preferred stock.
Dilution
LaTex's Certificate of Incorporation Without prejudice to any special rights
permits the issuance of additional previously conferred on the holders of
shares of common stock or shares of any existing shares or class of shares,
preferred stock, pursuant to which any shares in the capital of Alliance may
the interests in the assets, be issued with such special rights,
liabilities, cash flow, and results privileges or restrictions as Alliance
of operations of LaTex represented general meeting may (before the issuance
by the shares of LaTex Common Stock of such shares) from time to time
may be diluted. Under Nasdaq rules, determine.
LaTex may not issue common stock
equal to 20% or more of the then Alliance may from time to time by
outstanding shares in connection ordinary resolution of shareholders
with the acquisition of the stock increase its capital by the creation of
or assets of another entity without new shares, consolidate all or any of its
shareholder approval. Issuances of shares into shares of a larger amount
additional shares of common stock than its existing shares and subdivide
or preferred stock could adversely its existing shares or any of them into
affect existing shareholders' equity shares of smaller amount.
interest in LaTex and the market
price of the common stock. LaTex's In connection with soliciting approval of
Board of Directors by resolution the Merger, Alliance is also soliciting
may establish one or more classes approval of its shareholders to authorize
or series of preferred stock having the Board of
the number of shares, designations,
relative voting rights,
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preferences, and limitations that Directors of Alliance to issue
the Board of Directors fixes additional New Alliance shares in
without any shareholder approval. an amount up to 3.3% of the total
outstanding shares after the Merger
Under the DGCL, shareholders are generally and up to 5% other then
denied preemptive rights unless in accordance with statutory
preemptive rights are provided for pre-emption rights. The Board of
in the certificate of incorporation. Directors of Alliance has indicated
LaTex's Certificate of that it has no present intention of
Incorporation currently does not exercising this authority, but may
provide for preemptive rights. do so in the future if they deem
appropriate.
Liquidation
In the event of a liquidation, Alliances's Articles of Association
dissolution, or winding up of the provide that if the Company is
affairs of LaTex, after payment or wound up, a court-appointed
provision for payment of the debts liquidator may, with the
and liabilities of LaTex, the authority of an extraordinary
holders of the Series B Senior resolution and any other sanction
Convertible Preferred Stock are required by law, divide among the
entitled to receive out of the shareholders in specie the whole or
remaining assets of LaTex $10 for any part of the assets of Alliance,
each share of Series B Senior and for that purpose, set such
Convertible Preferred Stock they values as he deems fair upon the
hold, plus an amount equal to all property to be divided, and
dividends accumulated and unpaid determine how the division shall be
on each such share through the carried out between the
date fixed for distribution, shareholders. The liquidator may,
before any distribution may be with like authority, vest any part
made to holders of any shares of of the assets in trustees upon such
Common Stock and Series A trust for the benefit for
Convertible Preferred Stock. In the shareholders as he, with like
event of a liquidation, dissolution, authority shall think fit.
or winding-up of the affairs of
LaTex, after payment or provision
for payment of debts and
liabilities of LaTex, and after
payment of any prior and superior
rights of any series of LaTex's
preferred stock ranking prior and
superior to the shares of Series A
Convertible Preferred Stock with
respect to liquidation, including
the prior and superior rights of
the holders of LaTex's Series B
Senior Convertible Preferred Stock,
the holders of the Series A
Convertible Preferred Stock are
entitled to receive out of the
remaining assets of LaTex $10 for
each of the shares of Series A
Convertible Preferred Stock they
hold, plus an amount equal to all
dividends accumulated and unpaid on
each such share through the date
fixed for distribution, before any
distribution can be made to holders
of Common Stock or any other capital
stock of the Company ranking junior
to the Series A Convertible
Preferred Stock. After payment to
the holders of the Series A
Convertible Preferred Stock, the
entire remaining assets and funds
of LaTex legally available for
distribution, if any, will be
distributed among the holders of
Common Stock and any other capital
stock of the
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Company ranking junior to the
Series A Convertible Preferred
Stock in proportion to the
shares of such stock then held
by them.
Transferability
LaTex Shares are transferable on There are, in general, no
LaTex's books, pursuant to restrictions in Alliance's
applicable law and any rules as Articles of Association on the
the Board of Directors may transferability of fully-paid
prescribe from time to time. ordinary shares. The board may
in its absolute discretion, and
without giving a reason
therefor, decline to register a
transfer of any share that is
not fully-paid to a person of
whom it does not approve or of
any share over which it has a
lien. The board may also in
certain circumstances, decline
to register a transfer of a
share in respect of which the
shareholder has not replied to a
request by the company as to the
identity of persons interested
in such share.
Redemption Rights
LaTex, at its option and subject Holders of Alliance ordinary
to conditions stated in its shares will have no right to
Certificate of Designation, may surrender their shares in
at any time and from time to exchange for the pro rata share
time, redeem all or any part of of Alliance's net assets
the outstanding Series B Senior attributable to such shares, and
Convertible Preferred Stock at the ordinary shares are not
the rate of $10 per share of redeemable. If Alliance
such Preferred Stock plus all shareholders so authorize,
dividends accumulated and unpaid Alliance may repurchase its
on such share through the date shares. Any shares repurchased
of redemption. Subject to the must be canceled.
prior and superior rights of the
holders of any series of LaTex's
preferred stock ranking prior
and superior to the shares of
Series A Convertible Preferred
Stock with respect to
redemption, including the prior
and superior rights of the
holders of LaTex's Series B
Senior Convertible Preferred
Stock with respect to
redemption, LaTex, at its option
and subject to the conditions
stated in its Certificate of
Designation, may at any time and
from time to time, redeem all or
any part of the outstanding
Series A Convertible Preferred
Stock at the rate of $10 per
share plus all dividends
accumulated and unpaid on such
share through the date of
redemption. LaTex Common Stock
is not redeemable.
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Change of Control
Certain provisions in LaTex's For a company such as Alliance
Certificate of Incorporation, listed on the London Stock
including the ability of the Exchange, shareholder approval
Board of Directors to issue may be required for certain
classes or series of preferred acquisitions or disposals of
stock and restrictions on the assets involving directors or
ability of shareholders to substantial shareholders or
call meetings and propose their associates. In addition,
business at meetings of the takeovers of public companies
common shareholders, may are regulated by the City Code
impede a takeover attempt. on Takeovers and Mergers (the
LaTex is subject to the "City Code"), nonstatutory
provisions of Section 203 of rules that are unenforceable
the DGCL, which restricts at law but administered by the
"business combinations" Panel on Takeovers and
involving a company and an Mergers, a body comprised of
"interested shareholder" for representatives of certain
three years following the date City of London financial and
on which the shareholder professional institutions that
acquired 15% or more of the oversees the conduct of such
outstanding voting stock of takeovers. The City Code
the company, unless certain provides that (i) when any
statutory exceptions are person acquires, whether by a
satisfied. series of transactions over a
period of time or not, shares
that (taken together with
shares held or acquired by
persons acting in concert with
him) carry 30% or more of the
voting rights of a public
company; or (ii) when any
person, together with persons
acting in concert with him,
holds not less than 30% but
not more than 49% of the
voting rights and such person,
or any person acting in
concert with him, acquires in
any period of 12 months
additional shares carrying
more than 1% of the voting
rights, such person must
generally make an offer for
all of the equity shares of
the company (whether voting or
nonvoting) and all the voting
non-equity shares of the
company for cash, or
accompanied by a cash
alternative, at not less than
the highest price paid for the
relevant shares during the 12
months preceding the date of
the offer.
Indemnification
Section 145 of the DGCL Under English law,
permits a corporation to Alliance may only
indemnify any person who is, indemnify its officers and
or is threatened to be made, a directors against liabilities
party to any suit owing to the they incur in defending
fact that the person is or was proceedings (whether civil or
a director, officer, employee criminal) in which (i) a
or agent acting on behalf of judgment has been given in the
the corporation, subject to a indemnitee's favor (ii) the
determination by the board of indemnitee is acquitted or
directors that the person has (iii) relief has been granted
met certain standards of to the indemnitee by the court
conduct. Section 145 also from liability for negligence,
provides that it is not default, breach of duty or
exclusive of any other rights breach of trust in relation to
to indemnification or the affairs of Alliance or its
advancement of expenses. subsidiaries. The Articles of
LaTex's bylaws require Association of Alliance
indemnification of any provide that directors and
director or officer of LaTex officers of Alliance will be
to the fullest extent entitled to the benefit of
permitted by Delaware law and this indemnification.
permit indemnification of any
employee, attorney,
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agent or representative to the
extent permitted by Delaware law.
LaTex's bylaws also authorize the
advancement of expenses incurred
by the Indemnitee. LaTex's Certificate
of Incorporation authorizes the
indemnification of any person, in
accordance with Delaware law, who is,
or is threatened to be made a party to
such a suit.
Limits on Management's Liability
LaTex's Certificate of Incorporation, English law does not provide any
as permitted by the DGCL, eliminates mechanism for limiting the liability of
the monetary liability of LaTex's directors.
directors for a breach of their
fiduciary duty as directors, except
for liability (i) for any breach of
a director's duty of loyalty to
LaTex or its shareholders, (ii) for
acts or omissions not in good faith
or that involve intentional misconduct
or a knowing violation of law,
(iii) under Section 174 of the DGCL
(which provides for liability of
directors for unlawful payment of
dividends or unlawful stock purchases
or redemptions), or (iv) for any
transaction from which the director
derived an improper personal
benefit.
Appraisal Rights
Under the DGCL, a holder of LaTex While English law does not generally
Shares who does not vote in favor provide for appraisal rights, if a
of a merger or consolidation of shareholder applies to a court as
LaTex may, upon compliance with described below, the court may specify
certain procedures, be entitled to such terms for the acquisition as it
receive the fair value of the considers appropriate.
shares in cash in lieu of the
consideration that would otherwise The Companies Act provides that
be received in the merger or where a take-over offer (as defined
consolidation. Appraisal rights are therein) is made for the shares
not available in certain mergers, of a company incorporated in the
including (a) mergers in which LaTex UK and the offeror has, within four
is the surviving corporation and months of the date of the offer,
in which no vote of its shareholders acquired or contracted to acquire
was required and (b) mergers when not less than nine-tenths in value of
the shares were then listed on a the shares to which the offer relates,
national securities exchange or held the offeror may, within two months of
of record by more than 2,000 holders reaching the nine-tenths level,
and the holders of shares are not notify shareholders who did not
required to accept in exchange for accept the offer and require them to
their shares anything other than transfer their shares on the terms
shares of stock of the surviving of the offer. A dissenting shareholder
corporation that, on the effective may apply to the court within six
date of the merger, would be weeks of the date on which such notice
listed on a national securities is given, objecting to the transfer
exchange or held of record by more or its proposed terms. The court is
than 2,000 holders, cash in lieu unlikely (absent fraud or oppression)
of fractional shares, or any to exercise its discretion to order
combination thereof. that the acquisition not take
effect, but it may
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order that the offeror shall not be
entitled to acquire the relevant shares
or specify such terms of the transfer
as it finds appropriate. A minority
shareholder is also entitled in these
circumstances to require the offeror to
acquire his shares on the terms of the
offer.
Conflicts of Interest
LaTex's Certificate of Incorporation Alliance's Articles of Association
provides that, to the extent pro- provide that a director, or a firm in
vided by the DGCL, no contract or which he is interested, may act in a
transaction between LaTex and one or professional capacity for Alliance
more of its directors or officers or and will be entitled to remuneration
between LaTex and any other company, for such services as if he were not
partnership, association or other a director, except that such party
organization in which one or more of is not authorized to act as auditor
its directors or officers are direc- to Alliance. A director may contract
tors or officers of LaTex or have a with Alliance provided he discloses
financial interest, shall be void or his interests. Alliance's Articles
voidable solely for this reason, or of Association also detail those
solely because the directors or matters on which an interested direc-
officers are present at or partici- tor may and may not vote.
pate in the meeting of the board or
committee thereof which authorizes
the contract or transaction, or
solely because the directors or
officers or their votes are counted
for such purpose.
Common or interested directors may
be counted in determining the
presence of a quorum at a meeting of
the Board of Directors or a committee
thereof which authorizes the contract
or transaction.
Trading in Shares
LaTex's Common Stock is traded on The Existing Alliance Shares are traded
the Nasdaq SmallCap Market under the on the London Stock Exchange under the
symbol "LATX." Quotations for shares symbol "ARS." Based on their knowledge
traded on Nasdaq are generally avail- of the prices and share trading
able in newspapers and other publi- activity of small independent oil and
cations, as well as some computer gas companies on the London Stock
online services. Investors may place Exchange, Alliance and LaTex believe
orders for the purchase or sale of that the trading market for small
shares traded on Nasdaq through most independent oil and gas companies is
licensed broker dealers in the United generally more favorable in London than
States. in the U.S. This belief is supported by
the analysis of Wood Roberts described
in detail under "The Merger-Opinion of
LaTex's Financial Advisor."
Furthermore, the sponsorship and
support that is being and will be
provided by Alliance's financial
advisor and stockbroker is expected to
be positive for trading in the New
Alliance Shares, whereas currently
LaTex does not have any support for
trading in its shares. Therefore,
Alliance is applying for
listing on the London Stock Exchange
of the New Alliance Shares to be issued
in connection with the Merger. Of
course, there is no assurance that the
trading market for New Alliance Shares
on the London Stock Exchange will be
more favorable than the current market
for LaTex Common Stock in the U.S.
Quotations for shares listed on the
London Stock Exchange are not generally
readily available in newspapers or
other publications in the United
States, but are available in the daily
U.S. edition of the Financial Times.
However, investors may place orders for
the purchase or sale of shares traded
on the London Stock Exchange through
most licensed broker dealers in the
United States. Under current U.K. law,
the transfer of New Allaince Shares
will generally give rise to a liability
to U.K. stamp duty, normally at the
rate of 50p for every (Pounds)100 (or
part thereof) of the actual
consideration paid.
37
<PAGE>
RESTRICTIONS ON RESALES BY AFFILIATES
The issuance of the New Alliance Shares to be received by LaTex
shareholders in connection with the Merger, has been registered under the
Securities Act. Except as described in this paragraph, the New Alliance Shares
may be traded without restriction under the Securities Act. The New Alliance
Shares to be issued in the Merger and received by persons who are deemed to be
"affiliates" (as that term is defined in Rule 144 under the Securities Act) of
LaTex prior to the Merger may be resold by them only in transactions permitted
by the resale provisions of Rule 145 or other applicable exemption. The
principal requirement of Rule 145 is that an affiliate of LaTex may not
(together with other persons whose sales are aggregated under Rule 145) sell
during any three-month period a number of New Alliance Shares exceeding the
greater of (i) one percent of the total number of outstanding New Alliance
Shares or (ii) the average weekly trading volume of New Alliance Shares for a
specified four-week period.
APPRAISAL RIGHTS OF DISSENTING LATEX SHAREHOLDERS
Any person who is a holder of record of LaTex Shares and who objects to the
terms of the Merger may seek appraisal of the "fair value" of such holder's
LaTex Shares under and in compliance with the requirements of Section 262 of the
DGCL (the LaTex Shares as to which such appraisal rights have been asserted
being referred to herein as the "Dissenting Shares"). Section 262 provides a
procedure by which persons who are holders of LaTex Shares at the Effective Time
of the Merger may seek an appraisal of part of or all their LaTex Shares in lieu
of accepting New Alliance Shares in exchange therefor as described above under
"Terms of the Merger." In any such appraisal proceeding, the Delaware Court of
Chancery (the "Chancery Court") would determine the "fair value" of the
Dissenting Shares. Holders of LaTex Shares should recognize that such an
appraisal could result in a determination of a value higher or lower than, or
equivalent to, the New Alliance Shares they would receive in the Merger. The
following is a summary of the principal provisions of Section 262 and does not
purport to be a complete description. A copy of Section 262 is attached hereto
as Appendix D and is incorporated herein by reference.
FAILURE TO TAKE ANY NECESSARY STEPS FULLY AND PRECISELY TO SATISFY THE
REQUIREMENTS OF SECTION 262 OF THE DGCL WILL RESULT IN A TERMINATION OR WAIVER
OF THE APPRAISAL RIGHTS OF THE LATEX STOCKHOLDER UNDER SUCH SECTION. IN THAT
CASE, EACH LATEX SHARE OWNED BY SUCH STOCKHOLDER IMMEDIATELY PRIOR TO THE
EFFECTIVE DATE WILL BE CONVERTED INTO THE RIGHT TO RECEIVE NEW ALLIANCE SHARES
PURSUANT TO THE MERGER.
Under Section 262, a corporation, not less than 20 days prior to the
meeting at which a proposed merger is to be voted on, must notify each of its
shareholders entitled to appraisal rights as of the record date of the meeting
that appraisal rights are available and include in the notice a copy of Section
262. This Proxy Statement constitutes the notice to the holders of LaTex
Shares.
A holder of LaTex Shares electing to exercise appraisal rights under
Section 262 must (a) deliver to LaTex, before the taking of the vote on the
Merger, a written demand for appraisal that is made by or on behalf of the
person who is the holder of record of the Dissenting Shares and (b) not vote in
favor of adoption of the Merger. A proxy or vote against approval and adoption
of the Merger does not constitute a sufficient demand. In addition, mere
failure, after the completion of the Merger, to execute and return a letter of
transmittal to the Transfer Agent does not constitute a demand. A holder of
LaTex Shares electing to demand appraisal must do so before the taking of the
vote on the Merger by a separate written demand that reasonably informs LaTex of
the identity of the holder of LaTex Shares of record and of the holder's
intention thereby to demand the appraisal of the holder's LaTex Shares. Written
demands for appraisal
38
<PAGE>
should be directed to LaTex Resources, Inc., 4200 East Skelly Drive, Suite 1000,
Tulsa, Oklahoma 74135, Attention: Stacey D. Smethers, Secretary.
Only the holder of record of LaTex Shares is entitled to assert appraisal
rights for the LaTex Shares registered in that holder's name. The holder of
LaTex Shares asserting appraisal rights must hold LaTex Shares on the date of
record of making the demand and continuously through the Effective Time of the
Merger. The demand should be executed by or for the holder of record, fully and
correctly, as the holder's name appears on the holder's stock certificates. If
the stock is owned of record in a fiduciary capacity, such as by a trustee,
guardian or custodian, execution of the demand should be made in that capacity,
and if the stock is owned of record by more than one person, as in a joint
tenancy or tenancy in common, the demand should be executed by or for all
owners. An authorized agent, including one of two or more joint owners, may
execute the demand for appraisal for a holder of record; however, the agent must
identify the record owner or owners and expressly disclose the fact that, in
executing the demand, the agent is acting as agent for the record owner or
owners.
A record holder who holds LaTex Shares as nominee for beneficial owners may
exercise the holder's right of appraisal with respect to the LaTex Shares held
for all or less than all of such beneficial owners. In that case, the written
demand should set forth the number of shares of LaTex Shares covered by it.
Where no number of shares of LaTex Shares is expressly mentioned, the demand
will be presumed to cover all LaTex Shares held in the name of the record
holder.
Within ten days after the Effective Time of the Merger, Alliance will send
notice of the effectiveness of the Merger to each person who, prior to the
Effective Time of the Merger, made proper written demand for appraisal and who
did not vote in favor of, or consent to, the Merger.
Within 120 days after the Effective Time of the Merger, Alliance or any
holder of Dissenting Shares may file a petition in the Chancery Court demanding
a determination of the fair value of all of the Dissenting Shares. Holders of
Dissenting Shares should not assume that (i) Alliance will file a petition with
respect to the appraisal value of their Dissenting Shares, (ii) Alliance will
initiate any negotiations with respect to the "fair value" of such Dissenting
Shares or (iii) Alliance will notify them of any act in connection with the
Merger other than as required by law. Accordingly, holders of LaTex Shares
should regard it as their obligation to initiate all necessary action with
respect to the perfection of their appraisal rights within the time periods
prescribed in Section 262 of the DGCL.
Within 120 days after the Effective Time of the Merger, any holder of
Dissenting Shares is entitled, upon written request, to receive from Alliance a
statement setting forth the aggregate number of Dissenting Shares and the
aggregate number of holders of Dissenting Shares. Alliance is required to mail
this statement within ten days after it receives a written request therefor.
If a petition for an appraisal is timely filed, after a hearing on such
petition, the Chancery Court will determine the holders of LaTex Shares entitled
to appraisal rights and will appraise the Dissenting Shares owned by the
holders, determining their "fair value" exclusive of any element of value
arising from the accomplishment or expectation of the Merger and will determine
a fair rate of interest, if any, to be paid upon the "fair value." In
determining "fair value" of the Dissenting Shares, the Chancery Court will take
into account all relevant factors. The Delaware Supreme Court has stated that
such factors include "market value, asset value, dividends, earnings prospects,
the nature of the enterprise and any other facts which were known or which could
be ascertained as of the date of merger which throw any light on future
prospects of the merged corporation." The Delaware Supreme Court has also
stated, among other things, that "proof of value by any techniques or methods
generally considered acceptable in the financial community and otherwise
admissible in court" should be considered in an appraisal proceeding. The value
so determined for the
39
<PAGE>
Dissenting Shares could be more or less than, or the same as, the New Alliance
Shares to be received in the Merger. The Chancery Court may allocate the costs
of the appraisal proceedings as it deems equitable in the circumstances. The
Chancery Court may also order that all or a portion of the expenses incurred by
any holder of Dissenting Shares in connection with an appraisal proceeding,
including, without limitation, reasonable attorneys' fees and the fees and
expenses of experts utilized in the appraisal proceeding, be charged pro rata
against the value of all the Dissenting Shares.
Any holder of LaTex Shares who has duly demanded an appraisal in compliance
with Section 262 will not, after the Effective Time of the Merger, be entitled
to vote the LaTex Shares subject to the demand for any purpose or be entitled to
the payment of dividends or other distributions on the LaTex Shares (other than
those payable or deemed to be payable to holders of LaTex Shares of record as of
a date prior to the Effective Time of the Merger) or on any New Alliance Shares
otherwise issuable, but for the appraisal demand, in substitution therefor.
A holder of LaTex Shares will fail to perfect, or effectively lose, the
holder's right to appraisal if no petition for appraisal is filed within 120
days after the Effective Time of the Merger, or if a holder of LaTex Shares
delivers to LaTex a written withdrawal of the holder's demand for an appraisal
and an acceptance of the Merger, except that any such attempt to withdraw made
more than 60 days after the Effective Time of the Merger requires the written
approval of Alliance. Holders of LaTex Shares should also note that surrender
to the designated exchange agent of certificates for their LaTex Shares may
constitute a waiver of appraisal rights under the DGCL.
If an appraisal proceeding is timely instituted, the proceeding may not be
dismissed, without the approval of the Chancery Court as to any holder of LaTex
Shares who has perfected his right of appraisal.
PRICE RANGE OF STOCK AND DIVIDENDS
The Existing Alliance Shares are traded on the London Stock Exchange under
the symbol "ARS."LaTex's Common Stock is traded on the Nasdaq under the symbol
"LATX" and until September 4, 1996, was listed on the Pacific Stock Exchange
under the symbol "LAT," at which time it was removed from listing due to lack of
adequate trading volume. At the request of Alliance, the trading of the
Existing Alliance Shares on the London Stock Exchange was suspended upon the
announcement of the Merger Agreement and will remain suspended until completion
or abandonment of the Merger. Also at the request of Alliance, the trading of
the Existing Alliance Shares was suspended from September 6, 1995 to November 2,
1995 in connection with the investigation of the matters relating to Mr.
O'Brien, Alliance's former chief executive.
40
<PAGE>
The following table sets forth the high and low sales prices for the
Existing Alliance Shares on the London Stock Exchange (in pounds) and the high
and low closing bid prices per share of LaTex Common Stock on Nasdaq (in
dollars) for the periods indicated. Bid quotations represent quotations between
dealers without adjustment for retail mark-ups, mark-downs or commissions and
may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
PRICES
--------------------------------------------------------
ALLIANCE SHARES LATEX COMMON STOCK
--------------------------- -----------------------------
HIGH(Pounds)) LOW((Pounds)) HIGH($) LOW ($)
----------- ------------- ------- -------------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1994:
First Quarter........................... .0725 .0660 1.563 0.813
Second Quarter.......................... .0700 .0676 0.938 0.625
Third Quarter........................... .0776 .0676 1.625 0.875
Fourth Quarter.......................... .1126 .0926 1.063 0.750
Year Ended December 31, 1995:
First Quarter........................... .1000 .0660 0.875 0.500
Second Quarter.......................... .0726 .0546 0.688 0.438
Third Quarter........................... .066 .046 1.000 0.156
Fourth Quarter.......................... .046 .016 0.625 0.344
Year Ended December 31, 1996:
First Quarter........................... .050 .030 0.531 0.313
Second Quarter.......................... .0325 .0276 0.563 0.313
Third Quarter (through August 11 for
Alliance).............................. .0276 .0176 0.500 0.375
Fourth Quarter.......................... N/A N/A 0.422 0.266
Year Ended December 31, 1997:
First Quarter (through March 14)........ N/A N/A 0.486 0.281
</TABLE>
As of March 14, 1997, the approximate number of record holders of the
existing Alliance shares was 2,730.
As of March 14, 1997, the approximate number of record holders of
LaTex Common Stock was ___.
On August 9, 1996, the last complete trading day prior to the announcement
of the Merger Agreement, the closing sales prices of LaTex Common Stock was
$0.41 per share and of the Existing Alliance Shares on the London Stock Exchange
was (Pounds)0.02 per share.
On March 14, 1997, the closing bid price of LaTex Common Stock on Nasdaq
was $_______ per share.
Based on their knowledge of the prices and volumes of trading of small
independent oil and gas companies on the London Stock Exchange, as reflected in
the analysis of Wood Roberts, Alliance and LaTex believe that the trading market
for small independent oil and gas companies is generally more favorable in
London than in the U.S., Alliance is applying for listing on the London Stock
Exchange of the New Alliance Shares to be issued in connection with the Merger.
See "The Merger-Opinion of LaTex's Financial Advisor." Of course, there is no
assurance that the trading market for New Alliance Shares on the London Stock
Exchange will be more favorable than the current market for LaTex Common Stock
in the U.S. Alliance does not intend to list the New Alliance Shares on any
United States stock exchange or the Nasdaq National Market System or SmallCap
Market, but anticipates that the New Alliance Shares may be traded from time to
time over the counter. Quotations for shares listed on the London Stock Exchange
are not generally readily available in newspapers or other publications in the
United States, but are available in the daily U.S. edition of the Financial
Times. However, investors may place orders for the purchase or sale of shares
traded on the London Stock Exchange through most licensed broker dealers in the
United States. Under current U.K. law, the transfer of New Alliance Shares will
generally give rise to a liability to U.K. stamp duty, normally at the rate of
50p for every (Pounds) 100 (or part thereof) of the actual consideration paid.
41
<PAGE>
Neither Alliance nor LaTex have paid any cash dividends on the Existing
Alliance Shares or LaTex Common Stock for at least the last two completed fiscal
years. In addition, LaTex is restricted from paying cash dividends under the
LaTex Credit Agreement and Alliance will be restricted from paying dividends
under the Alliance Credit Agreement.
EXCHANGE RATES
The table below sets forth, for the periods and dates indicated, certain
information regarding the US dollar/pound sterling exchange rate, based on the
Noon Buying Rate, expressed in US dollars per (Pounds)1.00. Such rates were not
used by Alliance in the preparation of its consolidated financial statements
included in this Proxy Statement.
<TABLE>
<CAPTION>
CALENDAR PERIOD AVERAGE
YEAR END RATE(1) HIGH LOW
- ---------- ------ ---------- ---- ----
<S> <C> <C> <C> <C>
1992 1.51 1.81 2.00 1.51
1993 1.48 1.50 1.59 1.42
1994 1.56 1.53 1.64 1.45
1995 1.56 1.58 1.66 1.52
1996 1.71 1.56 1.72 1.49
</TABLE>
______________________
(1) The average daily closing values on the London Stock Exchange for each year
in question as quoted by Datastream (1992-1993) and Bloomberg
(1994-1996).
SPECIAL MEETING OF SHAREHOLDERS
The Special Meeting is scheduled to be held at 10 a.m. (Local time) on
April 18, 1997, at the Doubletree Downtown Hotel, 616 W. 7th, Tulsa, Oklahoma
74217.
PURPOSE OF THE MEETING
The purpose of the Special Meeting is to consider and vote upon a proposal
to approve and adopt a proposed Agreement and Plan of Merger, dated as of August
12, 1996 as amended, among LaTex, Alliance and Alliance Resources (Delaware),
Inc., which is a newly formed, wholly owned subsidiary of Alliance, pursuant to
which, among other things, (i) Alliance Resources (Delaware), Inc. will be
merged with and into LaTex resulting in LaTex becoming a wholly owned subsidiary
of Alliance and (ii) outstanding shares of LaTex's Common Stock will be canceled
and LaTex shareholders will receive New Alliance Shares at the Conversion Rate.
QUORUM AND VOTING
The record date for the determination of shareholders entitled to notice of
and to vote at the Special Meeting was the close of business on March 14, 1997
(the "Record Date"). As of the Record Date, there were 19,805,495 shares of
LaTex's Common Stock issued and outstanding.
Each share of LaTex's Common Stock is entitled to one vote on all matters
to be acted upon at the Special Meeting. The presence, in person or by proxy,
of holders of a majority of the issued and outstanding shares of LaTex's Common
Stock entitled to vote at the meeting is necessary to constitute a quorum to
transact business. Abstentions are counted towards determining whether a quorum
is present. Shares represented by
42
<PAGE>
broker non-votes are not considered present at the meeting and are not counted
towards a quorum. Abstentions and broker non-votes are not counted in
determining the number of shares voted for or against any proposal.
The affirmative vote of a majority of the shares of LaTex's Common Stock is
required for the approval and adoption of the Merger Agreement. The directors
and executive officers of LaTex beneficially own and have the right to vote
approximately 28% of the outstanding shares of LaTex's Common Stock and have
indicated their intention to vote in favor of the approval and adoption of the
Merger Agreement at the Special Meeting.
WHEN PROXIES IN THE ACCOMPANYING FORM ARE PROPERLY EXECUTED AND RECEIVED,
THE SHARES REPRESENTED WILL BE VOTED AT THE SPECIAL MEETING IN ACCORDANCE WITH
THE DIRECTIONS NOTED. IF NO DIRECTION IS INDICATED, SHARES WILL BE VOTED IN
FAVOR OF THE MERGER, AND IN THE DISCRETION OF THE PROXIES WITH RESPECT TO ANY
OTHER MATTER THAT IS PROPERLY BROUGHT BEFORE THE MEETING.
Each shareholder of LaTex giving a proxy has the unconditional right to
revoke the proxy at any time prior to its exercise either in person at the
Special Meeting or by giving written notice to LaTex addressed to: 4200 East
Skelly Drive, Suite 1000, Tulsa, Oklahoma 74135, Attention: Stacey D. Smethers,
Secretary. No revocation by written notice will be effective until the notice
has been received by the Secretary of LaTex prior to the day of the Special
Meeting or by the inspector(s) of elections at the Special Meeting prior to the
closing of the polls.
In addition to the solicitation of proxies by use of the mail and through
this Proxy Statement, directors, officers and regular employees of LaTex may
solicit the return of proxies, either by mail, personal contact, telephone,
telecopy or telegraph. Officers and employees of LaTex will not be additionally
compensated for their solicitation efforts but will be reimbursed for any out-
of-pocket expenses incurred. Brokerage houses and other custodians, nominees
and fiduciaries will be requested, in connection with shares registered in their
names, to forward solicitation materials to the beneficial owners of the shares.
RECOMMENDATION
THE LATEX BOARD OF DIRECTORS BELIEVES THAT THE MERGER IS IN YOUR BEST
INTEREST AND HAS UNANIMOUSLY RECOMMENDED THAT YOU VOTE FOR THE PROPOSAL TO
APPROVE AND ADOPT THE MERGER AGREEMENT AND MERGER.
PRINCIPAL SHAREHOLDERS AND STOCK OWNERSHIP OF MANAGEMENT
The following table and the notes thereto set forth certain information
regarding the beneficial ownership of LaTex Common Stock as of the Record Date,
by (i) each current director of LaTex and Alliance; (ii) each officer of LaTex
who received at least $100,000 in salary and bonus in fiscal 1996; (iii) all
present executive officers and directors of LaTex as a group and of Alliance as
a group; and (iv) each other person known to LaTex or Alliance to own
beneficially more than five percent of the presently outstanding LaTex Common
Stock or Existing Alliance Shares; and the number of New Alliance Shares that
will be held immediately after the Merger by (i) each of the foregoing persons
and (ii) each other person known to Alliance who will own beneficially more than
five
43
<PAGE>
percent of the New Alliance Shares after the Merger, based on their ownership on
the Record Date and after giving effect to the 40-to-1 reverse split of the
Existing Alliance Shares.
<TABLE>
<CAPTION>
Before the Merger After the Merger
------------------------------------ ----------------
Amount and
Class of
Existing
Amount and Alliance
Class of LaTex Shares Percent New Alliance
Name and Address of Beneficial Shares Owned Percent Owned Owned Owned Shares Owned Percent Owned
Owner(1) Beneficially Beneficially (2) Beneficially Beneficially Beneficially Beneficially(10)
- ------------------------------ ----------- ----------- ------------ ----------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey T. Wilson (3) 4,135,000 20.9% 0 - 3,555,314 11.4%
A. Dean Fuller 1,058,000 5.3% 0 - 909,678 2.9%
Malcolm W. Henley (4) 510,000 2.6% 0 - 438,503 1.4%
John R. Martinson (5) 856,000 4.2% 0 - 821,978 2.6%
John W. Heinsius (4) 271,500 1.4% 0 - 233,438 *
Robert L. Hull (4) 325,000 1.6% 0 - 279,438 *
John L. Cox (4) 230,500 1.2% 0 - 198,186 *
Enron Reserve Acquisition Corp. (6) 3,496,913 15.0% 0 - 3,006,680 8.8%
Trans Arabian Energy Ltd. (7) 0 - 63,035,000 19.4% 1,575,875 5.0%
Bank of America NT & SA (8) 0 - 0 - 3,719,325 11.1%
D. Patrick Maley 0 - 500,000 * 12,500 *
William J. A. Kennedy 0 - 165,000 * 4,125 *
M. Philip Douglas 0 - 1,983,333 * 49,583 *
Christopher R. L. Samuelson 0 - 0 - 0 -
Stanley J. Robinson 0 - 0 - 0 -
John A. Keenan 0 - 6,000,000 (9) 1.8% 150,000 (9) *
Paul R. Fenemore 0 - 1,000,000 (9) * 25,000 (9) *
H. Brian K. Williams 0 - 2,500,000 (9) * 62,500 (9) *
All Executive Officers and 6,328,000 30.8% 0 - 5,440,877 17.0%
Directors of LaTex as a group
(7 persons)
All Executive Officers, 4,991,000 (11) 24.7% 9,898,333 3.0% 4,681,000 14.6%
Directors and Proposed
Directors of Alliance as a
group (10 persons)
</TABLE>
___________________________
* Less than one percent.
(1) All of LaTex's directors and officers may be contacted at LaTex's offices,
4200 East Skelly Drive, Suite 1000, Tulsa, Oklahoma 74135. All of the
Alliance's directors and proposed directors may be contacted at Alliance's
offices, Kingsbury House, 15-17 King Street, London SW1Y 6QU.
(2) Based on 19,805,495 issued and outstanding shares of LaTex Common Stock at
the Record Date. Shares of LaTex Common Stock that an individual has the
right to acquire within 60 days pursuant to the exercise of options,
warrants, or other convertible securities are deemed to be outstanding for
the purpose of computing the percentage ownership of such individual, but
are not deemed to be outstanding for the purpose of computing the
percentage ownership of any other person or group shown in the table.
44
<PAGE>
(3) Includes 300,000 shares of Restricted Stock (See "Item 11. Executive
Compensation--Restricted Stock Grants." in the LaTex Form 10-K) and
excludes 300,000 shares held by the Old National Bank in Evansville,
Indiana, Trustee of the Jeffrey T. Wilson and Annalee Wilson Irrevocable
Family Trust for the benefit of the Wilson children.
(4) Includes: (a) with respect to Mr. Henley, 300,000 shares of Restricted
Stock; (b) with respect to Mr. Heinsius, 250,000 shares of Restricted
Stock; (c) with respect to Mr. Hull, 325,000 shares of Restricted Stock;
and (d) with respect to Mr. Cox 225,000 shares of Restricted Stock. See
LaTex Form 10-K, Item 12. Security Ownership of Certain Beneficial Owners
and Management.
(5) Includes presently exercisable warrants to purchase 436,000 shares held by
Wood Roberts, Inc., a corporation under the control of Mr. Martinson,
presently exercisable warrants to purchase 320,000 shares held by Wood
Roberts, LLC., a Texas limited liability company 50% owned by Mr. Martinson
and, upon completion of the Merger, 85,981 New Alliance Shares issued to
Wood Roberts LLC. in payment of a fee payable by LaTex in connection with
the restructuring of the LaTex Credit Agreement.
(6) Represents LaTex Common Shares that may be acquired upon conversion of
LaTex Series B Stock. The address of Enron Reserve Acquisition Corp. is
1400 Smith Street, Houston, Texas 77002.
(7) The address of Trans Arabian Energy Ltd. is 50 Town Range, Gibraltar. It
is wholly owned by Sheikh Ahmed Mannai of Qatar.
(8) Consists of 2,530,675 New Alliance Shares and immediately exercisable
warrants to purchase 1,188,650 New Alliance Shares to be issed to an
affiliate of the Bank concurrently with and contingent upon completion of
the Merger. The address of the Bank is 231 S. LaSalle Street, Chicago,
Illinois 60697.
(9) Consists of options to purchase the specified number of shares at a price
of 2p. per share. The options which were granted on 16 December 1996 and
can be exercised not earlier than three years from the date of grant and
not later than 10 years from that date. The number of options and the
exercise price will be adjusted to reflect the 40-for-1 reverse stock
split.
(10) Based on issued New Alliance Shares upon completion of the Merger, and
based on the exercise of all warrants by the applicable holder.
(11) Consists of LaTex Shares and warrants to purchase LaTex Shares currently
owned by Jeffrey T. Wilson and John R. Martinson, who are proposed to
become directors of Alliance upon completion of the Merger.
In addition to the foregoing, Alliance's settlement with Mr. O'Brien, see
"Alliance - Recent Developments," requires the disposal of 10,351,966 Existing
Alliance Shares held in the name of Progas Holdings Limited and the payment of
the proceeds from sale of those shares to Alliance. These shares are currently
in the custody of an independent third party, pending their sale. Mr. Keenan
has a proxy over the voting rights of 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.
LATEX
LaTex is an independent oil and gas exploration and production company
located in Tulsa, Oklahoma, primarily engaged in the acquisition of producing
oil and gas properties. LaTex owns and operates producing oil and gas
properties located in 13 states with crude reserves located primarily in the
states of Mississippi, Louisiana, Oklahoma, Texas and Alabama. The executive
offices of LaTex are at 4200 East Skelly Drive, Suite 1000, Tulsa, Oklahoma
74135.
ADDITIONAL INFORMATION CONCERNING LATEX, INCLUDING ITS BUSINESS,
PROPERTIES, FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS, IS INCLUDED IN ITS ANNUAL
REPORT ON FORM 10-K FOR THE YEAR ENDED JULY 31, 1996 AND ITS QUARTERLY REPORT ON
FORM 10-Q FOR THE QUARTER ENDED OCTOBER 31, 1996 WHICH ARE INCLUDED WITH THIS
PROXY STATEMENT AS APPENDIX S.
45
<PAGE>
ALLIANCE
GENERAL
Alliance is a London-based holding company of a group whose principal
activities are the exploration, development and production of oil and gas in the
United States. In May 1996, John A. Keenan was appointed as chief executive of
Alliance. In connection with the change in management, Alliance has adopted a
new business strategy. As formulated by its current management, Alliance's
near-term strategy is to focus its operations on the development, enhancement
and operation of producing properties in the United States, which would generate
the cash flow necessary to provide initial funding for international oil
development and enhancement projects, particularly in the former Soviet Union
and the Middle East.
Alliance believes that opportunities to increase production in older or
undeveloped fields employing new technology and capital have become available
internationally as a result of the eroding geographic, political and economic
barriers to private investment, particularly in the former Soviet Union and the
Middle East. However, realization of this strategy requires that Alliance has a
sufficient quantity of assets and of cash flow to fund the process of
identifying and securing additional properties for exploitation. Therefore, in
1996, Alliance concentrated on pursuing acquisition opportunities that would
provide a base of properties with relatively stable cash flow.
The Board of Directors of Alliance believes that the Merger will provide
necessary critical mass to Alliance, which will enhance prospects for its
further growth and the realization of its stated objective of building an
international portfolio of development prospects. At this time, other than
Alliance's interest in the Delvina field in Albania, discussed below, neither
Alliance nor LaTex holds any rights to international projects. However,
Alliance's management intends to pursue additional United States acquisitions
with the ultimate intention of utilizing the cash flow generated by those
properties to fund international development, exploitation and enhancement
projects.
Alliance was incorporated and registered under the laws of England and
Wales on August 20, 1990. Alliance's principal executive offices are at
Kingsbury House, 15-17 King Street, London SW1Y 6QU, England. After completion
of the Merger, Alliance will maintain corporate headquarters in London but
intends that its U.S. operations office will be located in LaTex's current
offices at 4200 East Skelly Drive, Suite 1000, Tulsa, Oklahoma 74135.
RECENT DEVELOPMENTS
Until September 1995, Mr. John O'Brien served as Alliance's chief executive
and as a director. In August 1995, the Board of Directors of Alliance questioned
Mr. O'Brien's past representations to the Board concerning Alliance's interest
in the Valentine Field in Louisiana. Thereafter, an internal investigation was
carried out that raised further issues regarding Mr. O'Brien's conduct.
Therefore, on September 6, 1995, the Alliance Board of Directors removed Mr.
O'Brien as a director and the chief executive and requested the suspension of
trading in Alliance's shares on the London Stock Exchange. After an extensive
investigation by the Board of Directors, which included work by specially
engaged forensic accountants, independent petroleum reservoir engineers and
legal counsel, Alliance determined to file litigation against Mr. O'Brien and to
report the matters to the Serious Fraud Office of the United Kingdom, which
continues to conduct its investigation. On August 13, 1996, Alliance announced
that it had agreed to stay its litigation against Mr. O'Brien. The terms of the
settlement are confidential.
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<PAGE>
D. Patrick Maley, a director of Alliance since November 29, 1995, served as
Chairman of the Company on an interim basis until May 1996. At that time, John
A. Keenan, who had been a non-executive director of Alliance since April 1996,
was appointed as chief executive of Alliance. In addition, Alliance's Board of
Directors appointed Paul Fenemore as Director of Operations and Business
Development of Alliance in May 1996 and Brian Williams as Financial Director of
Alliance in June 1996. Accordingly, although the events surrounding Mr.
O'Brien's activities created significant turmoil within Alliance, Alliance has
now appointed new management and has adopted a new business strategy for
Alliance.
After its fiscal year ended April 30, 1996, Alliance disposed of certain of
its properties and other assets. Specifically, on May 30, 1996, Alliance sold
its interest in four leases offshore Matagorda Island, Texas for net cash
consideration of $432,000. Alliance's interest in these blocks varied between
4.2% and 6.3%. On August 15, 1996, Alliance disposed of its interest in four
leases in Lovaca County, Texas for net cash consideration of $435,000.
Alliance's working interest in these blocks varied between 17.7% and 42.4%.
Also in August 1996, Alliance disposed of its interest in Geological Forecast
Technology Ltd. to Geos Seismology Limited by transferring its 50 A Shares as
part of a final settlement of actions brought by the latter.
In October 1996, Alliance sold its interest in three oil and gas fields
located in Texas and Oklahoma for net cash consideration of $1,425,000. The
fields had combined remaining reserves of approximately 25,920 barrels of oil
and 1,720 million cubic feet of gas as of May 1, 1996, representing
approximately 16% of Alliance's total proved and probable reserves. The
interest comprised 21 wells and Alliance's working interest in those wells
varied between 3% and 28%.
ACQUISITION OF OVERRIDING ROYALTY INTEREST FROM BANK
Effective March ___, 1997, Alliance has agreed in principal with the Bank
of America NT & SA (the "Bank") to acquire from the Bank an overriding royalty
interest (the "ORRI") held by the Bank in certain oil and gas properties in
which LaTex has an ownership interest. The Bank previously acquired the ORRI
from LaTex in connection with the Bank's extension of credit to LaTex. In
consideration for the ORRI, Alliance will issue to the Bank 2,377,301 New
Alliance Shares and warrants to purchase 1,188,650 New Alliance Shares at an
exercise price of (Pounds) 1.00 per share. For purposes of determining whether
to acquire the ORRI, Alliance estimated the future net revenues of the ORRI as
of November 1, 1996 by using escalated prices and costs discounted at 10% per
annum. For this purpose, Alliance used an oil price of $20.00 per barrel for
1996 and 1997, $19.00 for 1998 and thereafter escalating at an annual rate of
three percent to a maximum of $40.00 and then held constant for the life of each
lease. Gas prices used were $1.90 per mmbtu for 1996 and 1997 escalating
thereafter at an annual rate of three percent to $3.50 per mmbtu and then held
constant for the life of the lease. Operating expenses were based on actual
operating costs for 1996 and 1997 and then escalated at an annual rate of three
percent. On this basis Alliance estimated that the future net revenues,
discounted at 10% per annum, from the proved reserves attributable to the ORRI
at approximately $4.7 million and that additional probable and possible reserves
attributable to the ORRI. This estimate was not made on the basis required to be
used by the Commission for purposes of filings with the Commission and is not
intended to be a prediction of the actual cash flow from the ORRI, but was used
by Alliance solely to determine the appropriate consideration to be paid for the
ORRI. Alliance estimated the value of the ORRI at $3.8 million. Acquisition of
the ORRI will increase Alliance's cash flow, without significantly increasing
Alliance's capital or personnel needs, because the ORRI only burdens properties
in which LaTex already has an interest. Acquisition of the ORRI is conditioned
on the completion of the Merger, but the Merger will be completed regardless
whether the ORRI acquisition is completed.
OIL AND GAS INTERESTS
Alliance recently completed the disposal of all of its remaining non-
operated oil and gas properties located in Texas and Oklahoma, as described
above, and currently owns and/or operates oil and gas properties with proved
reserves located in the State of Louisiana. The net proceeds generated from the
property disposals subsequent to the April 30, 1996 fiscal year end represented
approximately 25% of Alliance's estimated future net revenue discounted at 10%
per annum as at April 30, 1996.
Alliance operates 36 producing wells and also owns non-operated interests
in 4 producing wells in Louisiana. Gross daily production for the oil and gas
properties in which Alliance has an interest is approximately 808 bopd and 916
mcfgpd as of December 15, 1996, and Alliance's net share is 413 bopd and 147
mcfgpd. Net proved reserves to Alliance as of April 30, 1996 were 1,026 mbbls
of oil equivalent.
The following is a summary of Alliance's principal areas of oil and gas
production activity:
South Elton Field. The South Elton Field is located twelve miles north of
the town of Jennings in Jefferson Davis Parish, Louisiana. Alliance currently
has a leasehold of 642 acres and operates six producing wells, two saltwater
disposal wells and three shut-in wells. The field was discovered by Stanolind
in the early 1930's. Production has been established in four Homeseeker (Middle
Frio) Sands, five Ortego (Upper Frio) Sands and two Marginulina (Lower Anahuac)
Sands. The productive reservoirs occur at depths at between 7,180 to 9,300
feet. The reservoir traps are faulted anticlines caused by south dipping growth
faults.
Gross daily production from the field is approximately 372 bopd and 329
mcfgpd, and Alliance's net share of production is 210 bopd and 100 mcfgpd as of
December 15, 1996. Net proved reserves to Alliance as of April 30, 1996 are 334
mmboe (using a 6:1 conversion factor for gas to oil).
Valentine Field. The Valentine Field is located south of New Orleans in
Lafourche Parish, Louisiana. Alliance currently has a leasehold of 65 acres and
operates two producing wells and three shut-in wells. In
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<PAGE>
addition, Alliance has a non-operated interest in the Arrowhead #1 Valentine
Sugars well. The field was discovered in 1935 when Pan American drilled the
Marang # 1 well. Production has been established in Middle Miocene Sands at
depths of between 6,450-10,800 feet. Alliance's oil and gas interests are
situated on the west flank of a salt dome.
Gross daily production from Alliance's oil and gas interests in the field
is approximately 145 bopd and 587 mcfgpd, and Alliance's net share of production
is 97 bopd and 47 mcfgpd as of December 15, 1996. Net proven reserves to
Alliance as of April 30, 1996 are 113 mmboe.
Jennings Field. The Jennings Field is located seven miles north of the
town of Jennings in Acadia Parish, Louisiana. Alliance has a leasehold of 275
acres and operates twenty-five producing wells, three saltwater disposal wells
and nineteen shut-in wells. The field was discovered by the Maywood Brothers in
1901. Production has been established in multiple Miocene age sandstone
reservoirs draped over a salt dome.
Gross daily production from the field is approximately 110 bopd and
Alliance's net share is 78 bopd as of December 15, 1996. Recent work activity
in November/December 1996 has increased gross production from 65 bopd to the
current level of 110 bopd. Net proved reserves to Alliance as of April 30, 1996
are 63 mmboe.
South Crowley Field. South Crowley Field is located at the town of Crowley
in Acadia Parish, Louisiana. Alliance has a leasehold of 40 acres and operates
one producing oil well. The field was discovered in the 1930's by Gulf and has
been developed by many operators. Production has been established in multiple
sands ranging in age from Upper Miocene to Middle Frio. The Guillot #1 well was
drilled in August 1992 and completed as a flowing well from perforations at a
depth of 6,743-44 feet.
Gross daily production from the Guillot #1 well is approximately 32 bopd as
of December 15, 1996. Net proved reserves to Alliance as of April 30, 1996 are
30 mmboe.
North Tepetate Field. The North Tepetate Field is located 24 miles
northeast of the town of Jennings in Acadia Parish, Louisiana. Alliance
presently holds 80 acres under lease and operates one producing well and one
saltwater disposal well. The field was discovered in the 1940's by Vincent and
Welch and production has been established in Oligocene age sands. The reservoir
trap is an anticlinal closure between two south dipping growth faults. The
Sweeney #3 well was drilled in July 1983 and is currently completed in the
Marginulina sands at a depth of approximately 7,000 feet.
Gross daily production from the Sweeney #3 well is approximately 29 bopd
and Alliance's net share of production is 11 bopd as of December 15, 1996. Net
proved reserves to Alliance as of April 30, 1996 are 19 mmboe.
Jefferson Island Field. The Jefferson Island field is located near the
town of Delcambre, approximately 12 miles southwest of the city of New Iberia in
Iberia Parish, Louisiana. Alliance is operator for a 525 acre leasehold which
is currently being maintained by production from the Will Drill Resources
(Texaco) #4 JISMC well. The Alliance lease has seven shut-in wells located on
it. The field was discovered by Texaco in May 1938. Since then production has
been established by various operators in Siphoni Divisi and Discorbis B age
sandstone reservoirs. The reservoir traps are combination structural-
stratigraphic traps in a salt dome piercement setting. Alliance currently has
not established production on the lease and net proved (behind pipe) reserves to
Alliance as of April 30, 1994 are 15 mbbls of oil. A number of potential
drilling locations have been identified on the lease for future exploration
activity.
48
<PAGE>
FINANCING
On March___, 1997, Alliance entered into a Credit Agreement (the
"Alliance Credit Agreement" with Bank of America NT & SA (the "Bank"), amending
and restating LaTex's Amended and Restated Credit Agreement dated as of October
20, 1995 between LaTex Petroleum Corporation, LaTex/GOC Acquisition, Inc. and
Germany Oil Company (the "Existing Borrowers"), as borrowers, and the Bank, as
the lender (the "LaTex Credit Agreement"), in order to restructure LaTex's
existing indebtedness to the Bank. The Alliance Credit Agreement will become
effective on the date of the Merger.
Under the Alliance Credit Agreement principal payments will be suspended
until July 31, 1998 following completion of the Merger. However, cash flows
generated by Alliance and its subsidiaries in excess of amounts shown in the
business plan that formed the basis of negotiation with the Bank will be used to
reduce outstanding principal indebtedness. The maturity date of the existing
line of credit remains at March 31, 2000.
Substantially all of the existing security for the outstanding indebtedness
under the LaTex Credit Agreement, being the mortgages of all of LaTex's
producing oil and gas properties and pledges of stock of the Existing Borrowers
and ENPRO, remains in place. As additional security, the Bank is receiving
mortgages on substantially all of Alliance's producing oil and gas properties
and pledges of the stock of Alliance's subsidiaries.
Under the Alliance Credit Agreement, the borrowing base will be equal to
the outstanding indebtedness under the LaTex Credit Agreement as of the date of
the Merger. The borrowing base is to be redetermined semiannually as of
December 31 and June 30 of each year.
Borrowings under the Alliance 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 Alliance Credit Agreement) plus 1 1/4%. Borrowings under the
Alliance 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 Alliance Credit Agreement), at a fluctuating rate equal to the
LIBO Rate (Reserve Adjusted) (as defined in the Alliance Credit Agreement) plus
2%.
As a condition to the Bank making the loans under the LaTex Credit
Agreement, LaTex's subsidiary, LaTex Petroleum, entered into hedging agreements
with the Bank designed to enable LaTex to (a) obtain agreed upon net realized
prices for LaTex's oil and gas production (the "Oil and Gas Hedging Agreements")
and (b) protect LaTex against fluctuations in interest rates with respect to the
principal amounts of all loans under the LaTex Credit Agreement. Under the
Alliance Credit Agreement, the Bank has agreed to make available, at its sole
discretion, to Alliance the amount of $2,500,000 to reduce or terminate the
Oil and Gas Hedging Agreements.
INTERNATIONAL
In Albania, Alliance held the negotiating rights to the Delvina gas and
condensate field and rights, negotiated by the previous management, for
production enhancement at the Kucova/Arrza oil fields. Following a review of the
prospects by its technical staff, it was determined to focus on the Delvina
Field, as the Kucova/Arrza wells were not sufficiently productive to obtain
economic returns. Accordingly, Alliance
49
<PAGE>
has notified Albpetrol, the Albanian national oil company, that it has
relinquished its exclusive negotiating right to the Kucova/Arrza Fields.
Alliance continued its studies and negotiations with Albpetrol in respect
of participation in the Delvina gas condensate field in Albania. The studies
confirmed that at least one new gas pipeline with a minimum length of in excess
of 80 kilometers, connecting Delvina with the main Albanian gas market, would
have to be laid due to the poor condition of the existing pipeline, which is
currently unserviceable. The large up-front capital expenditure on the new
pipeline, in conjunction with the high costs and risk associated with fracture
stimulation of the tight Delvina limestone unit, render the economics of the
project marginal. Alliance's exclusive rights to negotiate terms of
participation in the Delvina field lapsed in February 1997 and Alliance has
determined that it will not pursue an extension of these rights.
Alliance continues to appraise international opportunities with particular
emphasis on the former Soviet Union. A number of oil and gas opportunities in
Russia and Kazakhstan were identified during the period although Alliance is
awaiting completion of the proposed Merger before finalizing its international
strategy.
OPERATIONS
For the year ended April 30, 1996, Alliance carried out the following
activities on its oil and gas properties. In July 1995 Alliance successfully
drilled and completed the Tupper #7 well in South Elton Field, Jefferson Davis
Parish, Louisiana. The well produced upwards of 170 barrels of oil per day
(bopd) and 160 thousand cubic feet of gas per day and was a significant
contributor to revenue during the year. In April 1996 Alliance completed the
workover of the Valentine Sugars #3 well which added 155 bopd to production from
the well which had been shut-in since December 1993.
The Gueno #1 well was drilled in July 1995 in the Branch Field in Acadia
Parish, Louisiana and has been temporarily abandoned. The well encountered two
of the four objective productive sands, but at downdip locations. The leasehold
has been maintained for redrill at an upstructure location. In September 1995
the Jefferson Island Salt Mining Company #1 well was drilled in Iberia Parish.
The well was abandoned following the drill pipe being stuck and the hole junked.
Alliance has received a number of farmout proposals on this lease and is
actively considering its strategy having recently completed extensive geological
re-mapping and re-appraisal of the lease. In May 1996 Alliance farmed out its
interest in Valentine Sugars #2 well to American Explorer. The well was
unsuccessful and was plugged and abandoned.
Alliance completed its review of non-core assets after the fiscal year end,
notably the nonoperated properties owned by the wholly-owned subsidiary ARNO
Inc. Subsequent to the year end, these properties have been disposed of for a
cash consideration in excess of US$2.250 million. Following a review of the US
operations, Alliance also made some significant cuts to its overhead
commensurate with the size of the operations.
RESERVES
Ryder Scott Company ("Ryder Scott"), independent petroleum engineering
consultants, has prepared a reserve report with respect to properties having
approximately 71% of the total value of Alliance's proved reserves at April 30,
1996. Alliance's internal engineers have estimated the Proved Reserves
attributable to Alliance's remaining properties, as well as the estimated future
net cash flows therefrom, at the same date. The information presented below and
elsewhere in this Proxy Statement with respect to Alliance's properties is based
on the Ryder Scott reserve report and the estimates of
50
<PAGE>
Alliance's internal engineers. Alliance believes that the description contained
in this Proxy Statement of the report and these estimates is fair and
accurate.
The quantities of Alliance's proved reserves of oil and natural gas
presented below include only those amounts that Alliance reasonably expects to
recover in the future from known oil and gas reservoirs under existing economic
and operating conditions. Proved developed reserves are limited to those
quantities that are recoverable commercially at current prices and costs, under
existing regulatory practices and with existing technology. Accordingly, any
changes in prices, operating and development costs, regulations, technology or
other factors could significantly increase or decrease estimates of Alliance's
proved developed reserves. Alliance's proved undeveloped reserves include only
those quantities that Alliance reasonably expects to recover from the drilling
of new wells based on geological evidence from offsetting wells. The risks of
recovering these reserves are higher from both geological and mechanical
perspectives than the risk of recovering proved developed reserves.
Set forth below are estimates as of April 30, 1996 of Alliance's net proved
reserves and proved developed reserves and the estimated future net revenues
from such reserves and the present value thereof based upon the standardized
measure of discounted future net cash flows relating to proved oil and gas
reserves in accordance with the provisions of Statement of Financial Accounting
Standards No. 69. "Disclosures about Oil and Gas Producing Activities."
Estimated future net cash flows from proved reserves are determined by using
estimated quantities of proved reserves and the periods in which they are
expected to be developed and produced based on economic conditions at the date
of the report. The estimated future production is priced at current prices at
the date of the report. The resulting estimated future cash inflows are then
reduced by estimated future costs to develop and produce reserves based on cost
levels at the date of the report. No deduction has been made for depletion,
depreciation or income taxes or for indirect costs, such as general corporate
overhead. Present values were computed by discounting future net revenues at
10% per annum. Additional information concerning Alliance's reserves is
included in "Supplemental Oil and Gas Data" in the Notes to Alliance's Financial
Statements beginning on page F-36.
The following table sets forth estimates of the proved oil and natural gas
reserves of Alliance at April 30, 1996.
<TABLE>
<CAPTION>
OIL (MBBLS) GAS (MMCF)
----------------------------- ----------------------------------
DEVELOPED UNDEVELOPED TOTAL DEVELOPED UNDEVELOPED TOTAL
--------- ----------- ----- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Louisiana 561 - 561 170 - 170
Other 67 - 67 2,214 - 2,214
--- ----------- --- ----- ----------- -----
Total 628 - 628 2,384 - 2,384
=== =========== === ===== =========== =====
</TABLE>
The following table sets forth amounts as of April 30, 1996 determined in
accordance with the requirements of applicable accounting standards, to the
estimated future net cash flows from production and sale of the proved reserves
attributable to Alliance's oil and gas properties before income taxes and the
present value thereof. Benchmark prices used in determining the future net cash
flow estimates at April 30, 1996 were $22.34 per barrel for oil and $2.68 per
MMBtu for gas.
51
<PAGE>
<TABLE>
<CAPTION>
AT APRIL 30, 1996
--------------------------------
(IN THOUSANDS)
PROVED PROVED TOTAL
DEVELOPED UNDEVELOPED PROVED
RESERVES RESERVES RESERVES
--------- ----------- --------
<S> <C> <C> <C>
Estimated future net cash flows from
proved reserves before income 11,780 - 11,780
taxes
Present value of estimated future net
cash
flows from proved reserves before 8,897 - 8,897
income taxes (discounted at 10%)
</TABLE>
Subsequent to April 30, 1996, Alliance has sold substantial properties. See
"Alliance - Recent Developments." The disposals represented approximately 25%
of Alliance's estimated future net revenue discounted at 10% per annum as at
April 30, 1996.
The estimation of oil and gas reserves is a complex and subjective process
which is subject to continued revisions as additional information becomes
available. Reserve estimates prepared by different engineers from the same data
can vary widely. Therefore, the reserve data presented herein should not be
construed as being exact. Any reserve estimate depends in part on the quality
of available data, engineering and geologic interpretation, and thus represents
only an informed professional judgment. Subsequent reservoir performance may
justify upward or downward revision of such estimate.
Estimates of Alliance's proved reserves have not been filed or included in
reports to any United States' authority or agency. Alliance has filed estimates
of proved reserves with the London Stock Exchange. These estimates do not
differ materially from those contained in this Proxy Statement.
For further information on reserves, costs relating to oil and gas
activities, and results of operations from producing activities, see page F-36
to Alliance's Consolidated Financial Statements - Supplemental Oil and Gas Data
incorporated by reference herein.
Productive Wells and Acreage
The following table sets forth Alliance's producing wells at April 30,
1996.
<TABLE>
<CAPTION>
PRODUCTIVE WELLS
- --------------------------------------------
OIL GAS TOTAL
- -------------- ------------- -------------
GROSS NET GROSS NET GROSS NET
- ------- ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
64.00 59.08 52.00 14.52 116.00 73.60
</TABLE>
Productive wells consist of producing wells and wells capable of
production, including gas wells awaiting pipeline connections to commence
deliveries and oil wells awaiting connection to production
52
<PAGE>
facilities. Wells which are completed in more than one producing horizon are
counted as one well. Of the gross wells reported above, none had multiple
completions.
The following table sets forth the developed and undeveloped leasehold
acreage held by Alliance at April 30, 1996. Developed acres are acres which are
spaced or assignable to productive wells. Undeveloped acres are acres on which
wells have not been drilled or completed to a point that would permit he
production of commercial quantities of oil and gas, regardless of whether or not
such acreage contains proved reserves. Gross acres are the total number of
acres in which Alliance has a working interest. Net acres are the sum of
Alliance's fractional interests owned in the gross acres.
Developed and Undeveloped Acreage
<TABLE>
<CAPTION>
Gross Net
------ ------
<S> <C> <C>
Developed acreage 17,357 3,271
Undeveloped acreage 7,521 7,517
------ ------
Total 24,696 10,768
====== ======
</TABLE>
States in which Alliance held developed and undeveloped acreage at April 30,
1996, include Texas, Louisiana, and Oklahoma.
Production, Unit Prices and Costs
The following table sets forth information with respect to production and
average unit prices and costs for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30
-------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Production:
Gas (Mmcf) 153 238 602
Oil (Mbbls) 27 47 125
Average Sales Prices:
Gas (per Mcf) 2.59 1.65 1.73
Oil (per Bbl) 16.33 16.53 18.30
Average Production costs per BOE 12.12 9.77 9.24
(1)
</TABLE>
___________________
(1) The components of production costs may vary substantially among wells
depending on the methods of recovery employed and other factors, but
generally include production taxes, lease overhead, maintenance and repair,
labor and utilities.
53
<PAGE>
DRILLING ACTIVITY
During the periods indicated, Alliance drilled or participated in the
drilling of the following exploratory and development wells:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30
-----------------------------
1994 1995 1996
------------ ------------- -----------
GROSS NET GROSS NET GROSS NET
----- ---- ----- ---- ----- ---
<S> <C> <C> <C> <C> <C> <C>
Exploratory
Productive 2 1.88 1 .70 0 0
Non-Productive 1 .72 0 0 2 .6
Total 3 2.60 1 .70 2 .6
Development
Productive 1 .11 0 0 2 1
Non-Productive 0 0 0 0 0 0
Total 1 .11 0 0 2 1
</TABLE>
At April 30, 1996, Alliance was not participating in the drilling or
completion of any oil and gas wells.
PRODUCT MARKETING
Alliance's production is primarily from developed fields close to major
pipelines or refineries and established infrastructure. As a result, Alliance
has not experienced any difficulty in finding a market for all of its product as
it becomes available or in transporting its product to these markets.
Oil Marketing. Alliance markets its oil to a variety of purchasers, most
of which are large, established companies. The oil is generally sold under
short-term contracts with the sales price based on an applicable posted price,
plus a negotiated premium. This price is determined on a well-by-well basis and
the purchaser generally takes delivery at the wellhead.
Natural Gas Marketing. Virtually all of Alliance's natural gas production
is close to existing pipelines and consequently, Alliance generally has a
variety of options to market its natural gas. Alliance sells the majority of
its natural gas on the spot market with prices fluctuating month-to-month based
on published pipeline indices with slight premiums or discounts to the
index.
SIGNIFICANT OIL AND NATURAL GAS PURCHASERS
Oil and natural gas sales from operated properties are made under short-
term contracts at the current area market price as adjusted for the relevant
premium or discount. The loss of any purchaser would not be expected to have a
material adverse effect upon operations. For the period ended April 30, 1996,
Alliance sold 10% or more of its net production of oil to Texaco Trading and
Transportation, Inc. Alliance's gas production was largely from non-operated
properties for which revenues are received directly from the operator rather
than a third party.
54
<PAGE>
TITLE TO PROPERTIES
As is customary in the oil and natural gas industry, Alliance conducts only
a perfunctory title examination at the time properties believed to be suitable
for drilling operations are first acquired. Prior to commencement of drilling
operations, a thorough drill site title examination is normally conducted and
curative work is performed with respect to significant defects. During
acquisitions, title reviews are performed on all properties; however, formal
title opinions are obtained on only the higher value properties.
EMPLOYEES
At January 31, 1997, Alliance had eight management and administrative
employees and seven technical and operating employees.
COMPETITION
The oil and natural gas industry is highly competitive in all its phases.
Alliance encounters strong competition from many other energy companies in
acquiring economically desirable producing properties and drilling prospects and
in obtaining equipment and labor to operate and maintain its properties. In
addition, many energy companies possess greater resources than Alliance.
LITIGATION
Alliance is party to the following litigation:
Alliance 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. Alliance has obtained legal advice and will vigorously
prosecute its claim against Drexco, Inc. Alliance denies the counter claim and
will vigorously defend the matter.
Alliance has received, on 12 September, 1996, a writ from Best Royalties
Plc claiming $186,368 and a declaration that they are entitled to a sum equal to
40 per cent of Alliance USA, Inc.'s net cash proceeds received from the
Arrowhead well (and payment of the said sum), alternatively damages, plus
interest thereon. Alliance denies the claim and will vigorously defend this
matter.
Ernest M. Closuit et al have asserted a claim against Alliance 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. Alliance denies all
allegations and claims and will vigorously defend this matter.
REGULATION
The availability of a ready market for oil and gas production depends upon
numerous factors beyond Alliance's control. These factors include regulation of
natural gas and oil production, federal and state regulations governing
environmental quality and pollution control, state limits on allowable rates of
production by well or proration unit, the amount of natural gas
55
<PAGE>
and oil available for sale, the availability of adequate pipeline and other
transportation and processing facilities and the marketing of competitive fuels.
State and federal regulations generally are intended to prevent waste of natural
gas and oil, protect rights to produce natural gas and oil between owners in a
common reservoir, control the amount of natural gas and oil produced by
assigning allowable rates of production and control contamination of the
environment. Pipelines are subject to the jurisdiction of various federal, state
and local agencies. The following discussion summarizes the regulation of the
United States oil and gas industry and is not intended to constitute a complete
discussion of the various statutes, rules, regulations and governmental orders
to which Alliance's operations may be subject.
Regulation of Natural Gas and Oil Exploration and Production. Alliance's
operations are subject to various types of regulation at the federal, state and
local levels. Such regulation includes requiring permits for the drilling wells,
maintaining bonding requirements in order to drill or operate wells and
regulating the location of wells, the method of drilling and casing wells, the
surface use and restoration of properties upon which wells are drilled in, the
plugging and abandoning of wells and the disposal of fluids used in connection
with operations. Alliance's operations are also subject to various conservation
laws and regulations. These include the regulation of the size of drilling and
spacing units or proration units and the density of wells which may be drilled
in and the unitization or pooling of oil and gas properties. In addition, state
conservation laws establish maximum rates of production from oil and gas wells,
generally prohibit the venting or flaring of gas and impose certain requirements
regarding the ratability of production. The effect of these regulations may
limit the amount of oil and gas Alliance can produce from its wells and may
limit the number of wells or the locations at which Alliance can drill. The
regulatory burden on the oil and gas industry increases Alliance's costs of
doing business and, consequently, affects profitability. Inasmuch as such laws
and regulations are frequently expanded, amended and reinterpreted, Alliance is
unable to predict the future cost or impact of complying with such regulations.
Federal Regulation of Sales and Transportation of Natural Gas. Federal
legislation and regulatory controls in the U.S. have historically affected the
price of the natural gas produced by Alliance and the manner in which such
production is marketed. The Federal Energy Regulatory Commission (the "FERC")
regulates the interstate transportation and sale for resale of natural gas by
interstate and intrastate pipelines. The FERC previously regulated the maximum
selling prices of certain categories of gas sold in "first sales" in interstate
and intrastate commerce under the Natural Gas Policy Act. Effective January 1,
1993, however, the Natural Gas Wellhead Decontrol Act (the "Decontrol Act")
deregulated natural gas prices for all "first sales" of natural gas, which
includes all sales by Alliance of its own production. As a result, all sales of
Alliance's domestically produced natural gas may be sold at market prices,
unless otherwise committed by contract. The FERC's jurisdiction over natural
gas transportation and gas sales other than first sales was unaffected by the
Decontrol Act.
Alliance's natural gas sales are affected by the regulation of intrastate
and interstate gas transportation. In an attempt to restructure the interstate
pipeline industry with the goal of providing enhanced access to, and competition
among, alternative natural gas supplies, the FERC, commencing in April 1992,
issued Order Nos. 636, 636-A and 636-B ("Order No. 636") which have altered
significantly the interstate transportation and sale of natural gas. Among
other things, Order No. 636 required interstate pipelines to unbundle the
various services that they had provided in the past, such as sales, transmission
and storage, and to offer these services individually to their customers. By
requiring interstate pipelines to "unbundle" their services and to provide their
customers with direct access to pipeline capacity held by them, Order No. 636
has enabled pipeline customers to choose the levels of transportation and
storage service they require, as well as to purchase natural gas directly from
third-party merchants other than the pipelines and obtain transportation of such
gas on a non-discriminatory basis. The effect of Order No. 636 has been to
enable Alliance to market its natural gas production to a wider variety of
potential purchasers. Alliance believes that these changes generally have
improved Alliance's access to transportation and have enhanced the marketability
of its natural gas production.
56
<PAGE>
To date, Order No. 636 has not had any material adverse effect on Alliance's
ability to market and transport its natural gas production. However, Alliance
cannot predict what new regulations may be adopted by the FERC and other
regulatory authorities, or what effect subsequent regulation may have on
Alliance's activities. In addition, Order No. 636 and a number of related orders
were appealed. Recently, the United States Court of Appeals for the District of
Columbia Circuit issued an opinion largely upholding the basic features and
provisions of Order No. 636. However, even though Order No. 636 itself has been
judicially approved, several related FERC orders remain subject to pending
appellate review and further changes could occur as a result of court orders or
at the FERC's own initiative.
In recent years the FERC also has pursued a number of other important
policy initiatives which could significantly affect the marketing of natural
gas. Some of the more notable of these regulatory initiatives include (i) a
series of orders in individual pipeline proceedings articulating a policy of
generally approving the voluntary divestiture of interstate natural gas
pipeline-owned gathering facilities to pipeline affiliates, (ii) the completion
of a rulemaking involving the regulation of interstate natural gas pipelines
with marketing affiliates under Order No. 497, (iii) FERC's on-going efforts to
promulgate standards for pipeline electronic bulletin boards and electronic data
exchange, (iv) a generic inquiry into the pricing of interstate pipeline
capacity, (v) efforts to refine FERC's regulations controlling the operation of
the secondary market for released interstate natural gas pipeline capacity, and
(vi) a policy statement regarding market-based rates and other non-cost-based
rates for interstate pipeline transmission and storage capacity. Several of
these initiatives are intended to enhance competition in natural gas markets.
While any resulting FERC action would affect Alliance only indirectly, the
ongoing, or in some instances, preliminary evolving nature of these regulatory
initiatives makes it impossible at this time to predict their ultimate impact
upon Alliance's activities.
Oil Price Controls and Transportation Rates. Sales of crude oil,
condensate and gas liquids by Alliance are not currently regulated and are made
at market prices. Commencing in October 1993, the FERC has modified its
regulation of oil pipeline rates and services in order to comply with the Energy
Policy Act of 1992. That Act mandated the FERC to streamline oil pipeline
ratemaking by abandoning its old, cumbersome procedures and issue new procedures
to be effective January 1, 1995. In response, the FERC issued a series of rules
(Order Nos. 561 and 561-A) establishing an indexing system under which oil
pipelines will be able to change their transportation rates, subject to
prescribed ceiling levels. The FERC's new oil pipeline ratemaking methodology
was recently affirmed by the Court. Alliance is not able at this time to
predict the effects of Order Nos. 561 and 561-A, if any, on the transportation
costs associated with oil production from Alliance's oil producing operations.
Environmental Regulations. Alliance's operations are subject to numerous
laws and regulations governing the discharge of materials into the environment
or otherwise relating to environmental protection. Public interest in the
protection of the environment has increased dramatically in recent years. The
trend of more expansive and stricter environmental legislation and regulations
could continue. To the extent laws are enacted or other governmental action is
taken that restricts drilling or imposes environmental protection requirements
that result in increased costs to the oil and gas industry in general, the
business and prospects of Alliance could be adversely affected.
The EPA and various state agencies have limited the approved methods of
disposal for certain hazardous and nonhazardous wastes. Certain wastes
generated by Alliance's oil and natural gas operations that are currently exempt
from treatment as "hazardous wastes" may in the future be designated as
"hazardous wastes," and therefore be subject to more rigorous and costly
operating and disposal requirements.
57
<PAGE>
Alliance currently owns or leases numerous properties that for many years
have been used for the exploration and production of oil and gas. Most of these
properties have been operated by prior owners, operators and third parties whose
treatment and disposal or release of hydrocarbons or other wastes was not under
Alliance's control. These properties and the wastes disposed thereon may be
subject to Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"), Federal Resource Conservation and Recovery Act and analogous state
laws. Under such laws, Alliance could be required to remove or rededicate
previously disposed wastes (including wastes disposed of or released by prior
owners or operators) or property contamination (including groundwater
contamination) or to perform remedial plugging operations to prevent future
contamination.
Alliance's operations may be subject to the Clean Air Act ("CAA") and
comparable state and local requirements. Certain provisions of CAA may result
in the gradual imposition of certain pollution control requirements with respect
to air emissions from the operations of Alliance. The EPA and states have been
developing regulations to implement these requirements. Alliance may be
required to incur certain capital expenditures in the next several years for air
pollution control equipment in connection with maintaining or obtaining
operating permits and approvals addressing other air emission-related issues.
However, Alliance does not believe its operations will be materially adversely
affected by any such requirements.
Federal regulations require certain owners or operators of facilities that
store or otherwise handle oil, such as Alliance, to prepare and implement spill
prevention, control, countermeasure and response plans relating to the possible
discharge of oil into surface waters. The Oil Pollution Act of 1990 ("OPA")
contains numerous requirements relating to the prevention of and response to oil
spills into waters of the United States. The OPA subjects owners of facilities
to strict joint and several liability for all containment and cleanup costs and
certain other damages arising from a spill, including but not limited to, the
costs of responding to a release of oil to surface waters. Regulations are
currently being developed under the OPA and state laws concerning oil pollution
prevention and other matters that may impose additional regulatory burdens on
Alliance.
Alliance also is subject to a variety of federal, state and local
permitting and registration requirements relating to protection of the
environment. Management believes that Alliance is in substantial compliance
with current applicable environmental laws and regulations and that continued
compliance with existing requirements will not have a material adverse impact on
Alliance.
58
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION OF ALLIANCE
The selected historical financial information presented in the table below
for and at the end of each of the years ended April 30, 1992, 1993, 1994, 1995
and 1996 is derived from the audited consolidated financial statements of
Alliance. The audited financial statements of Alliance for the year ended April
30, 1996 are included in this Proxy Statement. The selected historical
financial information for the years ended April 30, 1992, and 1993 presented in
the table below are derived from audited financial statements of Alliance that
are not included in this Proxy Statement. The selected historical financial
information for the periods ended October 31, 1996 and 1995 is derived from the
unaudited interim statement included with this Proxy Statement. The selected
financial information presented below should be read in conjunction with
Alliance's consolidated financial statements and the notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations, included elsewhere in this Proxy Statement.
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
SELECTED FINANCIAL DATA(1)
<TABLE>
<CAPTION>
AS OF AND FOR THE
SIX MONTHS ENDED
OCTOBER 31 AS OF AND FOR THE YEAR ENDED APRIL 30,
------------------------- ------------------------------------------------------
1996 1995 1996 1995(2) 1994 1993 1992
----------- ---------- ---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(in thousands except per share data)
SELECTED INCOME STATEMENT DATA
Amounts in accordance with UK GAAP
Total revenues............................... 1,998 1,551 3,686 1,483 837 631 972
Depletion, depreciation and amortization..... 820 1,175 1,668 14,944 128 278 347
(Loss) from continuing operations
before and after income taxes.............. (987) (2,388) (3,593) (18,213) (1,177) (1,627) (818)
Approximate amounts in accordance with US GAAP
Net (loss)................................... (679) (2,118) (3,428) (21,641)
(Loss) per Existing Alliance Share (cents)... (0.2) (0.7) (1.1) (15.4)
SELECTED BALANCE SHEET INFORMATION
Amounts in accordance with UK GAAP
Working capital (deficiency)................. 2,523 536 (8,215) (1,478) (2,022) (2,364)
Net Property, Plant and Equipment............ 4,368 7,311 8,047 14,484 10,594 10,064
Long-term debt, net of current liabilities... 88 92 1,240 925 1,203 -
Total assets................................. 8,794 9,845 9,335 16,334 11,132 10,358
Total Liabilities............................ 1,991 2,090 10,773 4,045 5,068 2,667
Shareholders' equity......................... 6,803 7,755 (1,438) 12,289 6,064 7,691
Approximate amounts in accordance with US GAAP
Total Assets................................. 6,816 7,582 6,907
Long term debt, net of current liabilities...... 88 92 1,240
</TABLE>
_________________________________
(1) All figures are denominated in U.S. currency.
(2) The 1995 figures have been restated, as explained in Alliance's Consolidated
Financial Statements.
59
<PAGE>
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 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 72% of the combined company prior to issuance
of New Alliance Shares 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 had in fact occurred on the dates indicated or to project the
financial position or results of operations for any future date or period.
60
<PAGE>
CONDENSED PRO FORMA COMBINED BALANCE SHEET
AS OF OCTOBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
ALLIANCE
LATEX UK US GAAP ALLIANCE US
HISTORICAL GAAP ADJUSTMENTS GAAP
----------- -------- ----------- -----------
$000 $000 $000 $000
<S> <C> <C> <C> <C>
Assets:
Current assets:
Cash and cash equivalents 20 2,515 - 2,515
Receivables:
Trade 3,209 673 - 673
Other 513 554 (a) (295) 259
Prepaid expenses - 684 - 684
Inventory 175 - - -
Other current assets 22 - - -
Assets held for sale 165 - - -
------- ------- ----------- ---------
Total current assets 4,104 4,426 (295) 4,131
------- ------- ----------- ---------
Net property, plant and equipment 29,549 4,368 (b) (1,683) 2,685
Other assets:
Notes receivable, net of current portion 630 - - -
Deposits and other assets 124 - - -
Accounts and notes receivable - related parties 2 - - -
Intangible assets net of amortization 1,408 - - -
------- ------- ----------- ---------
Total assets 35,817 8,794 (1,978) 6,816
======= ======= =========== =========
Liabilities and stockholders' equity
Current liabilities:
Bank loans and overdrafts - 10 - 10
Trade accounts payable 9,991 1,043 - 1,043
Accrued expenses 593 383 - 383
Current portion of long term debt 21,127 6 - 6
Other 434 461 - 461
------- ------- ----------- ---------
Total current liabilities 32,145 1,903 - 1,903
Long-term debt, excluding current installments - 88 - 88
Other liabilities 615 - - -
------- ------- ----------- ---------
Total liabilities 32,760 1,991 - 1,991
------- ------- ----------- ---------
Stockholders' equity:
Ordinary shares, (Pounds)0.01 par value; issued - 5,105 - 5,105
324,152,633 (Alliance)
Common stock, $0.01 par value (LaTex) 208 - - -
Ordinary shares, (Pounds)0.40 par value issued
29,735,711 shares issued - - - -
Series A convertible preferred stock 4 - - -
Series B convertible preferred stock 5 - - -
Additional paid in capital 19,032 - - -
Treasury stock (489) - - -
Share premium - 20,157 - 20,157
Merger reserve - 401 - 401
Accumulated deficit (15,703) (18,860) (a) (295) (20,838)
(b) (1,683)
------- ------- ----------- ---------
Total stockholders' equity 3,057 6,803 (1,978) 4,825
------- ------- ----------- ---------
Total liabilities and stockholders' equity 35,817 8,794 (1,978) 6,816
======= ======= =========== =========
<CAPTION>
PRO FORMA PRO
ADJUSTMENTS FORMA
----------- ---------
$000 $000
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents - 2,535
Receivables:
Trade - 3,882
Other - 772
Prepaid expenses - 684
Inventory - 175
Other current assets - 22
Assets held for sale 165
----------- --------
Total current assets - 8,235
----------- --------
Net property, plant and equipment (c) 6,228 42,262
(h) 3,800
Other assets:
Notes receivable, net of current portion - 630
Deposits and other assets - 124
Accounts and notes receivable - related parties - 2
Intangible assets net of amortization - 1,408
----------- --------
Total assets 10,028 52,661
=========== ========
Liabilities and stockholders' equity
Current liabilities:
Bank loans and overdrafts - 10
Trade accounts payable - 11,034
Accrued expenses (d) 2,500 3,476
Current portion of long term debt - 21,133
Other - 895
----------- --------
Total current liabilities 2,500 36,548
Long-term debt, excluding current installments - 88
Other liabilities - 615
----------- --------
Total liabilities 2,500 37,251
----------- --------
Stockholders' equity:
Ordinary shares, (Pounds)0.01 par value; issued
324,152,633 (Alliance) (e) (5,105) -
Common stock, $0.01 par value (LaTex) (f) (208) -
Ordinary shares, (Pounds)0.40 par value issued
29,735,711 shares issued (e) 5,105 20,989
(f) 14,299
(h) 1,585
Series A convertible preferred stock (f) (4) -
Series B convertible preferred stock (f) (5) -
Additional paid in capital (c) 6,228 10,124
(d) (2,500)
(e) (280)
(f) (14,571)
(h) 2,215
Treasury stock (f) 489 -
Share premium (e) (20,157) -
Merger reserve (c) (401) -
Accumulated deficit (e) 20,838 (15,703)
----------- --------
Total stockholders' equity 7,528 15,410
----------- --------
Total liabilities and stockholders' equity 10,028 52,661
=========== =======
</TABLE>
61
<PAGE>
CONDENSED PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED APRIL 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
ALLIANCE
UK
LATEX GAAP ALLIANCE US
HISTORICAL YEAR GAAP
YEAR ENDED ENDED US YEAR ENDED
JULY 31, APRIL 30, GAAP APRIL 30, PRO FORMA PRO
1996(f) 1996 ADJUSTMENTS 1996 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) (44.1)
Weighted average number of shares
outstanding (d)7,929,391 (d) 7,929,391 29,378,178
============ ============= ==========
</TABLE>
62
<PAGE>
CONDENSED PRO FORMA COMBINED STATEMENT OF INCOME
SIX MONTHS ENDED OCTOBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
ALLIANCE US ALLIANCE
LATEX UK GAAP 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) (49.3)
Weighted average number of
shares outstanding (d) 8,103,816 (d)8,103,816 29,552,603
============= =========== ============
</TABLE>
63
<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 324,152,633 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:
<TABLE>
<CAPTION>
$000
<S> <C>
Fixed assets 8,913
Cash 2,515
Other net current assets and liabilities (281)
Debt (94)
-------
11,053
=======
</TABLE>
(d) To record an accrual for the expenses of the merger and the share issue.
(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.
64
<PAGE>
(g) To record the revised maturity of LaTex's bank borrowing following the re-
negotiation referred to under "Alliance-Financing" in this Proxy Statement.
(h) To record the issue of 2,377,301 shares of 40p each and 1,188,650 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.
Other
(f) The LaTex historical amounts for the three months ended July 31, 1996 are
included in the LaTex historical amounts for both the year ended July 31,
1996 and the six months ended October 31, 1996 shown in the Condensed Pro
Forma Combined Statements of Income.
65
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF ALLIANCE
GENERAL
The information in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" refers to the Consolidated Financial
Statements of Alliance included in this Prospectus which are prepared in
accordance with UK GAAP. UK GAAP differs in certain significant respects from
US GAAP. A discussion of the principal differences is set out in Note 29 to
Alliance's Consolidated Financial Statements. The Consolidated Financial
Statements contain a reconciliation of loss after tax (net loss) and
shareholders' equity to US GAAP.
Alliance's operating results are affected by a variety of factors, the most
significant of which is crude oil and natural gas prices. Lower product prices
have a negative effect on the operating income and cash flow of Alliance. For a
summary of other factors which may affect Alliance's operating results and
financial condition, see "Risk Factors." Although Alliance is organized in the
United Kingdom, all of its operations are located in the United States and its
financial statements are presented in U.S. dollars. Therefore, fluctuations in
the exchange rate of the pound sterling to the U.S. dollar do not significantly
impact the revenues and net income of Alliance.
SIX MONTHS ENDED OCTOBER 31, 1996 COMPARED WITH SIX MONTHS ENDED OCTOBER 31,
1995
Operating Results
Production. Despite the sale of certain non-core, predominantly gas producing
- ----------
properties, Alliance's production in the six months to October 31, 1996 amounted
to 93,000 boe, only marginally lower than production for the comparable six
months last year of 98,000 boe. This reflects the increase in oil volumes in the
current period, which is largely the result of improved production from the
successful workover program on the Valentine field and the successful well
drilled on the South Elton field.
All Alliance production came from the US. Natural gas represented approximately
15% of total production in the six months to October 31, 1996 compared with 52%
in the equivalent six months in 1995.
Sales. Total sales increased 29% from $1.551 million in the six months to
- -----
October 31, 1995 to $1.998 million in the six months to October 31, 1996,
reflecting the firmer prices together with the increase in oil production and
decrease in gas production.
Louisiana South Sweet crude fluctuated between $17.50 per barrel and $24.25 per
barrel during the current six months. Alliance's average crude oil price
realized for the six months to October 31, 1996 was $21.39 per barrel compared
with $16.81 per barrel in the equivalent period in 1995.
The realized average natural gas price increased from $1.46 per thousand cubic
feet in 1995 to $2.41 per thousand cubic feet in 1996.
Costs and expenses. The operating costs for the six months to October 31, 1996
- ------------------
were $0.817 million, against $1.089 million in the equivalent period in 1995, a
decrease of 25%. This decrease resulted from a combination of increased
efficiencies in field operations, which included the replacement of direct staff
with contract gaugers, slightly lower production and a reclassification of
workover rig and field equipment income as a reduction in operating costs
(rather than as additional income).
Depletion on oil and gas interests which is calculated on a unit of production
(boe) basis, amounted to $0.785 million, reflecting the upward revision of
reserves at April 1996 together with slightly lower production volumes. The
depletion charge for the comparable period last year amounted to $1.150 million.
The exceptional costs arising from irregularities in the six months to October
31, 1995 of $0.499 million, relate primarily to professional fees incurred in
connection with the investigations into the involvement of Mr. O'Brien in the
affairs of Alliance. The exceptional costs arising from irregularities in 1996
of $0.120 million relate to additional professional fees incurred in connection
with the aforementioned investigations.
The general and administrative expenses incurred in the six months to October
31, 1996 amounted to $1.351 million compared with $1.433 million in the
equivalent period last year. The six months to October 31, 1995 included a
number of non-recurring items which were incidental to the investigation into
the activities of Mr. O'Brien.
Loss before and after tax (Net loss). The loss before and after tax was $0.987
- ------------------------------------
million for the current six months compared with a loss of $2.388 million in
1995. The improvement stemmed from the increase in revenues resulting from the
firmer oil prices in the current period, lower operating costs arising from
improved efficiencies and a significant decrease in exceptional costs.
Net interest income decreased from net interest payable of $0.232 million in the
six months to October 31, 1995 to net interest receivable of $0.87 million in
the current six months. The decrease reflects the lower average cash balances
held this year. Interest as at October 1995 reflected the cash balances
following the open offer and share placing in May 1995.
Loss per Ordinary Share for the six months to October 31, 1996 was (0.3)
cents compared with the loss per Ordinary Share for the six months to October
31, 1995 of (0.8) cents.
1996 COMPARED WITH 1995
Operating Results
Production. In the year ended April 30, 1996, Alliance's production amounted
----------
to 225,000 barrels of oil equivalent ("boe"). The increase of 158% in Alliance's
production over 87,000 boe in the year April 30, 1995 was principally due to the
inclusion of a full year's contribution from Source Petroleum Inc. (which was
acquired by Alliance on January 25, 1995) and a full year's contribution from
the producing assets acquired by Alliance from North American Gas Investment
Trust PLC (NAGIT) on April 10, 1995. Production was also enhanced by the
successful drilling during the year ended April 30, 1996 of a well on the South
Elton field.
All Alliance production came from the U.S. Natural gas represented
approximately 45% of total production in both 1996 and 1995.
Sales. Louisiana, South Sweet crude oil prices fluctuated between $15.00 per
-----
barrel and over $23.25 per barrel during the year ended April 30, 1996.
Alliance's average crude oil price realized in 1996 was $18.36 per barrel
compared with $16.53 per barrel in 1995. Total sales increased by 148% from
$1.483 million in 1995 to $3.686 million in 1996, reflecting the significant
increase in production.
In 1996 and 1995, all crude oil was sold under contracts with terms of up to
six months.
The average realized natural gas price increased from $1.65 per mcf in 1995
to $1.73 per mcf in 1996.
Costs and expenses. 1996 operating costs were $2.318 million, compared to
------------------
$0.996 million in 1995, an increase of 133%. This increase reflects the higher
production volumes resulting from a full year's contribution from Source
Petroleum Inc. and the NAGIT assets. On a per barrel basis, lease operating
costs decreased, largely due to reductions in fixed costs, mainly field labor.
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<PAGE>
Depreciation, which is calculated on a unit of production (boe) basis,
amounted to $1.612 million, reflecting the higher production volumes. In the
previous year, depletion was included as part of the exceptional write down of
oil and gas interests totaling $14.881 million.
Exceptional costs arising from irregularities in 1996 were $0.589 million,
which relate primarily to professional fees incurred in connection with the
investigations into the involvement of Mr. O'Brien in the affairs of Alliance,
and are net of the estimated proceeds resulting from the settlement with Mr.
O'Brien. The exceptional costs arising from irregularities in 1995 of $1.787
million reflect the financial loss resulting from a number of transactions
involving Mr. O'Brien or parties now known to have been connected with him.
The general and administrative expenses incurred in 1996 of $2.629 million
(1995 - $1.637 million) include a number of non-recurring items which were
incidental to the investigation into the activities of Mr. O'Brien.
Loss before and after tax (Net loss). The loss before and after tax was
------------------------------------
$3.593 million in 1996 compared with a loss of $18.213 million in 1995. The
1995 loss included the exceptional write-down of $14.881 million of oil and gas
assets to the carrying value of Alliance's estimated proved oil and gas reserves
together with the exceptional charge of $1.787 million relating to the loss
arising from transactions with certain companies related to Mr. O'Brien.
Net interest income increased from net interest payable of $0.114 million in
1995 to net interest receivable of $0.070 million in 1996. The increase in
interest receivable from $0.049 million in 1995 to $0.257 million in 1996 arose
as the result of higher cash balances following the receipt of $11.7 million
from the placing and open offer in May 1995. This also enabled Alliance to
substantially reduce its debt and hence reduce bank interest payable from $0.163
million in 1995 to $0.028 million in 1996.
Exceptional amounts written off investments in 1996 of $0.201 represent
additional charges made to the profit and loss account in respect of costs
incurred in relation to investments written off in the year to 30 April 1995 of
$0.464 million.
Loss per Existing Alliance Share in 1996 was (0.8)p [($0.01)] compared with
the loss per Existing Alliance Share in 1995 of (8.1)p [$0.13].
1995 COMPARED WITH 1994
Operating Results.
Production. In the year ended April 30, 1995, Alliance's production amounted
----------
to 87,000 boe. The increase of 102% in Alliance production over 43,000 boe in
the year ended April 30, 1994 was principally due to the inclusion of six
months' contribution from Source Petroleum Inc. (which was acquired by Alliance
on January 25, 1995 with an effective date of November 1, 1994) and four months'
contribution from the producing assets acquired by Alliance from North American
Gas Investment Trust PLC (NAGIT) on April 10, 1995 (effective January 1,
1995).
All Alliance production came from the US. Natural gas represented
approximately 45% of total production in 1995 against 35% in 1994.
67
<PAGE>
Sales. Total sales increased by 79% from $0.837 million in 1994 to $1.483
-----
million in 1995, reflecting the significant increase in production. South
Louisiana Sweet crude fluctuated between $15.00 per barrel and over $19.00 per
barrel during the year to April 1995. Alliance's average crude oil price
realized in 1995 was $16.53 per barrel compared with $16.55 per barrel in
1994.
In 1995 and 1994, all crude oil was sold under contracts with terms of up to
six months.
The average realized natural gas price decreased from $2.59 per mcf in 1994
to $1.65 per thousand cubic feet in 1995.
Costs and expenses. 1995 operating costs were $0.996 million compared with
------------------
$0.521 million in 1994, an increase of 79%. This increase principally reflects
the higher production volumes resulting from a half year's contribution from
Source Petroleum Inc. and four months from the NAGIT assets. On a per barrel
basis however, lease operating costs actually decreased, largely due to
reductions in fixed costs, mainly field labor.
Depletion was included as part of the exceptional write down of oil and gas
interests totaling $14.881 million. The depletion charge for 1994 was $0.125
million.
The exceptional costs arising from irregularities in 1995 of $1.787 million
reflect the financial loss resulting from a number of transactions involving Mr.
O'Brien or parties now known to have been connected with him. No such
exceptional costs were reported in 1994.
The general and administrative expenses incurred in 1995 of $1.637 million
(1994 - $1.312 million) reflect the increased overheads attributable to the
enlarged group following the acquisition of Source Petroleum Inc.
Profit before and after tax (Net loss). The loss before and after tax was
--------------------------------------
$18.213 million in 1995 compared with a loss of $1.177 million in 1994. The
1995 loss included the exceptional write-down of $14.881 million of oil and gas
assets to the carrying value of Alliance's estimated proved oil and gas reserves
together with the exceptional charge of $1.787 million relating to loss arising
from transactions with certain companies related to Mr. O'Brien.
Net interest payable increased from $0.056 million in 1994 to $0.114 million
in 1995, largely reflecting the increase in debt at April 1995.
Exceptional amounts written off investments in 1995 of $0.464 represent
charges made to the profit and loss account in respect of costs incurred in
relation to investments written off in the year to 30 April 1995. No such
charges were incurred in 1994.
Loss per Existing Alliance Share in 1995 was (8.1)p [($0.13)] compared with
the loss per Existing Alliance Share in 1994 of (0.01)p [($0.02)].
LIQUIDITY AND CAPITAL RESOURCES
In the six months to October 31, 1996 cash outflow from operating activities
was $0.529 million compared with an outflow for the comparable period in 1995 of
$4.776 million. In the six months to October 31, 1995 a portion of the proceeds
to the placing and open offer was used to reduce operating creditors by almost
$2.3 million.
In 1996 cash outflow from operating activities was $5.399 million compared
with an inflow in 1995 of $1.987 million. In 1996 a portion of the proceeds
from the placing and open offer was used to reduce operating creditors by almost
$3.5 million. By comparison, in the year ended April 1995, operating creditors
had increased by $4.7 million.
Cash outflow in the six months to October 31, 1995 and in the year to April
30, 1996 also increased due to high professional fees incurred in connection
with the investigation into the affairs of Mr. O'Brien and overall, general and
administrative expenses increased due to
68
<PAGE>
a number of non-recurring items which were incidental to the O'Brien
investigation. The net outflow on investing activities was $2.512 million in
1996 compared with $4.045 million in 1995.
Capital expenditures in the six months to October 31, 1996 were $0.114
million compared with $1.509 million in the comparable period in 1995 reflecting
the low level of both drilling activity and acquisitions in the current
period.
Capital expenditures in 1996 were $1.672 million compared with $8.533
million in 1995 (1994 - $4.006 million). Of the $8.533 million, $2.264 million
related to the acquisition of Source Petroleum Inc. and $3.080 million related
to the purchase of a portfolio of producing properties located in the US from
NAGIT. In addition, the Valentine well was drilled and costs associated with
the Valentine well were capitalized amounting to $1.838 million. Following the
completion of the investigation into the affairs of Mr. O'Brien, $1.685 million
of the $1.838 million was identified as a loss arising from transactions with
certain companies related to Mr. O'Brien and accordingly reclassified. The
capital expenditure in 1996 included the drilling of three wells, one of which,
in part of the South Elton field, was successful and contributed significantly
to the uplift in reserves.
At April 1995, Alliance had capital commitments amounting to $5.300 million
(1994 - $6.037 million). At April 1996, Alliance had no capital commitments.
At April 1995, Alliance had total borrowings of $3.962 million (1994 - $1.692
million) and after deduction of cash, net borrowings of $3.898 million (1994 -
$1.404 million). In May 1995, Alliance raised $11.700 million (net) by way of a
placing and open offer and at April 1996 Alliance had reduced its debt to $0.134
million giving a net cash position of $1.043 million. In the six months to
October 31, 1996, Alliance raised net proceeds of $2.227 million from the
disposal of various non-operated predominantly gas producing properties. At
October 31, 1996 Alliance had debt of $0.104 million giving a net cash position
of $2.411 million.
Alliance currently plans to increase capital expenditures to approximately
$2.7 million in fiscal 1997 principally for remedial and developmental capital
expenditures for the combined company's assets in Alabama, Mississippi and
Louisiana. Management believes that, after debt service, it will have
sufficient cash provided by operating activities, availability under the
Alliance Credit Agreement, and asset sales to fund planned capital expenditures
in 1997. Cash from operating activities is anticipated to provide sufficient
funds to meet debt service requirements under the Alliance Credit Agreement.
See "Alliance--Financing." In addition, based on its knowledge of the market for
oil and gas properties and its recent property sales, Alliance believes that it
will be able to sell certain non-strategic properties for up to $4.8 million
during calendar 1997. Alliance intends to use the proceeds of these sales
to reinvest in the purchase and development of non-producing properties and to
reduce negative working capital. Similarly, based on anticipated revenues from
the proved developed oil and gas properties of the combined company as reflected
in the reserve reports for Alliance and LaTex, management of Alliance believes
that cash generated from operating activities will provide sufficient funds to
meet debt service requirements and fund planned capital expenditures through at
least April 30, 1999. Substantially all of Alliance's capital expenditures are
discretionary until shortly before being made and, therefore, permit flexibility
in planning. There can be no assurance, however, that the cash will be available
as anticipated or that the capital expenditures will be successfully made.
Alliance has also agreed in principal with the Bank to acquire from the Bank an
overriding royalty interest (the "ORRI") held by the Bank in certain oil and gas
properties in which LaTex has as ownership interest.
Impact of Inflation and Changing Prices. The business of Alliance is not
seasonal but is sensitive to crude oil and natural gas pricing, margins between
crude oil and refined products, and chemical margins. Inflation impacts Alliance
by increasing costs of labor and suppliers, and increasing costs of acquiring
and replacing property, plant and equipment. The replacement cost of property,
plant and equipment is generally greater than the historical cost as a result of
inflation.
69
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF ALLIANCE
The following table sets forth the name, age, position with Alliance and
principal occupations of each of the present and proposed directors and
executive officers of Alliance.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH ALLIANCE AND PRINCIPAL OCCUPATION
- ----------------------------- --- -------------------------------------------------
<S> <C> <C>
D. Patrick Maley 52 Chairman
John A. ("Jak") Keenan 42 Managing Director, Chief Executive Officer
H. Brian K. Williams 42 Director, Chief Financial Officer
Paul R. Fenemore 41 Director, Operations and Business Development
M. Philip Douglas 57 Director (Chairman of the Remuneration Committee)
William J. A. Kennedy 57 Director (Chairman of the Audit Committee)
Stanley J. Robinson 48 Director
Christopher R. L. Samuelson 50 Director
John R. Martinson 61 Proposed Director
Jeffrey T. Wilson 43 Proposed Director
</TABLE>
D. Patrick Maley is the non-executive Chairman of Alliance and has over 25
years experience in the oil and gas industry. He has held a variety of
positions with Mobil and Transworld Oil in London, New York and the Middle East.
For the past four years he has been a principal of a consulting firm
specializing in petroleum industry asset evaluation and business development.
Mr. Maley is a U.S. citizen resident in the United Kingdom.
John A. ("Jak") Keenan is an experienced executive in the U.S. and
international oil industry. From 1986 until 1992, Mr. Keenan was First Vice
President of Corporate Development for Great Western Resources Inc., an
independent oil and gas exploration and production company listed on the London
Stock Exchange. In that role he oversaw corporate acquisitions and divestitures
and also was the senior legal officer for the company. In 1990, Mr. Keenan
assumed the additional role of Chief Operating Officer for Great Western and in
that role was responsible for day to day administration of the company's
affairs. In 1992, Mr. Keenan was elected a director of Great Western and
appointed President of its Oil & Gas Division. In that capacity he oversaw the
day to day operations of the division which included both domestic operations as
well as international operations in Peru. He resigned his position at Great
Western in August, 1995 and accepted a position with the law firm of Jenkens &
Gilchrist in Houston, Texas where he specialized in oil and gas transactions.
He left Jenkens & Gilchrist in February, 1996 to assume a role overseeing
Alliance's U.S. operations. He was elected a director of Alliance in April,
1996 and appointed Managing Director in May, 1996. Mr. Keenan is a U.S.
citizen.
H. Brian K. Williams joined the Board as Finance Director in June 1996. He
is a chartered accountant and formerly the Finance Director of Pict Petroleum
PLC and previously with Hamilton Brothers and British National Oil
Corporation.
70
<PAGE>
Paul R. Fenemore was appointed to the Board of Alliance in May 1996 as
Operations and Business Development Director. He has previously served in a
variety of technical and management positions in Amoco, Gulf Oil, Hamilton
Brothers, Cairn Energy and Amerada Hess. Mr. Fenemore is a citizen of the
United Kingdom.
M. Philip Douglas is Chairman of the Remuneration Committee and is a former
director of and head of international investment at Morgan Grenfell, where he
spent 16 years. He is also a director of GT Management. Mr. Douglas is a
citizen of the United Kingdom. Mr. Williams is a citizen of the United
Kingdom.
William J. A. Kennedy is Chairman of the Audit Committee. After 25 years in
the investment industry, he served as a vice president of a major conglomerate,
Crownx Inc. For the past five years he has operated a management consulting
service and sits on the boards of three public Canadian companies. Mr. Kennedy
is a citizen of the United Kingdom.
Stanley J. Robinson was appointed to the Board as a non-executive director in
April 1996. He is a Vice President for Mannai Corporation and is responsible
for its activities outside of the Middle East. In recent years, his work has
largely concentrated on the development of businesses in the CIS and Eastern
Europe. He currently sits on a number of boards, both public and private, in
executive and non-executive roles. Mr. Robinson is a citizen of the United
Kingdom.
Christopher R. L. Samuelson joined the Board as a non-executive director in
April 1996. He has an extensive background in investment management and banking
and currently holds the position of Group Chief Executive of Valmet, a large
international trust company with whom he has been associated for the last twelve
years. He also holds a wide number of directorships around the world. Mr.
Samuelson is a citizen of the United Kingdom.
John R. Martinson has been a Director of LaTex since May 4, 1995. Mr.
Martinson is the principal and founder of Wood Roberts, Inc., an investment
banking firm. Since April 1988 Wood Roberts has been involved primarily in the
petroleum industry, with a particular focus on initiating and advising on merger
transactions and arranging financing. In January 1996 Wood Roberts, Inc. and J L
Ogden & Co, LLC. formed Wood Roberts, LLC. which also pursues investment banking
and financial advisory activities. In 1995 Mr. Martinson was also a principal in
the merchant banking firm Martinson, O'Dell & Ogden, L.L.C., specializing in
corporate and project finance. From 1973 to 1988, Mr. Martinson was an
independent oil operator and investor, including the founding and management of
companies involved in oil and gas exploration and development, crude oil and
products trading, refining and marketing, natural gas gathering and processing,
and electric utility load management. Mr. Martinson is a U.S. citizen.
Jeffrey T. Wilson has been a Director, Chairman of the Board and Chief
Executive Officer of LaTex since December 1991. Mr. Wilson was a Director and
Executive Vice President of Vintage Petroleum, Inc. ("Vintage") from May 1990 to
July 1991. He was Vice President-Production of Vintage from January 1984 to May
1990 and Manager-Acquisitions of Vintage from May 1983 to January 1984. Mr.
Wilson is a U.S. citizen.
Directors are elected by the shareholders of Alliance and hold office until
their earlier death, resignation, retirement, disqualification or removal. The
directors may at any time appoint additional directors who will hold office
until the next annual general meeting of Alliance, when they will be eligible
for re-election. One third of the directors retire from office at each annual
general meeting of Alliance but are eligible for re-
71
<PAGE>
election. The Board may appoint any director to the office of Chief Executive or
Managing Director or other executive office upon such terms and for such period
as they think fit.
No family relationships exist among the directors or executive officers of
Alliance or its subsidiaries.
Except as indicated above, none of the directors of Alliance is a director
of any other company that has a class of securities registered pursuant to
Section 12 of the Securities Exchange Act of 1934, or which is subject to the
requirements of Section 15(b) of that Act or any company registered as an
investment company under the Investment Company Act of 1940.
Committees. The Board has established the following standing committees:
The Remuneration Committee is composed of Mr. M. P. Douglas (chair), Mr. C.R.L.
Samuelson and Mr. S.J. Robinson. Its responsibilities include advising the Board
on remuneration of the executive directors. During 1996 the committee met once.
The Audit Committee is composed of Mr. W. J. A. Kennedy (chair), Mr. M.P.
Douglas and Mr. S.J. Robinson. Its responsibilities include recommending to the
shareholders the firm to be employed as Alliance's independent auditors and
consulting with, and reviewing the reports of, Alliance's independent auditors
and financial staff. During fiscal 1996 the committee met once.
EXECUTIVE COMPENSATION
The aggregate compensation paid by Alliance to its directors and executive
officers as a group for services in all capacities for the year ended April 30,
1996 was $573,223. During the year ended April 30, 1996, Alliance set aside or
accrued $7,000 for pension, retirement or similar benefits for directors and
officers. The total compensation paid for each of the three fiscal years ended
April 30, 1996, to the persons who served as Managing Director and chief
executive, and to each other executive officer who earned at least $100,000 in
salary and bonus in fiscal 1996 (collectively, the "Named Executive Officers"),
is set forth below in the following Summary Compensation Table:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
Securities All Other
Underlying Compen-
Fiscal Options/ sation
Name and Principal Position Year Salary ($) Bonus ($) SARs (#) ($)
- ----------------------------- ---- --------- -------- ---------- ------
<S> <C> <C> <C> <C> <C>
D. Patrick Maley, Acting 1996 57,311 125 -- --
Executive Chairman (1)
John X F O'Brien, Former 1996 25,009 -- 2,500,000 --
Managing Director (2) 1995 104,611 -- -- --
1994 82,138 -- -- --
Robert N. Sheard, Former 1996 77,628 30,107 -- 45,018
Managing Director (3)
Nicholas C. Gray, Former 1996 115,672 -- 1,500,000 45,018
Finance Director (4) 1995 64,372 -- -- --
1994 51,477 -- -- --
</TABLE>
72
<PAGE>
_______________
(1) Mr. Maley acted as Executive Chairman from November 29, 1995 to May 22,
1996.
(2) Mr. O'Brien was removed from all offices with Alliance on September 6,
1995.
(3) Mr. Sheard served as Managing Director from September 6, 1995 to April 3,
1995.
(4) Mr. Gray resigned his position with Alliance on March 6, 1996.
The following table discloses, for each of the Named Executive Officers,
options granted during the fiscal year ended April 30, 1996 and the potential
realizable values for such options:
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR(1)
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM (1)
------------------------------------------------------- -------------------------------
% OF TOTAL
SECURITIES OPTIONS/SHARES
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN OR BASE EXPIRATION
NAME GRANTED (#) FISCAL YEAR(2) PRICE($) DATE 5% 10%
- ------------------ ----------- --------------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
JOHN F X O'BRIEN 2,500,000 47% .10 3/6/98 $156,190 $404,110
NICHOLAS C. GRAY 1,500,000 28% .10 9/6/98 93,714 242,466
</TABLE>
________________
(1) All options reflected in this table expired on the removal or resignation
of the option holder during fiscal 1996.
Director Compensation. The compensation of the non-executive directors is
reviewed by the board of directors from time to time to ensure that this
compensation is in line with current market practice. Under Alliance's Articles
of Association, shareholders determine the maximum aggregate amount payable by
way of fees to directors and this maximum amount is currently fixed at
(Pounds)100,000 per year. During 1996, the following directors were paid the
indicated fees for their services as directors: Mr. Douglas $30,012, Mr. Kennedy
$10,504, Mr. Roberts $2,626, and Mr. Jones $2,626. In addition, Mr. Kennedy was
awarded $52,764 for his executive services as chairman of the management
committee from September 4, 1995.
Management Employment Agreements. Each of Messrs. Keenan, Williams and
Fenemore have entered into Executive Service Agreements with Alliance providing
for his employment in his current capacity for an initial fixed term of two
years beginning October 15, 1996, December 16, 1996, and September 20, 1996,
respectively, and automatic extensions of the initial term for additional one
year periods unless written notice of either party's intention not to extend has
been given to the other party at least three months prior to the expiration of
the then effective one year period of employment, provided that the executive
may at any time terminate his employment by giving a minimum of three months
notice. If the executive's employment terminates for any reason other than the
executive's breach of the agreement, disability or malfeasance, Alliance must
pay the executive an amount equal to the executive's salary for the then
remaining term of the executive's employment. Upon the involuntary termination
of the executive's employment without cause or voluntary termination by the
executive after a change in his office location, his responsibilities or
reduction in compensation following a change in control of Alliance, the
executive is entitled to the payment in one lump sum of cash in an amount equal
to two times the average annual salary, bonus and benefits paid to the executive
for the previous two years.
73
<PAGE>
The annual salary under the agreements is $160,000 for Mr. Keenan,
(Pounds)85,000 for Mr. Williams, and (Pounds)96,000 for Mr. Fenemore, plus any
bonuses or other compensation determined by Alliance's Board of Directors in its
discretion. The agreements also provide for the grant of stock options at an
exercise price of 2p per share for 6,000,000 Existing Alliance Shares for Mr.
Keenan, 2,500,000 Existing Alliance Shares for Mr. Williams, and 1,000,000
Existing Alliance Shares for Mr. Fenemore.
Stock Option Plans. Alliance has two stock option plans in existence.
Both plans are administered by the remuneration committee of the Board of
Directors (the "Committee"). All directors are employees of Alliance and any
other company of which Alliance has control, as well as consultants to any
director or employee of the consultants to Alliance who does not less than 20
hours per week to his duties with Alliance are eligible to receive awards under
the plans. The exercise price of options granted under the plans are determined
by the Committee, but may not be less than the higher of the nominal value of
the shares and the market value of the shares on the London Stock Exchange.
Options may be awarded during the six weeks following the announcement of
Alliance's final or interim results for any financial period and are not
transferrable or assignable. No option may be granted if, as a result, the
total number of shares issuable in respect of options granted within the ten
years or the three years preceding the date of grant would exceed 10% or 3%,
respectively, of Alliance's issued ordinary share capital on that date. No
option may be granted to an eligible employee within two years before his normal
retirement date and the total market value of shares subject to options granted
to an individual, when taken together with the total market value of any other
shares the individual has acquired or may acquire on the exercise of options
granted within the previous 10 years generally may not exceed four times the
individual's cash earnings from Alliance (or preceding tax year, whichever is
greater). Options granted under the plans may become exercisable beginning
three years after the date of the grant and must be exercised before the 10th
anniversary of the date of the grant.
DESCRIPTION OF ALLIANCE SHARES
The authorized capital stock of Alliance consists of 465,000,000 ordinary
shares of (Pounds)0.01 each. Upon completion of the Merger, the authorized
capital stock will consist of 45,000,000 New Alliance Shares of (Pounds)0.40
each, of which 29,552,603 shares will be outstanding if only the Merger is
completed, or 32,320,779 shares will be outstanding if both the Merger and the
acquisition of the ORRI are completed. The following sections include certain
information concerning such shares, based on English law and a summary of
certain provisions of the Memorandum and Articles of Association of Alliance.
This information and summary do not purport to be complete and are qualified in
their entirety by reference to the full Memorandum and Articles of Association,
copies of which have been filed as exhibits to the Registration Statement of
which this Proxy Statement forms a part. The description below reflects an
amendment to the Articles of Association that is to be adopted concurrently with
the completion of the Merger. LaTex shareholders should also review "The Merger
- - Summary Comparison of LaTex Common Stock and New Alliance Shares."
All of the 324,152,640 issued and outstanding Existing Alliance Shares are
fully paid or credited as fully paid and not subject to calls for additional
payments of any kind. The Existing Alliance Shares are, and the New Alliance
Shares will be, issued in registered form.
DIVIDENDS
Holders of Alliance Shares are entitled to receive such dividends as may be
declared by the board of directors. To date there have been no dividends paid
to holders of Alliance Shares.
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OPTIONS
In addition to options granted to management, see "Alliance - Management -
Executive Compensation," and the warrants to be issued in the Merger, see "The
Merger - Registration and Resale," by an agreement dated March 31, 1994,
Alliance granted to John Duncan and Co Limited an option to subscribe for
2,000,000 Existing Alliance 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.
LIQUIDATION RIGHTS
On a liquidation, the court-appointed liquidator may (with the sanction of
an extraordinary resolution) divide amongst the holders of the Alliance shares
the whole or any part of the assets of Alliance and may, for such purpose, set
such values as he deems fair upon any property to be divided and may determine
how such division shall be carried out as between the shareholders.
VOTING RIGHTS
Voting at any general meeting of shareholders is by a show of hands unless
a poll is duly demanded. A poll may be demanded by (i) the chairman of the
meeting, (ii) at least three shareholders entitled to vote at the meeting, (iii)
any shareholder or shareholders representing in the aggregate not less than one-
tenth of the total voting rights of all shareholders entitled to vote at the
meeting or (iv) any shareholder or shareholders holding shares conferring a
right to vote at the meeting on which there have been paid up sums in the
aggregate equal to not less than one-tenth of the total sum paid up on all the
shares conferring that right.
On a show of hands, every shareholder who (being an individual) is present
in person (or being a corporation) is present by a duly authorized
representative at a shareholders meeting of Alliance and entitled to vote will
have one vote, and on a poll, every shareholder who is present in person or by
proxy shall have one vote per share. The necessary quorum for a shareholders'
meeting shall be a minimum of two persons (each of whom is a shareholder or
proxy).
If all the members entitled to vote at a general meeting sign written
resolutions in lieu of a vote at such meeting, such resolutions shall be valid
and effective as resolutions passed at a general meeting.
Unless otherwise required by law or the Alliance's Articles of Association,
voting in a general meeting is by ordinary resolution (e.g., resolutions for the
election of directors, the approval of financial statements, the declaration of
final dividends, the appointment of auditors, the increase of authorized share
capital or the grant of authority to allot shares). An ordinary resolution
requires the affirmative vote of a majority of the votes of those persons
present at a meeting at which there is a quorum. A special resolution (e.g.,
modifying the rights of any class of shares at a meeting concerning an
alteration of Alliance's Memorandum or Articles of Association or a winding-up
of Alliance) or an extraordinary resolution requires the affirmative vote of not
less than three-fourths of the eligible votes. Meetings are generally convened
upon advance notice of 21 or 14 days (not including the days of delivery or
receipt of the notice) depending on the nature of the business to be transacted.
For as long as the Bank or its affiliate is a holder of New Alliance
Shares, it will not be entitled to vote more than 4.99% of the total votes
normally exercisable by holders of New Alliance Shares and will not be entitled
to vote on any resolution to alter this restriction. Upon a transfer of any New
Alliance Shares by the Bank or its affiliate to any other person, this
restriction will cease to apply to those New Alliance Shares. This restriction
will apply only to the Bank or its affiliate and will not apply to any other
holder of New Alliance Shares.
PRE-EMPTIVE RIGHTS
The Companies Act of 1985, as amended (the "Companies Act") confers upon
shareholders, to the extent not disapplied, rights of pre-emption in respect of
the allotment of equity securities that are or are to be paid up wholly in cash.
These provisions may be disapplied by a special resolution of the shareholders,
either generally or specifically, for a period not exceeding five years.
Additionally, the Articles of Association of Alliance provide the shareholders
with such a pre-emptive right unless Alliance shall by special resolution
otherwise direct.
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VARIATION OF RIGHTS
If at any time the share capital of Alliance is divided into different
classes of shares, the rights attached to any class may be varied or abrogated,
subject to the provisions of the Companies Act, with the written consent of the
holders of not less than three-quarters of the issued shares of the class, or
with the sanction of any extraordinary resolution passed at a separate meeting
of the holders of the shares of that class. At every such separate meeting, the
quorum shall be members of the class present in person or by proxy holding not
less than one-third of the issued shares of the class, or at an adjourned
meeting of such holders as described above a quorum will be established if any
one person entitled to vote at the meeting (or his proxy) is present. Each
holder of shares of the class shall have one vote in respect of every share of
the class held by such person.
DISCLOSURE OF INTERESTS
Under the Companies Act, any person who acquires (alone or, in certain
circumstances, with others) an interest in the relevant share capital of
Alliance in excess of the "notifiable percentage" (currently three percent)
comes under an obligation to disclose prescribed information to Alliance in
respect of those shares. After the "notifiable" level is exceeded, similar
notifications must be made, in respect of the whole percentage figure increases
or decreases, rounding down to the next whole number.
In addition, the Companies Act gives Alliance power to require persons who
it knows are, or has reasonable cause to believe to be, or to have been within
the previous three years, interested in its relevant share capital to disclose
prescribed particulars of those interests. Failure to supply the information
required may lead to disenfranchisement of the relevant shares and a prohibition
on their transfer and on dividend or other payments in respect of them.
In this context, the term "interest" is broadly defined and will generally
include an interest of any kind in shares.
EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
There are currently no U.K. foreign exchange controls on the payment of
dividends on the Existing or New Alliance Shares or the conduct of Alliance's
operations. There are no restrictions under Alliance's Memorandum and Articles
of Association or under English law that limit the right of non-resident or
foreign owners to hold or vote Existing or New Alliance Shares.
MATERIAL TAX CONSIDERATIONS
The following discussion is a summary of the material U.S. federal income
tax consequences of the Merger and the material U.S. federal income tax and U.K.
tax consequences of ownership and disposition of the New Alliance Shares.
However, it is not intended to be a complete discussion of all potential tax
effects that might be relevant to the Merger or the ownership or disposition of
the New Alliance Shares.
This summary deals only with citizens or residents of the United States or
domestic corporations (each a "U.S. Holder"). It may not be applicable to
certain classes of taxpayers, including, U.S. Holders who are a resident (or, in
the case of an individual, resident or ordinarily resident) for U.K. tax
purposes in the U.K. or who carry on business in the U.K. through a branch or
agency, insurance companies, tax-exempt organizations, financial institutions,
securities dealers, broker-dealers, foreign persons, and persons who acquired
LaTex Shares pursuant to an exercise of employee stock options or rights or
otherwise as compensation. These classes of taxpayers should consult their own
tax advisors regarding the specific tax consequences of the Merger and the
ownership and disposition of the New Alliance Shares. Moreover, the state,
local and foreign (other than certain
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U.K.) tax consequences of the Merger and the ownership and disposition of New
Alliance Shares are not discussed below.
This summary is based on laws, regulations, rulings, practice and judicial
decisions in effect at the date of this Proxy Statement. Legislative,
regulatory or interpretive changes, future court decisions or specific tax
treaty provisions may significantly modify the statements made in this
description. Any such changes or interpretations may or may not be retroactive
and could affect the tax consequences described herein. EACH SHAREHOLDER IS
URGED TO CONSULT WITH THE SHAREHOLDER'S OWN TAX ADVISOR AS TO THE PARTICULAR TAX
CONSEQUENCES TO THE HOLDER OF THE TRANSACTIONS DISCUSSED IN THIS SECTION,
INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS,
AND OF CHANGE IN APPLICABLE TAX LAWS.
Except as otherwise indicated, statements of legal conclusions regarding
United States' tax treatment, tax effect or tax consequences are the opinions of
Jenkens & Gilchrist, a Professional Corporation, United States counsel for
Alliance, based on the Internal Revenue Code of 1986 (the "Code") and applicable
regulations thereunder, each as amended and in effect on the date of this Proxy
Statement and on reported judicial decisions and published positions of the
Internal Revenue Service ("IRS"). No rulings have been requested from the IRS
concerning any of the matters described in this Proxy Statement. In some cases,
particularly those as to which tax counsel's opinion is qualified, there is a
risk that the IRS and the courts will disagree with the conclusions of tax
counsel and no assurance can be given that the tax opinions will be followed by
the courts if challenged.
Except as otherwise indicated, statements of the legal conclusion regarding
United Kingdom tax treatment, tax effect or tax consequences are the opinions of
Ashurst Morris Crisp, United Kingdom counsel for Alliance, based on United
Kingdom law and current Internal Revenue practice, as in effect of this Proxy
Statement and on reported judicial decisions and published positions of the
Inland Revenue ("UKIR"). No rulings have been requested from the UKIR regarding
any of the matters described in this Proxy Statement. In some cases,
particularly those as to which tax counsel's opinion is qualified, there is a
risk that the UKIR will disagree with the conclusions of tax counsel.
The laws, regulations, administrative rulings and judicial decisions that
form the basis for conclusions with respect to the tax consequences of the
Merger are very complex and are subject to change at any time. Accordingly, each
LaTex shareholder is urged to consult his own tax advisor as to the consequences
to him of the Merger. The tax opinions of Jenkens & Gilchrist, a Professional
Corporation and Ashurst Morris Crisp are filed as exhibits to the Registration
Statement on Form F-4 filed with the SEC, of which this Proxy Statement
constitutes a part. The tax opinions are not filed as appendices to the Proxy
Statement. Upon receipt of a written request by a LaTex shareholder (or his
representative who has been so designated in writing) to Alliance Resources PLC,
One Houston Center, 1221 McKinney, Suite 1814, Houston, Texas 77010, a copy of
the tax opinions will be transmitted promptly, without charge, by Alliance.
U.S. TAX CONSEQUENCES OF THE MERGER
Recognition of Gain. While the Merger qualifies as a reorganization within
the meaning of Sections 368(a)(1)(A) and 368(a)(2)(E) of the Internal Revenue
Code of 1986, as amended (the "Code"), because Alliance is a foreign corporation
and the New Alliance Shares to be issued to the U.S. Holders of LaTex Shares are
anticipated to represent more than 50% of the outstanding stock of Alliance
after the Merger, U.S. Holders must recognize any gain realized on the surrender
of LaTex Shares or a LaTex Warrant pursuant to the Merger (such a share or
warrant is referred to as a "Gain LaTex Share"). The amount of gain recognized
with respect to a Gain LaTex Share will be equal to the excess, if any, of (i)
the fair market value immediately after the Merger of the New Alliance Shares
received for the Gain LaTex Share, over (ii) the U.S. Holder's tax basis in the
Gain LaTex Share. Any gain recognized should be long-
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term capital gain, provided the Gain LaTex Share was a capital asset in the
hands of the U.S. Holder and had been held for more than the then applicable
long-term holding period (currently one year). A U.S. Holder will have a tax
basis in each New Alliance Share received for the Gain LaTex Share equal to the
fair market value of the New Alliance Share immediately after the Merger. The
holding period of each New Alliance Share received in exchange for a Gain LaTex
Share will begin as of the Effective Time of the Merger. To the extent a U.S.
Holder holds LaTex Shares subject to a substantial risk of forfeiture, the U.S.
Holder will recognize ordinary income at the time the substantial risk of
forfeiture lapses, equal to (i) the then fair market value of the LaTex Shares
or the New Alliance Shares received in exchange therefor, as the case may be,
over (ii) the U.S. Holder's tax basis in the LaTex Shares or such New Alliance
Shares, as the case may be.
Nonrecognition of Loss. U.S. Holders will be not entitled to
recognize any loss realized on the surrender of LaTex Shares or LaTex Warrant
pursuant to the Merger (such a share or warrant referred to as a "Loss LaTex
Share"). U.S. Holders surrendering both Gain LaTex Shares and Loss LaTex Shares
will not be entitled to offset the gains recognized on the Gain LaTex Shares
with the losses realized on the Loss LaTex Shares. A U.S. Holder will have an
aggregate tax basis in the New Alliance Shares received for the U.S. Holder's
Loss LaTex Shares equal to such U.S. Holder's aggregate tax basis in the Loss
LaTex Shares. The holding period of the New Alliance Shares will include the
holding period of the Loss LaTex Shares. U.S. Holders should consult their own
tax advisors as to the determination of their tax basis and holding period in
any New Alliance Share.
Information Reporting. Since Alliance is a foreign corporation, U.S.
Holders of LaTex Shares and LaTex Warrants may be required to complete, execute
and file IRS Form 926 with such Holder's U.S. federal income tax return for the
year in which the Effective Time of the Merger occurs. Failure to comply with
these reporting requirements may subject a U.S. Holder to a penalty equal to 25%
of the gain realized by the U.S. Holder as a result of the Merger, and the
statute of limitations for assessing tax on arising from the Merger will not
begin to run until the reporting requirement is complied with. U.S. Holders
should consult their tax advisors regarding the U.S. information reporting
requirements as a result of the Merger.
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UK AND US TAX CONSEQUENCES OF OWNERSHIP AND DISPOSITION OF NEW ALLIANCE SHARES
TAXATION OF DIVIDENDS
U.K. Taxation. Alliance does not expect to pay dividends for the
foreseeable future. Should Alliance begin paying dividends, it will be required
when paying a cash dividend in respect of its New Alliance Shares to pay to the
U.K. Inland Revenue a payment known as Advance Corporation Tax ("ACT"). The
current rate of ACT is 25% of the net dividend paid to a holder of New Alliance
Shares. An amount equivalent to the amount of the ACT paid in this way is,
under current English law, normally allowed as a credit against the U.K. tax
liability of holders of New Alliance Shares who are resident in the United
Kingdom.
A U.S. Holder will generally be entitled under the current Convention
between the U.S. and the U.K. for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gain
(the "Income Tax Convention") and current U.K. law as applied by the U.K. Inland
Revenue to receive from the U.K. Inland Revenue, in addition to any dividend
paid by Alliance, an amount in the nature of a tax refund (an "ACT Refund")
equal to the ACT in respect of the dividend, less a U.K. withholding tax of 15%
of the sum of the dividend and the related ACT. Thus, assuming continuance of
the ACT at a rate of 25%, a net dividend paid to a U.S. holder of (Pounds)8
(chosen for illustrative purposes only) will entitle the U.S. Holder described
above to receive, in addition to the dividend and upon compliance with the
refund procedures described below, an ACT Refund of (Pounds)0.5 calculated by
reducing the ACT of (Pounds)2 by a withholding tax of (Pounds)1.5. Special
rules may apply to certain U.S. Holders, including, without limitation, certain
domestic corporations, partnerships, trusts, estates, residents of the U.K., and
domestic corporations owning, actually or constructively, 10% or more of the
voting stock of Alliance.
A U.S. Holder who is entitled to the ACT Refund may, subject to agreement
with the U.K. Inland Revenue, receive payment in respect of the ACT Refund at
the same time as and together with a payment of the dividend. In order to do
so, a U.S. Holder must have his New Alliance Shares registered in the name of a
nominee approved by the U.K. Inland Revenue for the purpose, and the nominee
must follow certain procedural requirements. A U.S. Holder must provide the
name of his or her nominee in order to participate in this arrangement. In
addition, the U.S. Holder must be either:
1. An individual who (a) is not resident in the U.K.; (b) has not during the
previous four years been in the U.K. for as much as three months a year on
average, or for a period or periods amounting in all to six months in the
U.K. income tax year to which the claim on his behalf relates; (c) has not
been absent from the U.S. for a complete U.S. tax year in any of the
previous four years; (d) does not have a permanent establishment in the
U.K.; (e) does not perform professional/personal services from a fixed base
in the U.K.; and (f) does not own 10% or more of the class of shares in
respect of which the dividend is paid; or
2. A corporation (a) which is managed and controlled in the U.S. and does not
have a permanent establishment in the U.K.; (b) which does not own 10% or
more of the class of shares in respect of which the dividend is paid; (c)
which does not, alone or together with one or more associated corporations,
control, directly or indirectly, 10% of the voting power of Alliance; (d)
which is liable to U.S. tax on the dividend; and (e) at least 75% of the
capital of which is owned directly or indirectly by persons who are U.S.
residents.
These arrangements will be extended to trusts, estates in the course of
administration, pension funds, foundations and similar bodies only with the
prior approval of the U.K. Inland Revenue. These arrangements can be
restricted without notice by the U.K. Inland Revenue.
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U.S. Holders who wish to receive an ACT Refund but do not qualify to
receive the ACT Refund directly under the U.K. Inland Revenue arrangements
should consult their tax advisers on their eligibility to receive and the
procedures to obtain an ACT Refund.
The U.K. Finance Act 1994 contains certain provisions allowing companies to
elect to pay a foreign income dividend ("FID") to which special rules apply and,
in particular, which does not carry any tax credit. Alliance has no present
intention of electing to pay any dividends under the FID scheme and the above
applies only to dividends not paid under the scheme.
U.S. Taxation. A U.S. Holder will realize dividend income for U.S. federal
income tax purposes in an amount equal to the sum of any dividend paid by
Alliance, amounts paid in respect of the related refund of ACT and the amount of
any U.K. withholding tax thereon, to the extent paid out of the current or
accumulated earnings and profits of Alliance, as determined under current U.S.
federal income tax principles. The amount included in income to a U.S. Holder
will be the U.S. dollar value of the payment (determined at the spot rate on the
date of such payment) regardless of whether the payment is in fact converted
into U.S. dollars. Generally, any gain or loss resulting from currency exchange
fluctuations during the period between the date of such payment and the date the
dividend payment is converted into U.S. dollars will be treated as ordinary
income or loss. Dividends paid to a U.S. Holder will generally not be eligible
for the dividends received deduction allowed to corporations under the Code.
Subject to certain limitations, the U.K. withholding tax will be treated as
a foreign income tax that may be claimed as a deduction from taxable income or
as a credit against the U.S. federal income tax liability of the U.S. Holder.
The particular circumstances of each U.S. Holder will affect their ability to
use the foreign tax credit. U.S. Holders should consult their own tax advisor
about the availability and computation of the foreign tax credit.
BACKUP WITHHOLDING AND INFORMATION REPORTING
A U.S. Holder may, under certain circumstances, be subject to certain
information reporting requirements with respect to dividends paid on the New
Alliance Shares (but currently not backup withholding, although the issue of
whether backup withholding should apply in those circumstances, where
information reporting is required is under consideration by the IRS).
TAXATION OF CAPITAL GAINS
Upon the sale or exchange of a New Alliance Share, a U.S. Holder will
recognize a gain or loss for U.S. federal income tax purposes in an amount equal
to the difference between the amount realized and the U.S. Holder's tax basis in
the New Alliance Share. Such gain or loss will be a capital gain or loss if the
New Alliance Share was a capital asset in the hands of the U.S. Holder and will
be a long-term capital gain or loss if the New Alliance Share has been held for
more than one year on the date of the sale or exchange. The deductibility of
capital losses is subject to limitations.
A U.S. Holder that is not resident (or, in the case of an individual, not
resident or ordinarily resident) in the U.K. will not normally be liable for
U.K. taxation on capital gains realized on the sale of such Holder's New
Alliance Shares or on the sale of New Alliance Shares acquired pursuant to a
U.S. Holder's exercise of New Warrants, Bank Warrants or on any disposal of the
New Warrants or Bank Warrants unless such U.S. Holder carries on a trade in the
U.K. through a branch or agency and such New Alliance Shares or such Alliance
warrants are or have been used, held or acquired by or for the purposes of such
trade, branch or agency or used in or for the purpose of such trade.
A U.S. citizen who is resident or ordinarily resident in the U.K., a U.S.
corporation which is resident in the U.K. because its business is managed or
controlled there, or a U.S. citizen who, or a U.S. corporation that,
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carries on a trade or business through a permanent establishment in the U.K. and
that acquires or holds a New Alliance Share or Alliance warrant in connection
with that permanent establishment may be subject to both U.S. and U.K. tax on
its capital gains upon disposition of the New Alliance Share or Alliance
warrant. Subject to certain limitations, however, the U.S. tax laws would permit
a tax credit against U.S. federal income tax liability in the amount of any U.K.
tax (namely, capital in the case of an individual and corporation tax on
chargeable gains in the case of a corporation) which has been paid in respect of
such gain.
ESTATE AND GIFT TAX
Under the U.S.-U.K. double taxation convention relating to estate and gift
taxes (the "Estate and Gift Tax Convention"), a New Alliance Share held by an
individual who is domiciled in the U.S. and is not a national of the U.K. will
not be subject to U.K. Inheritance Tax on the individual's death or on a
transfer of the New Alliance Share in trust by a settler not domiciled in the
U.S. and in the exceptional case where the New Alliance Share is part of the
business property of a U.K. permanent establishment of an enterprise or pertains
to a U.K. fixed base of an individual used for the performance of independent
personal services. The Estate and Gift Tax Convention generally provides a
credit for the amount of any tax paid in the U.K. against the U.S. federal tax
liability in a case where the New Alliance Share is subject both to U.K.
Inheritance Tax and to U.S. federal estate and gift tax.
STAMP DUTY AND STAMP DUTY RESERVE TAX
No U.K. stamp duty or stamp duty reserve tax ("SDRT") will be payable on
the issuance of the New Alliance Shares nor in practice will U.K. stamp duty or
SDRT be payable on the issuance of Alliance warrants.
Under current U.K. law, the transfer of New Alliance Shares or Alliance
warrants will generally give rise to a liability to U.K. stamp duty, normally
at the rate of 50p for every (Pounds)100 (or part thereof) of the actual
consideration paid. Where there is no stamped document recording the sale of the
shares, a charge to SDRT, also at the rate of 0.5%, arises. Provided that the
transfer is executed and stamped within six years of the unconditional contract
to sell, any obligation to pay SDRT is canceled and any SDRT paid is refundable.
Special rules apply in relation to depository receipt arrangements and
clearance services.
Section 186 of the Finance Act 1996 provides that there is to be no
liability for stamp duty on the transfer of shares into CREST, the paperless
trading system which started in July 1996. SDRT is to be chargeable immediately
on entering into an unconditional agreement to transfer shares at the rate of
0.5% of the actual consideration paid (which SDRT is to be canceled or repaid if
the agreement is completed by a duly stamped transfer). Subsequent transfers of
shares within CREST will not give rise to a liability to stamp duty as there
will be no stampable document.
CONTROLLED FOREIGN CORPORATION STATUS
Under Subpart F of the Code, a controlled foreign corporation ("CFC") is a
foreign corporation that on any day of its taxable year is owned directly,
indirectly, or by attribution more than 50%, by vote or value, by "United States
Shareholders." For this purpose, a United States Shareholder is a United States
person who owns directly, indirectly or by attribution at least 10% of the total
combined voting power of all shares entitled to vote of the foreign corporation.
Alliance has represented that it is currently not a CFC and it is not
anticipated to be a CFC immediately after the Merger.
In the event Alliance becomes a CFC for an uninterrupted period of at least
30 days during a taxable year, a United States Shareholder of Alliance must
include in income for his taxable year in which or with which
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the taxable year of Alliance ends his pro rata share of certain types of
undistributed income of Alliance (primarily subpart F income and increase in
earnings invested in U.S. property). A U.S. person who owns directly,
indirectly, or by attribution less than 10% of the total combined voting power
of all classes of stock of Alliance entitled to vote would not be taxed on the
undistributed income of Alliance. Such a U.S. person would be taxed under the
ordinary rules relating to the taxation of corporate distributions as discussed
above.
U.S. Holders should consult their tax advisors as to the applicable law in
any year in which Alliance is a CFC.
PASSIVE FOREIGN INVESTMENT COMPANY STATUS
Because Alliance will receive passive income, including interest income and
royalties, Alliance may be classified as a Passive Foreign Investment Company
("PFIC") for U.S. federal income tax purposes. Under current rules, Alliance
will be a PFIC if either 75% or more of its gross income in a tax year is
passive income or the average percentage of its assets (by value) which produce
or are held for the production of passive income is at least 50%. The
determination whether a foreign corporation is a PFIC is made on a year-by-year
basis. A foreign corporation's status as a PFIC for one year, however, may
affect the shareholders even though the foreign corporation does not meet the
PFIC definition for all other years.
For purpose of the PFIC tests, if a foreign corporation owns directly or
indirectly at least 25% by value of the stock of another corporation, the
foreign corporation is treated as owning its proportionate share of the assets
of the other corporation, and as if it had received directly its proportionate
share of the income of such other corporation. Because Alliance will own 100%
of the stock of LaTex after the Merger, Alliance will be treated as owning all
of LaTex's assets and receiving directly all of LaTex's income for purposes of
the PFIC tests.
If Alliance were to be treated as a PFIC, a U.S. Holder of New Alliance
Shares would be subject to an interest charge on taxes deemed deferred by such
U.S. Holder on receipt of certain "excess" dividend distributions by Alliance to
the U.S. Holder and on recognition of gain on disposition of any New Alliance
Shares of the U.S. Holder (which distributions and gains would generally be
allocated ratably to all days in the U.S. Holder's holding period for such New
Alliance Shares, with the portion so allocated to prior years treated as
ordinary income subject to tax at the highest marginal rate applicable in such
prior years). Alternatively, a U.S. Holder could avoid such interest charge and
adverse tax consequences if Alliance were to agree to comply with certain
reporting requirements, and the U.S. Holder were to elect (a "qualified
election") to be currently taxable on such U.S. Holder's pro rata share of
Alliance's earnings and profits (excluding net capital gain) and net capital
gain for each year (at ordinary and long-term capital gain rates, respectively),
even if no distributions were received. U.S. Holders who make a qualified
election may make an additional election (the "deferral election") to defer
payment of the tax liability on such current income inclusion until the receipt
of distributions from Alliance of the amounts deemed included in the U.S.
Holder's income pursuant to the qualified election. However, a U.S. Holder who
makes a deferral election must pay interest on the deferred tax liability.
Qualified elections are made on a shareholder-by-shareholder basis. A U.S.
Holder may make a qualified election for any taxable year at any time on or
before the due date for filing his U.S. federal income tax return for the
taxable year for which the election is made. A U.S. Holder makes the qualified
election by attaching the shareholder election statement, the PFIC annual
information statement and IRS Form 8621 to such U.S. Holder's timely filed U.S.
federal income tax return and sending a copy of the shareholder election
statement to the Internal Revenue Service Center at P.O. Box 21086,
Philadelphia, Pennsylvania 19114. Once made, the qualified election applies to
all subsequent taxable years of the U.S. Holder with respect to Alliance unless
revoked by the U.S. Holder with the consent of the IRS. Alliance will supply
the PFIC annual information statement required to
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make a qualified election to any shareholder or former shareholder who requests
it and to all shareholders of record at any time in any PFIC year.
The deferral election is also made on a shareholder-by-shareholder basis.
The deferral election is made on a year-to-year basis with respect to each
year's tax liability and can be made only by those U.S. Holders who own New
Alliance Shares at the end of Alliance's taxable year to which such tax
liability is attributable. A U.S. Holder may make a deferral election for any
taxable year by attaching IRS Form 8621 or a similar statement with the U.S.
Holder's timely filed U.S. federal income for the taxable year for which the
election is made and sending a copy of the IRS Form 8621 or similar statement to
the Internal Revenue Service Center at P.O. Box 21086, Philadelphia,
Pennsylvania 19114.
U.S. Holders should consult with their own tax advisors to decide whether
and how to make the qualified and deferral elections.
If the qualified election is made, a shareholder may recognize foreign
currency gain or loss, if any, at the time it received an actual distribution
from Alliance with respect to income previously included.
U.S. Holders should consult their tax advisors as to the applicable law in
any year in which Alliance is a PFIC.
THE SUMMARY OF U.S. AND U.K. TAX CONSEQUENCES SET FORTH ABOVE IS BASED ON
THE INCOME TAX CONVENTION AND ESTATE TAX CONVENTION, U.S. LAW, U.K. LAW AND U.K.
INLAND REVENUE PRACTICE, ALL AS THEY EXIST AS OF THE DATE OF THIS PROXY
STATEMENT. THIS SUMMARY DOES NOT DISCUSS ALL ASPECTS THAT MAY BE RELEVANT TO
HOLDERS OF NEW ALLIANCE SHARES IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES. IN
PARTICULAR, IT DOES NOT ADDRESS THE CONSEQUENCES TO HOLDERS OF NEW ALLIANCE
SHARES RESIDENT OR DOMICILED IN THE U.K. OR DOING BUSINESS IN THE U.K. HOLDERS
OF NEW ALLIANCE SHARES ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
PARTICULAR TAX CONSEQUENCES TO THEM OF THE MERGER AND THE OWNERSHIP AND
DISPOSITION OF NEW ALLIANCE SHARES.
CERTAIN LONDON STOCK EXCHANGE LISTING REQUIREMENTS
In addition to the provisions of its Articles of Association and the
Companies Act, Alliance is subject to the listing rules of the London Stock
Exchange ("LSE") made under Section 142 of the Financial Services Act and, in
particular, to the continuing obligations under those rules. These require a
listed company to provide to its shareholders any information necessary to
enable them and the public to appraise the position of the company and to avoid
the creation of a false market in its listed securities. The listed company
must ensure equality of treatments for all shareholders who are in the same
position and, where the securities are listed on more than one stock exchange,
must ensure that equivalent information is made available to the market on each
exchange on which its securities are listed. In addition, the listing rules
impose obligations on listed companies to send the following information to
shareholders:
1. audited annual financial statements on a consolidated basis;
2. details relating to certain acquisitions, disposals, takeovers,
mergers and offers either made by or in respect of the company; and
3. an explanatory circular or explanation in the annual report and
accounts whenever a general meeting of the shareholders is convened
which includes any business other than routine business
83
<PAGE>
at an annual general meeting (routine business includes such items as
declarations of final dividends, approval of the report and financial
statements, re-election of directors and appointment of auditors).
In addition to the above requirements, a company is required to notify the
LSE of certain information, which the LSE will then publish. These include
details of any notifications received by the company of interests of 3% or more
in the company's share capital, any changes in the Board of Directors, any
purchase or redemption by the company of its own shares, any changes in
directors' interests in the shares or the debentures of the company and changes
in the share capital of the company. Unaudited half yearly reports of results
for the first six months of any financial year and an unaudited preliminary
announcement of results for any year must also be published. Quarterly results
are not required to be published.
There are additional obligations on companies listed on the LSE in relation
to transactions with related parties such as substantial shareholders, directors
(including directors within the last twelve months) of any group, company, or
associates of such persons. Where a transaction is proposed with a related
party, a circular to shareholders and the prior approval of the company at a
general meeting is generally required. The related party is not permitted to
vote at such general meeting.
EXPERTS
The consolidated financial statements of Alliance for each of the years in
the three-year period ended April 30, 1996 included in this Proxy Statement have
been included in reliance upon the report of KPMG Audit Plc, Independent
Chartered Accountants and Registered Auditors, appearing elsewhere in this Proxy
Statement and upon the authority of that firm as experts in accounting and
auditing. The consolidated financial statements of LaTex for each of the years
in the three-year period ended July 31, 1996 included in this Prospectus have
been included in reliance upon the report of Briscoe & Burke, certified public
accountants, appearing elsewhere in this Proxy Statement, and upon the authority
of that firm as experts in accounting and auditing.
The references to the reports of Ryder Scott Company and Lee Keeling and
Associates, Inc., both independent petroleum engineers, contained in this Proxy
Statement with respect to Alliance's and LaTex's, proved reserves, estimated
future net revenue from proved reserves and discounted present values of
estimated future net revenue, is made in reliance upon the authority of such
firms as experts with respect to such matters.
U.K. LISTING PARTICULARS
A copy of a document comprising the U.K. listing particulars relating to
Alliance in accordance with the listing rules made under Section 142 of the U.K.
Financial Services Act 1986 was delivered to the Registrar of Companies in
England and Wales for registration in accordance with Section 149 of that Act
and is available for inspection at the offices of Ashurst Morris Crisp,
Broadwalk House, 5 Appold Street, London EC2A 2AH, England and at the offices of
Alliance in London. The contents of such listing particulars do not form part
of, nor are they incorporated into, this Proxy Statement.
LEGAL MATTERS
Certain legal matters in connection with the New Alliance Shares offered
hereby are being passed upon for Alliance by Ashurst Morris Crisp, English legal
advisors to Alliance. Certain legal matters in connection with the offering of
the New Alliance Shares will be passed upon for Alliance by Jenkens & Gilchrist,
a Professional Corporation, U.S. counsel to Alliance.
84
<PAGE>
SHAREHOLDER PROPOSALS
In the event that the Merger is not consummated, proposals to be included
in LaTex's proxy statement relating to its next Annual Meeting of Shareholders
must have been delivered in writing to LaTex and received no later than December
9, 1996.
ENFORCEABILITY OF CIVIL LIABILITIES UNDER
UNITED STATES FEDERAL SECURITIES LAWS
Alliance is a public limited company incorporated under the laws of
England. Six of its ten directors after completion of the Merger (and certain
experts named in this Proxy Statement) are not subject to the jurisdiction of
the U.S. because they are neither citizens nor residents of the U.S. All or a
substantial portion of the assets of these persons and some of the assets of
Alliance and its subsidiaries are located in jurisdictions outside the U.S. As
a result, it may not be possible for investors to effect service of process
within the U.S. upon these persons or upon Alliance or any of its subsidiaries
(other than its U.S. subsidiaries) or to realize upon judgments of U.S. courts
predicated upon civil liability under the U.S. federal or state securities laws.
Alliance has been advised by its English solicitors, Ashurst Morris Crisp, that
there is doubt as to the enforceability in the U.K. against Alliance or any of
its subsidiaries (other than its U.S. subsidiaries) or any of their respective
directors, controlling persons or executive officers or any of the experts named
in this Prospectus who are not residents of the U.S., in actions for enforcement
of judgments of U.S. courts of liabilities predicated upon, or in original
actions predicated solely upon, U.S. federal or state securities laws.
Nevertheless, Alliance has irrevocably agreed that, after the Merger is
completed, it may be served with process with respect to actions based on the
offer and sale of the New Alliance Shares made by this Proxy Statement by
serving Alliance at its principal U.S. operations office: Attention: President,
4200 East Skelly Drive, Suite 1000, Tulsa, Oklahoma 74135.
Alliance has been advised by its English solicitors, Ashurst Morris Crisp,
that enforcement of judgments obtained outside the United Kingdom is subject to
detailed rules deriving in part from treaty, in part from statute and in part
from English common law. In particular, enforcement may not be permitted if a
judgment was obtained by fraud, was contrary to public policy of English law,
relates to foreign penal or revenue laws, is contrary to natural justice,
amounts to judgment on a matter previously determined by an English court, is
given in proceedings brought in breach of an agreement for settlement of
disputes or if enforcement of the judgment is restricted by the provisions of
the Protection of Trading Interests Act 1980 (which primarily relates to
multiple damages awards).
85
<PAGE>
ADDITIONAL INFORMATION
Alliance has filed with the Commission a Registration Statement on Form F-4
(together with any amendments thereto, the "Registration Statement") under the
Securities Act of 1933, as amended, of which this Prospectus is a part, with
respect to the New Alliance Shares and New Warrants offered hereby. This
Prospectus omits certain information contained in the Registration Statement,
and reference is made to the Registration Statement for further information with
respect to Alliance and the New Alliance Shares and New Warrants offered hereby.
Statements contained herein concerning the provisions of documents are
necessarily summaries of these documents and when any such document is an
exhibit to the Registration Statement, each such statement is qualified in its
entirety by reference to the copy of such document filed with the Commission.
Copies of the Registration Statement, including the exhibits and schedules
thereto, may be acquired upon payment of the prescribed fees or examined without
charge at the public reference facilities of the Commission at 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20539, and at the regional offices of the
Commission at Seven World Trade Center, New York, New York 10048, and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661.
LaTex is subject to the information and reporting requirements of the
Securities Exchange Act of 1934 and is, therefore, required to file reports and
other information with the Commission relating to its business, financial
condition and other matters. These reports, proxy statements and other
information are available for inspection at the public reference facilities of
the Commission located at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the Commission located in
the Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661 and in Seven World Trade Center, Suite 1300, New York, New York.
Copies may be obtained by mail upon payment of the Commission's customary
charges by writing to its principal office at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549. Historical information about LaTex
is included in the LaTex Annual Report Form 10-K for the Year Ended July 31,
1996 and the LaTex Quarterly Report on Form 10-Q for the Quarter Ended October
31, 1996 that are part of this Proxy Statement.
Copies of such material can also be obtained by mail at prescribed rates
from the Public Reference Section of the Commission at its principal office at
450 Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains a web
site (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission.
REPORTS TO SHAREHOLDERS
Upon completion of the Merger, Alliance will furnish its shareholders with
annual reports containing audited financial statements and the report thereon by
its auditors. In addition, Alliance will furnish its shareholders such
additional unaudited financial statements and reports which are required by the
various governmental regulatory agencies to whom it must report. The financial
statements will be prepared under accounting principles generally accepted in
the United Kingdom and include a reconciliation of profit and loss for the year
and shareholders equity to amounts estimated to be in accordance with United
States generally accepted accounting principles, or will be prepared in
accordance with the United States generally accepted accounting principles.
By Order of the Board of Directors
86
<PAGE>
Stacey D. Smethers
Secretary
______________, 1997
87
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
ALLIANCE
Report of Independent Auditors F-2
Statement of Directors' Responsibility 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-36
Unaudited interim statement for the six months ended October 31, 1996 F-41
</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.
KPMG Audit Plc
London, England Chartered Accountants
October 16, 1996, except note 26 Registered Auditor
which is as of February 19, 1997
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 208 (114) (56)
----- ----- -----
INVESTMENTS AND SERVICING OF FINANCE
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.
F-12
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
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.
. 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.
F-13
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
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) was: (244) (16,181) (191)
====== ====== ======
</TABLE>
F-14
<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).
F-15
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
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-16
<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 &
BUILDING 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-17
<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-18
<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-19
<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-20
<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
===== =======
</TABLE>
Bank loans and overdrafts were repayable as follows:
<TABLE>
<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
===== =======
</TABLE>
Development loans and other loans were repayable as follows:
<TABLE>
<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>
F-21
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
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.
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
============ ============
</TABLE>
<TABLE>
<CAPTION>
1996 1995
AMOUNT IN STERLING (Pounds)000 (Pounds)000
------------ ------------
<S> <C> <C>
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
============ ============
</TABLE>
<TABLE>
<CAPTION>
1996 1995
AMOUNT IN US DOLLARS $ 000 $ 000
------------ ------------
<S> <C> <C>
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.
F-22
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-23
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
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>
$ 000 $ 000
------ ------
<S> <C> <C>
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>
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.
F-24
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARY
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
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-25
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARY
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.
F-26
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARY
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
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>
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>
F-27
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARY
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
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-28
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOTE 24 - EMPLOYEES
<TABLE>
<S> <C> <C> <C>
1996 1995 1994
$ 000 $ 000 $ 000
----- ----- -----
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
===== ===== =====
The average number of persons employed by the Group, including Executive Directors, were as follows:
1996 1995 1994
$ 000 $ 000 $ 000
----- ----- -----
Management and administration 8 9 5
Technical and operational 7 11 -
----- ----- -----
15 20 5
===== ===== =====
</TABLE>
F-29
<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-30
<PAGE>
ALLIANCE RESOURCE 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%
F-31
<PAGE>
ALLIANCE RESOURCE PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
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.
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, 1996 APRIL 30, 1995
$000 $000 $000
-------------- -------------- --------------
<S> <C> <C> <C>
Capital commitments - 5,300 6,037
====== ====== ======
</TABLE>
F-32
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
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.
(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-33
<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 As at April 30,
--------- ---------------------
1996 1995
---------- ----------
<S> <C> <C> <C>
$ 000 $ 000
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-34
<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-35
<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-37
<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-38
<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
------- -------
<S> <C> <C>
$ 000 $ 000
------- -------
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-39
<PAGE>
ALLIANCE RESOURCES PLC
SUPPLEMENTAL OIL AND GAS DATA - (UNAUDITED)
CHANGES IN STANDARDIZED MEASURE DISCOUNTED FUTURE NET CASH FLOWS
<TABLE>
<S> <C>
$ 000
-------
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-40
<PAGE>
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
------------ ------------ -----------
<S> <C> <C> <C>
$000 $000 $000
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-41
<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
---------------- --------------
<S> <C> <C>
$000 $000
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-42
<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 31 201 208
SERVICING OF FINANCE --- --- ---
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 1,867 (804) (2,512)
ACTIVITIES ------ ------ ------
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
F-43
<PAGE>
ALLIANCE RESOURCES PLC
UNAUDITED INTERIM STATEMENT FOR THE SIX MONTHS ENDED OCTOBER 31, 1996
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).
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 months 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.
F-44
<PAGE>
ALLIANCE RESOURCES PLC
UNAUDITED INTERIM STATEMENT FOR THE SIX MONTHS ENDED OCTOBER 31, 1996
(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-45
<PAGE>
ALLIANCE RESOURCES PLC
UNAUDITED INTERIM STATEMENT FOR THE SIX MONTHS ENDED OCTOBER 31, 1996
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
<S> <C> <C> <C>
1996 1995
---- ----
$000 $000
(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 SHAREHOLDER'S EQUITY OF SIGNIFICANT DIFFERENCES BETWEEN UNITED KINGDOM
GAAP AND UNITED STATES GAAP:
<TABLE>
<CAPTION>
Reference to
note above As at October 31
------------- ----------------
<S> <C> <C> <C>
1996 1995
------- -------
$ 000 $ 000
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 4,825 6,775
with US GAAP ======= =======
</TABLE>
F-46
<PAGE>
APPENDIX A
GLOSSARY
The terms defined in this Appendix are used throughout this Proxy
Statement.
Alliance. Alliance Resources Plc, a corporation organized and registered
under the laws of England and Wales.
Alliance Credit Agreement. The Credit Agreement dated March __, 1997
between Alliance and the Bank.
Bank or Bank of America. Bank of America NT & SA.
bbl. One stock tank barrel, of 42 U.S. gallons liquid volume, used herein
in reference to crude oil or other liquid hydrocarbons.
bcf. One billion cubic feet of natural gas.
boe. One barrel of oil equivalent using the ratio of one barrel of crude
oil, condensate or natural gas liquids to 6 Mcf of natural gas.
bopd. Barrels of oil per day.
Btu. British thermal unit, which is the heat required to raise the
temperature of a one-pound mass of water from 58.5 to 59.5 degrees
Fahrenheit.
Commercial Well. Commercially Productive Well. An oil and gas well which
produces oil and natural gas in sufficient quantities such that proceeds from
the sale of such production exceed production expenses and taxes.
Conversion Rate. The rate at which holders of LaTex Shares will be entitled
to receive New Alliance Shares in the Merger. The Conversion Rate will be
0.85981 New Alliance Shares for each share of LaTex Common Stock, 2.58201 New
Alliance Shares for each share of LaTex Series A Stock, 6.17632 New Alliance
Shares for each share of LaTex Series B Stock, and a warrant to purchase 0.85981
New Alliance Shares for each share of LaTex Common Stock subject to warrants
issued by LaTex. Fractional New Alliance Shares will not be issed in the merger.
Instead, the shares issued to each holder will be rounded to the nearest whole
number of New Alliance Shares. No cash will be paid for fractional shares not
received.
Developed Acreage. The number of acres which are allocated or assignable
to producing wells or wells capable of production.
Development Well. A development well is a well drilled within the
presently proved productive area of an oil or natural gas reservoir, as
indicated by reasonable interpretation of available data, with the objective of
completing in that reservoir.
DGCL. The Delaware General Corporation Law.
Dry Hole; Dry Well; Non-Productive Well. A well found to be incapable of
producing either oil or natural gas in sufficient quantities to justify
completion as an oil or natural gas well.
A-1
<PAGE>
Existing Alliance Shares. The ordinary shares of Alliance, of (Pounds)0.01
each, currently outstanding.
Exploratory Well. An exploratory well is a well drilled either in search
of a new, as-yet undiscovered oil or natural gas reservoir or to greatly extend
the known limits of a previously discovered reservoir.
Forbearance Agreement. An agreement entered into by LaTex Resources, Inc.
and the Bank of America under which the Bank of America has agreed to delay
enforcement of its rights under the LaTex Credit Agreement.
GAAP. Generally accepted accounting principles.
Gross Acres or Gross Wells. The total acres or wells, as the case may be,
in which a working interest is owned.
Horizontal Wells. Wells which are drilled at angles greater than 70
degrees from vertical.
LaTex. LaTex Resources, Inc., a Delaware corporation.
LaTex Common Stock. The common stock, par value $.01 per share, of LaTex.
LaTex Credit Agreement. The Amended and Restated Credit Agreement dated
October 20, 1995 among certain subsidiaries of LaTex and the Bank.
LaTex Form 10-K. The Annual Report on Form 10-K for the year ended July
31, 1996, of LaTex.
LaTex Form 10-Q. The Quarterly Report on Form 10-Q for the quarter ended
October 31, 1996, of LaTex.
LaTex Series A Stock. The Series A Convertible Preferred Stock of LaTex,
par value $0.01 per share.
LaTex Series B Stock. The Series B Senior Convertible Preferred Stock of
LaTex, par value $0.01 per share.
LaTex Shares. The LaTex Common Stock, LaTex Series A Stock and LaTex
Series B Stock.
mbbls. One thousand barrels of crude oil or other liquid
hydrocarbons.
mboe. One thousand BOEs.
mbtu. One thousand BTUs.
mcf. One thousand cubic feet of natural gas.
mcfgpd. Mcf of gas per day.
A-2
<PAGE>
Merger. The merger of Alliance Resources (Delaware) Inc., a wholly owned
subsidiary of Alliance, into LaTex with the result that LaTex will become a
wholly owned subsidiary of Alliance and each outstanding LaTex Share (other than
LaTex Shares, if any, held by LaTex in treasury and shares held by a shareholder
who has properly exercised his dissent and appraisal rights) will be
automatically canceled and LaTex shareholders will receive New Alliance Shares
at the Conversion Rate.
Merger Agreement. The Agreement and Plan of Merger among Alliance, Alliance
Resources (Delaware) Inc., a wholly owned subsidiary of Alliance, and LaTex
dated as of August 12, 1996, as amended through March 12, 1997, which is
included as Appendix B to this Proxy Statement
mmbbl. One million barrels of crude oil or other liquid hydrocarbons.
mmboe. One million BOEs.
mmbtu. One million BTUs.
mmcf. One million cubic feet of natural gas.
Net Revenue Interest. Production or revenue that is owned by the respective
company and produced for its interest after deducting royalties and other
similar interests.
Net Acres or Net Wells. The sum of the fractional working interests owned
in gross acres or gross wells.
New Alliance Shares. The ordinary shares of Alliance, of (Pounds)0.40
each, to be outstanding after Alliance completes its 40-to-1 reverse stock split
immediately before the Merger.
New Warrants. The warrants to be issued by Alliance in the Merger to
replace currently outstanding warrants issued by LaTex. The New Warrants will
be convertible into 1,957,852 New Alliance Shares following the Merger.
ORRI. The royalty interest to be acquired by Alliance from the Bank at the
same time as the Merger.
PV10 Value. When used with respect to oil and natural gas reserves, PV10
Value means the estimated future gross revenue to be generated from the
production of proved reserves, net of estimated production and future
development costs, using prices and costs in effect at the determination date,
without giving effect to non-property related expenses such as general and
administrative expenses, debt service and future income tax expense or to
depreciation, depletion and amortization, discounted using an annual discount
rate of 10% in accordance with the guidelines of the SEC.
Productive Well. A well that is producing oil or natural gas or that is
capable of production.
Proved Developed Reserves. Reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.
Proved Reserves. The 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 Undeveloped Reserves. Reserves that are expected to be recovered
from new wells on undrilled acreage or from existing wells where a relatively
major expenditure is required for recompletion.
A-3
<PAGE>
Proxy Statement. This Prospectus/Proxy Statement.
Royalty Interest. An interest in an oil and natural gas property entitling
the owner to a share of oil or natural gas production free of costs of
production.
Undeveloped Acreage. Lease acreage on which wells have not been
participated in or completed to a point that would permit the production of
commercial quantities of oil and natural gas regardless of whether such acreage
contains proved reserves.
Working Interest. The operating interest which gives the owner the right
to drill, produce and conduct operating activities on the property as well as to
a share of production.
A-4
<PAGE>
APPENDIX B
AGREEMENT AND PLAN OF MERGER
----------------------------
(As amended through March 12, 1997.)
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is entered into as of
August 12, 1996, by and among ALLIANCE RESOURCES PLC, a public limited company
incorporated in England and Wales ("Alliance"), ALLIANCE RESOURCES (DELAWARE),
INC., a newly formed Delaware corporation ("Newco") and LATEX RESOURCES, INC., a
Delaware corporation ("LaTex").
Recitals
--------
The parties desire to effect a merger on the terms, and subject to the
provisions and conditions, of this Agreement.
Agreement
---------
NOW, THEREFORE, for and in consideration of the premises and the mutual
agreements hereinafter set forth, in accordance with the provisions of
applicable law, the parties hereby agree as follows:
1. Definitions. As used in this Agreement and the Exhibits, Schedules
-----------
and documents delivered pursuant to this Agreement, the following terms shall
have the following meanings:
ADEA. "ADEA" means the Age Discrimination in Employment Act, as
----
amended, or any successor statute.
Affiliate. "Affiliate" means an "affiliate" or associate" as those
---------
terms are defined in Rule 12b-2 promulgated by the Commission under the Exchange
Act.
Certificate of Merger. "Certificate of Merger" is as defined in
---------------------
Section 2.2.
- -----------
Closing. "Closing" means the closing referred to in Section 3.1.
------- -----------
Closing Date. The "Closing Date" is the second business day (other
------------
than a Saturday, Sunday or legal holiday) following the day on which the
conditions to the obligations of the parties set forth in Articles 8 and 9 shall
---------- -
have been satisfied or waived, or such other time as shall be set by the parties
in writing.
Code. "Code" means the Internal Revenue Code of 1986, as amended, or
----
any successor statute.
Commission. "Commission" means the Securities and Exchange Commission
----------
and/or any other Governmental Entity that administers either the Securities Act
or the Exchange Act.
DGCL. "DGCL" means the Delaware General Corporation Law, as amended,
----
or any successor statute.
Dissenting Shares. "Dissenting Shares" are as defined in Section 2.8.
----------------- -----------
Effective Time. "Effective Time" is as defined in Section 2.2.
-------------- -----------
B-1
<PAGE>
Encumbrance. An "Encumbrance" is any option, pledge, security
-----------
interest, lien, charge, encumbrance, or restriction (whether on voting, sale,
transfer, disposition or otherwise), whether imposed by agreement,
understanding, law or otherwise, except those arising under applicable federal
or state securities laws.
ERISA. "ERISA" means the Employee Retirement Income Security Act of
-----
1974, as amended, or any successor statute.
Exchange Act. "Exchange Act" means the Securities Exchange Act of
------------
1934, as amended, or any successor statute.
Excluded Entities. "Excluded Entities" means LaTex Resources
-----------------
International Inc.; Wexford Technology, Inc.; Imperial Petroleum, Inc. and
Phoenix Metals, Inc.
GAAP. "GAAP," with respect to the LaTex Entities, means generally
----
accepted accounting principles set forth in the opinions and pronouncements of
the Accounting Principles Board of the American Institute of Certified Public
Accountants, in statements and pronouncements of the Financial Accounting
Standards Board or in such other statements by such other entity as may be
approved by a significant segment of the accounting profession, which are
applicable to the circumstances as of the date of determination, and with
respect to the Alliance Entities, means Financial Reporting Standards and
Statements of Standard Accounting Practice issued by the Accounting Standards
Board and its predecessor which are current as of the date of determination.
Good and Defensible Title. "Good and defensible title" means such
-------------------------
title that (i) is deducible of record (or otherwise acceptable to a reasonably
prudent title examiner) and free from reasonable doubt to the end that a prudent
person engaged in the business of the ownership, development and operation of
oil and gas properties with knowledge of all of the facts and appreciation of
their legal significance would be willing to accept the same, (ii) is free and
clear of all Encumbrances, except for Permitted Encumbrances, and (iii) with
respect to each Major Oil and Gas Interest of the Alliance Entities or the LaTex
Entities, as the case may be, entitles the relevant party or Subsidiary to
receive not less than the Net Revenue Interest set forth in Exhibit A-1 or A-2
------------------
(with respect to the Alliance Entities), and Exhibit B-1 or B-2 (with respect to
------------------
the LaTex Entities) with respect to all Hydrocarbons produced and attributable
to such Major Oil and Gas Interest, and obligates the party or the relevant
Subsidiary to pay costs and expenses relating to such Major Oil and Gas Interest
in an amount not greater than the Working Interest set forth in Exhibit A-1 or
--------------
A-2 (with respect to the Alliance Entities), and Exhibit B-1 or B-2 (with
- --- ------------------
respect to the LaTex Entities) with respect to such Major Oil and Gas Interest.
Governmental Entity. A "Governmental Entity" is any federal, state,
-------------------
municipal, domestic or foreign court, tribunal, administrative agency,
department, commission, board, bureau or other governmental authority or
instrumentality.
Hydrocarbons. "Hydrocarbons" mean oil, gas and/or other liquid and
------------
gaseous hydrocarbons or any combination thereof.
LaTex. "LaTex" means LaTex Resources, Inc., a Delaware corporation.
-----
LaTex Common Shares. "LaTex Common Shares" means all of the issued
-------------------
and outstanding common stock of LaTex, par value $.01 per share.
B-2
<PAGE>
LaTex Disclosure Schedule. The "LaTex Disclosure Schedule" is the
-------------------------
Disclosure Schedule delivered by LaTex to Alliance contemporaneously with the
execution of this Agreement. Each heading in the LaTex Disclosure Schedule shall
refer to the applicable section of this Agreement.
LaTex Entities. "LaTex Entities" means LaTex and its Subsidiaries
--------------
other than the Excluded Entities.
LaTex Financial Statements. The "LaTex Financial Statements" are,
--------------------------
collectively, the respective audited consolidated financial statements of the
LaTex Entities as of and for the years ended July 31, 1994 and 1995; and the
respective unaudited interim consolidated financial statements of the LaTex
Entities as of and for the quarter and nine months ended April 30, 1996.
LaTex Interests. "LaTex Interests" means:
---------------
(a) the Major Oil and Gas Interests of the LaTex Entities;
(b) the Miscellaneous Interests of the LaTex Entities; and
(c) all of the rights, titles and interests, whether direct or
indirect, of the LaTex Entities in and to all of the property, rights and
interests incident to such Major Oil and Gas Interests or such Miscellaneous
Interests, including without limitation all of the rights, titles and interests
of the LaTex Entities in and to all LaTex Oil and Gas Contracts, leases, rights-
of-way, easements, options, orders and rulings of applicable regulatory
agencies, wells, lease and well equipment, machinery, production facilities,
processing facilities, gathering systems, transportation systems, disposal
systems, fixtures and other items of personal property and improvements now or
as of the Closing Date appurtenant to such Major Oil and Gas Interests or such
Miscellaneous Interests or used, obtained or held for use in connection with the
operation of such Major Oil and Gas Interests or such Miscellaneous Interests or
with the production, treatment, sale or disposal of Hydrocarbons or water
produced therefrom or attributable thereto.
LaTex's Reimbursable Expenses. "LaTex's Reimbursable Expenses" shall
-----------------------------
mean all costs and expenses, evidenced by reasonable and customary documentary
support, that have been incurred (prior to and following the execution of this
Agreement) by, or for which liability has (prior to and following the execution
of this Agreement) arisen on the part of the LaTex Entities in connection with
(i) the investigation of the Alliance Entities and due diligence conducted by or
on behalf of LaTex and (ii) the negotiation, execution and performance of this
Agreement and the consummation of the transactions contemplated hereby
(including, without limitation, the financing of the Merger), including, without
limitation, (A) any financial advisory fees payable by LaTex, (B) amounts
payable in respect of legal, financial and accounting services provided by
outside advisors to LaTex and (C) other reasonable expenses incurred by LaTex in
connection with the Merger.
LaTex Reserve Report. "LaTex Reserve Report" means that reserve
--------------------
report with respect to LaTex's Major Oil and Gas Interests effective April 1,
1996 prepared by Lee Keeling and Associates.
LaTex Series A Shares. "LaTex Series A Shares" means all of the
---------------------
issued and outstanding Series A Convertible Preferred Stock of LaTex, par value
$.01 per share.
LaTex Series B Shares. "LaTex Series B Shares" means all of the
---------------------
issued and outstanding Series B Senior Convertible Preferred Stock of LaTex, par
value $.01 per share.
B-3
<PAGE>
LaTex Shares. "LaTex Shares" means the LaTex Common Shares, LaTex
------------
Series A Shares and LaTex Series B Shares.
LaTex Stockholders. "LaTex Stockholders" means the holders of LaTex
------------------
Shares and holders of Options and Warrants of LaTex from time to time.
Leases. "Leases" means oil, gas and mineral leases, oil and gas
------
leases, oil leases, gas leases, other mineral leases, subleases, assignments of
operating rights and similar agreements, and any extensions or renewals thereof.
Major Non-Producing Leases. "Major Non-Producing Leases" of the
--------------------------
Alliance Entities or the LaTex Entities, as the case may be, means all of such
group's rights, titles and interests, including leasehold interests, whether
direct or indirect, in and to the lands and Leases described in Exhibit A-2
-----------
(with respect to the Alliance Entities) or Exhibit B-2 (with respect to the
-----------
LaTex Entities), as appropriate.
Major Oil and Gas Interests. "Major Oil and Gas Interests" of
---------------------------
Alliance Entities or the LaTex Entities, as the case may be, means (i) the Major
Producing Leases of the Alliance Entities or the LaTex Entities, as the case may
be, and (ii) the Major Non-Producing Leases of the Alliance Entities or the
LaTex Entities, as the case may be.
Major Producing Leases. "Major Producing Leases" of the Alliance
----------------------
Entities or the LaTex Entities, as the case may be, means all of such group's
rights, titles and interests, whether direct or indirect, in and to the Wells
described in Exhibit A-1 (with respect to the Alliance Entities) or Exhibit B-1
----------- -----------
(with respect to the LaTex Entities) and in and to any Leases (whether or not
described in Exhibit A-1 (with respect to the Alliance Entities) or Exhibit B-2
----------- -----------
(with respect to the LaTex Entities) upon which such Wells have been drilled or
which have been pooled or unitized with Leases upon which such Wells have been
drilled.
Material Effect. "Material Effect" means a material adverse effect on
---------------
the business or financial condition of a party and its Subsidiaries taken as a
whole.
Merger. "Merger" means the merger of Newco with and into LaTex as
------
described in Section 2.1.
-----------
Miscellaneous Interests. "Miscellaneous Interests" of the Alliance
-----------------------
Entities or the LaTex Entities, as the case may be, means all of such group's
claims, rights, titles and interests, whether direct or indirect, in and to all
Leases, royalty interests, overriding royalty interests and other oil, gas and
mineral properties of every kind and character, whether producing, non-
producing, developed or undeveloped, wherever situated (other than its Major Oil
and Gas Interests), including without limitation those oil, gas and mineral
properties described in Exhibit A-3 (with respect to the Alliance Entities) or
-----------
Exhibit B-3 (with respect to the LaTex Entities).
- -----------
Alliance. "Alliance" means Alliance Resources Plc, a public limited
--------
company incorporated in England and Wales.
Alliance Disclosure Schedule. The "Alliance Disclosure Schedule" is
----------------------------
the Disclosure Schedule delivered by Alliance to LaTex contemporaneously with
the execution of this Agreement. Each heading in the Alliance Disclosure
Schedule shall refer to the applicable section of this Agreement.
Alliance Entities. "Alliance Entities" means Alliance and its
-----------------
Subsidiaries.
B-4
<PAGE>
Alliance Financial Statements. The "Alliance Financial Statements"
-----------------------------
are, collectively, the audited consolidated financial statements of the Alliance
Entities as of and for the year ended April 30, 1995 and the five month period
ended September 30, 1995; and the unaudited interim financial statements of the
Alliance Entities as of and for the six months ended October 31, 1995.
Alliance Interests. "Alliance Interests" means:
------------------
(a) the Major Oil and Gas Interests of the Alliance Entities;
(b) the Miscellaneous Interests of the Alliance Entities; and
(c) all of the rights, titles and interests, whether direct or
indirect, of the Alliance Entities in and to all of the property, rights and
interests incident to such Major Oil and Gas Interests or such Miscellaneous
Interests, including without limitation all of the rights, titles and interests
of the Alliance Entities in and to all Alliance Oil and Gas Contracts, leases,
rights-of-way, easements, options, orders and rulings of applicable regulatory
agencies, wells, lease and well equipment, machinery, production facilities,
processing facilities, gathering systems, transportation systems, disposal
systems, fixtures and other items of personal property and improvements now or
as of the Closing Date appurtenant to such Major Oil and Gas Interests or such
Miscellaneous Interests or used, obtained or held for use in connection with the
operation of such Major Oil and Gas Interests or such Miscellaneous Interests or
with the production, treatment, sale or disposal of Hydrocarbons or water
produced therefrom or attributable thereto.
Alliance's Reimbursable Expenses. "Alliance's Reimbursable Expenses"
--------------------------------
shall mean all costs and expenses, evidenced by reasonable and customary
documentary support, that have been incurred (prior to and following the
execution of this Agreement) by, or for which liability has (prior to and
following the execution of this Agreement) arisen on the part of the Alliance
Entities in connection with (i) the investigation of the LaTex Entities and due
diligence conducted by or on behalf of Alliance and (ii) the negotiation,
execution and performance of this Agreement and the consummation of the
transactions contemplated hereby (including, without limitation, the financing
of the Merger), including, without limitation, (A) any financial advisory fees
payable by Alliance, (B) amounts payable in respect of legal, financial and
accounting services provided by outside advisors to Alliance and (C) other
reasonable expenses incurred by Alliance in connection with the Merger.
Alliance Reserve Report. "Alliance Reserve Report" means that reserve
-----------------------
report with respect to Alliance's Major Oil and Gas Interests effective April 1,
1996, prepared by Ryder Scott Company.
Alliance Shares. "Alliance Shares" means all of the issued and
---------------
outstanding ordinary shares of (Pounds)0.01 each in the capital of Alliance.
Alliance Stockholders. "Alliance Stockholders" means the holders of
---------------------
Alliance Shares from time to time.
Net Revenue Interest. "Net Revenue Interest" (or "NRI") means the
--------------------
decimal interest in and to all production of the Hydrocarbons produced and saved
or sold from the Alliance Interests or the LaTex Interests, as the case may be,
after giving effect to all valid lessors' royalties, overriding royalties and/or
other non-expense bearing burdens against production.
Net Revenue Interest After Payout. "Net Revenue Interest After
---------------------------------
Payout" ("NRIAPO") means the NRI after any payout occurs in connection with any
NRI described in Exhibits A-1 and A-2 (with respect
B-5
<PAGE>
to the Alliance Entities) or Exhibits B-1 and B-2 (with respect to the LaTex
--------------------
Entities) to this Agreement. Such payouts are defined and shall occur pursuant
to the agreements relating thereto.
Net Revenue Interest Before Payout. "Net Revenue Interest Before
----------------------------------
Payout" ("NRIBPO") means the NRI before any payout occurs in connection with any
NRI described in Exhibits A-1 and A-2 (with respect to the Alliance Entities) or
--------------------
Exhibits B-1 and B-2 (with respect to the LaTex Entities) to this Agreement.
- --------------------
Such payouts are defined and shall occur pursuant to the agreements relating
thereto.
Oil and Gas Contracts. "Oil and Gas Contracts" means all Leases,
---------------------
permits, licenses, farmout or farming agreements, bottom hole or acreage
contribution agreements, operating agreements, unit agreements, declarations or
orders, joint venture, exploration, participation or acquisition agreements,
division orders, production sales, purchase, exchange, processing or
transportation agreements and all other contracts and agreements in effect or in
existence on the date hereof and affecting or relating to the ownership or
operation of the Alliance Interests or the LaTex Interests, as the case may be,
or the disposition of the Hydrocarbons produced therefrom. The Oil and Gas
Contracts affecting or relating to the Alliance Interests are referred to herein
as the "Alliance Oil and Gas Contracts" and the Oil and Gas Contracts affecting
or relating to the LaTex Interests are referred to herein as the LaTex Oil and
Gas Contracts.
Paying Agent. "Paying Agent" means the transfer agent for the
------------
Alliance Shares.
Permitted Encumbrances. "Permitted Encumbrances" means (i) lessor's
----------------------
royalties, overriding royalties, division orders and sales contracts covering
Hydrocarbons, reversionary interests and similar burdens and all existing
operating agreements and unit agreements, if the net cumulative effect of the
same does not operate to reduce the Net Revenue Interests of the Alliance
Interests or the LaTex Interests, as the case may be, to less than the Net
Revenue Interests set forth in Exhibits A-1 and A-2 (with respect to the
--------------------
Alliance Entities) or Exhibits B-1 and B-2 (with respect to the LaTex Entities)
--------------------
or increase the Working Interests of the Alliance Interests or the LaTex
Interests, as the case may be, to more than the Working Interests set forth in
Exhibits A-1 and A-2 (with respect to the Alliance Entities) or Exhibits B-1 and
- -------------------- ----------------
B-2 (with respect to the LaTex Entities) (unless there is a corresponding
- ---
increase in the Net Revenue Interests); (ii) any and all federal and state
regulatory orders and rules to which the Alliance Interests or the LaTex
Interests, as the case may be, are presently subject; (iii) preferential rights
to purchase and required third-party consents to assignments and similar
agreements; (iv) liens for Taxes not due or not delinquent at the time of
Closing or the validity of which are being contested in good faith by
appropriate actions; (v) statutory Encumbrances not yet delinquent; (vi) all
rights to consent by, required notices to, filings with, or other actions by
governmental entities in connection with the sale or conveyance of Leases or
interests therein if the same are customarily obtained after such sale or
conveyance; (vii) easements, rights-of-way, servitudes, permits, surface leases
and other rights in respect of surface operations, pipelines, grazing, logging,
canals, ditches, reservoirs or the like; and easements for streets, alleys,
highways, pipelines, telephone lines, power lines, railways and other easements
and rights-of-way, on, over or in respect of any of the Alliance Interests or
the LaTex Interests, as the case may be; (viii) liens of operators relating to
obligations not yet due or not delinquent; (ix) title problems commonly
encountered in the oil and gas business which would not be considered material
by a reasonable and prudent person engaged in the business of the ownership,
development and operating of oil and gas properties with knowledge of all the
facts and appreciation of their legal significance; and (x) Encumbrances
described in Exhibit A-1, A-2 and A-3 (with respect to the Alliance Entities) or
------------------------
Exhibit B-1, B-2 and B-3 (with respect to the LaTex Entities).
- ------------------------
Plan. "Plan" means (i) any employee benefit plan as defined in
----
Section 3(3) of ERISA, which is (a) maintained by a party or any of its
Subsidiaries, or (b) to which a party or any of its Subsidiaries is making or
accruing an obligation to make contributions, or (ii) any other formal or
informal obligation to, arrangement with, or plan or program for the benefit of,
employees of a party or any of its Subsidiaries,
B-6
<PAGE>
including, but not limited to, stock options, stock bonuses, stock purchase
agreements, bonuses, incentive compensation, deferred compensation, supplemental
pensions, vacations, severance pay, insurance or any other benefit, program or
practice.
Securities Act. "Securities Act" means the Securities Act of 1933, as
--------------
amended, or any successor statute.
Subsidiary and Subsidiaries. "Subsidiary" or "Subsidiaries" means any
---------------------------
corporation more than fifty percent (50%) of the voting power of which is owned
directly or indirectly by a party or other relevant person, as the context
requires, other than the Excluded Entities with respect to LaTex.
Surviving Corporation. "Surviving Corporation" is as defined in
---------------------
Section 2.1.
- -----------
Taxes. "Taxes" means all taxes, charges, fees, levies, duties or
-----
other assessments, including, without limitation, income, gross receipts,
excise, ad valorem, property, production, severance, sales, use, license,
payroll and franchise taxes, imposed by any Governmental Entity and includes any
estimated tax, interest and penalties or additions to tax.
Tax Return. "Tax Return" means a report, return or other information
----------
required to be supplied by a party comprising a part of the Alliance Entities or
the LaTex Entities, as the case may be, to a Governmental Entity in connection
with Taxes including, where permitted or required, combined or consolidated
returns for any group of entities that includes that entity.
Warrants. "Warrants" means those warrants to purchase up to
--------
1,927,908 LaTex Common Shares pursuant to publicly and privately issued
warrants.
Wells. "Wells" means the wells described in Exhibit A-1 (with respect
----- -----------
to the Alliance Entities) or Exhibit B-1 (with respect to the LaTex Entities),
-----------
as appropriate. The Wells of the Alliance Entities are referred to herein as
"Alliance's Wells" and the Wells of the LaTex Entities are referred to herein as
"LaTex's Wells."
Working Interest. "Working Interest" ("WI") means the decimal
----------------
interest in the full and entire leasehold estate in any of the Alliance
Interests or the LaTex Interests, as the case may be, and all rights and
obligations of every kind and character pertinent thereto or arising therefrom,
without regard to any valid lessor royalties, overriding royalties and/or other
burdens against production insofar as interest in said leasehold is burdened
with the obligation to bear and pay the cost of exploration, development and
operation.
Working Interest After Payout. "Working Interest After Payout"
-----------------------------
("WIAPO") means the WI after any payout occurs in connection with any WI
described in Exhibits A-1 and A-2 (with respect to the Alliance Entities) or
--------------------
Exhibits B-1 and B-2 (with respect to the LaTex Entities) to this Agreement.
- --------------------
Such payouts are defined and shall occur pursuant to the agreements relating
thereto.
Working Interest Before Payout. "Working Interest Before Payout
------------------------------
("WIBPO") means the WI before any payout occurs in connection with any WI
described in Exhibits A-1 and A-2 (with respect to the Alliance Entities) or
--------------------
Exhibits B-1 and B-2 (with respect to the LaTex Entities) to this Agreement.
- --------------------
Such payouts are defined and shall occur pursuant to the agreements relating
thereto.
B-7
<PAGE>
2. The Merger.
----------
2.1 The Merger. Subject to the terms and conditions of this
----------
Agreement, at the Effective Time, Newco shall be merged with and into LaTex and
the separate corporate existence of Newco shall cease (the "Merger"). LaTex
shall be the surviving corporation in the Merger (sometimes referred to as the
"Surviving Corporation") and shall continue to be governed by the laws of the
State of Delaware, and the separate corporate existence of LaTex with all its
rights, privileges, immunities, powers and franchises shall continue unaffected
by the Merger, except as set forth below in this Article 2. The Merger shall
---------
have the effects specified in the DGCL.
2.2 Effective Time. On the Closing Date, LaTex and Alliance will
--------------
cause a Certificate of Merger (the "Certificate of Merger") to be executed and
filed with the Secretary of State of Delaware as provided in Section 251 of the
DGCL to reflect the Merger. The Merger shall become effective at the date and
time at which the Certificate of Merger is duly filed with the Secretary of
State of Delaware, and such time is referred to in this Agreement as the
"Effective Time."
2.3 The Certificate of Incorporation. The Certificate of
--------------------------------
Incorporation of LaTex in effect at the Effective Time shall be the Certificate
of Incorporation of the Surviving Corporation, until duly amended in accordance
with the terms thereof and the DGCL.
2.4 The Bylaws. The Bylaws of LaTex in effect at the Effective Time
----------
shall be the Bylaws of the Surviving Corporation, until duly amended in
accordance with the terms thereof and the DGCL.
2.5 Officers and Directors. The officers and directors of Newco at
----------------------
the Effective Time shall be the officers and directors of the Surviving
Corporation until their successors have been duly elected or appointed and
qualified or until their earlier death, resignation or removal in accordance
with the Surviving Corporation's Certificate of Incorporation and Bylaws.
2.6 Conversion or Cancellation of LaTex Shares and Newco Shares. The
-----------------------------------------------------------
LaTex Shares shall be canceled and the Newco Shares shall be converted in the
Merger as follows:
(a) At the Effective Time,
(i) each LaTex Common Share issued and outstanding
immediately prior to the Effective Time, other than Dissenting Shares,
shall by virtue of the Merger and without any action on the part of the
holder thereof, be canceled and the holder shall, in consideration of such
cancellation, become entitled to the allotment of 0.85981 Alliance
Shares;
(ii) each LaTex Series A Share issued and outstanding
immediately prior to the Effective Time, other than Dissenting Shares,
shall by virtue of the Merger and without any action on the part of the
holder thereof, be canceled and the holder shall, in consideration of such
cancellation, become entitled to the allotment of 2.58201 Alliance
Shares;
(iii) each LaTex Series B Share issued and outstanding
immediately prior to the Effective Time, other than Dissenting Shares,
shall by virtue of the Merger and without any action on the part of the
holder thereof, be canceled and the holder shall, in consideration of such
cancellation, become entitled to the allotment of 6.17632 Alliance
Shares;
(iv) each Warrant outstanding at the signing of this
Agreement, and remaining outstanding at the Effective Time, whether or not
then exercisable or vested, shall be
B-8
<PAGE>
canceled and the holders shall, in consideration of such cancellation,
become entitled to receive a new warrant issued by Alliance pursuant to
which the holder will have the right to subscribe for, in accordance with
the terms and subject to the conditions of the existing Warrant, that
number of Alliance Shares as the holder would have been entitled to receive
had the holder exercised the existing Warrant immediately prior to the
Closing Date, but only in accordance with the terms and conditions of the
existing Warrant,
with the result that, immediately after the Effective Time, the persons who held
LaTex Shares (including those who receive LaTex Shares in consideration for the
cancellation of outstanding options to purchase LaTex Shares) shall hold
21,448,787 Alliance Shares, constituting 72% of the Alliance Shares then
outstanding (including the 237,500 post-reverse split Alliance Shares issuable
upon exercise of the options approved for management of Alliance, but excluding
for purposes of the computation any Alliance shares or warrants issuable to the
Bank of America NT & SA concurrently with or after the Effective Time) and the
holders of Warrants shall have the right to subscribe an additional 0.85981
Alliance Shares for each LaTex Common Share subject to the Warrants, pursuant to
replacement warrants to be issued by Alliance under the provisions of Section
-------
2.6(a)(iv), subject, in each case, to appropriate adjustments to reflect the
- ----------
reverse stock split referred to in Section 2.10(c).
---------------
(b) By virtue of the Merger and without any action on the part of the
holders thereof, all LaTex Shares and all Warrants shall no longer be
outstanding and shall be canceled and shall cease to exist and each holder of a
certificate representing LaTex Shares or an agreement representing Warrants
shall thereafter cease to have any rights with respect to such LaTex Shares or
such Warrants, and in consideration therefor shall be entitled to receive the
Alliance Shares specified in this Section upon the surrender of the certificate
representing the LaTex Shares as provided in Section 2.7, or the new warrant
-----------
issued by Alliance upon the surrender of the agreement with respect to the
Warrant as provided in Section 2.7 or the right, if any, to receive payment from
-----------
the Surviving Corporation of the "fair value" of such LaTex Shares as determined
in accordance with Section 262 of the DGCL. This Agreement shall effect an
amendment to the Certificate of Incorporation of LaTex with the effects
described in this Article 2, and approval of this Agreement by holders of LaTex
---------
Shares shall constitute approval of such amendments. Until such surrender, no
dividend or other distribution, if any, payable to holders of record of Alliance
Shares as of any date on or after the Closing Date shall be paid to the holder
of certificates representing LaTex Shares but upon surrender of certificates
representing the LaTex Shares as provided in Section 2.7, such holder shall be
-----------
entitled to receive all dividends and other distributions, if any, without
interest, that have become payable subsequent to the Effective Time with respect
to the number of Alliance Shares such holder is to receive.
(c) At the Effective Time, each Newco Share issued and outstanding
immediately prior to the Effective Time shall, by virtue of the Merger and
without any action on the part of Newco or the holder of such Shares, be
converted into one share of common stock of the Surviving Corporation.
2.7 Payment for LaTex Shares; New Warrants.
--------------------------------------
(a) Alliance shall, with effect from the Effective Time, allot the
new Alliance Shares to the holders of LaTex Shares which allotment shall be
conditioned on the relevant holders of LaTex Shares complying with Section
-------
2.7(b) and shall make available or cause to be made available to the Paying
- ------
Agent at the Effective Time certificates in respect of the Alliance Shares
sufficient to enable the Paying Agent to deliver the necessary certificates in
respect of the Alliance Shares to the holders of LaTex Shares as required by
Section 2.6.
- -----------
(b) On or after the Closing Date, each person who is at the Effective
Time a holder of record of issued and outstanding LaTex Shares may deliver to
the Paying Agent a letter of transmittal in a form suitable to the Paying Agent
duly executed and completed in accordance with the instructions thereto,
together with such holders' certificates representing such LaTex Shares, and
Alliance shall cause the Paying Agent to
B-9
<PAGE>
deliver to such holders certificates in respect of the Alliance Shares and any
dividends or distributions thereon to which such holders are then entitled. Upon
surrender to the Paying Agent of such certificates, together with such letter of
transmittal, duly executed and completed in accordance with the instructions
thereto, Alliance shall promptly cause to be delivered to the persons entitled
thereto certificates in respect of the Alliance Shares and any dividends or
distributions thereon to which such persons are then entitled.
(c) Fractional Alliance Shares will not be issued to any person. In
lieu of issuing a fractional Alliance Share to any person, Alliance will round
the number of Alliance Shares to be issued to each person to the nearest whole
number of Alliance Shares. No cash will be paid for fractional shares not
received.
(d) If Alliance Shares are to be issued to a person other than the
registered holder of the certificates surrendered, it shall be a condition of
such issue that the certificates so surrendered shall be properly endorsed or
otherwise in proper form for transfer and that the person requesting such
delivery shall pay any transfer or other taxes required by reason of the
delivery to a person other than the registered holder of the certificates
surrendered or establish to the satisfaction of Alliance or the Paying Agent
that such tax has been paid or is not applicable.
(e) Sixty (60) days following the Effective Time, Alliance shall be
entitled to cancel the allotment of Alliance Shares and to cause the Paying
Agent to deliver to Alliance the share certificates in respect of any Alliance
Shares made available to the Paying Agent that have not been delivered to
holders of certificates formerly representing LaTex Shares outstanding at the
Effective Time, and thereafter, such holders shall be entitled to look to
Alliance only as general creditors thereof with respect to the issue of Alliance
Shares and any dividends or distributions thereon upon due surrender of their
certificates or agreements. Notwithstanding the foregoing, neither the Paying
Agent nor any party hereto shall be liable to any holder of certificates
formerly representing LaTex Shares for any Alliance Shares or any dividends or
distributions thereon delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law. Alliance shall pay all charges and
expenses, including those of the Paying Agent, in connection with the exchange
of Alliance Shares for LaTex Shares.
(f) On or after the Closing Date, each person who is at the Effective
Time a holder of record of issued and outstanding Warrants may deliver to
Alliance the agreements representing such Warrants and Alliance shall deliver to
such holders an agreement representing the new warrants to purchase Alliance
Shares on the terms of, and as provided by, Section 2.6(a)(iv).
2.8 Dissenters' Rights.
------------------
(a) Notwithstanding anything in this Agreement to the contrary, LaTex
Shares that are issued and outstanding immediately prior to the Effective Time
and that are held by LaTex Stockholders who have delivered a written demand for
appraisal of such LaTex Shares in the manner provided in Section 262 of the DGCL
(the "Dissenting Shares") shall not be canceled and the holders thereof shall
not receive the right to receive the consideration provided in Section 2.6(a),
--------------
unless and until such holder shall have failed to perfect or shall have
effectively withdrawn or lost the right to appraisal and payment under the DGCL,
as the case may be. If such holder shall have failed to perfect or shall have
effectively withdrawn or lost such right, the LaTex Shares shall thereupon be
deemed to have been canceled and the holders thereof to have become entitled,
with effect from the Effective Time, to receive the consideration specified in
Section 2.6.
- -----------
(b) LaTex promptly shall give Alliance notice of any demand made by
or on behalf of any dissenting LaTex Stockholder to be paid the "fair value" of
the LaTex Stockholder's LaTex Shares, as provided in Section 262 of the DGCL,
and the Surviving Corporation shall thereupon have sole and exclusive rights to
conduct and resolve, in its sole discretion, all negotiations proceedings and
ultimate disposition
B-10
<PAGE>
with respect to any such demands in any manner that the Surviving Corporation
may elect. All such payments shall be made solely by the Surviving Corporation
and shall not be made by, nor shall Alliance reimburse the Surviving Corporation
for, such payments.
2.9 Transfer of LaTex Shares After the Effective Time. No transfers
-------------------------------------------------
of LaTex Shares shall be made on the stock transfer books of the Surviving
Corporation at or after the Effective Time. If, after the Effective Time,
certificates formerly representing LaTex Shares are presented to the Surviving
Corporation, they shall be canceled and the holders thereof shall instead be
entitled to be issued Alliance Shares as provided in this Article 2.
---------
2.10 Approval of the Stockholders and Registration.
---------------------------------------------
(a) As soon as reasonably practicable after the date of this
Agreement, LaTex will, in compliance with all applicable state and federal laws,
and in form and substance satisfactory to Alliance, file with the Commission
solicitation material necessary, and use its best efforts, after effectiveness
of the registration statement referred to in Section 2.10(b), to obtain the
---------------
approval of the LaTex Stockholders to the Merger. The materials sent by LaTex
in connection with the approval of the LaTex Stockholders will not include any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Alliance agrees to
furnish to LaTex all information (which shall meet the standard of the preceding
sentence) reasonably requested by LaTex in connection with preparing such
materials. The materials shall in form and substance be satisfactory to
Alliance and shall include all information regarding the Alliance Entities
required by applicable law to inform holders of the LaTex Shares of all
necessary information concerning the Merger and of their appraisal rights under
the DGCL. LaTex agrees to use its best efforts to cooperate with Alliance in
soliciting the approval of the LaTex Stockholders to the Merger as soon as is
reasonably practicable. Subject to compliance with their fiduciary duties in
connection with an Alternative Transaction as described in Section 6.9 as
-----------
advised in writing by outside counsel, the board of directors of LaTex shall
recommend approval by the LaTex Stockholders of the Merger, without reservation
or qualification.
(b) As soon as reasonably practicable after the date of this
Agreement, Alliance will, in compliance with all applicable state and federal
laws, and in form and substance satisfactory to LaTex, file with the Commission
and applicable state authorities, and use its best efforts to obtain the
effectiveness of, a registration statement relating to the issuance of the
Alliance Shares in the Merger. The filing may be made in conjunction with the
filing by LaTex of solicitation material for the LaTex Stockholders. The
materials filed by Alliance will not include any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading. LaTex agrees to furnish to Alliance all information
(which shall meet the standard of the preceding sentence) reasonably requested
by Alliance in connection with preparing such materials. The materials shall in
form and substance be satisfactory to LaTex and shall include all information
regarding the Alliance Entities required by applicable law to inform holders of
the LaTex Shares of all necessary information concerning the Merger and of their
appraisal rights under the DGCL.
(c) As soon as reasonably practicable after the date of this
Agreement, Alliance will, in compliance with all applicable laws, and in form
and substance satisfactory to LaTex, file with London Stock Exchange Limited
solicitation materials reasonably necessary, and use its best efforts, to obtain
the approval of the Alliance Stockholders to the Merger, to the issue of the new
Alliance Shares and to a 40 to one reverse stock split of the Alliance Shares.
The materials sent by Alliance in connection with the approval of Alliance
Stockholders will not include any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they
B-11
<PAGE>
were made, not misleading. LaTex agrees to furnish to Alliance all information
(which shall meet the standard of the preceding sentence) reasonably requested
by Alliance in connection with preparing such materials. The materials shall in
form and substance be satisfactory to LaTex and shall include all information
regarding the LaTex Entities required by applicable law or regulation to inform
holders of the Alliance Shares of all necessary information concerning the
Merger and the reverse stock split. Alliance agrees to use its best efforts in
soliciting the approval of the Alliance Stockholders to the Merger and the
reverse stock split as soon as is reasonably practicable. Subject to compliance
with their fiduciary duties in connection with an Alternative Transaction as
described in Section 7.8 as advised in writing by outside counsel, the board of
-----------
directors of Alliance shall recommend approval by the Alliance Stockholders of
the Merger and the reverse stock split, without reservation or qualification.
2.11 Restructuring Option. At any time on or before September 27,
--------------------
1996, Alliance shall have the right (but not the obligation) to elect to
restructure the Merger and the transaction contemplated thereby in a manner
determined by Alliance with the consent of LaTex, which consent will not be
unreasonably withheld, and which restructured transaction will include the
following: (a) the LaTex Stockholders (excluding holders of LaTex Warrants)
will, immediately prior to the completion of the transaction, hold 72% of the
equity, and the Alliance Stockholders and the holders of Alliance options will,
immediately prior to the completion of the transaction, hold 28% of the equity,
and (b) the matters to be addressed in the opinion described in Section 9(k)
------------
will be true and correct as of the closing of such restructured transaction.
Furthermore, such restructured transaction will, to the extent reasonably
practical, otherwise contain the terms reflected in this Agreement. Upon
Alliance's timely exercise of its rights under this Section, the parties shall
promptly execute such documents and agreements and shall take such other action
as may be necessary or appropriate to effect such restructuring.
3. The Closing.
-----------
3.1 Time and Place of Closing. The closing of the Merger (the
-------------------------
"Closing"), shall, unless otherwise agreed to in writing by the parties, take
place at the offices of Jenkens & Gilchrist, P.C., 1445 Ross Avenue, Suite 3200,
Dallas, Texas at 10:00 a.m., local time, on the Closing Date.
3.2 Obligations of LaTex at or Prior to the Closing. At or prior to
-----------------------------------------------
the Closing, LaTex shall deliver to Alliance the following:
(a) A copy of the charters of each of the LaTex Entities certified as
of a date within ten days of the Closing Date by the Secretary of State of the
state of incorporation of each of the respective entities and certified by the
respective corporate secretary as to the absence of any amendments between the
date of certification by the respective Secretary of State and the Closing Date;
(b) A certificate from the appropriate governmental officials of the
state of incorporation as to the existence and good standing of each of the
LaTex Entities and the payment of Taxes by each of the LaTex Entities as of a
date within ten days of the Closing Date, and, if available, a telecopy from
such officials as to the same matters dated the business day before the Closing
Date;
(c) A certificate of the corporate secretary of each of the LaTex
Entities attaching thereto a true and correct copy of the bylaws of the
respective entity;
(d) A certificate of the corporate secretary of LaTex attaching
copies of the resolutions of the board of directors and the LaTex Stockholders
approving the Merger;
(e) The Certificate of Merger duly executed on behalf of LaTex;
B-12
<PAGE>
(f) The certificate of an officer of LaTex referred to in Section
-------
8(b);
- ----
(g) The agreement from each of the Affiliates of LaTex relating to
his, her or its investment in the Alliance Shares referred to in Section 8(d);
------------
(h) The opinion of LaTex's counsel referred to in Section 8(e);
------------
(i) All contracts, contract amendments, LaTex Oil and Gas Contracts,
commitments, leases, books, records, files and other data relating to any of the
LaTex Entities and their assets then in the possession of the LaTex
Stockholders;
(j) All consents or approvals of any third party that are required to
be identified pursuant to Section 4.4; and
-----------
(k) Such other documents as are required pursuant to this Agreement
or as may reasonably be requested from LaTex by Alliance or its counsel.
3.3 Obligations of Alliance and Newco at or Prior to the Closing. At
------------------------------------------------------------
or prior to the Closing, Alliance shall deliver to LaTex the following:
(a) a copy of the Memorandum and Articles of Association (and all
amendments thereto, if any) of Alliance and each of Alliance's U.K. Subsidiaries
certified by the corporate secretary as to the absence of any amendments as of
the Closing Date;
(b) a copy of the charters of Newco and each of Alliance's
Subsidiaries not included in Section 3.3(a) certified as of a date within ten
--------------
days of the Closing Date by the appropriate governmental officials of the
jurisdiction of organization of each of the respective entities and certified by
the respective corporate secretary as to the absence of any amendments between
the date of certification by the governmental official and the Closing Date;
(c) A certificate from the appropriate governmental officials of the
jurisdiction of organization of Newco and each of Alliance's Subsidiaries not
included in Section 3.3(a) as to the existence and good standing of such
--------------
Subsidiary as of the date within ten days of the Closing Date, and, if
available, a telecopy from such officials as to the same matters dated the
business day before the Closing Date;
(d) A certificate of the corporate secretary of each of Alliance and
Newco attaching copies of corporate resolutions duly adopted by the board of
directors and stockholders of each of them approving the Merger, the issue of
new Alliance Shares, the reverse stock split and authorizing the consummation of
the transactions contemplated hereby;
(e) The Certificate of Merger duly executed on behalf of Newco;
(f) The certificate of an officer of Alliance and Newco referred to
in Section 9(b);
------------
(g) The opinions of Alliance's and Newco's counsel referred to in
Section 9(d);
- ------------
(h) All consents or approvals of any third party that are required to
be identified pursuant to Section 5.4;
-----------
B-13
<PAGE>
(i) Such other documents as are required pursuant to this Agreement
or as may reasonably be requested from Alliance by LaTex or its counsel.
4. Representations, Warranties and Covenants of LaTex. Except as
--------------------------------------------------
expressly set forth and specifically identified by section number of this
Agreement in the LaTex Disclosure Schedule, LaTex represents, warrants and
covenants to Alliance and Newco, on the date hereof and as of the Closing Date,
as follows:
4.1 Corporate Organization.
----------------------
(a) Each of the LaTex Entities is a corporation duly organized and
validly existing as a corporation and in good standing under the laws of its
jurisdiction of incorporation. Each of the LaTex Entities has the requisite
corporate power and authority to carry on its business as now being conducted
and to own, lease and operate its property and assets, and each of the LaTex
Entities is duly qualified or licensed to do business and is in good standing in
every jurisdiction in which the failure to be so qualified and licensed could
have a Material Effect. Section 4.1 of the LaTex Disclosure Schedule sets forth
--------------------------------------------
the name and state of incorporation of each of the LaTex Entities and each state
in which each of them is qualified or licensed to do business. LaTex has
heretofore delivered to Alliance true, correct and complete copies of each of
the LaTex Entities' respective Certificate of Incorporation and Bylaws as
presently in effect.
(b) Section 4.1 of the LaTex Disclosure Schedule sets forth a
--------------------------------------------
complete list of the present officers and directors of each of the LaTex
Entities.
4.2 Capitalization.
--------------
(a) The authorized, issued and outstanding capital stock of each of
the LaTex Entities is as set forth in Section 4.2 of the LaTex Disclosure
-----------------------------------
Schedule. All of the issued shares of each of the LaTex Entities are validly
- --------
issued, fully paid and nonassessable and none of such shares have been issued in
violation of the preemptive rights of any person.
(b) There are no (i) shares of capital stock or other securities
bearing voting or other equity rights, whether contingent or not, of any of the
LaTex Entities outstanding; (ii) outstanding subscriptions, puts, options,
warrants or other rights, contractual or otherwise, to purchase or acquire any
capital stock of any of the LaTex Entities; or (iii) contracts, commitments,
understandings, arrangements or restrictions by which any of the LaTex Entities
is or may become bound to issue any additional equity interests or any options
or rights with respect thereto, or any securities convertible into any equity
interests.
(c) The issued and outstanding stock of LaTex owned by the directors,
executive officers and 5% or greater stockholders of LaTex is owned of record,
and to the knowledge of LaTex, beneficially, as described in Section 4.2 of the
------------------
LaTex Disclosure Schedule. LaTex owns all of the issued and outstanding stock
- -------------------------
of each of its Subsidiaries, directly or indirectly, free and clear of all
Encumbrances. Except for its Subsidiaries, neither LaTex nor any of its
Subsidiaries owns or holds any equity, debt or other interest in any entity or
business or any option to acquire any such interest, except for accounts
receivable that have arisen in the ordinary course of business.
4.3 Authority; No Violation.
-----------------------
(a) The execution and performance of this Agreement by LaTex have
been duly and validly authorized by the board of directors of LaTex and, except
for the approval of the LaTex Stockholders, no other corporate action is
necessary to authorize the execution, delivery and performance of this Agreement
B-14
<PAGE>
by LaTex. LaTex has full, absolute and unrestricted right, power and authority
to execute and perform this Agreement and, subject to the approval by the LaTex
Stockholders, to carry out the transactions contemplated hereby. This Agreement
has been duly and validly executed by LaTex and, subject to approval by the
LaTex Stockholders, is a valid and binding obligation of LaTex, enforceable in
accordance with its terms, except as enforceability may be limited by
bankruptcy, moratorium, reorganization, receivership or similar laws affecting
the rights of creditors generally.
(b) None of the execution, delivery or performance of this Agreement
does or will, after the giving of notice, lapse of time or otherwise, (i) result
in any violation of or be in conflict with or constitute a default under any
term or provision of the Certificate of Incorporation or Bylaws of any of the
LaTex Entities of or any term or provision of any judgment, decree, order,
statute, injunction, rule or regulation applicable to any of the LaTex Entities,
or of any material note, bond, mortgage, indenture, lease, license, franchise,
agreement or other instrument or obligation to which any of the LaTex Entities
is bound; (ii) result in the creation of any material Encumbrance upon LaTex
Shares, the securities of the Surviving Corporation or any of the properties or
assets of the LaTex Entities pursuant to any such term or provision; or (iii)
constitute a material default under or give any party the right to accelerate,
amend or modify, terminate, abandon or refuse to perform or comply with, any
material contract, agreement, arrangement, commitment or plan to which any LaTex
Entities is a party, or by which any of the LaTex Entities or any of their
rights, properties or assets may be subject or bound.
4.4 Consents and Approvals. No consent, waiver, approval or
----------------------
authorization of, or declaration, designation, filing, registration or
qualification with, any Governmental Entity or any third party, is required to
be made or obtained by the LaTex Entities in connection with the execution,
delivery and performance of this Agreement or to preserve any material rights
and benefits enjoyed by any of the LaTex Entities on the date hereof following
the consummation of the transactions contemplated by this Agreement except (a)
those that have already been obtained or (b) those specifically contemplated by
this Agreement.
4.5 Violations of Laws, Permits, etc.
---------------------------------
(a) None of the LaTex Entities is in violation of any term or
provision of its Certificate of Incorporation or Bylaws. None of the LaTex
Entities is in violation of any term or provision of any judgment, decree,
order, statute, injunction, rule, ordinance or regulation applicable to it, or
of any agreement or instrument applicable to such entity where the violation
thereof would result in a Material Effect.
(b) Each of the LaTex Entities holds and has maintained in full force
and effect all certificates, licenses and permits material to the conduct of its
business, and has not received any notification that any revocation or
limitation thereof is threatened or pending where such revocation or limitation
would result in a Material Effect.
4.6 LaTex Financial Statements.
--------------------------
(a) In all material respects the consolidated LaTex Financial
Statements fairly present the consolidated assets, liabilities and financial
position of the respective entities purported to be covered thereby as of the
dates thereof and the results of their operations and cash flow for the
respective periods ended on such dates, all in conformity with GAAP consistently
applied, except that the April 30, 1996 unaudited interim financial statements
do not contain footnotes (that, if presented, would not differ materially from
those in the audited LaTex Financial Statements) and are subject to normal,
recurring year-end adjustments (which will not, individually or in the
aggregate, have a Material Effect).
B-15
<PAGE>
(b) The LaTex Financial Statements were prepared from the books and
records of each of the respective entities purported to be covered thereby.
Such LaTex Financial Statements do not contain any items of a material special
or nonrecurring nature, except as expressly noted in such statements.
4.7 No Undisclosed Liabilities, etc. None of the LaTex Entities has
--------------------------------
any material liabilities or obligations, whether direct, indirect, absolute or
contingent (including, without limitation, liabilities as guarantor or otherwise
with respect to obligations of others), except (a) liabilities that are fully
reflected on or reserved against on the latest balance sheet of such entity
included in the LaTex Financial Statements or (b) liabilities incurred in the
ordinary course of business since the date of the latest balance sheet included
in the LaTex Financial Statements that are consistent with past practice.
4.8 Absence of Certain Changes. Since the date of the latest audited
--------------------------
LaTex Financial Statement, except as specifically disclosed in the April 30,
1996 unaudited interim consolidated LaTex Financial Statements, none of the
LaTex Entities has:
(a) Suffered any change that would result in a Material Effect;
(b) Adopted or made any change in any pension, retirement, profit
sharing or other employee benefit plan or arrangement;
(c) Borrowed or agreed to borrow any money or incurred, assumed or
become subject to, whether directly or by way of guarantee or otherwise, any
other material obligation or liability for borrowed money, whether absolute or
contingent;
(d) (i) Issued, purchased or redeemed any of its capital securities
or any option, warrant or right to purchase any of the same; or (ii) authorized,
declared or made any dividends, distributions of earnings or capital on, or
splits or any other reclassification of its equity securities;
(e) Mortgaged, pledged or subjected to any Encumbrance any of its
assets, tangible or intangible, having a value in excess of $25,000 in the
aggregate;
(f) Acquired or disposed of, or entered into any agreement to acquire
or dispose of, any material assets or properties, other than oil and gas
production in the ordinary course of business, or other assets having a value in
excess of $25,000 in the aggregate;
(g) Increased the salaries, compensation, pension or other benefits
payable, or paid any bonuses, to its officers and directors or their Affiliates;
(h) Forgiven or canceled any debts or claims or waived any rights
against the LaTex Stockholders or any officer or director of the LaTex Entities
or their Affiliates or forgiven or canceled any debts or claims or waived any
rights against any other person in excess of $25,000 in the aggregate;
(i) Entered into, terminated or received notice of the termination of
any commitment, contract, agreement or transaction that is material to any of
the LaTex Entities; or
(j) Agreed, either in writing or otherwise, to take any action
described in this Section 4.8.
-----------
B-16
<PAGE>
4.9 Title to Property; Encumbrances.
-------------------------------
(a) The LaTex Entities, either directly or indirectly, have (and as
of the Closing will have) good and defensible title to the LaTex Interests.
(b) The LaTex Entities own no real property other than the LaTex
Interests. Section 4.29 of the LaTex Disclosure Schedule sets forth a complete
---------------------------------------------
list of all real property other than the LaTex Interests that the LaTex Entities
lease or sublease, and which lease or sublease provides for payments at an
annual rate in excess of $25,000. LaTex has delivered to Alliance correct and
complete copies of all such leases and subleases (the "LaTex Real Property
Leases"). With respect to each such Real Property Lease:
(i) each LaTex Real Property Lease is legal, valid, binding,
enforceable and in full force and effect;
(ii) each LaTex Real Property Lease will continue to be legal, valid,
binding, enforceable and in full force and effect on identical terms
following the consummation of the transactions contemplated hereby;
(iii) to the knowledge of the LaTex Entities, no party to any LaTex
Real Property Lease is in breach or default and no event has occurred
which, with notice or lapse of time, would constitute a breach or default
or permit termination, modification or acceleration thereunder;
(iv) to the knowledge of the LaTex Entities, no party to any LaTex
Real Property Lease has repudiated any provision thereof;
(v) to the knowledge of the LaTex Entities, there are no disputes,
oral agreements or forbearance programs in effect as to any LaTex Real
Property Lease;
(vi) with respect to each sublease included as a LaTex Real Property
Lease, the representations and warranties set forth in subsections (i) and
(v) above are true and correct with respect to the underlying lease;
(vii) none of the LaTex Entities has assigned, transferred, conveyed,
mortgaged, deeded in trust or encumbered any interest in the leasehold or
subleasehold;
(viii)to the knowledge of the LaTex Entities, all facilities leased or
subleased thereunder have received all approvals of all Governmental
Entities (including licenses and permits) required in connection with the
operation thereof and have been operated and maintained in accordance with
applicable laws and regulations;
(ix) all facilities leased or subleased thereunder are supplied with
utilities and other services necessary for the operation of said
facilities; and
(x) to the knowledge of the LaTex Entities, the owner of the
facility leased or subleased has good and marketable title to the parcel of
real property, free and clear of any security interest, easement, covenant
or other restriction, except for installments of special easements not yet
delinquent and recorded easements, covenants, and other restrictions which
do not impair the current use, occupancy or value or the marketability of
title, of the property subject thereto.
B-17
<PAGE>
(c) The LaTex Entities, either directly or indirectly, have (and as
of the Closing will have) good and defensible title to and other legal right to
use all properties and assets, real, personal and mixed, tangible and intangible
(other than the LaTex Interests), reflected as owned on the latest balance sheet
included in the LaTex Financial Statements of the relevant entity or acquired
after the date of such balance sheet, except for properties and assets disposed
of in accordance with customary practice in the business or disposed of for full
and fair value since the date of such balance sheet in the ordinary course of
business consistent with past practice and except for matters that would not
have a Material Effect.
(d) There are no properties (real, personal or mixed, tangible or
intangible) owned by any LaTex Stockholders or any Affiliate of the LaTex
Stockholders that are used in the normal day-to-day operations of the LaTex
Entities as conducted prior to the Closing Date.
(e) The properties and assets described in (a), (b) and (c) above
are free and clear of any and all Encumbrances, except the Permitted
Encumbrances.
4.10 Proceedings Affecting LaTex Interests. There is no action,
-------------------------------------
proceeding, investigation, inquiry, claim or demand pending or, to the knowledge
of the LaTex Entities, threatened that is likely to result in the material
impairment or loss of any of the LaTex Entities' title to any part of the LaTex
Interests or that might hinder or impede in any material respect the use,
operation or value of the LaTex Interests and LaTex shall promptly notify
Alliance of any such suit, action, investigation, inquiry, claim or demand
arising or threatened prior to the Closing with respect to which LaTex receives
notice. To the knowledge of the LaTex Entities, there are no facts, events or
conditions existing with respect to operations or conditions of the LaTex
Interests which are reasonably likely to hinder or impede the use, operation or
value of the LaTex Interests in any material respect or which are reasonably
likely to form the basis of a claim of any party against any of the LaTex
Entities or any of their assets that would result in a Material Effect.
4.11 LaTex Oil and Gas Contracts.
---------------------------
(a) To the knowledge of the LaTex Entities, all of the Leases
included in the LaTex Interests are in full force and effect and are the valid
and legally binding obligations of the parties to those agreements and are
enforceable in all material respects in accordance with their respective terms.
(b) To the knowledge of the LaTex Entities, none of the LaTex
Entities is in material breach or default with respect to any of its
representations, warranties or obligations pursuant to any of the LaTex Oil and
Gas Contracts or with respect to any regulations incorporated in or governing
the LaTex Oil and Gas Contracts.
(c) To the knowledge of the LaTex Entities, all payments (including
royalties, delay rentals, shut-in royalties, payments due under unit or
operating agreements but excluding royalties held in suspense and good faith by
the LaTex Entities for a justifiable purpose) due under the Leases included in
the LaTex Interests have been properly and timely made; all conditions necessary
to keep such Leases in force have been fully performed; and no notices have been
received by the LaTex Entities of any claim to the contrary.
(d) To the knowledge of the LaTex Entities, there are no obligations
to engage in continuous development operations in order to maintain any Lease
included in the LaTex Interests in force and effect.
(e) To the knowledge of the LaTex Entities, the execution and
delivery of this Agreement and the consummation of the transaction as
contemplated by this Agreement will not result in a material breach
B-18
<PAGE>
of, constitute a material default under, result in a material violation of or
entitle any party to a right of first refusal or preferential right to purchase
under any of the LaTex Oil and Gas Contracts.
(f) To the knowledge of the LaTex Entities, the LaTex Entities have
fulfilled all material requirements for filings, certificates, disclosures of
parties in interest and other similar matters contained in (or otherwise, by
law, rule or regulation, applicable to) the Leases included in the LaTex
Interests and are fully qualified to own and hold all such Leases.
4.12 Operations.
----------
(a) To the knowledge of the LaTex Entities, the LaTex Interests are
being developed, operated and maintained in material compliance with the LaTex
Oil and Gas Contracts. In operating the LaTex Interests, the LaTex Entities are
not dependent on the right to use the property of others, except under valid and
enforceable agreements, rights or other arrangements included in the LaTex Oil
and Gas Contracts.
(b) Since April 30, 1996, none of the LaTex Entities, directly or
indirectly, has operated or in any manner dealt with, incurred obligations with
respect to, or undertaken any transactions relating to, the LaTex Interests
other than in the ordinary course of business consistent with past practice or
other than sales of property in any single transaction having a value of less
than $25,000, and, to the knowledge of the LaTex Entities, the LaTex Interests
have not suffered any destruction, damage, or loss (except depreciation of
equipment through ordinary wear and tear) that would result in a Material
Effect.
(c) To the knowledge of the LaTex Entities, there are no outstanding
authorities for expenditures ("AFEs") covering work in progress or work not yet
started covering the LaTex Interests. Prior to Closing, LaTex will provide
Alliance with an updated listing of similar information concerning AFEs
outstanding as of a date not more than three (3) business days prior to Closing.
(d) To the knowledge of the LaTex Entities, no condition, obligation
or other circumstance, including any prior overproduction under a gas balancing
agreement, exists that would adversely affect the right of the LaTex Entities to
receive their full share of production and full payment of proceeds from the
sale of Hydrocarbons produced from any of the LaTex Interests.
4.13 No Reversionary Interests. To the knowledge of the LaTex
-------------------------
Entities, the LaTex Interests are not subject to any reversionary, back-in or
similar rights, the exercise of which would reduce the LaTex's Entities' Net
Revenue Interests to less than the Net Revenue Interests set forth in Exhibits
--------
B-1 and B-2.
- -----------
4.14 Sales and Transportation Agreements. There are no material crude
-----------------------------------
oil and condensate sales, arrangements or gas purchase and sales agreements or
division orders relating to the LaTex Interests (collectively "LaTex Sales
Agreements") and no material transportation agreements relating to the LaTex
Interests that cannot be terminated by the LaTex Entities upon 60 days' or less
notice without penalty or detriment to the LaTex Entities. There are no LaTex
Sales Agreements pursuant to which Hydrocarbons are being sold at less than the
prevailing market price therefor.
4.15 Tax Partnerships. None of the LaTex Entities have filed any
----------------
federal or state income tax returns identifying the LaTex Interests as held by
any tax partnership.
4.16 Prepayments. To the knowledge of the LaTex Entities, there
-----------
exists no material imbalance regarding production taken or marketed from any
Lease included in the LaTex Interests or otherwise affecting any of the LaTex
Entities which could result in (i) a portion of its interest in production
therefrom
B-19
<PAGE>
to be taken or delivered after the Closing Date without the applicable entity
receiving full payment therefor and at the price it would have received absent
such imbalance; or (ii) the applicable entity being obligated to make payment to
any person or entity as a result of such imbalance; or (iii) production being
shut-in or curtailed after the Closing Date due to non-compliance with
allowables, production quotas, proration rules or similar orders or regulations
of a Governmental Entity; and none of the LaTex Entities is obligated, by virtue
of any prepayment arrangement take-or-pay agreement or similar arrangements to
deliver Hydrocarbons produced from the LaTex Interests at some future time
without then receiving full payment therefor in all material respects.
4.17 Production Sales Contracts. To the knowledge of the LaTex
--------------------------
Entities, the buyers under all production sales contracts pursuant to which any
of the LaTex Entities is selling crude oil or natural gas or constituents
thereof produced from the Leases included in the LaTex Interests are in
compliance in all material respects with all the material terms of such
contracts and none of the LaTex Entities has received a notice from any such
buyer of such party's intention or desire to modify, renegotiate or repudiate
any such contract or any of the material terms thereof.
4.18 Calls. To the knowledge of the LaTex Entities, no person has any
-----
call upon, option to purchase, or similar right to purchase any portion of the
Hydrocarbons from the LaTex Interests at a price less than the prevailing market
price therefor.
4.19 Reserve Reports. With respect to such LaTex Reserve Report, (a)
---------------
the information furnished by the LaTex Entities to the reserve engineers in
connection with the preparation of the LaTex Reserve Report was true and correct
in all material respects; (b) to the knowledge of the LaTex Entities, the
assumptions utilized in the preparation of the LaTex Reserve Report are
reasonable in light of the properties involved; (c) to the knowledge of the
LaTex Entities, the calculations and other methodology utilized in the
preparation of the LaTex Reserve Report are consistent with generally accepted
standards of petroleum reservoir engineering at the dates of their preparation;
(d) none of the LaTex Entities have any knowledge that the oil, condensate,
natural gas liquids and gas reserves attributable to the LaTex Interests as of
the date of the LaTex Reserve Report are materially less than the estimates of
quantities of those reserves shown in the LaTex Reserve Report; (e) none of the
LaTex Entities have any knowledge of any change (other than normal depletion by
production in the ordinary course, price changes, and sales of property in any
single transaction having a value of less than $25,000) occurring since the date
of the LaTex Reserve Report that would result in a material change in the
information contained in the LaTex Reserve Report, and (f) to the knowledge of
the LaTex Entities, none of the LaTex Entities or the LaTex Interests are
subject to any agreements, consents, orders or regulations that would materially
reduce the rate of production of Hydrocarbons or other substances from the LaTex
Interests below that reflected in the LaTex Reserve Report.
4.20 Wells.
-----
(a) To the knowledge of the LaTex Entities, all of LaTex's Wells
have been drilled and completed within the boundaries of the Major Producing
Leases of the LaTex Entities or within the limits otherwise permitted by the
LaTex Oil and Gas Contracts, and by law.
(b) To the knowledge of the LaTex Entities, the drilling and
completion of all LaTex's Wells and all development and operations of the LaTex
Interests have been conducted in material compliance with all applicable laws,
ordinances, rules, regulations and permits, and judgments, orders and decrees of
any Governmental Entity.
(c) To the knowledge of the LaTex Entities, none of LaTex's Wells is
subject to material penalties on allowable production after the date of this
Agreement because of any overproduction or any other
B-20
<PAGE>
violation of applicable laws, rules, regulations or permits or judgments, orders
or decrees of any Governmental Entity that would prevent any of LaTex's Wells
from being entitled to its full legal and regular allowable production from and
after the date of this Agreement as prescribed by any Governmental Entity.
4.21 No Funds in Suspense. To the knowledge of the LaTex Entities,
--------------------
all material proceeds from the sale of Hydrocarbons produced from the LaTex
Interests are currently being paid to the LaTex Entities and no portion of such
proceeds is currently being held in suspense by any purchaser thereof or any
other party by whom proceeds are paid except for immaterial amounts.
4.22 Regulatory Compliance. To the knowledge of the LaTex Entities,
---------------------
all material filings and approvals under the Natural Gas Policy Act of 1978, as
amended for with the Federal Energy Regulatory Commission ("FERC"), or required
under any rules or regulations adopted by FERC which are necessary for the
operation of the LaTex Interests in the manner in which they are presently
operated, have been made or granted.
4.23 Physical Condition of Facilities. To the knowledge of the LaTex
--------------------------------
Entities, in all material respects, the physical facilities on the LaTex
Interests (including facilities held under lease) have been maintained in
accordance with good industry maintenance practices and are in a state of repair
(normal wear and tear excepted) that is adequate for the intended use of such
facilities in the ordinary conduct of the business.
4.24 Data Regarding the LaTex Interests. All of the information
----------------------------------
described in Sections 6.6 and 6.7 made or to be made available to Alliance and
------------ ---
its representatives is accurate and complete in all material respects, when
considered in context and together with all relevant information made available.
4.25 Litigation.
----------
(a) There is no action, proceeding, investigation or inquiry pending
or, to the knowledge of the LaTex Entities, threatened (i) against or affecting
any of the LaTex Entities or their assets or ordinary conduct of the business
that, if determined adversely to the LaTex Entities, would result in a Material
Effect or (ii) that questions this Agreement or any action contemplated by this
Agreement or in connection with the Merger.
(b) There are no citations, fines or penalties heretofore asserted
against any of the LaTex Entities or their assets under any federal, state or
local law relating to air, noise or water pollution or other environmental
protection matters, or relating to occupational health or safety, of which such
entity has received notice and that remain unpaid or that could otherwise bind
the assets of any of the LaTex Entities and that would result in a Material
Effect.
(c) LaTex has no knowledge of any state of facts or of the
occurrence or nonoccurrence of any event or group of related events, that should
reasonably cause LaTex to determine that there exists any basis for any material
claim against the LaTex Entities for any of the matters described in paragraphs
(a) or (b).
4.26 Tax Returns and Payments.
------------------------
(a) The LaTex Entities (or the common parent of any affiliated group
of which any of such entities is or has been a member) have duly filed in
correct form in all material respects all Tax Returns required to be filed by
such entities and have duly paid or provided for payment of (or there have been
paid on their behalf) all Taxes due or claimed to be due from them by federal,
state, local or foreign taxing
B-21
<PAGE>
authorities, excluding Taxes that are being contested in good faith by
appropriate proceedings and as to which adequate reserves have been provided and
that are specilly identified in Section 4.26 of the LaTex Disclosure Schedule.
---------------------------------------------
(b) There are no tax liens upon any property or assets owned by any
of the LaTex Entities that would have a Material Effect.
(c) All Tax Returns of the LaTex Entities filed, including any
amendments to date, have been prepared in good faith without willful
misrepresentation and are complete and accurate in all material respects. The
federal income tax returns of the LaTex Entities have been examined by the
Internal Revenue Service for all periods through December 31, 1990, and all
deficiencies assessed as a result of such examination have been paid in full or
finally settled and no issue has been raised by the Internal Revenue Service in
any such examination that has been resolved adversely to any of the LaTex
Entities or is still pending and, by application of similar principles,
reasonably could be expected to result in an assertion by the Internal Revenue
Service of a material deficiency in any other taxable year or with respect to
any other of the LaTex Entities. There are no outstanding agreements, waivers or
other arrangements providing for an extension of time with respect to the filing
of any Tax Returns or the payment by, or assessment against, any of the LaTex
Entities for any Taxes. Each of the LaTex Entities is taxed as a C corporation
under the Code.
(d) The reserves made for Taxes on the respective balance sheets in
the LaTex Financial Statements are sufficient for the payment of all unpaid
Taxes due and payable by the LaTex Entities attributable to all periods ended on
or before the date of the respective balance sheets in accordance with GAAP.
4.27 Insurance. Section 4.27 of the LaTex Disclosure Schedule
--------- ---------------------------------------------
contains a true, correct, and complete description of all policies of fire,
casualty and extended coverage, public liability, products liability, worker's
compensation and other forms of insurance owned or held by or for the benefit of
the LaTex Entities (other than insurance owned or held by operators for those
LaTex Interests where one of the LaTex Entities is not the operator). All such
policies are sufficient for material compliance with all requirements of law and
all agreements for which those entities are parties, are, to the knowledge of
the LaTex Entities, valid and enforceable policies, will remain in full force
and effect through the respective dates set forth in Section 4.27 of the LaTex
-------------------------
Disclosure Schedule, subject to the timely payment of the premiums set forth
- -------------------
therein, and will not in any way be affected by, or terminate or lapse by reason
of, the transactions contemplated by this Agreement. All premiums due under
such policies have been paid and the insureds have complied in all material
respects with such policies.
4.28 Bank Accounts. Section 4.28 of the LaTex Disclosure Schedule
------------- ---------------------------------------------
sets forth the names and locations of all bank institutions at which the LaTex
Entities maintain accounts or lock boxes of any nature, the account or box
number and the names of all persons authorized to draw thereon or make
withdrawals therefrom.
4.29 Contracts.
---------
(a) Section 4.29 of the LaTex Disclosure Schedule contains a
---------------------------------------------
complete and correct list as of the date hereof of all agreements, contracts and
commitments of the following types (and all amendments thereto), written or
oral, to which any of the LaTex Entities is a party or by which any of their
properties is bound:
(i) notes, agreements, mortgages, indentures, security agreements
and other instruments relating to the borrowing of money or evidence of
credit or the deferred purchase price of property,
B-22
<PAGE>
or the direct or indirect guarantee by such entities of any such
indebtedness or deferred purchase price, in excess of $20,000;
(ii) leases of real property and material personal property providing
for payments under any such lease or group of related leases at an annual
rate in excess of $25,000 (other than Leases);
(ii) partnership or joint venture agreements;
(iv) management, employment and consulting agreements or other
contracts for personal services that are not terminable by any of such
entities on not more than one month's notice without penalty;
(v) agreements providing for liability for severance pay, collective
bargaining agreements, labor contracts, or labor or personnel policies;
(vi) surety, performance and maintenance bonds in excess of $5,000;
(vii) agreements or commitments for capital expenditures in excess of
$25,000;
(viii)any plan, contract or arrangement providing for bonuses,
pensions, deferred compensation, retirement plan payments, profit sharing,
incentive pay, or for any other employee benefit plan;
(ix) brokerage or finder's agreements;
(x) any agreement that (a) restricts the right of such entities to
engage in any place in any line of business or (b) would restrict the right
of the Surviving Corporation or any Subsidiary of the Surviving Corporation
to engage in any line of business after the Closing Date;
(xi) any contract, commitment or agreement that involves the
disposition after April 30, 1996 of any assets of any of such entities not
in the ordinary course of business consistent with past practice;
(xii) any contract, commitment or agreement between any of such
entities or between any of such entities and any director or officer of any
of the LaTex Entities in excess of $10,000;
(xiii)any LaTex Oil and Gas Contract that commits any of the LaTex
Entities to make any capital expenditures in any calendar year; and
(xiv) other agreements, contracts and commitments that in any way
involve payments or receipts during the remaining term of such agreement,
contract or commitment in excess of $25,000.
(b) LaTex has made available to Alliance complete and correct copies
of all written agreements, contracts and commitments, together with all
amendments thereto, and accurate (in all material respects) descriptions of all
oral agreements, in all cases, described in subparagraph (a). Such agreements,
contracts and commitments are in full force and effect, and all of such entities
and, to the knowledge of the LaTex Entities, all other parties to such
agreements, contracts and commitments have performed all obligations required to
be performed by them to date thereunder in all material respects and are not in
default thereunder in any material respect.
B-23
<PAGE>
(c) None of the LaTex Entities has outstanding any powers of
attorney, including powers of attorney with respect to representation before any
Governmental Entity, customs agents and brokers, or given in connection with
qualification to conduct business in any other jurisdiction.
4.30 Transactions with Interested Persons. No officer or director of
------------------------------------
any of the LaTex Entities (or spouse or any child thereof) owns, directly or
indirectly, on an individual or joint basis, any material interest in, or serves
as an officer, director or employee of, any customer, competitor or supplier of
or any person or entity that has a material contract or arrangement with any of
the LaTex Entities, except for holdings of capital stock not exceeding one
percent (1%) of the total number of shares of capital stock of such customer,
competitor or supplier outstanding.
4.31 Compensation and Employee Plans.
-------------------------------
(a) LaTex has provided Alliance (i) the names and current annual
compensation rates of all present directors, officers, employees, independent
contractors or agents of each of the LaTex Entities and (ii) the number, job
category and range of compensation by job category of all employees of such
entities.
(b) Section 4.31 of the LaTex Disclosure Schedule sets forth the
---------------------------------------------
name of each Plan applicable to any of the LaTex Entities and lists all
documents evidencing any Plan applicable to any of the LaTex Entities.
(c) Each Plan applicable to any of the LaTex Entities is now, and
has been from its inception, administered in compliance in all material respects
with the provisions of all applicable laws and regulations, including ERISA, the
Code and the ADEA, insofar as such statutes are applicable to such Plan.
4.32 Accounts Receivable; Inventories.
--------------------------------
(a) The accounts receivable of the LaTex Entities as reflected on
the respective balance sheets of the LaTex Financial Statements (except to the
extent collected after the date thereof) (i) have arisen in the ordinary course
of business for goods delivered or services rendered, and (ii) are good and
collectible, except as otherwise reserved for on the respective balance sheets.
(b) To the knowledge of the LaTex Entities, all of the LaTex
Entities' accounts receivable existing at Closing will be collectible in all
material respects at their aggregate recorded amounts (net of any allowances for
doubtful accounts reflected on the LaTex Financial Statements) in the ordinary
course of business within ninety (90) days of the Closing, without resort to
litigation, and will not be subject to counterclaim or set off.
(c) The inventories of the LaTex Entities as reflected on the
respective balance sheets included in the LaTex Financial Statements have been
valued in accordance with GAAP and customary industry practice using COPAS
guidelines.
4.33 Brokers, Finders and Advisors. LaTex has not employed any
-----------------------------
broker, finder, or investment advisor on its behalf, or incurred any liability
for any brokerage or finder's fees or commissions in connection with the
transaction contemplated hereby.
4.34 Labor Force.
-----------
(a) Each of the LaTex Entities is in compliance in all material
respects with all applicable laws (including without limitation federal income
tax laws), ordinances, regulations, statutes, rules and
B-24
<PAGE>
restrictions of any Governmental Entity respecting employment and employment
practices and terms and conditions of employment.
(b) No union representation question exists respecting the employees
of any of the LaTex Entities and, to the knowledge of the LaTex Entities, no
union organizing activities are taking place.
4.35 Books and Records. The books and records of each of the LaTex
-----------------
Entities (including, without limitation, the books of account, minute books and
stock record books) are complete and correct in all material respects and have
been maintained in accordance with sound business practices. The minute books
of each of the LaTex Entities contain accurate and complete records in all
material respects of all meetings held of, and corporate action taken by, the
shareholders and the Boards of Directors of the respective entities and no
meetings of or actions by such shareholders or any such Boards of Directors have
been held or taken for which minutes have not been prepared and are not
contained in such minute books. None of the records and written documents
furnished or made available to Alliance's representatives or agents by the LaTex
Entities concerning the LaTex Interests, when considered in context and together
with any relevant or related documents also so furnished or made available,
contain any untrue statement of material fact or omit a material fact necessary
to make any statement therein not misleading.
4.36 Payments. None of the LaTex Entities has, directly or
--------
indirectly, paid or delivered any fee, commission or other sum of money or item
of property however characterized to any finder, agent, government official or
other party, in the United States or any other country, in any manner related to
its business or operations, which such entity knows or has reason to believe to
have been illegal under any federal, state or local laws of the United States or
any other country or territory having jurisdiction over such entity, and has not
participated, directly or indirectly, in any boycotts or similar practices.
4.37 Public Utility Holding Company. None of the LaTex Entities owns
------------------------------
or operates any facilities used for the retail distribution of natural or
manufactured gas for heat, light or power, nor does any of the LaTex Entities,
directly or indirectly, own, control or hold with power to vote ten percent
(10%) or more of the outstanding stock of, or exercise direct or indirect
controlling influence over the management or policies of such a company or a
company so controlling such a company.
4.38 SEC Filings. LaTex has filed all forms, reports and documents
-----------
required to be filed with the Commission since January 1, 1993. All of such
filings were prepared in accordance with the requirements of all applicable laws
and did not at the time they were filed contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
4.39 Disclosure. No representation or warranty made by LaTex in this
----------
Agreement (including, without limitation, in the LaTex Disclosure Schedule)
contains any untrue statement of material fact or omits or will omit to state
any material fact necessary to make the statements herein or therein not
misleading in light of the circumstances under which made.
5. Representations, Warranties and Covenants of Alliance.
-----------------------------------------------------
Except as expressly set forth and specifically identified by section number
of this Agreement in the Alliance Disclosure Schedule, Alliance represents,
warrants and covenants to LaTex, on the date hereof and as of the Closing Date,
as follows:
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<PAGE>
5.1 Organization, etc.
-----------------
(a) Alliance is a public limited company duly incorporated and
validly existing under the laws of England and Wales. Each of Alliance's U.K.
Subsidiaries is a limited company duly incorporated and validly existing under
the laws of England and Wales. Each of Alliance's other Subsidiaries is a
corporation duly organized, validly existing and in good standing under the laws
of its jurisdiction of incorporation. Each of the Alliance Entities has the
requisite corporate power and authority to carry on its business as now being
conducted and to own, lease and operate its property and assets, and each of the
United States Alliance Entities is duly qualified or licensed to do business and
is in good standing in every jurisdiction in which the failure to be so
qualified and licensed could have a Material Effect. Section 5.1 of the
------------------
Alliance Disclosure Schedule sets forth the name and jurisdiction of
- ----------------------------
incorporation of each of Alliance's Subsidiaries and each jurisdiction in which
each of the Alliance Entities is qualified or licensed to do business. Alliance
has heretofore delivered to LaTex true, correct and complete copies of the
organizational documents of each of the Alliance Entities as presently in
effect.
(b) Section 5.1 of the Alliance Disclosure Schedule sets forth a
-----------------------------------------------
complete list of the present officers and directors of each of the Alliance
Entities.
5.2 Capitalization.
--------------
(a) The authorized, issued and outstanding capital stock of each of
the Alliance Entities is as set forth in Section 5.2 of the Alliance Disclosure
--------------------------------------
Schedule. All of the issued shares of each of the Alliance Entities are, and
- --------
all of the Alliance Shares to be issued in consideration of the cancellation of
LaTex Shares upon consummation of the Merger, when issued in accordance with the
terms of this Agreement, will be validly issued, fully paid and nonassessable
and none of such shares have been or will be issued in violation of the
preemptive rights of any person.
(b) There are no (i) shares of capital stock or other securities
bearing voting or other equity rights, whether contingent or not, of any of the
Alliance Entities outstanding; (ii) outstanding subscriptions, puts, options,
warrants or other rights, contractual or otherwise, to purchase or acquire any
capital stock of any of the Alliance Entities; or (iii) contracts, commitments,
understandings, arrangements or restrictions by which any of the Alliance
Entities is or may become bound to issue any additional equity interests or any
options or rights with respect thereto, or any securities convertible into any
equity interests.
(c) The issued and outstanding stock of Alliance owned by the
directors and 5% or greater stockholders of Alliance is owned of record, and to
the knowledge of Alliance, beneficially, as described in Section 5.2 of the
------------------
Alliance Disclosure Schedule. Alliance beneficially owns all of the issued and
- ----------------------------
outstanding stock of each of its Subsidiaries, directly or indirectly, free and
clear of all Encumbrances. Except for its Subsidiaries, neither Alliance nor
any of its Subsidiaries owns or holds any equity, debt or other interest in any
entity or business or any option to acquire any such interest, except for
accounts receivable that have arisen in the ordinary course of business.
5.3 Authority; No Violation.
-----------------------
(a) The execution and performance of this Agreement by Alliance and
Newco have been duly and validly authorized by the respective boards of
directors of Alliance and Newco and, except for the approval of the Alliance
Stockholders, no other corporate action is necessary to authorize the execution,
delivery and performance of this Agreement by Alliance or Newco. Alliance has
full, absolute and unrestricted right, power and authority to execute and
perform this Agreement and, subject to the approval by the Alliance
Stockholders, to carry out the transactions contemplated hereby. This Agreement
has been duly and validly
B-26
<PAGE>
executed by Alliance and Newco and, subject to approval by the Alliance
Stockholders, is a valid and binding obligation of Alliance and Newco,
enforceable in accordance with its terms, except as enforceability may be
limited by bankruptcy, moratorium, reorganization, receivership or similar laws
affecting the rights of creditors generally.
(b) None of the execution, delivery or performance of this Agreement
does or will, after the giving of notice, lapse of time or otherwise, (i) result
in any violation of or be in conflict with or constitute a default under any
term or provision of the organizational documents of any of the Alliance
Entities, or any term or provision of any judgment, decree, order, statute,
injunction, rule or regulation applicable to any of the Alliance Entities or of
any material note, bond, mortgage, indenture, lease, license, franchise,
agreement or other instrument or obligation to which any of the Alliance
Entities is bound; (ii) result in the creation of any material Encumbrance upon
Alliance Shares, the securities of the Surviving Corporation or any of the
properties or assets of any of the Alliance Entities pursuant to any such term
or provision; or (iii) constitute a material default under or give any party the
right to accelerate, amend or modify, terminate, abandon or refuse to perform or
comply with, any material contract, agreement, arrangement, commitment or plan
to which any of the Alliance Entities is a party, or by which any of the
Alliance Entities or any of their rights, properties or assets may be subject or
bound.
5.4 Consents and Approvals. No consent, waiver, approval or
----------------------
authorization of, or declaration, designation, filing, registration or
qualification with, any Governmental Entity or any third party, is required to
be made or obtained by any of the Alliance Entities in connection with the
execution, delivery and performance of this Agreement or to preserve any
material rights and benefits enjoyed by any of the Alliance Entities on the date
hereof following the consummation of the transactions contemplated by this
Agreement except (a) those that have already been obtained or (b) those
specifically contemplated by this Agreement.
5.5 Violations of Laws, Permits, etc.
---------------------------------
(a) None of the Alliance Entities is in violation of any term or
provision of its organizational documents. None of the Alliance Entities is in
violation of any term or provision of any judgment, decree, order, statute,
injunction, rule, ordinance or regulation applicable to it, or of any agreement
or instrument applicable to such entity where the violation thereof would result
in a Material Effect.
(b) Each of the Alliance Entities holds and has maintained in full
force and effect all certificates, licenses and permits material to the conduct
of its business, and has not received any notification that any revocation or
limitation thereof is threatened or pending where such revocation or limitation
would result in a Material Effect.
5.6 Alliance Financial Statements.
-----------------------------
(a) In all material respects the consolidated Alliance Financial
Statements fairly present the consolidated assets, liabilities and financial
position of the respective entities purported to be covered thereby as of the
dates thereof and the results of their operations and cash flow for the
respective periods ended on such dates, all in conformity with GAAP consistently
applied, except that the October 31, 1995 unaudited interim financial statements
do not contain footnotes (that, if presented, would not differ materially from
those in the audited Alliance Financial Statements) and are subject to normal,
recurring year-end adjustments (which will not, individually or in the
aggregate, have a Material Effect).
B-27
<PAGE>
(b) The Alliance Financial Statements were prepared from the books
and records of each of the respective entities purported to be covered thereby.
Such Alliance Financial Statements do not contain any items of a material
special or nonrecurring nature, except as expressly noted in such statements.
5.7 No Undisclosed Liabilities, etc. None of the Alliance Entities
--------------------------------
has any material liabilities or obligations, whether direct, indirect, absolute
or contingent (including, without limitation, liabilities as guarantor or
otherwise with respect to obligations of others), except (a) liabilities that
are fully reflected on or reserved against on the latest balance sheet of such
entity included in the Alliance Financial Statements or (b) liabilities incurred
in the ordinary course of business since the date of the latest balance sheet
included in the Alliance Financial Statements that are consistent with past
practice.
5.8 Absence of Certain Changes. Since the date of the latest audited
--------------------------
Alliance Financial Statement, except as specifically disclosed in the October
31, 1995 unaudited interim consolidated Alliance Financial Statements, none of
the Alliance Entities has:
(a) Suffered any change that would result in a Material Effect;
(b) Adopted or made any change in any pension, retirement, profit
sharing or other employee benefit plan or arrangement;
(c) Borrowed or agreed to borrow any money or incurred, assumed or
become subject to, whether directly or by way of guarantee or otherwise, any
other material obligation or liability for borrowed money, whether absolute or
contingent;
(d) (i) Issued, purchased or redeemed any of its capital securities
or any option, warrant or right to purchase any of the same; or (ii) authorized,
declared or made any dividends, distributions of earnings or capital on, or
splits or any other reclassification of its equity securities;
(e) Mortgaged, pledged or subjected to any Encumbrance any material
portion of its assets, tangible or intangible, having a value in excess of
$25,000 in the aggregate;
(f) Acquired or disposed of, or entered into any agreement to acquire
or dispose of, any material assets or properties, other than oil and gas
production in the ordinary course of business, or other assets having a value in
excess of $25,000 in the aggregate;
(g) Increased the salaries, compensation, pension or other benefits
payable, or paid any bonuses, to its officers and directors or their Affiliates;
(h) Forgiven or canceled any debts or claims or waived any rights
against any officer or director of the Alliance Entities or their Affiliates or
forgiven or canceled any material debts or claims or waived any rights against
any other person in excess of $25,000 in the aggregate;
(i) Entered into, terminated or received notice of the termination of
any commitment, contract, agreement or transaction that is material to any of
the Alliance Entities; or
(j) Agreed, either in writing or otherwise, to take any action
described in this Section 5.8.
-----------
B-28
<PAGE>
5.9 Title to Property; Encumbrances.
-------------------------------
(a) The Alliance Entities, either directly or indirectly, have (and
as of the Closing will have) good and defensible title to the Alliance
Interests.
(b) The Alliance Entities own no real property other than the
Alliance Interests. Schedule 5.28 of the Alliance Disclosure Schedule sets forth
-------------------------------------------------
a complete list of all real property other than the Alliance Interests that the
Alliance Entities lease or sublease and which lease or sublease provides for
payments at an annual rate in excess of $25,000. Alliance has delivered to LaTex
correct and complete copies of all such leases and subleases (the "Alliance Real
Property Leases"). With respect to each such Real Property Lease:
(i) each Alliance Real Property Lease is legal, valid, binding,
enforceable and in full force and effect;
(ii) each Alliance Real Property Lease will continue to be legal,
valid, binding, enforceable and in full force and effect on identical terms
following the consummation of the transactions contemplated hereby;
(iii) to the knowledge of the Alliance Entities, no party to any
Alliance Real Property Lease is in breach or default and no event has
occurred which, with notice or lapse of time, would constitute a breach or
default or permit termination, modification or acceleration thereunder;
(iv) to the knowledge of the Alliance Entities, no party to any
Alliance Real Property Lease has repudiated any provision thereof;
(v) to the knowledge of the Alliance Entities, there are no
disputes, oral agreements or forbearance programs in effect as to any
Alliance Real Property Lease;
(vi) with respect to each sublease included as a Alliance Real
Property Lease, the representations and warranties set forth in subsections
(i) and (v) above are true and correct with respect to the underlying
lease;
(vii) none of the Alliance Entities has assigned, transferred,
conveyed, mortgaged, deeded in trust or encumbered any interest in the
leasehold or subleasehold;
(viii)to the knowledge of the Alliance Entities, all facilities leased
or subleased thereunder have received all approvals of all Governmental
Entities (including licenses and permits) required in connection with the
operation thereof and have been operated and maintained in accordance with
applicable laws and regulations;
(ix) all facilities leased or subleased thereunder are supplied with
utilities and other services necessary for the operation of said
facilities; and
(x) to the knowledge of the Alliance Entities, the owner of the
facility leased or subleased has good and marketable title to the parcel of
real property, free and clear of any security interest, easement, covenant
or other restriction, except for installments of special easements not yet
delinquent and recorded easements, covenants, and other restrictions which
do not impair the current use, occupancy or value or the marketability of
title, of the property subject thereto.
B-29
<PAGE>
(c) The Alliance Entities, either directly or indirectly, have (and
as of the Closing will have) good and defensible title to and other legal right
to use all properties and assets, real, personal and mixed, tangible and
intangible (other than the Alliance Interests), reflected as owned on the latest
balance sheet included in the Alliance Financial Statements of the relevant
entity or acquired after the date of such balance sheet, except for properties
and assets disposed of in accordance with customary practice in the business or
disposed of for full and fair value since the date of such balance sheet in the
ordinary course of business consistent with past practice and except for matters
that would not have a Material Effect.
(d) There are no properties (real, personal or mixed, tangible or
intangible) owned by any Alliance Stockholders or any Affiliate of the Alliance
Stockholders that are used in the normal day-to-day operations of the Alliance
Entities as conducted prior to the Closing Date.
(e) The properties and assets described in (a), (b) and (c) above
are free and clear of any and all Encumbrances, except the Permitted
Encumbrances.
5.10 Proceedings Affecting the Alliance Interests. There is no
--------------------------------------------
action, proceeding, investigation, inquiry, claim or demand pending or, to the
knowledge of the Alliance Entities, threatened that is likely to result in the
material impairment or loss of any of the Alliance Entities' title to any part
of the Alliance Interests or that might hinder or impede in any material respect
the use, operation or value of the Alliance Interests and Alliance shall
promptly notify LaTex of any such suit, action, investigation, inquiry, claim or
demand arising or threatened prior to the Closing with respect to which Alliance
receives notice. To the knowledge of the Alliance Entities, there are no facts,
events or conditions existing with respect to operations or conditions of the
Alliance Interests which are reasonably likely to hinder or impede the use,
operation or value of the Alliance Interests in any material respect or which
are reasonably likely to form the basis of a claim of any party against any of
the Alliance Entities or any of their assets that would result in a Material
Effect.
5.11 Alliance Oil and Gas Contracts.
------------------------------
(a) To the knowledge of the Alliance Entities, all of the Leases
included in the Alliance Interests are in full force and effect and are the
valid and legally binding obligations of the parties to those agreements and are
enforceable in all material respects in accordance with their respective terms.
(b) To the knowledge of the Alliance Entities, none of the Alliance
Entities is in material breach or default with respect to any of its
representations, warranties or obligations pursuant to any of the Alliance Oil
and Gas Contracts or with respect to any regulations incorporated in or
governing the Alliance Oil and Gas Contracts.
(c) To the knowledge of the Alliance Entities, all payments
(including royalties, delay rentals, shut-in royalties, payments due under unit
or operating agreements but excluding royalties held in suspense and good faith
by the Alliance Entities for a justifiable purpose) due under the Leases
included in the Alliance Interests have been properly and timely made; all
conditions necessary to keep such Leases in force have been fully performed; and
no notices have been received by the Alliance Entities of any claim to the
contrary.
(d) To the knowledge of the Alliance Entities, there are no
obligations to engage in continuous development operations in order to maintain
any Lease included in the Alliance Interests in force and effect.
B-30
<PAGE>
(e) To the knowledge of the Alliance Entities, the execution and
delivery of this Agreement and the consummation of the transaction as
contemplated by this Agreement will not result in a material breach of,
constitute a material default under, result in a material violation of or
entitle any party to a right of first refusal or preferential right to purchase
under any of the Alliance Oil and Gas Contracts.
(f) To the knowledge of the Alliance Entities, the Alliance Entities
have fulfilled all material requirements for filings, certificates, disclosures
of parties in interest and other similar matters contained in (or otherwise, by
law, rule or regulation, applicable to) the Leases included in the Alliance
Interests and are fully qualified to own and hold all such Leases.
5.12 Operations.
----------
(a) To the knowledge of the Alliance Entities, the Alliance
Interests are being developed, operated and maintained in material compliance
with the Alliance Oil and Gas Contracts. In operating the Alliance Interests,
the Alliance Entities are not dependent on the right to use the property of
others, except under valid and enforceable agreements, rights or other
arrangements included in the Alliance Oil and Gas Contracts.
(b) Since October 31, 1995, none of the Alliance Entities, directly
or indirectly, has operated or in any manner dealt with, incurred obligations
with respect to, or undertaken any transactions relating to, the Alliance
Interests other than in the ordinary course of business consistent with past
practice or other than sales of property in any single transaction having a
value of less than $25,000, and, to the knowledge of the Alliance Entities, the
Alliance Interests have not suffered any destruction, damage, or loss (except
depreciation of equipment through ordinary wear and tear) that would result in a
Material Effect.
(c) To the knowledge of the Alliance Entities, there are no
outstanding AFEs covering work in progress or work not yet started covering the
Alliance Interests. Prior to Closing, Alliance will provide LaTex with an
updated listing of similar information concerning AFEs outstanding as of a date
not more than three (3) business days prior to Closing.
(d) To the knowledge of the Alliance Entities, no condition,
obligation or other circumstance, including any prior overproduction under a gas
balancing agreement exists, that would adversely affect the right of the
Alliance Entities to receive their full share of production and full payment of
proceeds from the sale of Hydrocarbons produced from any of the Alliance
Interests.
5.13 No Reversionary Interests. To the knowledge of the Alliance
-------------------------
Entities, the Alliance Interests are not subject to any reversionary, back-in or
similar rights, the exercise of which would reduce the Alliance Entities' Net
Revenue Interests to less than the Net Revenue Interests set forth in Exhibits
--------
A-1 and A-2.
- -----------
5.14 Sales and Transportation Agreements. There are no material crude
-----------------------------------
oil and condensate sales, arrangements or gas purchase and sales agreements or
division orders relating to the Alliance Interests (collectively "Alliance Sales
Agreements") and no material transportation agreements relating to the Alliance
Interests that cannot be terminated by the Alliance Entities upon 60 days' or
less notice without penalty or detriment to the Alliance Entities. There are no
Alliance Sales Agreements pursuant to which Hydrocarbons are being sold at less
than the prevailing market price therefor.
5.15 Tax Partnerships. None of the Alliance Entities have filed any
----------------
federal or state income tax returns identifying the Alliance Interests as held
by any tax partnership.
B-31
<PAGE>
5.16 Prepayments. To the knowledge of the Alliance Entities, there
-----------
exists no material imbalance regarding production taken or marketed from any
Lease included in the Alliance Interests or otherwise affecting any of the
Alliance Entities which could result in (i) a portion of its interest in
production therefrom to be taken or delivered after the Closing Date without the
applicable entity receiving full payment therefor and at the price it would have
received absent such imbalance; or (ii) the applicable entity being obligated to
make payment to any person or entity as a result of such imbalance; or (iii)
production being shut-in or curtailed after the Closing Date due to non-
compliance with allowables, production quotas, proration rules or similar orders
or regulations of a Governmental Entity; and none of the Alliance Entities is
obligated, by virtue of any prepayment arrangement take-or-pay agreement or
similar arrangements to deliver Hydrocarbons produced from the Alliance
Interests at some future time without then receiving full payment therefor in
all material respects.
5.17 Production Sales Contracts. To the knowledge of the Alliance
--------------------------
Entities, the buyers under all production sales contracts pursuant to which any
of the Alliance Entities is selling crude oil or natural gas or constituents
thereof produced from the Leases included in the Alliance Interests are in
compliance in all material respects with all the material terms of such
contracts and none of the Alliance Entities has received a notice from any such
buyer of such party's intention or desire to modify, renegotiate or repudiate
any such contract or any of the material terms thereof.
5.18 Calls. To the knowledge of the Alliance Entities, no person has
-----
any call upon, option to purchase, or similar right to purchase any portion of
the Hydrocarbons from the Alliance Interests at a price less than the prevailing
market price therefor.
5.19 Reserve Reports. With respect to the Alliance Reserve Report,
---------------
(a) the information furnished by the Alliance Entities to the reserve engineers
in connection with the preparation of the Alliance Reserve Report was true and
correct in all material respects; (b) to the knowledge of the Alliance
Entities, the assumptions utilized in the preparation of the Alliance Reserve
Report are true and correct in all material respects in light of the properties
involved; (c) to the knowledge of the Alliance Entities, the calculations and
other methodology utilized in the preparation of the Alliance Reserve Report are
consistent with generally accepted standards of petroleum reservoir engineering
at the dates of their preparation; (d) none of the Alliance Entities have any
knowledge that the oil, condensate, natural gas liquids and gas reserves
attributable to the Alliance Interests as of the date of the Alliance Reserve
Report are materially less than the estimates of quantities of those reserves
shown in the Alliance Reserve Report; (e) none of the Alliance Entities have any
knowledge of any change (other than normal depletion by production in the
ordinary course, price changes, and sales of property in any single transaction
having a value of less than $25,000) occurring since the date of the Alliance
Reserve Report that would result in a material change in the information
contained in the Alliance Reserve Report, and (f) to the knowledge of the
Alliance Entities, none of the Alliance Entities or the Alliance Interests are
subject to any agreements, consents, orders or regulations that would materially
reduce the rate of production of Hydrocarbons or other substances from the
Alliance Interests below that reflected in the Alliance Reserve Report.
5.20 Wells.
-----
(a) To the knowledge of the Alliance Entities, all of Alliance's
Wells have been drilled and completed within the boundaries of the Major
Producing Leases of the Alliance Entities or within the limits otherwise
permitted by the Alliance Oil and Gas Contracts, and by law.
(b) To the knowledge of the Alliance Entities, the drilling and
completion of all Alliance's Wells and all development and operations of the
Alliance Interests have been conducted in material
B-32
<PAGE>
compliance with all applicable laws, ordinances, rules, regulations and permits,
and judgments, orders and decrees of any Governmental Entity.
(c) To the knowledge of the Alliance Entities, none of Alliance's
Wells is subject to material penalties on allowable production after the date of
this Agreement because of any overproduction or any other violation of
applicable laws, rules, regulations or permits or judgments, orders or decrees
of any Governmental Entity that would prevent any of Alliance's Wells from being
entitled to its full legal and regular allowable production from and after the
date of this Agreement as prescribed by any Governmental Entity.
5.21 No Funds in Suspense. To the knowledge of the Alliance Entities,
--------------------
all material proceeds from the sale of Hydrocarbons produced from the Alliance
Interests are currently being paid to the Alliance Entities and no portion of
such proceeds is currently being held in suspense by any purchaser thereof or
any other party by whom proceeds are paid except for immaterial amounts.
5.22 Regulatory Compliance. To the knowledge of the Alliance
---------------------
Entities, all material filings and approvals under the Natural Gas Policy Act of
1978, as amended for with FERC, or required under any rules or regulations
adopted by FERC which are necessary for the operation of the Alliance Interests
in the manner in which they are presently operated, have been made or granted.
5.23 Physical Condition of Facilities. To the knowledge of the
--------------------------------
Alliance Entities, in all material respects, the physical facilities on the
Alliance Interests (including facilities held under lease) have been maintained
in accordance with good industry maintenance practices and are in a state of
repair (normal wear and tear excepted) that is adequate for the intended use of
such facilities in the ordinary conduct of the business.
5.24 Data Regarding the Alliance Interests. All of the information
-------------------------------------
described in Sections 7.6 and 7.7 made or to be made available to LaTex and its
------------ ---
representatives is accurate and complete in all material respects, when
considered in context and together with all relevant information made available.
5.25 Litigation.
----------
(a) There is no action, proceeding, investigation or inquiry pending
or, to the knowledge of the Alliance Entities, threatened (i) against or
affecting any of the Alliance Entities or their assets or ordinary conduct of
the business that, if determined adversely to the Alliance Entities, would
result in a Material Effect or (ii) that questions this Agreement or any action
contemplated by this Agreement or in connection with the Merger.
(b) There are no citations, fines or penalties heretofore asserted
against any of the Alliance Entities or their assets under any federal, state or
local law relating to air, noise or water pollution or other environmental
protection matters, or relating to occupational health or safety, of which such
entity has received notice and that remain unpaid or that could otherwise bind
the assets of any of the Alliance Entities and that would result in a Material
Effect.
(c) Alliance has no knowledge of any state of facts or of the
occurrence or nonoccurrence of any event or group of related events, that should
reasonably cause Alliance to determine that there exists any basis for any
material claim against the Alliance Entities for any of the matters described in
paragraphs (a) or (b).
B-33
<PAGE>
5.26 Tax Returns and Payments.
------------------------
(a) The Alliance Entities (or the common parent of any affiliated
group of which any of such entities is or has been a member) have duly filed in
correct form in all material respects all Tax Returns required to be filed by
such entities and have duly paid or provided for payment of (or there have been
paid on their behalf) all Taxes due or claimed to be due from them by federal,
state, local or foreign taxing authorities, excluding Taxes that are being
contested in good faith by appropriate proceedings and as to which adequate
reserves have been provided and that are specifically identified in Section 5.26
------------
of the Alliance Disclosure Schedule.
- -----------------------------------
(b) There are no tax liens upon any property or assets owned by any
of the Alliance Entities that would have a Material Effect.
(c) All Tax Returns of the Alliance Entities filed, including any
amendments to date, have been prepared in good faith without willful
misrepresentation and are complete and accurate in all material respects. The
United Kingdom income tax returns of the Alliance Entities have been examined by
the Inland Revenue Service or other relevant tax authority for all periods
through April 30, 1994, and all deficiencies assessed as a result of such
examination have been paid in full or finally settled and no issue has been
raised by the Inland Revenue Service or other relevant tax authority in any such
examination that has been resolved adversely to any of the Alliance Entities or
is still pending and, by application of similar principles, reasonably could be
expected to result in an assertion by the Inland Revenue Service or other
relevant tax authority of a material deficiency in any other taxable year or
with respect to any other of the Alliance Entities. There are no outstanding
agreements, waivers or other arrangements providing for an extension of time
with respect to the filing of any Tax Returns or the payment by, or assessment
against, any of the Alliance Entities for any Taxes.
(d) The reserves made for Taxes on the respective balance sheets in
the Alliance Financial Statements are sufficient for the payment of all unpaid
Taxes due and payable by the Alliance Entities attributable to all periods ended
on or before the date of the respective balance sheets in accordance with GAAP.
5.27 Insurance. Section 5.27 of the Alliance Disclosure Schedule
--------- ------------------------------------------------
contains a true, correct, and complete description of all policies of fire,
casualty and extended coverage, public liability, products liability, worker's
compensation and other forms of insurance owned or held by or for the benefit of
the Alliance Entities (other than insurance owned or held by operators for those
Alliance Interests where one of the Alliance Entities is not the operator). All
such policies are sufficient for material compliance with all requirements of
law and all agreements for which those entities are parties, are, to the
knowledge of the Alliance Entities, valid and enforceable policies, will remain
in full force and effect through the respective dates set forth in Section 5.27
------------
of the Alliance Disclosure Schedule subject to the timely payment of the
- -----------------------------------
premiums set forth therein, and will not in any way be affected by, or terminate
or lapse by reason of, the transactions contemplated by this Agreement. All
premiums due under such policies have been paid and the insureds have complied
in all material respects with such policies.
5.28 Contracts.
---------
(a) Section 5.28 of the Alliance Disclosure Schedule contains a
------------------------------------------------
complete and correct list as of the date hereof of all agreements, contracts and
commitments of the following types (and all amendments thereto), written or
oral, to which any of the Alliance Entities is a party or by which any of their
properties is bound:
B-34
<PAGE>
(i) notes, agreements, mortgages, indentures, security agreements
and other instruments relating to the borrowing of money or evidence of
credit or the deferred purchase price of property, or the direct or
indirect guarantee by such entities of any such indebtedness or deferred
purchase price, in excess of $20,000;
(ii) leases of real property and material personal property
providing for payments under any such lease or group of related leases at
an annual rate in excess of $25,000 (other than Leases);
(iii) partnership or joint venture agreements;
(iv) management, employment and consulting agreements or other
contracts for personal services that are not terminable by any of such
entities on not more than one month's notice without penalty;
(v) agreements providing for liability for severance pay,
collective bargaining agreements, labor contracts, or labor or personnel
policies;
(vi) surety, performance and maintenance bonds in excess of $5,000;
(vii) agreements or commitments for capital expenditures in excess of
$25,000;
(viii) any plan, contract or arrangement providing for bonuses,
pensions, deferred compensation, retirement plan payments, profit sharing,
incentive pay, or for any other employee benefit plan;
(ix) brokerage or finder's agreements;
(x) any agreement that (a) restricts the right of such entities to
engage in any place in any line of business or (b) would restrict the right
of the Surviving Corporation or any Subsidiary of the Surviving Corporation
to engage in any line of business after the Closing Date;
(xi) any contract, commitment or agreement that involves the
disposition after October 31, 1995, of any assets of any of such entities
not in the ordinary course of business consistent with past practice;
(xii) any contract, commitment or agreement between any of such
entities or between any of such entities and any director or officer of any
of the Alliance Entities (other than those that will be terminated on or
prior to Closing);
(xiii) any Alliance Oil and Gas Contract that commits any of the
Alliance Entities to make any capital expenditures in any calendar year;
and
(xiv) other agreements, contracts and commitments that in any way
involve payments or receipts during the remaining term of such agreement,
contract or commitment in excess of $25,000.
(b) Alliance has made available to LaTex complete and correct
copies of all written agreements, contracts and commitments, together with all
amendments thereto, and accurate (in all material respects) descriptions of all
oral agreements, in all cases, described in subparagraph (a). Such agreements,
contracts and commitments are in full force and effect, and all of such entities
and, to the knowledge of the Alliance Entities, all other parties to such
agreements, contracts and commitments have performed all
B-35
<PAGE>
obligations required to be performed by them to date thereunder in all material
respects and are not in default thereunder in any material respect.
(c) None of the Alliance Entities has outstanding any powers of
attorney, including powers of attorney with respect to representation before any
Governmental Entity, customs agents and brokers, or given in connection with
qualification to conduct business in any other jurisdiction.
5.29 Transactions with Interested Persons. No officer or director of
------------------------------------
any of the Alliance Entities (or spouse or any child thereof) owns, directly or
indirectly, on an individual or joint basis, any material interest in, or serves
as an officer, director or employee of, any customer, competitor or supplier of
or any person or entity that has a material contract or arrangement with any of
the Alliance Entities, except for holdings of capital stock not exceeding one
percent (1%) of the total number of shares of capital stock of such customer,
competitor or supplier outstanding.
5.30 Compensation and Employee Plans.
-------------------------------
(a) Alliance has provided LaTex (i) the names and current annual
compensation rates of all present directors, officers, employees, independent
contractors or agents of each of the Alliance Entities and (ii) the number, job
category and range of compensation by job category of all employees of such
entities.
(b) Section 5.30 of the Alliance Disclosure Schedule sets forth the
------------------------------------------------
name of each Plan applicable to any of the Alliance Entities and lists all
documents evidencing any Plan applicable to any of the Alliance Entities.
(c) Each Plan applicable to any of the Alliance Entities is now, and
has been from its inception, administered in compliance in all material respects
with the provisions of all applicable laws and regulations, including ERISA, the
Code and the ADEA, insofar as such statutes are applicable to such Plan.
5.31 Accounts Receivable; Inventories.
--------------------------------
(a) The accounts receivable of the Alliance Entities as reflected on
the respective balance sheets of the Alliance Financial Statements (except to
the extent collected after the date thereof) (i) have arisen in the ordinary
course of business for goods delivered or services rendered, and (ii) are good
and collectible, except as otherwise reserved for on the respective balance
sheets.
(b) To the knowledge of the Alliance Entities, all of the Alliance
Entities' accounts receivable existing at Closing will be collectible in all
material respects at their aggregate recorded amounts (net of any allowances for
doubtful accounts reflected on the Alliance Financial Statements) in the
ordinary course of business within ninety (90) days of the Closing, without
resort to litigation, and will not be subject to counterclaim or set off.
(c) The inventories of the Alliance Entities as reflected on the
respective balance sheets included in the Alliance Financial Statements have
been valued in accordance with GAAP and customary industry practice using COPAS
guidelines.
5.32 Brokers, Finders and Advisors. Alliance has not employed any
-----------------------------
broker, finder, or investment advisor on its behalf, or incurred any liability
for any brokerage or finder's fees or commissions in connection with the
transaction contemplated hereby.
B-36
<PAGE>
5.33 Labor Force.
-----------
(a) Each of the Alliance Entities is in compliance in all material
respects with all applicable laws (including without limitation federal income
tax laws), ordinances, regulations, statutes, rules and restrictions of any
Governmental Entity respecting employment and employment practices and terms and
conditions of employment.
(b) No union representation question exists respecting the employees
of any of the Alliance Entities and, to the knowledge of the Alliance Entities,
no union organizing activities are taking place.
5.34 Books and Records. The books and records of each of the Alliance
-----------------
Entities (including, without limitation, the books of account, minute books and
stock record books) are complete and correct in all material respects and have
been maintained in accordance with sound business practices. The minute books of
each of the Alliance Entities contain accurate and complete records in all
material respects of all meetings held of, and corporate action taken by, the
shareholders and the Boards of Directors of the respective entities and no
meetings of or actions by such shareholders or any such Boards of Directors have
been held or taken for which minutes have not been prepared and are not
contained in such minute books. None of the records and written documents
furnished or made available to LaTex's representatives or agents by the Alliance
Entities concerning the Alliance Interests, when considered in context and
together with any relevant or related documents also so furnished or made
available, contain any untrue statement of material fact or omit a material fact
necessary to make any statement therein not misleading.
5.35 Payments. None of the Alliance Entities has, directly or
--------
indirectly, paid or delivered any fee, commission or other sum of money or item
of property however characterized to any finder, agent, government official or
other party, in the United States or any other country, in any manner related to
its business or operations, which such entity knows or has reason to believe to
have been illegal under any federal, state or local laws of the United States or
any other country or territory having jurisdiction over such entity, and has not
participated, directly or indirectly, in any boycotts or similar practices.
5.36 Public Utility Holding Company. None of the Alliance Entities
------------------------------
owns or operates any facilities used for the retail distribution of natural or
manufactured gas for heat, light or power, nor does any of the Alliance
Entities, directly or indirectly, own, control or hold with power to vote ten
percent (10%) or more of the outstanding stock of, or exercise direct or
indirect controlling influence over the management or policies of such a company
or a company so controlling such a company.
5.37 Exchange Filings. Alliance has filed all forms, reports and
----------------
documents required to be filed with the London Stock Exchange Limited since
January 1, 1993. All of such filings were prepared in accordance with the
requirements of all applicable laws and did not at the time they were filed
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
5.38 Disclosure. No representation or warranty made by Alliance in
----------
this Agreement (including, without limitation, in the Alliance Disclosure
Schedule) contains any untrue statement of material fact or omits or will omit
to state any material fact necessary to make the statements herein or therein
not misleading in light of the circumstances under which made.
5.39 Status of Newco. Except in connection with the Merger, Newco has
---------------
never had any assets or conducted any business. As of the Effective Time, all of
the issued and outstanding stock of Newco will be owned by Alliance.
B-37
<PAGE>
6. Actions of LaTex Prior to the Closing Date.
------------------------------------------
6.1 Affirmative Covenants. Prior to the Closing Date, LaTex, except
---------------------
as otherwise set forth in Section 6.1 of the LaTex Disclosure Schedule,
--------------------------------------------
covenants that, unless the prior written consent of Alliance is first obtained,
which consent shall not be unreasonably withheld, the LaTex Entities will:
(a) Carry on their respective businesses in the usual, regular and
ordinary course in substantially the same manner as heretofore conducted and use
all reasonable efforts to (i) preserve intact their respective present business
organizations, (ii) keep available the services of their respective present
officers and key employees and (iii) preserve their respective relationships
with customers, suppliers and any others having business dealings with them; and
(b) Duly comply with all laws applicable to them and their respective
properties, operations, business and employees which if not complied with would
result in a Material Effect.
6.2 Negative Covenants. Prior to the Closing Date, except with the
------------------
prior written consent of Alliance, and except as otherwise set forth in Section
-------
6.2 of the LaTex Disclosure Schedule, which consent shall not be unreasonably
- ------------------------------------
withheld, the LaTex Entities will not:
(a) Do any of the restricted acts set forth in Section 4.8 hereof, or
-----------
enter into any agreement of a nature set forth in Section 4.29 hereof;
------------
(b) Enter into or permit any of the LaTex Entities to enter into any
transaction other than in the ordinary course of business; or
(c) Amend the respective organizational or governing documents of any
of the LaTex Entities.
6.3 Consents. The LaTex Entities will use their best efforts to
--------
obtain all consents from third parties necessary or appropriate to effectuate
the transactions contemplated by this Agreement.
6.4 Advice of Changes. LaTex will promptly advise Alliance in
-----------------
writing from time to time prior to the Closing Date with respect to any matter
hereafter arising and known to it that, if existing or occurring at the date of
this Agreement, would have been required to be set forth or described in the
LaTex Disclosure Schedule or would have resulted in any representation of LaTex
in this Agreement being untrue.
6.5 Best Efforts. The LaTex Entities will use their best efforts to
------------
cause to be fulfilled those of the conditions to Alliance's and Newco's
obligations to consummate the transactions contemplated by this Agreement that
are dependent upon their actions and to execute and deliver such instruments and
take such other actions as necessary or appropriate in order to carry out the
intent of this Agreement.
6.6 Access to Properties and Records. From and after the date of
--------------------------------
this Agreement through the earlier of the Closing or the termination of this
Agreement, the LaTex Entities shall (a) provide Alliance an identification of
and access to all books, records and documents, including contracts, agreements,
consents, settlements, maps, revenue and expense information, production data
and geological and geophysical data relating to the LaTex Interests, (b) afford
to Alliance and their officers, attorneys, accountants and other authorized
representatives free and full access during normal business hours to the
offices, properties, books and records of the LaTex Entities, and (c) cause
counsel and accountants to the LaTex Entities to furnish such additional
financial and operating data and other information as Alliance shall from time
to time request in
B-38
<PAGE>
order that Alliance may have full opportunity to make such investigation as they
shall desire to make of the affairs of the LaTex Entities and their assets.
6.7 Supply Documents, Reports, etc.
-------------------------------
(a) LaTex shall furnish or make available to Alliance all documents,
reports and other information and data (including financial statements)
concerning the LaTex Entities as Alliance may reasonably require in connection
with any statement, application, or document required to be filed with
applicable Governmental Entities in connection with the transaction contemplated
by this Agreement or furnished to any other person, firm, corporation or
Governmental Entity in connection with this Agreement, including, but not
limited to the Commission, the Federal Trade Commission and the Department of
Justice.
(b) LaTex represents and warrants that all such information shall be
true, correct, and complete in all material respects and shall not omit any
material fact required to be stated to make such information not misleading in
light of the circumstances under which made.
6.8 Employees. LaTex agrees to use all reasonable efforts to
---------
persuade such of the employees, agents, and independent contractors of the LaTex
Entities as Alliance may designate to continue as employees, agents, and
independent contractors of the LaTex Entities after the Closing Date.
6.9 No Solicitation, etc. LaTex shall not (and will cause each of
--------------------
the executive officers and members of its executive management, as identified in
LaTex's Annual Report to Stockholders for the fiscal year ended July 31, 1995
(collectively, "LaTex's Executives"), and its directors, legal and financial
advisors and Affiliates not to) directly or indirectly make, solicit, encourage,
initiate or enter into any agreement or agreement in principle, or announce any
intention to do any of the foregoing, with respect to any offer or proposal to
acquire all or a substantial part of its or its Subsidiaries' business and
properties or any of its or its Subsidiaries' capital stock whether by merger,
purchase of assets, tender offer or otherwise (an "Alternative Transaction").
LaTex shall not (and will cause each of LaTex's Executives, directors, legal and
financial advisors and Affiliates not to), directly or indirectly, participate
in any negotiations or discussions regarding, or furnish any information with
respect to, or otherwise cooperate in any way in connection with, or assist or
participate in, facilitate or encourage, any effort or attempt to effect or seek
to effect, any Alternative Transaction with or involving any person other than
Alliance unless LaTex shall have received an unsolicited written offer to effect
an Alternative Transaction which, in the exercise of its fiduciary duty after
consideration of advice from its legal and financial advisors, LaTex's Board of
Directors determines is likely to be more beneficial to the LaTex Stockholders
than the Merger. LaTex will promptly communicate to Alliance the terms of any
proposal which it may receive in respect of any such transaction and will keep
Alliance informed as to the status of any actions, including negotiations or
discussions, taken pursuant to the preceding sentence.
7. Actions of Alliance and Newco Prior to the Closing Date.
-------------------------------------------------------
7.1 Affirmative Covenants. Prior to the Closing Date, Alliance,
---------------------
except as otherwise set forth in Section 7.1 of the Alliance Disclosure
--------------------------------------
Schedule, covenants that, unless the prior written consent of LaTex is first
- --------
obtained, which consent shall not be unreasonably withheld, the Alliance
Entities will:
(a) Carry on their respective businesses in the usual, regular and
ordinary course in substantially the same manner as heretofore conducted and use
all reasonable efforts to (i) preserve intact their respective present business
organizations, (ii) keep available the services of their respective present
officers and key employees and (iii) preserve their respective relationships
with customers, suppliers and any others having business dealings with them; and
B-39
<PAGE>
(b) Duly comply with all laws applicable to them and their respective
properties, operations, business and employees which if not complied with would
result in a Material Effect.
7.2 Negative Covenants. Prior to the Closing Date, except with the
------------------
prior written consent of LaTex, and except as otherwise set forth in Section 7.2
-----------
of the Alliance Disclosure Schedule, which consent shall not be unreasonably
- -----------------------------------
withheld, the Alliance Entities will not:
(a) Do any of the restricted acts set forth in Section 5.8 hereof, or
-----------
enter into any agreement of a nature set forth in Section 5.28 hereof;
------------
(b) Enter into or permit any of the Alliance Entities to enter into
any transaction other than in the ordinary course of business; or
(c) Amend the respective organizational or governing documents of any
of the Alliance Entities.
7.3 Consents. The Alliance Entities will use their best efforts to
--------
obtain all consents from third parties necessary or appropriate to effectuate
the transactions contemplated by this Agreement.
7.4 Advice of Changes. Alliance will promptly advise LaTex in
-----------------
writing from time to time prior to the Closing Date with respect to any matter
hereafter arising and known to it that, if existing or occurring at the date of
this Agreement, would have been required to be set forth or described in the
Alliance Disclosure Schedule or would have resulted in any representation of
Alliance in this Agreement being untrue.
7.5 Best Efforts. The Alliance Entities will use their best efforts
------------
to cause to be fulfilled those of the conditions to LaTex's obligations to
consummate the transactions contemplated by this Agreement that are dependent
upon their actions and to execute and deliver such instruments and take such
other actions as necessary or appropriate in order to carry out the intent of
this Agreement.
7.6 Access to Properties and Records. From and after the date of
--------------------------------
this Agreement through the earlier of the Closing or the termination of this
Agreement, the Alliance Entities shall (a) provide LaTex an identification of
and access to all books, records and documents, including contracts, agreements,
consents, settlements, maps, revenue and expense information, production data
and geological and geophysical data relating to the Alliance Interests, (b)
afford to LaTex and their officers, attorneys, accountants and other authorized
representatives free and full access during normal business hours to the
offices, properties, books and records of the Alliance Entities, and (c) cause
counsel and accountants to the Alliance Entities to furnish such additional
financial and operating data and other information as LaTex shall from time to
time request in order that LaTex may have full opportunity to make such
investigation as they shall desire to make of the affairs of the Alliance
Entities and their assets.
7.7 Supply Documents, Reports, etc.
-------------------------------
(a) Alliance shall furnish or make available to LaTex all documents,
reports and other information and data (including financial statements)
concerning the Alliance Entities as LaTex may reasonably require in connection
with any statement, application, or document required to be filed with
applicable Governmental Entities in connection with the transaction contemplated
by this Agreement or furnished to any other person, firm, corporation or
Governmental Entity in connection with this Agreement, including, but not
limited to the Commission, the Federal Trade Commission and the Department of
Justice.
B-40
<PAGE>
(b) Alliance represents and warrants that all such information shall
be true, correct, and complete in all material respects and shall not omit any
material fact required to be stated to make such information not misleading in
light of the circumstances under which made.
7.8 No Solicitation, etc. Alliance shall not (and will cause each of
--------------------
the executive officers and members of its executive management, as identified in
Alliance's Annual Report to Stockholders for the fiscal year ended April 30,
1996 (collectively, "Alliance's Executives"), and its directors, legal and
financial advisors and Affiliates not to) directly or indirectly make, solicit,
encourage, initiate or enter into any agreement or agreement in principle, or
announce any intention to do any of the foregoing, with respect to any offer or
proposal to acquire all or a substantial part of its or its Subsidiaries'
business and properties or any of its or its Subsidiaries' capital stock whether
by merger, purchase of assets, tender offer or otherwise (an "Alternative
Transaction"). Alliance shall not (and will cause each of Alliance's
Executives, directors, legal and financial advisors and Affiliates not to),
directly or indirectly, participate in any negotiations or discussions
regarding, or furnish any information with respect to, or otherwise cooperate in
any way in connection with, or assist or participate in, facilitate or
encourage, any effort or attempt to effect or seek to effect, any Alternative
Transaction with or involving any person other than LaTex unless Alliance shall
have received an unsolicited written offer to effect an Alternative Transaction
which, in the exercise of its fiduciary duty after consideration of advice from
its legal and financial advisors, Alliance's Board of Directors determines is
likely to be more beneficial to the Alliance Stockholders than the Merger.
Alliance will promptly communicate to LaTex the terms of any proposal which it
may receive in respect of any such transaction and will keep LaTex informed as
to the status of any actions, including negotiations or discussions, taken
pursuant to the preceding sentence. Nothing contained herein shall preclude
Alliance from continuing negotiations to acquire certain assets and companies
which have been previously disclosed to LaTex ("Potential Additional
Transactions"); provided, however, that the terms of any Potential Additional
-------- -------
Transaction shall have been disclosed in writing and are acceptable to LaTex
prior to the execution of a definitive agreement with respect to such assets or
companies and further provided that any agreement by Alliance to acquire such
assets or companies pursuant to any Potential Additional Transaction shall
require the issuance of a fairness opinion by Rothschild Natural Resources LLC;
and further provided that if LaTex fails or refuses to accept the terms of any
Potential Additional Transaction disclosed to it in writing by Alliance, such
Potential Additional Transaction shall not constitute an Alternative
Transaction, but if Alliance determines to proceed with a Potential Alternative
Transaction, the terms of which have not been accepted by LaTex, LaTex shall
have the absolute right to terminate this Agreement pursuant to Section 11.1(l),
---------------
in which event neither party shall have any further obligation or liability to
the other as more particularly described in Section 11.3(a).
---------------
8. Conditions to Alliance's or Newco's Obligations. Each and every
-----------------------------------------------
obligation of Alliance and Newco under this Agreement to be performed on or
before the Closing Date is, at the option of Alliance, subject to the
satisfaction on or before the Closing Date of each of the following conditions:
(a) Each class of the LaTex Stockholders shall have approved the
Merger.
(b) (i) All of the terms, covenants and conditions of this Agreement
to be complied with or performed by LaTex at or before the Closing Date shall
have been duly complied with and performed in all material respects, (ii) the
representations and warranties of LaTex set forth in Article 4, as modified by
---------
the statements contained in the LaTex Disclosure Schedule, shall be true in all
material respects on and as of the Closing Date with the same force and effect
as if such representations and warranties had been made on and as of the Closing
Date (but this provision shall not mean that representations and warranties
relating to a specific date, such as Section 4.6(a), shall relate to any other
--------------
date) and (iii) Alliance shall have received a certificate to such effect from
an officer of LaTex. Whether the conditions in subparagraphs (i) and (ii) above
have been satisfied shall be determined without regard to any materiality
qualifications or provisions contained in any such covenants, representations or
warranties.
B-41
<PAGE>
(c) All consents, waivers, approvals, licenses, authorizations of, or
filings or declarations with third parties or Governmental Entities required to
be obtained by the LaTex Entities in order to permit the transactions
contemplated by this Agreement to be consummated in accordance with governmental
laws, rules, regulations and agreements shall have been obtained, and the
registration statement required by Section 2.10(b) shall be effective under the
---------------
Securities Act, no stop orders suspending the effectiveness of the registration
statement shall have been issued, no action, suit, proceeding or investigation
by the Commission to suspend the effectiveness thereof shall have been initiated
and be continuing, and all necessary approvals under state securities laws or
the Securities Act or the Securities Exchange Act of 1934 relating to the
issuance or trading of the Alliance Shares issuable pursuant to the Merger shall
have been received.
(d) LaTex shall have delivered to Alliance an agreement in the form
attached to this Agreement as Exhibit C, executed by each of LaTex's Affiliates
---------
regarding his or its investment in the Alliance Shares.
(e) Alliance and Newco shall have received the opinion of counsel for
LaTex, dated the Closing Date, opining to certain of the matters referenced in
Sections 4.1, 4.2, 4.3, 4.4, 4.10 and 4.25 and in the form acceptable to
- ------------------------------------------
Alliance and Newco and their counsel.
(f) The aggregate number of each class of LaTex Shares held by the
LaTex Stockholders who have delivered and not withdrawn a written demand for
appraisal of their shares shall not exceed five percent (5%) of that class of
LaTex Shares outstanding and entitled to vote at the meeting of LaTex
Stockholders.
(g) All outstanding options or other rights to purchase or acquire
LaTex Shares (other than the Warrants) shall have been canceled without further
liability to LaTex or Alliance.
(h) All actions, proceedings, instruments and documents in connection
with the consummation of the transactions contemplated by this Agreement,
including the forms of all documents, legal matters, opinions and procedures in
connection therewith, shall have been approved in form and substance by counsel
for Alliance, Jenkens & Gilchrist, P.C., which approval shall not be
unreasonably withheld.
(i) The LaTex Entities shall have furnished such certificates to
evidence compliance with the conditions set forth in this Article, as may be
reasonably requested by Alliance or its counsel.
(j) There shall not have been any material loss resulting from
destruction of the LaTex Interests due to acts of God, fire, explosion or other
casualty which is not reimbursable in all material respects under policies of
insurance maintained by or for the benefit of the LaTex Entities.
(k) No material information or data provided or made available to
Alliance by or on behalf of LaTex shall be incorrect in any material respect.
(l) LaTex shall have sold or otherwise disposed of its interests in
the Excluded Entities. The conditions of the sale or disposition shall result
in no less favorable terms to LaTex than if the existing equity and debt
reflected on LaTex's books for these interests were written down to zero. At the
time of the Merger, LaTex shall have no rights or obligations with respect to
any of these entities.
(m) The Alliance Shares to be issued to the LaTex Stockholders
pursuant to the Merger shall have been approved for listing on the London Stock
Exchange and such listing shall have become effective.
B-42
<PAGE>
(n) Each LaTex Stockholder who will directly own five percent (5%) or
more of both the voting power and total value of Alliance as a consequence of
the Merger and the transactions contemplated thereby will enter into a gain
recognition agreement with the Internal Revenue Service.
9. Conditions to LaTex's Obligations. Each and every obligation of LaTex
---------------------------------
under this Agreement to be performed on the Closing Date is, at the option of
LaTex, subject to the satisfaction on or before the Closing Date, of each of the
following conditions:
(a) The Alliance Stockholders shall have approved the Merger, the
issue of the new Alliance Shares and the reverse stock split of the Alliance
Shares;
(b) (i) All of the terms, covenants and conditions of this Agreement
to be complied with or performed by Alliance and Newco at or before the Closing
Date shall have been duly complied with and performed in all material respects,
(ii) the representations and warranties of Alliance and Newco set forth in
Article 5, as modified by the statements contained in the Alliance Disclosure
- ---------
Schedule, shall be true in all material respects on and as of the Closing Date
with the same force and effect as if such representations and warranties had
been made on and as of the Closing Date (but this provision shall not mean that
representations and warranties relating to a specific date, such as Section
-------
5.6(a), shall relate to any other date), and (iii) LaTex shall have received a
- ------
certificate to such effect from an officer of each of Alliance and Newco at
Closing. Whether the conditions in subparagraphs (i) and (ii) above have been
satisfied shall be determined without regard to any materiality qualifications
or provisions contained in any such covenants, representations or warranties.
(c) All consents, waivers, approvals, licenses, authorizations of, or
filings or declarations with third parties or Governmental Entities required to
be obtained by Alliance and Newco in order to permit the transactions
contemplated by this Agreement to be consummated in accordance with governmental
laws, rules, regulations and agreements shall have been obtained, and the
registration statement required by Section 2.10(b) shall be effective under the
---------------
Securities Act, no stop orders suspending the effectiveness of the registration
statement shall have been issued, no action, suit, proceeding or investigation
by the Commission to suspend the effectiveness thereof shall have been initiated
and be continuing, and all necessary approvals under state securities laws or
the Securities Act or the Securities Exchange Act of 1934 relating to the
issuance or trading of the Alliance Shares issuable pursuant to the Merger shall
have been received.
(d) LaTex shall have received opinions from counsel for Alliance and
Newco, dated the Closing Date, opining to certain of the matters referenced in
Sections 5.1, 5.2, 5.3, 5.4, 5.6, 5.10 and 5.24 and in the forms acceptable to
- ------------------------------------------------
LaTex and its counsel.
(e) All actions, proceedings, instruments and documents in connection
with the consummation of the transactions contemplated by this Agreement,
including the forms of all documents, legal matters, opinions and procedures in
connection therewith, shall have been approved in form and substance by counsel
for LaTex, Pray, Walker, Jackman, Williamson & Marlar, which approval shall not
be unreasonably withheld.
(f) Alliance and Newco shall have furnished such certificates of its
officers and others to evidence compliance with the conditions set forth in this
Article, as may be reasonably requested by LaTex or its counsel.
(g) There shall not have been any material loss resulting from
destruction of the Alliance Interests due to acts of God, fire, explosion or
other casualty which is not reimbursable in all material respects under policies
of insurance maintained by or for the benefit of the Alliance Entities.
B-43
<PAGE>
(h) No material information or data provided or made available to
LaTex by or on behalf of Alliance shall be incorrect in any material respect.
(i) The Alliance Shares to be issued to the LaTex Stockholders
pursuant to the Merger shall have been approved for listing on the London Stock
Exchange and such listing shall have become effective.
(j) Alliance shall have entered into a definitive agreement with John
O'Brien, the former Chief Executive Officer of Alliance ("O'Brien"), to settle
all claims, disputes, actions and disagreements between Alliance and O'Brien on
terms either previously disclosed in writing to LaTex or otherwise reasonably
satisfactory to LaTex.
(k) [INTENTIONALLY DELETED]
(l) Alliance shall have consummated all Potential Additional
Transactions, if any, for which definitive agreements were executed by Alliance
on or before September 27, 1996, in accordance with the provisions of Section
-------
7.8, and which are required so that the matters to be addressed in the opinion
- ---
described in Section 9(k) will be true and correct as of Closing.
------------
10. Additional Agreements.
---------------------
10.1 Confidentiality. The parties hereto will, and will cause their
---------------
officers, directors, employees and authorized representatives to, hold in
confidence all, and not to use or to disclose to others any, nonpublic
information received by them from another party hereto in connection with the
transactions contemplated by this Agreement; provided, however, the foregoing
shall not restrict necessary disclosures in compliance with requirements of any
law, governmental order or regulation.
10.2 Further Assurances. After Closing, the parties shall execute,
------------------
acknowledge and deliver or cause to be executed, acknowledged and delivered such
instruments and take such other action including payment of monies as may be
necessary or advisable to carry out their obligations under this Agreement and
under any document, certificate or other instrument delivered pursuant hereto or
required by law. If at any time subsequent to the Closing, any party comes into
possession of money or property belonging to another party, such money or
property shall be promptly turned over to the party entitled thereto.
10.3 Resignations. Messrs. Jeffrey T. Wilson and Malcom W. Henley
------------
shall resign as officers, directors and employees of the LaTex Entities as of
Closing, and LaTex shall cause all other officers and directors of the LaTex
Entities to resign as officers and directors as of Closing.
10.4 Alliance Directors. At the Closing Date, the Board of Directors
------------------
of Alliance will be expanded to nine members and Messrs. Jeffrey T. Wilson and
John R. Martinson will be appointed to the Board of Alliance.
10.5 Offices. The executive offices of the Surviving Corporation
-------
shall be located in London, England, with LaTex's present offices becoming the
operational headquarters for the assets located in the United States.
10.6 LaTex Personnel. Alliance agrees that any LaTex personnel
---------------
terminated as a result of the Merger will be compensated on a no less favorable
basis than LaTex's existing policies governing these matters currently provides;
provided, however, that Alliance shall have the right to terminate any employee
B-44
<PAGE>
at any time for any reason or for no reason. The following key personnel shall
be retained as full-time employees of the Surviving Corporation for a minimum of
six months following the completion of the Merger: Messrs. Hull, Heinsius, Cox,
Ensminger, Smethers and Burns; provided, however, that Alliance shall have the
right to terminate any of the foregoing individuals for good cause.
10.7 Consulting Agreement. As of the Closing Date, Alliance shall
--------------------
enter into a consulting arrangement with Mr. Jeffrey T. Wilson satisfactory to
both parties pursuant to which Mr. Wilson will provide certain consulting
services relating to acquisitions in the energy industry for Alliance subsequent
to the Merger.
11. Termination, Waiver and Amendment.
---------------------------------
11.1 Termination. This Agreement and the transactions contemplated
-----------
herein may be terminated and abandoned at any time on or prior to the Closing
Date:
(a) By mutual consent of LaTex and Alliance; or
(b) By Alliance if:
(i) Any representation, warranty or covenant made herein for
the benefit of Alliance or Newco or any certificate, schedule or
document furnished to Alliance pursuant to this Agreement is untrue in
any material respect (without regard to any materiality or knowledge
qualifications or provisions contained in such representation,
warranty or covenant) and such breach is not cured within ten (10)
days of LaTex's receipt of a notice from Alliance that such breach
exists or has occurred;
(ii) LaTex shall have defaulted in any material respect
(without regard to any materiality qualifications or provisions
contained in such representation, warranty or covenant) in performance
of any material obligation under this Agreement and such breach is not
cured within ten (10) days of LaTex's receipt of a notice from
Alliance that such breach exists or has occurred; or
(iii) Consummation of the transactions contemplated by this
Agreement would violate any nonappealable final order, decree or
judgment of any court or governmental body having competent
jurisdiction; or
(c) By LaTex if:
(i) Any representation, warranty or covenant made herein for
the benefit of LaTex or any certificate, schedule or document
furnished to LaTex pursuant to this Agreement is untrue in any
material respect (without regard to any materiality or knowledge
qualifications or provisions contained in such representation,
warranty or covenant) and such breach is not cured within ten (10)
days of Alliance's receipt of a notice from LaTex that such breach
exists or has occurred;
(ii) Alliance or Newco shall have defaulted in any material
respect (without regard to any materiality qualifications or
provisions contained in such representation, warranty or covenant) in
performance of any material obligation under this Agreement and such
breach is not cured within ten (10) days of Alliance's receipt of a
notice from LaTex and the Controlling Stockholders that such breach
exists or has occurred; or
B-45
<PAGE>
(iii) Consummation of the transactions contemplated by this
Agreement would violate any nonappealable final order, decree or
judgment of any court or governmental body having competent
jurisdiction; or
(d) By either party if the Closing Date does not occur on or before
April 30, 1997 (or such later date as may be mutually agreed upon by the
parties hereto), and such party has complied with the provisions of Section 6.5
-----------
or Section 7.5, as the case may be.
-----------
(e) By either Alliance or LaTex, if this Agreement, the Merger and
the Alliance reverse stock split shall fail to be approved and adopted by the
affirmative vote of the LaTex Stockholders required under the law applicable to
LaTex and LaTex's charter;
(f) By either LaTex or Alliance, if this Agreement, the Merger and
the Alliance reverse stock split shall fail to be approved and adopted by the
affirmative vote of the Alliance Stockholders required under the law applicable
to Alliance and Alliance's charter;
(g) By LaTex, upon the prior payment of a termination fee to Alliance
in the amount of $1,000,000, plus an amount equal to Alliance's Reimbursable
Expenses if LaTex shall have received an unsolicited written offer from a person
to effect an Alternative Transaction which, in the exercise of its fiduciary
duty after consideration of advice from its legal and financial advisors,
LaTex's Board of Directors determines will be more beneficial to the LaTex
Stockholders than the Merger and which LaTex's Board of Directors has determined
to accept; provided that LaTex shall not be entitled to terminate this Agreement
--------
pursuant to this paragraph (g) if LaTex shall have breached Section 6.9 with
-----------
respect to the offer in question;
(h) By Alliance, upon the prior payment of a termination fee to LaTex
in the amount of $1,000,000, plus an amount equal to LaTex's Reimbursable
Expenses if Alliance shall have received an unsolicited written offer from a
person to effect an Alternative Transaction which, in the exercise of its
fiduciary duty after consideration of advice from its legal and financial
advisors, Alliance's Board of Directors determines will be more beneficial to
the Alliance Stockholders than the Merger and which Alliance's Board of
Directors has determined to accept; provided that Alliance shall not be entitled
--------
to terminate this Agreement pursuant to this paragraph (h) if Alliance shall
have breached Section 7.8 with respect to the offer in question;
-----------
(i) By LaTex if Alliance's Board of Directors shall have approved,
recommended or endorsed an Alternative Transaction; or
(j) By Alliance if LaTex's Board of Directors shall have approved,
recommended or endorsed an Alternative Transaction.
(k) By LaTex if, on September 27, 1996, the matters to be addressed
in the opinion described in Section 9(k) will not be true and correct as of that
-----------
date because Alliance has neither (i) entered into any definitive agreement(s)
with respect to any Potential Additional Transactions in accordance with the
provisions of Section 7.8, after giving effect to such Potential Additional
-----------
Transaction as if it had occurred on September 27, 1996 nor (ii) elected to
restructure the Merger and the transactions contemplated thereby in accordance
with Section 2.11.
------------
(l) By LaTex, pursuant to its rights under Section 7.8 hereof.
-----------
11.2 Manner of Exercise. In the event of termination and abandonment
------------------
by Alliance or LaTex, or both, authorized by Section 11.1, written notice
------------
thereof shall forthwith be given to the other
B-46
<PAGE>
parties and this Agreement shall terminate and the transactions contemplated
hereunder shall be abandoned without further action by the parties.
11.3 Effect of Termination.
---------------------
(a) In the event of the termination and abandonment authorized by
Section 11.1(a), (b), (c), (d), (e), (f), (k) or (l), then, subject to, and
- ----------------------------------------------------
except as otherwise provided in, the provisions of Section 11.3(d) and Section
--------------- -------
11.3(e), this Agreement shall become void and have no effect, without any
- -------
liability on the part of any of the parties or their directors or officers or
stockholders in respect of this Agreement and the transactions contemplated
hereby, except for the confidentiality obligation of Section 10.1 and this
------------
Section 11.3.
- ------------
(b) LaTex shall pay to Alliance a termination fee in cash of
$1,000,000 plus an amount equal to Alliance's Reimbursable Expenses within five
business days of termination of this Agreement by LaTex pursuant to Section
-------
11.1(g) or by Alliance pursuant to Section 11.1(j).
- ------- ---------------
(c) Alliance shall pay to LaTex a termination fee in cash of
$1,000,000 plus an amount equal to LaTex's Reimbursable Expenses within five
business days of termination of this Agreement by Alliance pursuant to Section
-------
11.1(h) or by LaTex pursuant to Section 11.1(i).
- ------- ---------------
(d) At the election of Alliance, LaTex shall pay to Alliance a
termination fee in cash of $1,000,000, plus the amount of Alliance's
Reimbursable Expenses within five business days following written notice of such
election by Alliance delivered following termination of this Agreement by
Alliance pursuant to Section 11.1(b)(i) or (b)(ii), provided that any breach, in
------------------ ------- --------
addition to giving rise to Alliance's right to terminate this Agreement pursuant
to Section 11.1(b)(i) or (b)(ii), constituted a knowing misrepresentation or
------------------ -------
intentional breach of warranty by LaTex as of the date hereof or an intentional
breach of an obligation of LaTex, or a knowing or intentional breach of Article
-------
6 hereof, provided, further, that if Alliance delivers such written notice,
- - -------- -------
payment in full of the fees and expense reimbursement pursuant to this Section
shall be in complete satisfaction of any and all liabilities or obligations that
LaTex or its officers, directors and stockholders may have to Alliance as a
result of any of the provisions of this Agreement or the termination thereof.
(e) At the election of LaTex, Alliance shall pay to LaTex a
termination fee in cash of $1,000,000, plus the amount of LaTex's Reimbursable
Expenses within five business days following written notice of such election by
LaTex delivered following termination of this Agreement by LaTex pursuant to
Section 11.1(c)(i) or (c)(ii), provided that any breach, in addition to giving
- ------------------ ------- --------
rise to LaTex's right to terminate this Agreement pursuant to Section 11.1(c)(i)
------------------
or (c)(ii), constituted a knowing misrepresentation or intentional breach of
-------
warranty by Alliance as of the date hereof or an intentional breach of an
obligation of Alliance, or a knowing or intentional breach of Article 6 hereof,
---------
provided, further, that if LaTex delivers such written notice, payment in full
- -------- -------
of the fees and expense reimbursement pursuant to this Section shall be in
complete satisfaction of any and all liabilities or obligations that Alliance or
its officers, directors and stockholders may have to LaTex as a result of any of
the provisions of this Agreement or the termination thereof.
12. Miscellaneous.
-------------
12.1 Survival. Except for Sections 2.1 through 2.9 and this Article
-------- ------------ --- -------
12, the representations, warranties, covenants and agreements of the parties to
- --
this Agreement shall not survive the Closing and shall thereafter be of no
further force and effect for any purpose.
B-47
<PAGE>
12.2 Expenses. Except as otherwise provided herein, the parties shall
--------
each pay their own expenses and costs in connection with this Agreement and the
transactions contemplated hereby.
12.3 Press Releases. No party shall make any public announcement or
--------------
press release with respect to this transaction without first consulting with the
other parties and giving such parties the opportunity to review and comment
thereon.
12.4 Binding Effect. This Agreement and all of the provisions hereof
--------------
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns. Neither this Agreement nor any of
the rights, interests or obligations hereunder shall be assigned by any party
without the prior written consent of the others. Nothing contained herein,
express or implied, is intended to confer on any person other than the parties
hereto or their respective successors and permitted assigns, any rights,
remedies, obligations or liabilities under or by reason of this Agreement.
12.5 Severability. Any provision of this Agreement that is prohibited
------------
or unenforceable in any jurisdiction shall, in such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
12.6 Notices. Any notice, request, instructions or other document to
-------
be given hereunder to any party shall be in writing, sent by facsimile
transmission or delivered personally or by courier or sent by certified mail,
postage prepaid, as follows:
If to LaTex (prior to the Closing):
LaTex Resources, Inc.
4200 East Skelly Drive, Suite 1000
Tulsa, Oklahoma 74135
Attn: Jeffrey T. Wilson, President
FAX: (918) 747-7010
If to Alliance or Newco:
Alliance Resources Plc
Kingsbury House
15-17 King Street
London SWIY 6QU
Attn: John A. Keenan, Managing Director
FAX: 011 44 171 930 6579
With copy to:
Jenkens & Gilchrist, P.C.
1445 Ross Avenue, Suite 3200
Dallas, Texas 75202-2711
Attn: Francis M. Munchinski
FAX: (214) 855-4300
B-48
<PAGE>
Any party may change its address for purposes of this Section by giving written
notice of such change of address to the other parties in the manner herein
provided for giving notice. Any notice or communication hereunder shall be
deemed to have been given when (i) deposited in the United States mail, if by
certified mail, and (ii) received, if delivered personally or by courier or
facsimile transmission.
12.7 Entire Agreement. This Agreement (including the instruments
----------------
between the parties referred to herein and any waivers delivered pursuant
hereto) constitutes the entire agreement among the parties and supersedes all
other prior agreements and understandings, both written and oral, among the
parties, or any of them, with respect to the subject matter hereof, including,
without limitation, that certain letter agreement, dated June 28, 1996 between
Alliance and LaTex. The Exhibits and Schedules are a part of this Agreement as
if fully set forth herein. All references to articles, sections, subsections,
paragraphs, clauses, exhibits and schedules shall be deemed references to such
part of this Agreement, unless the context shall otherwise require.
12.8 Amendments; Waivers. No supplement, modification, or amendment
-------------------
of this Agreement or waiver of any provision of this Agreement will be binding
unless executed in writing by, or on behalf of, all parties to this Agreement.
No waiver of any of the provisions of this Agreement will be deemed or will
constitute a waiver of any other provision of this Agreement (regardless of
whether similar), nor will any such waiver constitute a continuing waiver unless
otherwise expressly provided.
12.9 Headings. Descriptive headings contained herein are for
--------
convenience of reference only and shall not affect the meaning or interpretation
hereof.
12.10 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute but one agreement.
12.11 Specific Performance. The parties hereto agree that irreparable
--------------------
damage would occur if any of the provisions of this Agreement were not performed
in accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provision hereof in any court of the United States or any state
having jurisdiction, in addition to any other remedy to which they are entitled
at law or in equity.
12.12 GOVERNING LAW. THIS AGREEMENT AND THE LEGAL RELATIONS AMONG THE
-------------
PARTIES HERETO SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
INTERNAL LAWS OF THE STATE OF DELAWARE APPLICABLE TO CONTRACTS MADE AND TO BE
PERFORMED IN THAT STATE, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES.
12.13 Schedules. Any item disclosed by any party in the its
---------
DisclosureSchedule for one purpose and in response to a specific section of this
Agreement shall not be deemed disclosed for any other purpose and in response to
any other section of the Agreement unless specifically so stated.
12.14 Time of Essence. Time is of the essence of the parties'
---------------
obligations to consummate the transactions contemplated by this Agreement on the
Closing Date.
12.15 Best Efforts. No provision of this Agreement calling for a
------------
party to use its best efforts or reasonable efforts shall be construed so as to
require such party to incur out-of-pocket expenditures other than expenditures
normally incurred in transactions similar to the Merger or to take any step that
would not be commercially reasonable, in light of all of the circumstances.
B-49
<PAGE>
EXECUTED as of the day and year first above written.
Alliance:
ALLIANCE RESOURCES PLC
By: John A. Keenan
President
NEWCO:
ALLIANCE RESOURCES (DELAWARE),
INC.
By: John A. Keenan
President
LATEX:
LATEX RESOURCES, INC.
By: Jeffrey T. Wilson
President
B-50
<PAGE>
APPENDIX C
OPINIONS OF WOOD ROBERTS, LLC.
[Wood Roberts Letterhead]
August 8, 1996
The Board of Directors
LaTex Resources, Inc.
4200 East Skelly Drive, Suite 1000
Tulsa, Oklahoma 74135
Gentlemen:
You have asked Wood Roberts, LLC. to examine the terms of the proposed merger
(the "Merger") between LaTex Resources, Inc. ("LaTex") and Alliance Resources
PLC ("Alliance"), as set forth in the Agreement and Plan of Merger scheduled to
be executed on August 9, 1996 (the "Agreement"), in conjunction with the
proposed disposal of certain assets of LaTex as provided by the Agreement, and
to render an opinion as to the fairness of such terms from a financial stand
point to the shareholders of LaTex.
Pursuant to the Agreement, Alliance Resources (Delaware), Inc. ("Alliance
Delaware"), a newly formed, wholly owned subsidiary of Alliance, will be merged
with and into LaTex and the separate corporate existence of Alliance Delaware
will cease. LaTex will be the surviving corporation in the Merger and will be a
wholly owned subsidiary of Alliance.
All issued and outstanding Common Shares, Series A Shares and Series B Shares of
LaTex will be canceled and, in consideration of such cancellation, the holders
will become entitled to the allotment of common shares of Alliance with a par
value (Pounds)0.40 ("Alliance Shares") in the total amount of 21,448,787
Alliance Shares, equal to 72% of the then issued Alliance Shares, and in amounts
for each Common Share, Series A Share and Series B Share as will be set forth in
the Agreement prior to execution. In consequence, the opinion expressed
hereinbelow is qualified with respect to the fairness of the allocation of
Alliance Shares between the separate classes of LaTex shares.
Each warrant to purchase LaTex Common Shares (a "Warrant") will be canceled and,
in consideration of such cancellation, the holder will become entitled to
receive a new warrant to subscribe for the number of Alliance Shares that the
holder of the Warrant would have been entitled to receive if such holder had
exercised the Warrant prior to the Merger and received LaTex shares. The
holders of Warrants will have the right to subscribe to a further number of
Alliance Shares as will be set forth in the Agreement.
The Alliance Shares are currently traded on the London Stock Exchange and LaTex
Common Shares are traded on the over the counter market of the NASD. Following
the Merger, the Alliance Shares will be traded on the London Stock Exchange and
no market will be made on NASDAQ.
It is a condition of the Agreement that the Merger will qualify as a
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986 and that the exchange of shares in the Merger will not give rise to gain
or loss to LaTex or its shareholders.
C-1-1
<PAGE>
As of the date of this letter, Alliance is in negotiation with certain other
entities regarding the potential acquisition of other assets or companies. We
cannot give an opinion on the effect of such potential acquisitions on the
shareholders of LaTex. However, the terms of the Agreement provide that the
terms of such potential acquisitions must be acceptable to LaTex prior to the
execution of an agreement relating thereto.
The Agreement excludes certain non-performing assets of LaTex from the Merger.
Such assets will be sold to Imperial Petroleum, Inc. for a consideration of
100,000 LaTex Common Shares.
In arriving at our opinion, we have reviewed the Agreement, information provided
to us by the management of LaTex and Alliance and by certain of their
professional advisors, as well as information that is in the public domain.
Furthermore, we have had the opportunity of meeting with the management of LaTex
and Alliance to discuss the historical and current business of each company,
their prospects as stand-alone entities and the potential short-term and medium-
term strategic and financial benefits of the proposed Merger.
Our review of the terms of the Merger has been undertaken with reference to,
among other things: the relative net asset values of LaTex and Alliance;
financial condition and debt ratios; earnings, cash flow and the ability to
develop or re-work assets; and the pro forma financial position of the merged
company and its ability to obtain debt or equity funding. We have analyzed
certain financial, industry and market related information and data.
Furthermore, we have examined data indicative of the relative merits of LaTex
shareholders exchanging their shares for shares listed for trading on the London
Stock Exchange. We have not been asked to undertake an independent analysis of
comparable transactions. However, we have reviewed certain published data in
this regard.
We have not independently verified any of the foregoing information and, in
using such information in our review of the Merger, we have relied upon it being
complete and accurate in all material respects.
In any merger of publicly traded companies, regulatory and governmental
approvals must be sought and obtained. In our review of the Merger of LaTex and
Alliance, we have assumed that such approvals will be forthcoming and that no
restriction will be imposed that will have a material adverse effect on the
contemplated benefits of the Merger. Our opinion is rendered on the basis of
our knowledge of the circumstances disclosed to us as of the date of this
letter.
We act as financial advisor to LaTex in relation to the Merger. We have
received fees for such services in the past and have an agreement with LaTex for
the payment of a fee if the Merger is consummated. John R. Martinson, a director
of LaTex, is a principal of Wood Roberts, LLC. Mr. Martinson has recused
himself from consideration of the terms of the Merger for the purpose of this
opinion.
Based upon the results of our analysis of the matters set forth above, our
knowledge of the market for and valuation of securities in the U.S.A. and the
United Kingdom, our overall experience in the energy sector in both of the
aforementioned countries, all other factors that we consider to be relevant and
subject to the qualification hereinbefore stated, we are of the opinion that the
financial terms of the Merger are fair to the shareholders of LaTex.
Yours sincerely,
WOOD ROBERTS, LLC.
C-1-2
<PAGE>
[Wood Roberts Letterhead]
October 1, 1996
The Board of Directors
LaTex Resources, Inc.
4200 East Skelly Drive, Suite 1000
Tulsa, Oklahoma 74135
Gentlemen:
You have asked Wood Roberts, LLC. to examine the proposed amended Section 9(k)
of the proposed merger (the "Merger") between LaTex Resources, Inc. ("LaTex"),
and Alliance Resources Plc ("Alliance") and Alliance Resources (Delaware), Inc.
("Alliance Delaware"), as set forth in the Agreement and Plan of Merger dated
August 12, 1996 (the "Agreement") and to render an opinion as to the fairness of
such amendment from a financial stand point to the shareholders of LaTex.
The amendment, as proposed by Alliance, seeks to eliminate the condition that
counsel for Alliance and Alliance Delaware shall issue a satisfactory opinion
that the Merger is a tax free reorganization under Section 368(a) of the
Internal Revenue Code of 1986 and that the exchange of LaTex shares and warrants
for Alliance shares will not give rise to gain or loss to the LaTex
shareholders.
In rendering this further opinion, Wood Roberts has relied upon information
provided to it by LaTex to the effect that the transaction will be a taxable
event and offers no opinion as to the tax status of the transaction.
Furthermore, Wood Roberts has not been asked to, nor is it willing to, provide
an opinion on the tax effect of the transaction on individual shareholders or
classes of shareholders, and all such shareholders should consult their own tax
advisor with reference to their own position.
The contents of this opinion and the related analysis provided herewith should
be considered in conjunction with and subject in all respects to the terms of
reference, contents of and limitations to the fairness opinion rendered by Wood
Roberts in relation to the Merger on August 8, 1996.
Based upon our understanding of the tax effect of the proposed amendment, our
knowledge of the historical and current price of LaTex shares, our knowledge of
the market for and valuation of securities in the U.S.A. and the United Kingdom,
our experience in the energy sector in both of the aforementioned countries, the
overall and continuing benefits to be obtained by the shareholders of LaTex from
the Merger with Alliance, all other factors that we consider to be relevant, and
subject to the qualifications hereinbefore stated, we are of the opinion that
the financial terms of the Merger remain fair to the shareholders of LaTex.
Yours sincerely,
WOOD ROBERTS, LLC.
C-2-1
<PAGE>
March 11, 1997
The Board of Directors
LaTex Resources, Inc.
4200 East Skelly Drive, Suite 1000
Tulsa, Oklahoma 74135
Gentlemen:
The terms of the proposed merger (the "Merger") between LaTex Resources, Inc.
("LaTex"), Alliance Resources Plc ("Alliance") and Alliance Resources
(Delaware), Inc. ("Alliance Delaware"), as set forth in the Agreement and Plan
of Merger dated August 12, 1996 (the "Agreement") have been amended with respect
to the allocation of New Alliance Shares between the various classes of LaTex
shareholders.
The fairness of the Merger to the shareholders of LaTex as a group from a
financial standpoint has been examined and opinions of Wood Roberts on this
matter have been provided to the Board of Directors of LaTex in opinions dated
August 6, 1996 and October 1, 1996. You have asked Wood Roberts to provide an
opinion as to the fairness of the amended allocation of the shares of New
Alliance between the three classes of LaTex stock: the Common, the Series A
Convertible Preferred and Series B Senior Convertible Preferred.
The contents of this opinion and all related analyses must be considered in
conjunction with and subject in all respects to the terms of reference, contents
of and limitations to the previous fairness opinions rendered by Wood Roberts in
relation the Merger. As previously, Mr. John Martinson has recused himself from
the consideration of the matters addressed herein.
The aggregate number of New Alliance Shares to be issued to the shareholders of
LaTex will remain unchanged in the total amount of up to 21,448,787 shares,
equal to approximately 72% of the then issued New Alliance Shares. However,
pursuant to the amended terms, the LaTex shareholders will receive: 0.85981
New Alliance Shares for each Common Share; 2.58201 New Alliance Shares for
each Series A Convertible Preferred Share; and 6.17632 New Alliance Shares for
each Series B Senior Convertible Preferred Share.
The amendment to the terms has been made for two reasons: first, because the
payment of quarterly preference dividends attributable to the Series A
Convertible Preferred Stock and Series B Senior Convertible Preferred Stock has
been satisfied, in the same manner as all previous dividends, by the issuance of
additional shares of preferred stock, thereby increasing the proportion of the
Company owned by such preferred shareholders; and, second, so as properly to
reflect the value of the senior preference rights of the Series B Senior
Convertible Preferred Stock.
C-3-1
<PAGE>
March 11, 1997
The Board of Directors
LaTex Resources, Inc.
Page 2
Based upon our analysis of the rights attaching to each class of LaTex share and
the number of such shares issued, Wood Roberts is of the opinion that the
allocation of the New Alliance Shares between the three classes of LaTex shares
is fair to the holders of each class.
Yours sincerely,
WOOD ROBERTS, LLC.
C-3-2
<PAGE>
APPENDIX D
DELAWARE GENERAL CORPORATION LAW
(S)262. APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to (S)228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of his shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock corporation and also
a member of record of a nonstock corporation; the words "stock" and "share" mean
and include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely of
stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to (S)251, (S)252, (S)254, (S)257, (S)258, (S)263 or (S)264 of
this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the national Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsections (f) or (g) of (S)251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal
rights under this section shall be available for the shares of any class or
series of stock of a constituent corporation if the holders thereof are
required by the terms of an agreement of merger or consolidation pursuant
to (S)(S)251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting
from such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock or depository
receipts at the effective date of the merger or consolidation will be
either listed on a national securities exchange or designated as a
national market system security on an interdealer quotation system by
the National Association of Securities Dealers, Inc. or held of record
by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
D-1
<PAGE>
d. Any combination of the shares of stock, depository receipts
and cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a., b. and c. of
this paragraph.
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under (S)253 of this title is not
owned by the parent corporation immediately prior to the merger, appraisal
rights shall be available for the shares of the subsidiary Delaware
corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporation, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of his shares
shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares.
Such demand will be sufficient if it reasonably informs the corporation of
the identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing
to take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to (S)228 or
253 of this title, the surviving or resulting corporation, either before
the effective date of the merger ro consolidation or within 10 days
thereafter, shall notify each of the stockholders entitled to appraisal
rights of the effective date of the merger or consolidation and that
appraisal rights are available for any or all of the shares of the
constituent corporation, and shall include in such notice a copy of this
section. The notice shall be sent by certified or registered mail, return
receipt requested, addressed to the stockholder at his address as it
appears on the records of the corporation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of the
notice, demand in writing from the surviving or resulting corporation the
appraisal of his shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of his shares.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days
D-2
<PAGE>
after the effective date of the merger or consolidation, any stockholder shall
have the right to withdraw his demand for appraisal and to accept the terms
offered upon the merger or consolidation. Within 120 days after the effective
date of the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair
rate of interest, the Court may consider all relevant factors, including the
rate of interest which the surviving or resulting corporation would have had to
pay to borrow money during the pendency of the proceeding. Upon application by
the surviving or resulting corporation or by any stockholder entitled to
participate in the appraisal proceeding, the Court may, in its discretion,
permit discovery or other pretrial proceedings and may proceed to trial upon the
appraisal prior to the final determination of the stockholder entitled to an
appraisal. Any stockholder whose name appears on the list filed by the
surviving or resulting corporation pursuant to subsection (f) of this section
and who has submitted his certificates of stock to the Register in Chancery, if
such is required, may participate fully in all proceedings until it is finally
determined that he is not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the
D-3
<PAGE>
surrender to the corporation of the certificates representing such stock. The
Court's decree may be enforced as other decrees in the Court of Chancery may be
enforced, whether such surviving or resulting corporation be a corporation of
this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
D-4
<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A2
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 1996
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
incorporation or organization) Identification No.)
4200 East Skelly Drive
Suite 1000
Tulsa, Oklahoma 74135
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (918) 747-7000
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
<S> <C>
Common Stock, $0.01 par value per share Pacific Stock Exchange
Common Stock Purchase Warrants Pacific Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- ------
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of the Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [_]
The aggregate market value of the Registrant's voting stock held by
non-affiliates as of October 25, 1996 was approximately $4,830,888 (based upon
the average of the high bid and closing asked prices on such date).
On October 25, 1996 there were 19,805,495 shares of the Registrant's
common stock issued and outstanding.
Documents Incorporated by Reference
NONE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
LATEX RESOURCES, INC.
FORM 10-K
FISCAL YEAR ENDED JULY 31, 1996
--------------------------------------------------------
TABLE OF CONTENTS
PART I
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Item 1. Business................................................................................. 3
Item 2. Properties............................................................................... 3
Item 3. Legal Proceedings........................................................................ 21
Item 4. Submission of Matters to a Vote of Security Holders...................................... 23
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.................... 23
Item 6. Selected Financial Data.................................................................. 24
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................... 26
Item 8. Financial Statements and Supplementary Data.............................................. 37
PART III
Item 10. Directors and Executive Officers of the Registrant....................................... 38
Item 11. Executive Compensation................................................................... 40
Item 12. Security Ownership of Certain Beneficial Owners and Management........................... 46
Item 13. Certain Relationships and Related Transactions........................................... 48
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K............................................................................. 49
Signatures............................................................................... 61
</TABLE>
Certain statements in this Report under the captions "Item 1. Business and
Item 2. Properties" and Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations", and elsewhere in this Report
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Reform Act"). Such forward-
looking statements involve known and unknown risks, uncertainties and other
factors which may cause the actual result, performance or achievements of the
Company, or industry trends and results, to be materially different from any
future results, trends, performance, or achievements expressed or implied by
such forward-looking statements. Such risks, uncertainties and other factors
include, among others, the following: general economic and business conditions;
oil and gas and other industry conditions and trends, including supply and
demand; fluctuations in the prices for oil, gas and refined products;
competition; import protection and regulation (including the implementation of
the World Trade Organization and North American Free Trade Agreement; the loss
of any significant customers; changes in business strategy or development plans;
quality of management; availability, terms and deployment of debt and equity
capital; business abilities and judgment of personnel; availability of qualified
personnel; changes in or the failure to comply with government regulations; and
other factors referenced in this Report. See "Item 1. Business and Item 2.
Properties - Cautionary Statement and Risk Factors."
Without limiting the foregoing, as disclosed in "Item 1. Business and
Item 2. Properties--Proposed Merger with Alliance Resources Plc," the Company
has entered into an Agreement and Plan of Merger with Alliance Resources PLC
("Alliance") pursuant to which the Company will merge (the "Merger") with a
wholly-owned subsidiary of Alliance. Pursuant to the Merger, two of the current
directors of the Company will become directors of Alliance, but the management
of the combined companies will otherwise consist of the current management of
Alliance. Statements made in this Report concerning future drilling,
acquisitions, budgets, spending, capital needs, operating plans and other
activities are made on behalf of the current management of the Company and will
not be indicative of the plans of the new management or activities of the
combined companies in the event the Merger is completed.
2
<PAGE>
PART I
Item 1. Business and Item 2. Properties.
As used in this Form 10-K:
"Mcf" means thousand cubic feet, "MMcf" means million cubic feet and
"Bcf" means billion cubic feet. "Mcfe" means thousand cubic feet equivalent,
"MMcfe" means million cubic feet equivalent and "Bcfe" means billion cubic feet
equivalent. "Bbl" means barrel, "MBbls" means thousand barrels and "MMBbls"
means million barrels. "BOE" means equivalent barrels of oil and "MBOE" means
thousands equivalent barrels of oil. Unless otherwise indicated herein, natural
gas volumes are stated at the legal pressure base of the state or area in which
the reserves are located and at 60 (degrees) Fahrenheit. Natural gas equivalents
are determined using the ratio of six Mcf of natural gas to one Bbl of crude
oil.
The term "gross" refers to the total leasehold acres or wells in which
the Company has a working interest. The term "net" refers to gross leasehold
acres or wells multiplied by the percentage working interest owned by the
Company. "Net production" means production that is owned by the Company less
royalties and production due others.
"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 reserves which are expected to be recovered through existing wells
with existing equipment and operating methods. "Proved undeveloped reserves"
are those reserves which are expected to be recovered from new wells on
undrilled acreage or from existing wells where a relatively major expenditure is
required for recompletion.
The term "oil" includes crude oil, condensate and natural gas liquids.
Unless the context requires otherwise, all references to the "Company"
include LaTex Resources, Inc., and its consolidated subsidiaries including,
LaTex Petroleum Corporation ("LaTex Petroleum"), LaTex/GOC Acquisition, Inc.
("GOCA"), Germany Oil Company, formerly known as LRI Acquisition, Inc.
("Germany"), ENPRO, Inc. ("ENPRO"), Phoenix Metals, Inc. ("Phoenix Metals"), and
LaTex Resources International, Inc. ("LaTex Resources International").
The Company
LaTex Resources, Inc. ("the Company") is an independent oil and gas
company primarily engaged in the acquisition of producing oil and gas properties
which possess the potential for increased value through exploitation and
development. The Company seeks to realize such potential through workovers,
recompletions, secondary recovery operations, and the drilling of development or
infill wells. The Company is also engaged in the purchase and marketing of
crude oil and natural gas and the exploration and development of non-producing
oil and gas properties.
The Company owns and operates producing oil and gas properties located
in 12 states, with proved reserves located primarily in the states of
Mississippi, Louisiana, Oklahoma, Texas, and Alabama. Since July 31, 1991, the
Company has acquired approximately 4,500 MBbls of crude oil and 25.8 Bcf of
natural gas reserves involving total capital expenditures of approximately
$30,840,000 for an average acquisition cost of $3.50 per BOE. Daily gross
production from 156 wells operated by the Company in these states currently
averages approximately 1,055 Bbls of oil and 7,600 Mcf of gas. The Company also
owns interests in 342 producing wells and units in the same states which are
operated by others. Daily gross production from both operated and non-operated
wells, net to the Company's interest, currently averages approximately 1,000
Bbls of oil and 8,000 Mcf of gas from a total of 95 net wells.
From the end of its first year of oil and gas operations in 1987, the
Company's proved reserves have grown from 10 MBOE to 11,048 MBOE at July 31,
1996. At July 31, 1996, the Company's proved reserves were 6,353 MBbls of oil
and 28.2 Bcf of gas. The Company has increased its average net daily
3
<PAGE>
production from two Bbls of oil during 1987 to 1,000 Bbls of oil and 8,000 Mcf
of gas at July 31, 1996. See "Item 1. Business and Item 2. Properties -
Reserves."
The Company has agreed to sell approximately 400 non-strategic oil and
gas properties for total consideration of approximately $1,526,000, before
adjustments. The oil and gas reserve analysis, well count, acreage summaries
and other data included in this Item I. Business and Item 2. Properties for the
year ended July 31, 1996 do not include these properties.
Historical Background
The Company's predecessor was incorporated as a Texas corporation in
1981 under the name Video Science Technology, Inc. ("VSTI") and was initially
organized to research, develop and market specialized video systems and products
pertaining to medical, petroleum and low power television applications. By
1988, substantially all of VSTI's original businesses had been terminated and
VSTI had become substantially inactive.
In December 1991, Jeffrey T. Wilson ("Wilson"), James G. Borem
("Borem") and Dewitt C. Shreve ("Shreve"), agreed to exchange (the "LaTex
Exchange Transaction") all outstanding shares of common stock of LaTex Petroleum
Corporation, an Oklahoma corporation ("LaTex Petroleum"), for a total of
7,000,000 newly issued shares of VSTI's common stock representing approximately
61% of VSTI's resulting issued and outstanding common stock. As a result, LaTex
Petroleum became a wholly owned subsidiary of VSTI. VSTI moved its principal
offices from Dallas, Texas to its current offices located in Tulsa, Oklahoma and
Messrs. Borem, Wilson and Shreve were elected the Directors and executive
officers of VSTI. As a result of the LaTex Exchange Transaction, VSTI resumed
operation through its wholly-owned subsidiary, LaTex Petroleum, in the business
of acquisition of producing oil and gas properties and exploration for and
production of oil and gas.
In May 1992, VSTI was merged (the "Reincorporation Merger") with and
into the Company (which had been formed as a wholly-owned subsidiary of VSTI
solely for the purpose of effecting the Reincorporation Merger). As a result of
the Reincorporation Merger, the state of incorporation of the Company was
changed from Texas to Delaware and the name of the Company was changed from
"Video Science Technology, Inc." to "LaTex Resources, Inc.". Each outstanding
share of stock of VSTI was converted into one share of stock of the Company and
the existing shareholders of VSTI automatically became shareholders of the
Company. The Reincorporation Merger did not result in any change in the
physical location, business, management, or financial condition of the Company.
In November 1992 the Company completed a public offering of 1,125,000
units, each unit consisting of one share of common stock and two redeemable
Stock Purchase Warrants to purchase one share of common stock. The purchase
price for the units under the offering was $3.70 per unit. Net proceeds to the
Company from the offering, approximately $4,226,063, were used to pay off the
Company's then existing bank debt and for working capital.
Proposed Merger With Alliance Resources Plc
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 0.8806 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
4
<PAGE>
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.
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 $2,372,452 investment
in Wexford, its $1,812,429 investment in Imperial, and its $3,446,795 investment
in LaTex Resources International (which includes $2,491,299 in dry hole costs
and $955,496 in abandonments relating to the Company's investments in Tunisia
and Kazakhstan, respectively). Effective July 31, 1994, the Company wrote off
its $222,918 investment in Phoenix Metals. 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. By subsequent
agreement, Imperial granted the Company an option to repurchase its interests in
Imperial, Wexford, LaTex Resources International and Phoenix Metals for the
original purchase price of 100,000 shares of the Company's common stock. The
option is for a term of two years from the closing date of the sale by the
Company of its interests in Imperial, Wexford, LaTex Resources International and
Phoenix Metals or the Company fails to fund its proportionate share (defined as
16% for Imperial, 33% for Wexford, 50% for LaTex Resources International and 50%
of Phoenix Metals) of the ongoing expenses associated with the development of
the assets held by these companies within 30 days of being presented with an
authority for expenditure with respect to such expenses. In addition, Imperial
granted the Company a right to share in the net proceeds from any subsequent
sale by Imperial of these companies in the same proportions outlined above. See
"Exploration and Development", "Other Business" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Proposed Merger With Alliance Resources Plc."
Pursuant to the Alliance Merger, two of the current directors of the
Company will become directors of Alliance, but the management of the combined
companies will otherwise consist of the current management of Alliance.
Statements made in this Report concerning future drilling, acquisitions,
budgets, spending, capital needs, operating plans and other activities are made
on behalf of the current management of the Company and will not be indicative of
the plans of the new management or activities of the combined companies in the
event the Merger is completed.
Cautionary Statement and Risk Factors
Cautionary Statement Regarding Forward-Looking Statements. In the
---------------------------------------------------------
interest of providing the Company's shareholders and potential investors with
certain information regarding the Company, including management's assessment of
the Company's future plans and operations, certain statements set forth in this
Report contain or are based on the Company's projections or estimates of
revenue, income, earnings per share and other financial items or relate to
management's future plans and objectives or to the Company's future economic and
financial performance. Such statements are "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, and are made
pursuant to and in reliance on the safe harbor provisions of such sections.
Although any forward-looking statements contained in this report or
otherwise expressed by or on behalf of the Company are, to the knowledge and in
the judgment of the officers and directors of the Company, expected to prove
true and to come to pass, management is not able to predict the future with
absolute certainty. Forward-looking statements involve known and unknown risks
and uncertainties which may cause the Company's actual performance and financial
results in future periods to differ materially from any projection, estimate or
forecasted result. These risks and uncertainties include, among other things:
volatility of oil and gas prices; product supply and demand; market competition;
risks inherent in the Company's oil and gas operations both domestic and
foreign; imprecision of reserve estimates; the Company's ability to replace and
expand oil and gas reserves; the Company's ability to generate sufficient cash
flow from operations to meet its current and future obligations; the Company's
ability to access external sources of debt and equity capital; and such other
risks and uncertainties described from time to time in the Company's periodic
reports and filings with the Securities and Exchange Commission. These and
other risks are described elsewhere in this report and in the Company's other
filings with the Securities and Exchange Commission. Accordingly, shareholders
and potential investors are cautioned that certain events or circumstances could
cause actual results to differ materially from those projected, estimated or
predicted. In addition, forward-looking statements are based on management's
knowledge and judgment as of the date of this report, and the Company does not
intend to update any forward-looking statements to reflect events occurring or
circumstances existing hereafter.
History of Losses; Accumulated Deficit. For the fiscal years ended
--------------------------------------
July 31, 1996, 1995 and 1994, the Company incurred net losses of $10,230,783,
$2,491,342 and $423,341 respectively. At July 31, 1996, the Company had an
accumulated deficit of $11,747,860 and its working capital deficit was
$28,420,291.
5
<PAGE>
It is expected that the Company will continue to experience losses and that, in
order to achieve profitability and generate cash flow, it will be dependent upon
acquiring additional debt or equity capital and acquiring or developing
additional oil and gas properties. There can be no assurance that the Company
will be able to do so. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Item 8. Financial
Statements and Supplementary Data."
Limited Available Capital; Need for Additional Financing. Without
--------------------------------------------------------
raising additional capital, the Company will be unable to acquire additional
producing oil and gas properties and its ability to develop its existing oil and
gas properties will be limited to the extent of available cash flow.
Accordingly, in order for the Company to achieve its business objective and
achieve profitable operations, it will be necessary to generate additional cash
flow from operations, raise additional capital or enter into joint oil and gas
development arrangements. Management intends to fund future acquisitions and
develop its oil and gas reserves using cash flow from operations as well as
borrowings, public and private sales of debt and equity securities and joint oil
and gas development arrangements, among other possible sources. The Company
estimates that it will need approximately $800,000 of capital to develop its
undeveloped oil and gas reserves during the year ended July 31, 1997 and an
additional $1,000,000 to develop such reserves during the following year. The
Company expects to obtain these funds from cash flow, the proceeds from the sale
of certain non-strategic oil and gas properties, and additional borrowings. The
Company has no present arrangements for future borrowings and its cash flow from
operations is not expected to be adequate to provide the funds needed for these
purposes. Although the Company has agreed to sell certain non-strategic oil and
gas properties for approximately $1.5 million, before adjustments, there can be
no assurance that this transaction or other sources will provide funds in
sufficient amounts to allow the Company to successfully implement its present
business strategy of additional oil and gas property acquisitions or the
development of its existing oil and gas reserves. The Company has no present
arrangements to raise additional capital from the sale of its securities or
joint development arrangements. No assurance can be given as to the
availability or terms of any such additional financing or joint development
arrangements or that such terms as are available may not be dilutive to the
interests of the Company's shareholders. See "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Item 8.
Financial Statements and Supplementary Data."
Credit Facility Covenants and Restrictions. The Company currently
------------------------------------------
owes approximately $22,206,707 under its credit facility with the Company's
principal bank. The interest rate on the indebtedness is, at the option of the
Company, either the lending bank's base interest rate plus 1% or up to 2% (based
on the principal balance outstanding) over the rate for borrowing dollars by the
lending bank in the London Interbank market. The principal must be amortized at
the rate of $365,000 per month with the entire outstanding balance due March 31,
2000. The credit facility is secured by first mortgages on all of the Company's
oil and gas properties. The loan agreement relating to the credit facility
contains various affirmative and negative covenants including, among others, the
requirements that the Company maintain certain ratios of current assets to
current liabilities, minimum tangible net worth, restrictions on selling,
general and administrative expenses and the payment of dividends. Material
breaches of these or other covenants which are not cured or waived could result
in a default under the loan agreement resulting in this indebtedness becoming
immediately due and payable and empowering the lender to foreclose against the
collateral for the loan. The Company has been in default under various
affirmative and negative covenants of the loan agreement with its principal bank
with respect which the bank agreed to not take any action before November 29,
1996. The Bank has indicated its willingness to extend its agreement to forbear
any action on the Company's default through February 28, 1997. If the Company
cannot cure its default, the bank could declare the balance due and foreclose on
the Company's oil and gas properties. Under such circumstances the Company's
shareholders could lose their entire investment. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Capital Resources and Liquidity".
Industry Conditions; Impact on Company's Profitability. The
------------------------------------------------------
profitability and revenues of the Company are dependent, to a significant
extent, upon prevailing market prices for oil and gas. In the past, oil and gas
prices and markets have been volatile. Prices are subject to wide fluctuations
in response to changes in supply of and demand for oil and gas, market
uncertainty and a variety of additional factors that are beyond the control of
the Company. Such factors include supply and demand, political conditions,
weather conditions, government regulations, the price and availability of
alternative fuels and
6
<PAGE>
overall economic conditions. Crude oil and natural gas prices have increased
significantly over the past 12 months. Any decline from current oil or gas
prices would have a material adverse effect on the Company's revenues and
operating income and might, under certain conditions, require a write-down of
the book value of the Company's oil and gas properties. If such declines were
severe enough, they could result in a reduction in the Company's borrowing base
under its credit facility with its principal bank and could require the sale of
some of its properties under unfavorable market conditions or require the
Company to seek additional debt or equity capital. There can be no assurance
that the Company could, if the need arose, effect any sale of its debt or equity
securities on terms acceptable to the Company or on terms which would not be
dilutive to the Company's shareholders. See "Marketing".
Acquisition Strategy. The Company must acquire producing properties
--------------------
or locate and develop new oil and gas reserves to replace those being depleted
by production. Without acquisition of producing properties or successful
drilling and exploration activities, the Company's reserves and revenues will
decline. In particular, the Company's principal producing properties are
characterized by a high initial production rate, followed by a steep decline in
production. Subject to the availability of the required capital, the Company
intends to seek to acquire additional producing oil and gas properties. No
funds are currently available for this purpose. Although the Company engages in
discussions regarding the acquisition of additional properties on a regular
basis, as of the date of this report the Company has no agreements or
understandings to acquire any other properties and there can be no assurance
that the Company will be able to identify and acquire additional producing oil
and gas properties that will prove to be profitable to the Company. The process
of integrating acquired properties into the Company's operations may result in
unforeseen difficulties and may require a disproportionate amount of
management's attention and the Company's resources. In connection with
acquisitions, the Company could become subject to significant contingent
liabilities arising from the activities of the acquired properties to the extent
the Company assumes, or an acquired entity becomes liable for, unknown or
contingent liabilities or in the event that such liabilities are imposed on the
Company under theories of successor liability. See "Acquisition Activities,"
"Exploitation Activities" and "Production".
Reliance on Estimates of Proved Reserves; Depletion of Reserves.
---------------------------------------------------------------
There are numerous uncertainties inherent in estimating quantities of proved oil
and gas reserves and in projecting future rates of production and timing of
development expenditures, including many factors beyond the control of the
producer. The reserve data set forth in this report represents estimates only.
Oil and gas reserve engineering is a subjective process of estimating
underground accumulations of oil and gas that cannot be measured in an exact
way, and estimates by other engineers might differ from those included in this
report. The accuracy of any reserve estimate is a function of the quality of
available data and of engineering and geological interpretation and judgment.
This report contains estimates of the Company's proved oil and gas reserves and
the projected future net revenue therefrom, which have been prepared by an
independent petroleum engineering firms. Actual future production, oil and gas
prices, revenue, capital expenditures, taxes and operating expenses may vary
substantially from those assumed in making estimates, and the Company's reserves
may be subject to material upward or downward revision and the rate of
production from oil and gas properties declines as reserves are depleted. In
addition, the Company's ability to develop its reserves will be dependent upon
the timely availability of financing for this purpose without which the
Company's ability to produce the projected amounts of oil and gas will be
adversely affected thereby adversely affecting the projected future net revenue.
See "Reserves".
Dependence on Other Operators. With respect to wells not to be
-----------------------------
operated by the Company in which it owns a working interest, the independent
operators are, in some cases, privately-held companies who may have limited
financial resources. If a third party operator experiences financial difficulty
and fails to pay for materials and services in a timely manner, the wells
operated by such third party operators could be subject to material and
workmen's liens. In such event, the Company would incur costs in discharging
such liens. However, the Company has no reason to believe that its current
operators are experiencing significant financial difficulties.
Reliance on Key Personnel. The Company is dependent upon the services
-------------------------
of its President, Jeffrey T. Wilson, its Vice President and Chief Financial
Officer, John L. Cox, its Vice President of Operations, Robert L. Hull, and its
Vice President of Exploration, John W. Heinsius. The loss of their services
could have a material adverse effect upon the Company. The Company does not
have employment agreements with Messrs. Wilson, Cox, Hull or Heinsius. The
Company does not maintain insurance on the lives of
7
<PAGE>
Messrs. Wilson, Cox, Hull or Heinsius. See "Item 10. Directors and Executive
Officers of the Registrant."
Competition. The oil and gas industry is highly competitive. The
-----------
Company competes with major integrated and independent oil and gas companies in
acquiring properties. Many competitors have resources substantially exceeding
the resources of the Company. See "Competition".
Operational Hazards, Environmental Concerns, Insurance and Government
---------------------------------------------------------------------
Regulation. The oil and gas industry involves a number of operating risks, such
- ----------
as the risks of fire, blowouts, explosions, cratering, pipe failure, casing
collapse and abnormally pressured formations, the occurrence of any of which
could materially and adversely affect the Company. The business is also subject
to environmental hazards including oil and saltwater spills, gas leaks, ruptures
and discharges of toxic gases. These risks could result in substantial losses
to the Company due to injury and loss of life, severe damage to and destruction
of property and equipment, pollution and other environmental damage, and
suspension of operations. As the owner of working interests in its oil and gas
properties, the Company bears its proportionate share of the obligations and
liabilities arising out of the exploration and development of those properties.
Generally, owners of working interests in oil and gas properties are jointly and
severally liable for all such obligations and liabilities. As a result, there
exists a risk that the Company could become liable for amounts in excess of its
proportionate share of such obligations and liabilities, although generally the
Company would have a right of contribution against the other working interest
owners. In accordance with customary industry practices, the Company maintains
insurance against some, but not all, of such risks and some, but not all of such
losses. The occurrence of such an event not fully covered by insurance could
have a material adverse effect on the financial position and operations of the
Company. The Company maintains insurance against some, but not all, potential
risks, and does not carry insurance covering environmental impairment
liabilities. The Company can provide no assurance that the insurance it carries
will be adequate to cover any loss or exposure to liability, or that such
insurance will continue to be available on terms acceptable to the Company. See
"Operational Hazards and Insurance".
Effect of Warrants and Convertible Preferred Stock Outstanding. The
--------------------------------------------------------------
Company has outstanding (i) warrants which provide for the purchase of an
aggregate of 3,034,750 shares of common stock at prices ranging from $0.75 to
$4.44 per share, (ii) shares of Series A Convertible Preferred Stock ("Series A
Preferred Stock") convertible into an aggregate of 1,350,835 shares of common
stock, if calculated as of July 31, 1996, and (iii) shares of Series B Senior
Convertible Preferred Stock ("Series B Preferred Stock") convertible into an
aggregate of 3,200,167 shares of common stock, if calculated as of July 31,
1996. Issuances of shares of the Company's common stock upon exercise of
warrants or conversion of shares of preferred stock will have a dilutive effect
on the Company's shareholders by decreasing their percentage ownership in the
Company.
Registration Rights. The holders of the outstanding shares of the
-------------------
Company's Series A Preferred Stock and Senior B Preferred Stock and the holders
of warrants to purchase up to 305,000 shares of the Company's common stock have
the right to either require the Company to register shares of the Company's
common stock issuable upon conversion of such preferred stock or exercise of
such warrants under the Securities Act of 1933 ("Securities Act") or to have
such shares included in any registration statement filed by the Company, subject
to certain limitations, to enable a public sale of those shares. In the event
the holders of a material amount of such shares should seek to have their shares
registered for sale under the Securities Act, these obligations could result in
considerable expense to the Company and the effect of the offer and sale of such
shares may be to depress the market price for the Company's common stock.
Compliance with these obligations may also interfere with the Company's ability
to raise additional capital when required.
Authorization and Discretionary Issuance of Preferred Stock; Anti-
-----------------------------------------------------------------
takeover Provisions. The Company's Certificate of Incorporation authorizes the
- -------------------
issuance of preferred stock with such designations, rights and preferences as
may be determined from time to time by the Board of Directors. Accordingly, the
Board of Directors is empowered, without shareholder approval, to issue
preferred stock with dividend, liquidation, conversion, voting or other rights
which could adversely affect the voting power or other rights of holders of the
Company's common stock. In the event of issuance, the preferred stock could be
utilized, under certain circumstances, as a method of discouraging, delaying or
preventing a change in control of the Company, which could have the effect of
discouraging bids for the Company and
8
<PAGE>
thereby prevent shareholders from receiving a premium for their shares over the
then-current market prices. Although the Company has no present intention to
issue any additional shares of its preferred stock (other than in payment of
dividends on the Series A and Series B Preferred Stock), there can be no
assurance that the Company will not do so in the future.
The Delaware General Corporation Law includes provisions which are
intended to encourage persons considering unsolicited tender offers or other
unilateral takeover proposals to negotiate with the Company's Directors rather
than pursue non-negotiated takeover attempts. These existing takeover
provisions may have a significant effect on the ability of a shareholder to
benefit from certain kinds of transactions that may be opposed by the incumbent
Directors.
Qualification Requirements for Nasdaq Securities. The common stock of
------------------------------------------------
the Company is presently quoted on Nasdaq, which is administered by the National
Association of Securities Dealers, Inc. (the "NASD"). Until September 4, 1996,
the common stock of the Company was also listed on the Pacific Stock Exchange.
Effective September 4, 1996, the common stock was delisted by the Pacific Stock
Exchange as a result of the failure of the minimum share bid price for the
common stock to meet the minimum listing maintenance requirements of the
Exchange. For the Company's securities to continue to be eligible for inclusion
on Nasdaq, the Company must, among other things, maintain at least $2,000,000 in
total assets and have at least $1,000,000 of capital and surplus and the bid
price of the common stock must be at least $1.00 per share, provided, however,
that, if the Company's stock falls below such minimum bid price, it will remain
eligible for continued inclusion if the market value of the public float is at
least $1,000,000 and the Company has at least $2,000,000 in capital and surplus.
While the Company presently meets the NASDAQ required standards, there can be no
assurance that it will continue to be able to do so. If this should occur,
trading, if any, in the common stock would then continue to be conducted in the
over-the-counter market on the OTC Bulletin Board, an NASD-sponsored inter-
dealer quotation system, or in what are commonly referred to as "pink sheets."
As a result, a shareholder may find it more difficult to dispose of, or to
obtain accurate quotations as to the market value of, the Company's securities.
In addition, if the Company's securities cease to be quoted on Nasdaq and the
Company fails to meet certain other criteria, those securities would be subject
to a Commission rule that imposes additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers and accredited investors. For transactions covered by this rule, the
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction prior to
sale. Consequently, if the Company's securities were no longer quoted on
Nasdaq, the rule may affect the ability of broker-dealers to sell the Company's
securities and the ability of shareholders to sell their securities in the
secondary market. See "Item 5. Market for Registrant's Common Equity and
Related Shareholder Matters."
Dividends Unlikely. The Company has never declared or paid dividends
------------------
on its common stock and currently does not intend to pay dividends in the
foreseeable future. The payment of dividends in the future will be at the
discretion of the Board of Directors. In addition, the Company's credit
facility contains a provision which prohibits the payment of dividends except
for dividends on its shares of Series A and Series B Preferred Stock payable in
the form of additional shares of Series A and Series B Preferred Stock.
Government Regulation. The Company's business is subject to extensive
---------------------
federal, state and local laws and regulations relating to the exploration for,
development, production, marketing and transmission of oil and gas, as well as
environmental and safety matters. Such laws and regulations have generally
become more stringent in recent years, often imposing greater liability on a
larger number of potentially responsible parties. The Company believes that it
is currently in compliance with applicable government regulations. Because the
requirements imposed by such laws and regulations are frequently changed, the
Company is unable to predict the ultimate cost of compliance with such
requirements. The states of Oklahoma, Texas and Louisiana have recently adopted
revisions to their production allowable rules under which they regulate the
quantities of natural gas which producers may produce within their respective
borders. The state of Kansas is considering similar revisions to their allowable
rules. Legislation has recently been introduced in the United States Congress to
restrict the ability of states to regulate the production of natural gas. It is
impossible at this time to determine the effect, if any, these developments may
have on the natural gas industry as a whole. The Company does not believe these
developments will materially affect its operations. There is no assurance that
federal, state or local laws and regulations enacted in the future will not
adversely affect the Company's ability to explore for,
9
<PAGE>
produce and market oil and natural gas. See "Regulation" and "Recent and
Proposed Legislation."
Business Strategy
The Company's business strategy has been and will continue to be to
increase shareholder value through the acquisition of producing oil and gas
properties and exploitation of those properties to maximize production and
ultimate reserve recovery. The Company's growth strategy focuses on the
technical expertise of its management and employees to evaluate acquisitions and
to exploit the development potential of each oil and gas property through
recompletions, workovers, cost reduction measures or marketing efforts.
Acquisition Activities
Historically, the Company has allocated a substantial portion of its
capital expenditures to the acquisition of producing oil and gas properties.
From July 31, 1991 through July 31, 1996, the Company completed 12 acquisitions
of oil and gas properties, involving total acquisition costs of approximately
$30,840,000 and resulting in an average reserve replacement cost of
approximately $3.50 per BOE. During the year ended July 31, 1996, the Company
completed the acquisition of approximately 15 oil and gas properties from
Sackett Oil Company for a purchase price of approximately $2,900,000. A portion
of these properties were subsequently sold by the Company for approximately
$2,800,000.
To the extent that it has the capital resources to do so, the Company
intends to continue to pursue a business strategy that emphasizes reserve
additions through acquisitions. The Company may utilize any one or a
combination of lines of credit with banks, public and private sales of debt and
equity securities, joint oil and gas development arrangements and internally-
generated cash flow to finance its acquisition efforts. No assurance can be
given that sufficient external or internal funds will be available to fund the
Company's desired acquisitions. See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The Company may
also use, where appropriate, its equity securities as all or part of the
consideration for such acquisitions.
Prospective acquisitions are evaluated by the Company's management.
After the acquisition of oil and gas properties, management generally develops a
reservoir depletion plan to maximize production rates, ultimate reserve recovery
and cash flow generation. Such plans consider field operating procedures,
workovers, recompletions, secondary recovery implementation, additional drilling
and such other procedures as the situation dictates.
The Company does not have a specific budget for the acquisition of oil
and gas properties since the timing and size of acquisitions are difficult to
forecast. However, the Company is constantly reviewing acquisition
possibilities.
Exploitation Activities
The Company concentrates its acquisition efforts on proved producing
properties which demonstrate a potential for significant additional development
through workovers, behind-pipe recompletions, secondary recovery operations, the
drilling of development or infill wells, and other exploitation activities which
the Company may find appropriate. The Company has pursued an active workover
and recompletion program on the properties it has acquired and intends to
continue its workover and recompletion program in the future as properties
acquired warrant. In connection with oil and gas property acquisitions,
properties are reviewed and evaluated by the Company with a view toward taking
the appropriate actions to maximize production. Such actions may include repair
or replacement of equipment or more extensive efforts such as recompletion in a
different producing zone or implementation of secondary recovery operations.
The expenditures required for the Company's workover and recompletion
program have historically been financed, and it is expected that they will
continue to be financed, by borrowings and internally generated funds.
10
<PAGE>
Production
The Company owns and operates producing properties located in 12
states, with its proved reserves located primarily in the states of Mississippi,
Louisiana, Oklahoma, Texas, and Alabama. The Company operates 156 producing
wells in these areas and also owns non-operated interests in 342 producing wells
and units. Oil and gas sales from the Company's producing oil and gas properties
accounted for substantially all of the Company's revenues for the years ended
July 31, 1994, 1995, 1996, respectively. The Company continuously evaluates the
profitability of its oil, gas and related activities and has a policy of
divesting itself of unprofitable oil and gas properties or areas of operation
that are not consistent with its operating philosophy.
The following map shows the locations of the Company's principal areas
of oil and gas production.
A United States map appears here showing oil and gas
operations and locations of major fields in Alabama, Arkansas, Colorado,
Louisiana, Mississippi, Texas, and the Gulf of Mexico.
The following table sets forth certain information regarding the
Company's principal areas of oil and gas production.
<TABLE>
<CAPTION>
SUMMARY OF MAJOR PRODUCING FIELDS
Avg. Avg. Net Net Proved
Working Revenue Producing Date Reserves at
Field Name Location Interest Interest Wells Acquired July 31, 1996
- ---------- -------- -------- -------- --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
South Alabama 100.00% 77.66% 56 May, 1993 4,217.3 MBbls
Carlton
Black Alabama/ 53.11% 40.66% 145 Apr., 1995 30.8 MBbls
Warrior Mississippi 10,733.2 MMcf
Basin
Wolf Colorado 80.72% 59.41% 1 Apr., 1995 662.4 MBbls
Mountain
War~Wink Texas 13.20% 9.79% 45 May, 1990 100.2 MBbls
South/East and 2,165.1 MMcf
Quito Oct., 1992
Tinsley Mississippi 100.00% 76.51% 5 July, 1991 282.2 MBbls
Perkins Louisiana 100.00% 81.25% 7 Jan., 1995 236.3 MBbls
Bolton Mississippi 96.86% 75.04% 1 Nov., 1995 36.6 MBbls
768.9 MMcf
Ozona Texas 52.86% 41.03% 24 Apr., 1995 1 MBbls
969 MMcf
Turtle Louisiana 3.43% 2.30% 6 Apr., 1995 7 MBbls
Bayou/ 806 MMcf
Deer Island
Springhill Arkansas - 2.30% 6 May, 1990 10 MBbls
ORRI 667.7 MMcf
GOM State Texas 23.62% 17.65% 2 Apr., 1995 14.6 MBbls
Tract 904 560.1 MMcf
</TABLE>
The following summarizes certain information regarding the Company's
principal areas of oil and gas production activity.
South Carlton Field, Alabama. The South Carlton Field is located in
----------------------------
Clarke and Baldwin Counties in southwest Alabama. The Company operates 56
active producing oil wells and three water injection wells. Production is from
the Massive and Pilot sands of the Tuscaloosa Formation with daily gross
production being approximately 380 Bbls of oil. Based on the production history
of certain infill wells previously drilled in this field and an extensive
geological and engineering review, the Company believes that additional infill
drilling potential exists for the Tuscaloosa reservoirs. Net proven reserves to
the Company as of July 31, 1996 are 4,217.3 MBbls of oil.
Black Warrior Basin, Mississippi and Alabama. The Company owns
--------------------------------------------
operated and non-operated working interests in 145 wells (55 operated and 90
non-operated) in Lamar, Fayette and Pickens Counties, Alabama and Lee and
Chickasaw Counties, Mississippi. Production from these wells are from multiple
sandstones of Mississippian age and range in depth from approximately 1,900 feet
to 4,600 feet. Net proven reserves to the Company as of July 31, 1996, are 30.8
MBbls of oil and 10,733.2 MMcf of gas.
War-Wink South/East Quito Fields, Texas. The Company owns non-
---------------------------------------
operated working interests in 45 active wells operated by Texaco, Chevron, Enron
and BC Operating in the War-Wink South and East Quito Fields in Ward County,
Texas. These fields produce from the Fusselman, Atoka, Wolfcamp and Cherry
Canyon Formations at depths ranging from 6,200 feet to 17,500 feet. Based upon
review of geological and engineering data, the Company believes that additional
behind pipe and infill drilling potential exists on these properties. Net
proven reserves to the Company as of July 31, 1996 are 100.2 MBbls of oil and
2,165.2 MMcf of gas.
Wolf Mountain Field, Colorado. The Company operates one well in the
-----------------------------
Wolf Mountain Field in Routt County, Colorado. The well produces oil at a daily
rate of 28 Bbls from the Niobrara reservoir at a depth of approximately 5,500
feet. Additional potential exists behind the pipe to recomplete the well to
other undrained sections of the reservoir. Net proven reserves to the Company
as of July 31, 1996 are 662.4 MBbls of oil.
Perkins Field, Louisiana. The Company operates seven active wells in
------------------------
the Perkins Field which produce crude oil on gas lift from various Miocene sands
at depths ranging from approximately 6,000 to 7,500 feet. The Perkins field is
a multiple reservoir structural feature which is nearing the later stages of
depletion. Net proven reserves to the Company as of July 31, 1996 are 236.3
MBbls of oil.
Tinsley Field, Mississippi. The Tinsley Field is located in Yazoo
--------------------------
County in north central Mississippi and produces from a series of Selma-Eutaw
sands of Upper Cretaceous age. The Company operates five active wells and two
water injection wells in the field having a daily gross production of
approximately 85 Bbls of oil. Through extensive mapping and engineering work,
the Company believes that significant additional oil reserves may remain in
various Eutaw sand and in the underlying Tuscaloosa sand which has not been
extensively tested in the field. Net proven reserves to the Company as of July
31, 1996 are 282.2 MBbls of oil.
Bolton Field, Mississippi. The Bolton Field is located in Hinds
-------------------------
County in west central Mississippi.
11
<PAGE>
The Company operates two wells in the field and has non-operated interests in
four additional wells. Production is from the Cotton Valley, Sligo, Rodessa and
Mooringsport Formations. Daily gross production from the operated wells is 425
Mcf of gas and 20 Bbls of oil. Based on a review of the field data, the Company
believes that significant behind pipe potential exists in several of the wells.
Net proven reserves to the Company as of July 31, 1996 are 36.6 MBbls of oil and
768.9 MMcf of gas.
Ozona Field, Texas. The Ozona Field is located in Crockett County in
------------------
west Texas. The Company owns non-operated working interests in 24 wells which
produce from the Cisco and Canyon sand reservoirs. Net proven reserves to the
Company as of July 31, 1996, are 1.0 MBbls of oil and 969 MMcf of gas.
Turtle Bayou/Deer Island Fields, Louisiana. These fields are located
------------------------------------------
in Terrebonne Parish, Louisiana. Production is from multiple sands,
predominantly in the normal pressured upper and middle Miocene. The Company
owns non-operated working interests in six producing wells. Based on geological
and engineering data, the Company believes that additional development potential
exists within the field. Net proven reserves to the Company as of July 31,
1996, are 7.0 MBbls of oil and 806 MMcf of gas.
Springhill Field, Arkansas. The Springhill Field is located in
--------------------------
Columbia County, Arkansas. The Company owns royalty interests in six wells
operated by Sonat which produce from the Haynesville formation at a combined
rate of 16.5 MMCf of gas and 335 Bbls of oil per day. Net proven reserves to
the Company as of July 31, 1996 are 10 MBbls of oil and 667.7 MMcf of gas.
GOM State Tract 904 Field, Texas. The GOM State Tract 904 Field is
--------------------------------
located in offshore waters of Nueces County, Texas. The Company owns interests
in two wells operated by National Energy Group which produce from the Frio sands
at a combined rate of 80 Bbls of oil and 1150 Mcf of gas per day. Net proven
reserves to the Company as of July 31, 1996 are 14.6 MBbls of oil and 560.1 MMcf
of gas.
Marketing
The availability of a market for oil and gas produced or marketed by
the Company is dependent upon a number of factors beyond its control which at
times cannot be accurately predicted. These factors include the proximity of
wells to, and the available capacity of, natural gas pipelines, the extent of
competitive domestic production and imports of oil and gas, the availability of
other sources of energy, fluctuations in seasonal supply and demand, and
governmental regulation. In addition, there is always the possibility that new
legislation may be enacted which would impose price controls or additional taxes
upon crude oil or natural gas, or both. In the event a productive gas well is
completed in an area that is distant from existing gas pipelines, the Company
may allow the well to remain shut-in until a pipeline is extended to the well or
until additional wells are drilled to establish the existence of sufficient
producing reserves to justify the cost of extending existing pipelines to the
area. It appears that the United States is emerging from a period of oversupply
of natural gas which has, and may still, cause delays, restrictions or
reductions of natural gas production and which has adversely affected gas
prices. In addition, increased imports of natural gas from Canada and Mexico
have occurred and are expected to continue. Oversupplies of natural gas can be
expected to recur from time to time and may result in depressed gas prices and
in the gas producing wells of the Company being shut-in.
Since the early 1970's the supply and market price for crude oil has
been significantly affected by policies adopted by the member nations of OPEC.
Members of OPEC establish among themselves prices and production quotas for
petroleum products from time to time with the intent of manipulating the global
supply and price levels for crude oil. In addition, Canada recently revised its
laws affecting the exportation of natural gas to the United States. Mexico also
continues to fine tune its import/export policies. The oil and gas policies of
the United States, Canada and Mexico are impacted by the Canadian/U.S. Free
Trade Agreement, the General Agreement on Tariffs and Trade, and the North
American Free Trade Agreement. These factors are expected to increase
competition and may adversely affect the price of natural gas in certain areas
of the United States. The Company is unable to predict the effect, if any,
which OPEC, Canadian and Mexican policies, and emerging international trade
doctrines will have on the amount of, or the prices received for, oil and
natural gas produced and sold by the Company.
12
<PAGE>
Changes in oil and natural gas prices significantly affect the
revenues and cash flow of the Company and the value of its oil and gas
properties. Significant declines in the prices of oil and natural gas could
have a material adverse effect on the business and financial condition of the
Company. The Company is unable to predict accurately whether the price of oil
and natural gas will rise, stabilize or decline in the future. In an effort to
protect the Company against fluctuations in oil and gas prices, the Company has
entered into certain commodity hedging arrangements. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Results of Operations."
Substantially all of the Company's crude oil and condensate production
is sold at posted prices under short term contracts, as is customary in the
industry. The most significant purchaser of the Company's oil and gas
production (including production sold by the Company's marketing subsidiary,
ENPRO) during the year ended July 31, 1996 was ENRON Reserve Acquisition Corp.
which accounted for 16% of the Company's oil and gas sales. No other purchaser
of crude oil or natural gas during this period exceeded 10% of the Company's oil
and gas sales. With respect to losses incurred by the Company as a result of
its crude and natural gas price hedging arrangements, see "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Capital Resources and Liquidity."
The Company's wholly-owned subsidiary, ENPRO, purchases and resells
crude oil and natural gas in Alabama, Colorado, Louisiana, Mississippi, Montana,
New Mexico, Oklahoma and Texas. ENPRO currently markets approximately 704 BOE
per day to refiners and large resellers. For its services, ENPRO receives a
margin which averages approximately 9.75% of gross sales. ENPRO currently
markets approximately 969 barrels per day of oil from wells operated by the
Company. By aggregating barrels of crude oil purchased by ENPRO from third
parties with those purchased by ENPRO from the Company, additional revenues are
generated through what the Company believes are improved marketing practices.
ENPRO owns a crude oil trans-shipment facility in Poyner, Texas
approximately 30 miles south of Tyler, Texas. The facility consists of 2,410
barrels of storage capacity on four acres owned by ENPRO. The terminal was
originally constructed and operated as a crude oil blending facility. The
facility is presently inactive.
The Company's gas production and gathered gas is sold primarily on the
spot market or under market sensitive long term agreements with a variety of
purchasers, including intrastate and interstate pipelines, their marketing
affiliates, independent marketing companies and other purchasers who have the
ability to move the gas under firm transportation agreements.
Exploration and Development
General. Development drilling opportunities available to the Company
-------
are largely a result of the Company's acquisition of producing oil and gas
properties. Several infill and development locations exist on Company properties
currently producing oil and gas. As a result, the Company will continue to
evaluate additional opportunities for developmental drilling on its existing
properties.
Exploratory drilling has been minimal to date. In the United States,
the Company reviews exploration proposals from other companies and individuals
and may from time to time participate in certain ventures where the risk-reward
ratio is sufficiently high to warrant capital outlays. The Company does not
anticipate generating exploration projects utilizing its own staff at the
present time. Consequently, exploratory drilling within the United States will
likely only remain a small part of the Company's business.
Outside the United States, the Company has from time to time pursued
foreign exploration concessions which offer limited capital expenditure exposure
through the drilling commitment phase. However, the Company's focus in the
future will be on domestic oil and gas opportunities.
Tunisian Prospect. On June 30, 1993, the Company's wholly-owned
-----------------
subsidiary, LaTex Resources International, together with Enterprise Tunisienne
D'Activities Petroleries, the Tunisian State Oil Company ("ETAP"), ARCO Tunisia,
Inc. ("ARCO") and Premier Pict Petroleum Ltd. (formerly Pict Petroleum (Tunisia)
Ltd.) ("Premier"), acquired from the Republic of Tunisia a permit (the "Sbiba
Permit") for the exploration and production of oil and gas from a 4,936 square
kilometer (1,220,000 acres) area (the "Permit
13
<PAGE>
Area") located in north-central Tunisia. The respective participating interests
of the parties in the Permit Area are 50% ETAP, 32% ARCO, 10% Premier and 8%
LaTex Resources International.
The seismic acquisition and processing and the geological and
geophysical evaluations of the Permit Area began in September 1993. In July
1994, the initial well location was recommended and approved by the Sbiba
Operating Committee and wellsite preparation began. The Sbiba #1, scheduled to
be drilled to a total depth of 2,500 meters (8,200 feet), was spudded on
November 9, 1994. The well encountered unexpected and severe overpressure zones
in the Eocene Evaporites resulting in slower than expected drilling rates and
ultimately in having to drill a sidetrack hole at 1,343 meters (4,405 feet). A
total depth of 2,076 meters (6,810 feet) was reached before having to suspend
operations on March 5, 1995 due to overpressure concerns and the presence of
natural gas in the wellbore. The objective reservoir, the Albo-Aptian
carbonates, was never reached or evaluated and the well was temporarily
abandoned. Subsequently, the operator of the project, in response to a request
from the Tunisian government, permanently plugged the well and restored the
drill site.
ARCO and Premier have indicated their interest in terminating their
participation in the Permit. The Company is currently seeking to locate new
participants to acquire the interests of ARCO and Premier. No assurance can be
made that new participants willing to acquire the Arco and Premier interests
will be found.
Since inception of the Tunisian project, approximately $13,168,000 has
been expended by the participants to date, of which LaTex Resources
International's share has been approximately $2,106,880. The Company has
insufficient capital to continue its active participation in the project and,
effective July 31, 1996, the Company has written off its entire investment in
the Sbiba Permit in the amount of $2,491,299.
Kazakhstan Prospect. In April 1995, the Company's wholly-owned
-------------------
subsidiary, LaTex Resources International, agreed to participate, for a 25%
interest, in a production sharing service contract to rehabilitate divisions
three, four and eight of the Uzen oil and gas field located in the Republic of
Kazakhstan, C.I.S. Pursuant to that agreement, the Company agreed to fund the
initial $2.5 million of capital on behalf of itself and Edco Drilling Company
("Edco"). The terms of the project were to provide for immediate cash flow to
the Company's interest. Subsequently, Delcon Petroleum Development Kazakhstan
Limited, L.L.C. ("Delcon"), as operator, entered into a service contract with
Uzenmunaigas Production Association ("UMG") to carry out the work. The
participants in the project, pursuant to an operating agreement signed in August
1995, include Delcon (47.5%), LaTex International (25%), and Petronet (27.5%).
The objective of the Uzen project was to repair, rework and recomplete inactive
oil and gas wells in the field utilizing western technology, expertise and
capital in order to restore or enhance production from the field. In exchange
for providing these services and risk capital, UMG was to advance to the western
participants a total of 200,000 metric tons (1.5 million barrels) of crude oil
in two increments. The proceeds from the sale of this crude was to be utilized
in the rehabilitation project. In addition, the western participants were to
have received reimbursement of all capital costs and expenses. UMG and the
western participants were to each retain a 50% interest in crude oil production
above a base line of approximately 30 barrels of oil per day per well.
During the first quarter of fiscal 1996, the Company received written
notice from both Edco and Delcon that, in their view, the Company was in breach
of its agreement with Edco. The Company strongly disagreed with Edco's position
since the Company was in compliance with the operating agreement governing the
project. In addition, Delcon notified the Company that UMG would seek to
further alter the terms of the service contract in a manner which the Company
believed would be detrimental to the project's viability. There has been no
further progress on, or correspondence between the Company and Delcon or Edco
regarding, the Uzen project since the second quarter of fiscal 1996. There can
be no assurance that the uncertainties surrounding this project will be resolved
in a manner acceptable to the Company.
Effective July 31, 1996, the Company has written off its entire
investment in the Uzen project in the amount of $955,496.
14
<PAGE>
Reserves
Lee Keeling and Associates, Inc. ("LKA"), the Company's independent
petroleum engineering consulting firm, has made estimates of the Company's oil
and gas reserves at July 31, 1996. LKA's report covers the estimated present
value of future net cash flows before income taxes (discounted at 10%)
attributable to the Company's proved developed reserves, as well as its proved
undeveloped reserves and estimated future net cash flows therefrom. The oil and
gas reserve and economic data covered by the LKA report and presented below
represents substantially all of the Company's oil and gas reserves except small
interests owned by the Company in approximately 400 operated and non-operated,
non-strategic oil and gas properties which the Company sold effective August 1,
1996 and September 1, 1996 for a total sales price of $1,526,000, before
adjustments. Other small interests which the Company has retained, but which are
not included in the LKA report, are immaterial and represent less than one
percent of the total value of the Company's oil and gas reserves. The Company
believes that the summary of the LKA report presented below is fair and
accurate.
The quantities of the Company's proved reserves of oil and natural gas
presented below include only those amounts which the Company reasonably expects
to recover in the future from known oil and gas reservoirs under existing
economic and operating conditions. Proved developed reserves are limited to
those quantities which are recoverable commercially at current prices and costs,
under existing regulatory practices and with existing technology. Accordingly,
any changes in prices, operating and development costs, regulations, technology
or other factors could significantly increase or decrease estimates of the
Company's proved developed reserves. The Company's proved undeveloped reserves
include only those quantities which the Company reasonably expects to recover
from the drilling of new wells based on geological evidence from offsetting
wells. The risks of recovering these reserves are higher from both geological
and mechanical perspectives than the risks of recovering proved developed
reserves.
Set forth below are estimates of the Company's net proved reserves and
proved developed reserves and the estimated future net revenues from such
reserves and the present value thereof based upon the standardized measure of
discounted future net cash flows relating to proved oil and gas reserves in
accordance with the provisions of Statement of Financial Accounting Standards
No. 69. "Disclosures about Oil and Gas Producing Activities." Estimated future
net cash flows from proved reserves are determined by using estimated quantities
of proved reserves and the periods in which they are expected to be developed
and produced based on economic conditions at the date of the report. The
estimated future production is priced at current prices at the date of the
report. The resulting estimated future cash inflows are then reduced by
estimated future costs to develop and produce reserves based on cost levels at
the date of the report. No deduction has been made for depletion, depreciation
or income taxes or for indirect costs, such as general corporate overhead.
Present values were computed by discounting future net revenues at 10% per
annum.
The following table sets forth estimates of the proved oil and natural
gas reserves of the Company at July 31, 1996, as evaluated by LKA.
<TABLE>
<CAPTION>
Oil (MBbls) Gas (MMcf)
----------------------------- ------------------------------
Developed Undeveloped Total Developed Undeveloped Total
--------- ----------- ----- --------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Alabama 2,072 1,244 3,316 6,338 --- 6,338
Louisiana 571 --- 571 2,977 --- 2,977
Mississippi 314 141 455 4,160 --- 4,160
Oklahoma 218 --- 218 5,724 --- 5,724
Texas 756 15 771 6,437 415 6,852
Other 1,022 --- 1,022 2,121 --- 2,121
----- ----- ----- ------ --- ------
Total 4,953 1,400 6,353 27,757 415 28,172
===== ===== ===== ====== === ======
</TABLE>
The following table sets forth amounts as of July 31, 1996 determined
in accordance with the requirements of the applicable accounting standards, to
the estimated future net cash flows from production and sale of the proved
reserves attributable to the Company's oil and gas properties before income
taxes and the present value thereof. Benchmark prices used in determining the
future net cash flow estimates at July 31, 1996 were $19.74 per barrel for oil
and $2.66 per MMBtu for gas.
15
<PAGE>
<TABLE>
<CAPTION>
At July 31, 1996
--------------------------------
(in thousands)
Proved Proved Total
Developed Undeveloped Proved
Reserves Reserves Reserves
--------- ----------- --------
<S> <C> <C> <C>
Estimated future net cash
flows from proved reserves
before income taxes $93,958 $7,846 $101,804
Present value of estimated
future net cash flows from
proved reserves before
income taxes (discounted
at 10%) $51,540 $1,959 $ 53,499
</TABLE>
The estimation of oil and gas reserves is a complex and subjective
process which is subject to continued revisions as additional information
becomes available. Reserve estimates prepared by different engineers from the
same data can vary widely. Therefore, the reserve data presented herein should
not be construed as being exact. Any reserve estimate depends in part on the
quality of available data, engineering and geologic interpretation, and thus
represents only an informed professional judgment. Subsequent reservoir
performance may justify upward or downward revision of such estimate.
Estimates of the Company's proved reserves have never been filed or
included in reports to any federal authority or agency, other than the
Securities and Exchange Commission.
For further information on reserves, costs relating to oil and gas
activities, and results of operations from producing activities, see Note 14 to
the Company's Consolidated Financial Statements -Supplementary Financial
Information for Oil and Gas Producing Activities incorporated by reference
herein.
Productive Wells and Acreage
The following table sets forth the Company's producing wells and
developed acreage assignable thereto at July 31, 1996.
<TABLE>
<CAPTION>
Productive Wells
------------------------------------
Developed Acreage Oil Gas Total
------------------- ------------ ---------- ----------
Gross Net Gross Net Gross Net Gross Net
----- --- ----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C> <C>
235,820 43,960 268 65 230 30 498 95
</TABLE>
Productive wells consist of producing wells and wells capable of
production, including gas wells awaiting pipeline connections to commence
deliveries and oil wells awaiting connection to production facilities. Wells
which are completed in more than one producing horizon are counted as one well.
Of the gross wells reported above, 12 had multiple completions.
At July 31, 1996, the Company held by lease a total of 67,897 gross
(10,882 net) undeveloped acres consisting of (i) 4,080 gross (510 net)
undeveloped acres in the State of Colorado, (ii) 4,997 gross (2,166 net)
undeveloped acres in the State of Louisiana, (iii) 1,960 gross (245 net)
undeveloped acres in the State of Oklahoma, (iv) 56,668 gross (7,937 net)
undeveloped acres in the State of Texas, and (v) 192 gross (24 net) undeveloped
acres located in the State of Wyoming.
Production, Unit Prices and Costs
The following table sets forth information with respect to production
and average unit prices and costs for the periods indicated.
16
<PAGE>
<TABLE>
<CAPTION>
Year Ended July 31
-----------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Production:
Gas (MMcf) 2,107 2,612 3,481
Oil (MBbls) 335 359 405
Average Sales Prices:
Gas (per Mcf) 1.81 1.48(1) 1.67(2)
Oil (per Bbl) 14.56 12.86(1) 15.24(2)
Average Production
costs per BOE(3) 7.06 6.63 6.71
- ------------------------
</TABLE>
(1) The Company's price hedging arrangements did not have a material effect on
average sales prices for the year ended July 31, 1995.
(2) After giving effect to the impact of the Company's price hedging
arrangements with the Company's principal bank. Without such hedging
arrangements, the average sales prices for the year ended July 31, 1996
would have been $15.73 for oil and $2.03 for gas.
(3) The components of production costs may vary substantially among wells
depending on the methods of recovery employed and other factors, but
generally include production taxes, lease overhead, maintenance and repair,
labor and utilities.
Drilling Activity
During the periods indicated, the Company drilled or participated in the
drilling of the following exploratory and development wells.
<TABLE>
<CAPTION>
Year Ended July 31
---------------------------------------------
1994 1995 1996
------------ ------------ -----------
Gross Net Gross Net Gross Net
----- ----- ----- ----- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Exploratory:
Productive 0 ---- 0 ---- 0 0
Non-Productive 1 0.450 1 0.250 2 1.16
- ----- - ----- - ----
Total 1 0.450 1 0.250 2 1.16
= ===== = ===== = ====
Development:
Productive 6 1.457 6 1.189 6 .46
Non-Productive 0 ---- 0 ---- 1 .08
- ----- - ----- - ----
Total 6 1.457 6 1.189 7 .54
= ===== = ===== = ====
Total:
Productive 6 1.457 6 1.189 6 .46
Non-Productive 1 0.450 1 0.250 3 1.24
- ----- - ----- - ----
Total 7 1.907 7 1.439 9 1.70
= ===== = ===== = ====
</TABLE>
The well information above excludes wells in which the Company has only an
overriding royalty interest.
At July 31, 1996 the Company was not participating in the drilling or
completion of any oil and gas wells.
All of the Company's drilling activities are conducted with independent
contractors. The Company owns no drilling equipment.
17
<PAGE>
Competition
Competition in the acquisition of producing oil and gas properties and in
the exploration and production of oil and gas is intense. In seeking to obtain
desirable producing properties, new leases and exploration prospects, the
Company faces competition from both major and independent oil and gas companies
as well as from numerous individuals. Many of these competitors have financial
and other resources substantially in excess of those available to the Company.
Increases in worldwide energy production capability and decreases in energy
consumption as a result of conservation efforts have brought about substantial
surpluses in energy supplies in recent years. This, in turn, has resulted in
substantial competition for markets historically served by domestic natural gas
resources both with alternate sources of energy, such as residual fuel oil, and
among domestic gas suppliers. As a result, there have been reductions in oil
and gas prices, widespread curtailment of gas production and delays in producing
and marketing gas after it is discovered. Changes in government regulations
relating to the production, transportation and marketing of natural gas have
also resulted in significant changes in the historical marketing patterns of the
industry. Generally, these changes have resulted in the abandonment by many
pipelines of long-term contracts for the purchase of natural gas, the
development by gas producers of their own marketing programs to take advantage
of new regulations requiring pipelines to transport gas for regulated fees, and
the emergence of various types of gas marketing companies and other aggregators
of gas supplies. See "Item 1. Business and Item 2. Properties -Regulation." As
a consequence, gas prices, which were once effectively determined by government
regulation, are now largely established by market competition. Competitors of
the Company in this market include other producers, gas pipelines and their
affiliated marketing companies, independent marketers, and providers of
alternate energy supplies, such as residual fuel oil.
Regulation
The oil and gas industry is extensively regulated by federal, state and
local authorities. Legislation affecting the oil and gas industry is under
constant review for amendment or expansion. Numerous departments and agencies,
both federal and state, have issued rules and regulations binding on the oil and
gas industry and its individual members, some of which carry substantial
penalties for the failure to comply. The Company believes that it is currently
in material compliance with applicable government regulations. The regulatory
burden on the oil and gas industry increases its cost of doing business and,
consequently, affects its profitability. Inasmuch as such laws and regulations
are frequently amended or reinterpreted, the Company is unable to predict the
future cost or impact of complying with such regulations.
Exploration and Production. Exploration and production operations of the
--------------------------
Company are subject to various types of regulation at the federal, state and
local levels. Such regulation includes requiring permits for the drilling of
wells, maintaining bonding requirements in order to drill or operate wells, and
regulating the location of wells, the method of drilling and casing wells, the
surface use and restoration of properties upon which wells are drilling and
producing, and the plugging and abandoning of wells. The Company's operations
are also subject to various conservation matters. These include the regulation
of the size of drilling and spacing units or proration units, the density of
wells which may be drilled, and the unitization or pooling of oil and gas
properties or interests. In this regard, some states allow the forced pooling
or integration of tracts to facilitate exploration while other states rely on
voluntary pooling of lands and leases. In addition, state conservation laws
establish maximum rates of production from oil and gas wells, generally prohibit
the venting or flaring of gas, and impose certain requirements regarding the
rate of production. The effect of these regulations is to limit the amounts of
oil and gas the Company can produce from its wells, and to limit the number of
wells or the locations at which the Company can drill.
The states of Oklahoma, Texas, Kansas, and Louisiana have adopted and are
considering revisions to their production allowable rules under which they
regulate the quantities of natural gas which may be produced within their
borders. The stated rationale behind such prorationing legislation and
rulemaking is the conservation of natural resources, prevention of waste and
protection of the correlative rights of oil and gas interest owners by limiting
production to the available market. It is impossible at this time to determine
the effect, if any, these developments may have on the natural gas industry as a
whole. The Company does not believe the developments will materially affect its
operations.
18
<PAGE>
Certain of the Company's oil and gas leases are granted by the federal
government and administered by various federal agencies. Such leases require
compliance with detailed federal regulations and orders which regulate, among
other matters, drilling and operations on these leases and calculation of
royalty payments to the federal government. The Mineral Lands Leasing Act of
1920 places limitations on the number of acres under federal leases that may be
owned in any one state. While the Company does not have a substantial federal
lease acreage position in any state or in the aggregate, the Company does own
interests in federal oil and gas leases which produce amounts of oil and gas
material to the Company The Mineral Lands Leasing Act of 1920 and related
regulations also may restrict a corporation from holding title to federal
onshore oil and gas leases if stock of such corporation is owned by citizens of
foreign countries which are not deemed reciprocal under such Act. Reciprocity
depends, in large part, on whether the laws of the foreign jurisdiction
discriminate against a United States person's ownership of rights to minerals in
such jurisdiction. The purchase of shares in the Company by citizens of foreign
countries who are not deemed to be reciprocal under such Act could have an
impact on the Company's ownership of federal leases.
The Company's operations are subject to extensive federal, state and local
laws and regulations relating to the generation, storage, handling, emission,
transportation and discharge of materials into the environment. Permits are
required for various of the Company's operations, and these permits are subject
to revocation, modification and renewal by issuing authorities. Governmental
authorities have the power to enforce compliance with their regulations, and
violations are subject to fines, injunctions or both. It is possible that
increasingly strict requirements will be imposed by environmental laws and
enforcement policies thereunder. The Company is also subject to laws and
regulations concerning occupational safety and health. The Company believes that
it is in material compliance with applicable environmental, occupational safety
and health laws and regulations. It is not anticipated that the Company will be
required in the near future to expend amounts that are material in the aggregate
to the Company's overall operations by reason of environmental, or occupational
safety and health laws and regulations, but inasmuch as such laws and
regulations are frequently changed, the Company is unable to predict the
ultimate cost of compliance.
Natural Gas Sales and Transportation. Federal legislation and regulatory
------------------------------------
controls have historically affected the price of the gas produced by the Company
and the manner in which such production is marketed. The transportation and
sale for resale of gas in interstate commerce are regulated pursuant to the
Natural Gas Act of 1938 (the "NGA") and the Natural Gas Policy Act of 1978 (the
"NGPA") and Federal Energy Regulatory Commission ("FERC") regulations
promulgated thereunder. Since 1978, maximum selling prices of certain
categories of gas, whether sold in interstate or intrastate commerce, have been
regulated pursuant to the NGPA. The NGPA established various categories of gas
and provided for graduated deregulation of price controls of several categories
of gas and the deregulation of sales of certain categories of gas. All price
deregulation contemplated under the NGPA has already taken place.
Title to Properties
As is customary in the oil and gas industry, the Company performs a minimal
title investigation before acquiring undeveloped properties, which generally
consists of obtaining a title report from legal counsel covering title to the
major properties (for example, properties comprising at least 80% by value of
the acquired properties) and due diligence reviews by independent landmen of the
remaining properties. The Company believes that it has satisfactory title to its
oil and gas properties in accordance with standards generally accepted in the
oil and gas industry and is not aware of any material title defects with respect
to any of its properties. A title opinion is obtained prior to the commencement
of any drilling operations on such properties. The Company's properties are
subject to customary royalty interests, liens incident to operating agreements,
liens for current taxes and other burdens which the Company believes do not
materially interfere with the use of or affect the value of such properties.
Substantially all of the Company's oil and gas properties are and will continue
to be mortgaged to secure borrowings under the Company's credit facilities. See
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations-Liquidity and Capital Resources.
Operational Hazards and Insurance
The operations of the Company are subject to all risks inherent in the
exploration for and production of oil and gas, including such natural hazards as
blowouts, cratering and fires, which could
19
<PAGE>
result in damage or injury to, or destruction of, drilling rigs and equipment,
formations, producing facilities or other property, or could result in personal
injury, loss of life or pollution of the environment. Any such event could
result in substantial expense to the Company which could have a material adverse
effect upon the financial condition of the Company to the extent it is not fully
insured against such risk. The Company carries insurance against certain of
these risks but, in accordance with standard industry practice, the Company is
not fully insured for all risks, either because such insurance is unavailable or
because the Company elects not to obtain insurance coverage because of cost.
Although such operational risks and hazards may to some extent be minimized, no
combination of experience, knowledge and scientific evaluation can eliminate the
risk of investment or assure a profit to any company engaged in oil and gas
operations.
Other Business
The Company has invested in the development of certain other business
interests. While the Company continues to believe these ventures have merit,
the Company has been unable, due to its own capital requirements, to provide
sufficient financial assistance and support to achieve its original objectives
in undertaking these investments. The continued viability of these business
ventures is in jeopardy without the infusion of substantial additional capital.
As a result of the Company's own declining financial condition and its inability
to provide any further financial assistance to these ventures, the Company has
abandoned its efforts and written off its investments and loans with respect to
these businesses. Under the terms of the proposed merger of the Company with
Alliance Resources Plc, the Company is required to dispose of its interests in
these ventures, provided that in making such disposition the Company is not
required to pay or mitigate any of the liabilities of these businesses. The
Company has agreed to sell these business interests to Imperial Petroleum, Inc.,
an affiliate of the Company, for 100,000 shares of the Company's common stock.
Completion of the sale is subject to, among other things, the receipt of an
opinion from an independent investment banking firm as to the fairness of the
sale to the Company's stockholders. Even in the event the proposed merger with
Alliance Resources Plc is not completed, the Company intends to proceed with the
sale of its interests in these ventures in order to refocus its efforts on its
core oil and gas business. See "Proposed Merger With Alliance Resources Plc."
Crude Oil Processing. The Company owns 5,000,000 shares of common stock of
--------------------
Wexford Technology, Incorporated ("Wexford") representing approximately 32% of
Wexford's issued and outstanding common stock. In addition, the Company has an
agreement with Wexford that provides for the issuance of additional Wexford
shares to the Company as an incentive for providing certain loans to Wexford.
Wexford's wholly-owned subsidiary, Waste Conversion Corp. ("Waste Conversion"),
holds the exclusive license to certain proprietary microwave technology utilized
to reclaim crude oil from oilfield waste, including tank bottoms, to reform or
blend crude oils with varying gravities, to reduce paraffin content of waxy
crude oil and to remove naturally occurring radio active material from oil field
produced fluids. Wexford is a development-stage company. Through December
1993, the Company had invested in Wexford $943,577 for the construction of a
commercial crude oil blending and processing facility in Troy, Alabama utilizing
the proprietary processing technology. The facility was substantially completed
in April 1992, at which time the Company concluded that the proprietary
technology for crude oil and tank bottoms processing required no further
research and development to meet all material functional and economic
requirements necessary for commercial exploitation. The Company has
subsequently made additional loans to Wexford and Waste Conversion for operating
capital.
The Alabama processing facility is not commercially active and Wexford and
Waste Conversion are seeking to raise additional debt or equity capital
necessary to begin full scale commercial operations. Wexford and Waste
Conversion are currently in default with respect to various debt and other
obligations and have received numerous demands for payment and threats of
litigation. Effective July 31, 1996 the Company has written off its entire
investment in and loans to Wexford and Waste Conversion in the total amount of
$2,372,752.
Mining. The Company owns 3,798,730 shares of the common stock of Imperial
------
Petroleum, Inc. ("Imperial") representing approximately 12% of Imperial's issued
and outstanding common stock. Imperial's wholly-owned subsidiary, Ridgepointe
Mining Company, owns gold and copper mining claims in Arizona and participates
in a joint venture to explore and develop certain gold mining claims in Mexico.
20
<PAGE>
The Company's investment in Imperial and Ridgepointe consisted primarily of
loans for operating capital. At present, Imperial is actively seeking to raise
additional debt or equity capital to fund its operations. Imperial is currently
in default under its bank debt. Effective July 31, 1996 the Company has written
off its entire investment in and loans to Imperial in the total amount of
$1,812,429.
Employees
The Company employs a total of 30 people, including 20 people in its Tulsa,
Oklahoma office and one person in its Evansville, Indiana office, whose
functions are associated with management, operations, accounting and oil and gas
marketing. The Company employs seven people in the Tensaw, Alabama office who
are lease operators in the Company's South Carlton field, and one field person
each in the states of Louisiana and Tennessee. The Company's other field
activities are accomplished through independent contractors. The Company
believes its relations with its employees and contractors are excellent.
Item 3. Legal Proceedings.
Torch/Nuevo/Panda Litigation. In connection with the Company's sale of its
----------------------------
subsidiaries Panda Resources, Inc. and Richfield Natural Gas, Inc. in 1993, the
Company became a party to three different lawsuits.
On October 10, 1994, Nuevo Liquids, Inc. ("Nuevo") filed a lawsuit against
the Company and its wholly-owned subsidiary, LaTex Petroleum Corporation ("LaTex
Petroleum") styled Nuevo Liquids, Inc. v. LaTex Resources, Inc. and LaTex
------------------------------------------------------
Petroleum Corp., Case No. 94-049944, District Court of Harris County, Texas,
- ---------------
234th Judicial District. Nuevo alleged that the Company and LaTex Petroleum had
refused to arbitrate certain disputes arising under the Stock Purchase Agreement
dated July 15, 1993 between Nuevo and Panda Resources, Inc. ("Panda"), pursuant
to which Panda sold to Nuevo its former wholly-owned subsidiary, Richfield
Natural Gas, Inc. ("Richfield"). Under the terms of the Stock Purchase
Agreement, the Company was the guarantor of Panda's obligations to Nuevo. The
disputed issues between Nuevo and the Company related to a post-closing final
accounting and settlement statement by which the final purchase price under the
Stock Purchase Agreement was to be adjusted to reflect certain post-closing
costs and events.
On October 12, 1994, Torch Energy Marketing, Inc. ("Torch") filed a lawsuit
against the Company and its wholly-owned subsidiary, LaTex Petroleum styled
Torch Energy Marketing, Inc. v. LaTex Resources, Inc. and LaTex Petroleum Corp.,
- -------------------------------------------------------------------------------
Case No. 94-050945, District Court of Harris County, Texas, 270th Judicial
District. Torch alleged that the Company and LaTex Petroleum had refused to
arbitrate certain disputes arising under the Stock Purchase Agreement dated
July 26, 1993, between Torch and LaTex Petroleum, pursuant to which the Company
sold to Torch its former wholly-owned subsidiary, Panda. The disputed issues
between Torch and the Company related to a post-closing final accounting and
settlement by which the final purchase price under the Stock Purchase Agreement
was to be adjusted to reflect certain post-closing costs and events. On
January 6, 1995, the Company removed both the Nuevo and Torch lawsuits to the
United States District Court for the Southern District of Texas, Houston
Division, Case No. H-95-0029.
On March 21, 1995, the Company filed a lawsuit against its former wholly-
owned subsidiary, Panda, styled LaTex Petroleum Corporation v. Panda Resources,
-----------------------------------------------
Inc., Case No. CJ-95-01302, in the District Court of Tulsa County, Oklahoma.
- ----
The Company sought recovery of $163,191.16 plus interest and attorneys' fees,
for the sale of natural gas to Panda for the period from June 1993, through
March 1994.
On December 7, 1995, the company entered into a Settlement Agreement (the
"Settlement") with Torch, Nuevo, Panda, Steve Wilson and Wilson, Tucker &
Associates to settle each of the referenced lawsuits. Pursuant to the
Settlement, the company agreed (a) to pay Nuevo $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 Torch $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. To secure its obligation under the Settlement, the Company
stipulated to an agreed judgment in the amount of $1,000,000 (less any amounts
paid pursuant to the Settlement) upon the Company's
21
<PAGE>
default of its obligations under the Settlement. Torch, Nuevo and Panda agreed
to dismiss their respective claims against the Company arising from the
referenced litigation. In addition, the Company agreed to assume and indemnify
Panda and Torch against all obligations and amounts owed under a May 2, 1989,
agreement (the "Dewey County Contract") between Panda and Northern Natural Gas
Company relating to the transportation of natural gas through a facility located
in Dewey County, Oklahoma. The Company has subsequently been asked to indemnify
Torch with respect to claims brought against it by Northern in a lawsuit filed
March 7, 1996, as more fully discussed below.
Northern Natural Gas Company v. LaTex Resources, Inc., Case No. 94-049766,
-----------------------------------------------------
152nd District Court of Harris County, Texas. 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, a former wholly-owned subsidiary
of the Company. Northern claimed damages, including damages for anticipatory
breach, in the amount of $1,600,000, plus other actual damages and interest.
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 by
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.
Associated Storage Corp., formerly known as Centennial Storage Corp., a
-----------------------------------------------------------------------
subsidiary of Associated Natural Gas, Inc., a Colorado corporation v. LaTex
- ---------------------------------------------------------------------------
Resources, Inc., Case No. CJ-94-04711, District Court for Tulsa County,
- ---------------
Oklahoma. 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 pursuant to which the
Company allegedly agreed to pay Associated $150,000 in connection with the sale
of the Company's former wholly-owned subsidiary, Panda Resources, Inc., and
Panda's wholly-owned subsidiary, Richfield Natural Gas, Inc. Associated seeks
actual damages in the amount of $150,000, prejudgment interest, court costs and
attorneys' fees.
Jones, et al. v. Hughes Eastern, et al., Case No. CV-95-133, Circuit Court
---------------------------------------
for Lamar County, Alabama; Hubbert, et al. v. Hughes Eastern, et al., Case No.
-----------------------------------------
CV-95-134, Circuit Court for Lamar County, Alabama; Perkins, et al. v. Hughes
-------------------------
Eastern, et al., Case No. CV-95-137, Circuit Court for Lamar County, Alabama.
- ---------------
Each of these cases is a wrongful death or personal injury action arising out of
an accident which occurred at a heater-treatment unit on the Blowhorn Creek
Millerella Oil Unit lease in Lamar County, Alabama. Germany Oil Company, a
wholly-owned subsidiary of the Company, is a working interest owner in the oil
and gas lease relevant to the case and, together with all other working interest
owners, is a named defendant. Each plaintiff seeks damages in the amount of $25
million. All three cases have been referred to Germany Oil Company's insurance
carrier for defense. Each case is in the initial stages of discovery.
Northern Natural Gas Company v. Torch Energy Advisors, Inc., Case No.
-----------------------------------------------------------
96-12462, 269th Judicial District Court of Harris County, Texas. On March 7,
1996, Northern Natural Gas Company ("Northern") filed this lawsuit against Torch
Energy Advisors, Inc. ("Torch" for alleged breach of a May 2, 1989, agreement
(the "Dewey County Contract") between Torch, Panda Resources, Inc. ("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.
In addition to the foregoing litigation, 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 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.
22
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
On May 16, 1996 the Company held its 1995 annual meeting of shareholders to
(i) elect six directors, and (ii) ratify the selection of Briscoe Robinson Co.,
(now known as Briscoe & Burke) as the Company's independent auditors for 1996.
At the meeting the following individuals were elected directors of the Company.
Each individual elected was a director of the Company prior to the meeting.
<TABLE>
<CAPTION>
Votes Votes
Director For Withheld
-------- ----- --------
<S> <C> <C>
Jeffrey T. Wilson 14,425,882 226,165
Malcolm W. Henley 14,406,107 245,940
Philip J. Wade(1) 14,403,107 248,940
Dennis J. Strauch(2) 14,403,107 248,940
John R. Martinson 14,420,432 231,615
John L. Cox 14,412,432 239,615
</TABLE>
- --------------------
(1) Mr. Wade resigned as a Director of the Company on October 8, 1996.
(2) Mr. Strauch resigned as a Director of the Company on June 24, 1996.
The selection of Briscoe & Burke was ratified by shareholders by a vote of
14,464,929 shares for and 115,303 against with 71,815 shares abstaining.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
Market Information and Dividends
The common stock of the Company (i) is traded over-the-counter and quoted
on NASDAQ under the symbol "LATX" and (ii) until September 4, 1996, was listed
on the Pacific Stock Exchange under the symbol "LAT". Effective September 4,
1996, the Company's common stock was delisted by the Pacific Stock Exchange as a
result of the failure of the minimum bid price for the common stock to meet the
Exchange's listing maintenance requirements.
The following table sets forth, for the periods indicated, (i) the high and
low closing bid prices per share of common stock as quoted by NASDAQ, and (ii)
the high and low closing bid prices per share of common stock as reported on the
Pacific Stock Exchange. Bid quotations represent quotations between dealers
without adjustment for retail mark-ups, mark-downs or commissions and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
Pacific
NASDAQ Stock Exchange(1)
--------------- --------------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
Fiscal Year Ended July
31, 1996:
First Quarter 7/8 7/16 3/4 3/8
Second Quarter 11/16 13/32 3/8 3/8
Third Quarter 1/2 11/32 1/2 1/2
Fourth Quarter 17/32 5/16 N/A(2) N/A(2)
Fiscal Year Ended July
31, 1995:
First Quarter 1 7/8 1/2 1/2 1/2
Second Quarter 1 5/16 23/32 1 3/4
Third Quarter 15/16 1/2 7/8 1/2
Fourth Quarter 5/8 7/16 3/8 1/4
- ---------------------------
</TABLE>
23
<PAGE>
(1) Effective September 4, 1996, the Company's common stock was delisted by the
Pacific Stock Exchange as a result of the failure of the minimum bid price
for the common stock to meet the Exchange's listing maintenance
requirements.
(2) There was no trading activity in the Company's common stock on Pacific
Stock Exchange during the fourth quarter of fiscal 1996 and, therefore, no
price information for this period is available.
No cash dividends have been declared by the Company's Board of Directors
during the Company's two most recent fiscal years. The Company does not
presently intend to declare or pay dividends on the common stock. The terms of
the Company's existing bank credit facility do not permit the Company to pay
dividends on the common stock. Payment of dividends in the future, if any, will
depend on applicable legal and contractual restrictions, as well as the
financial condition and requirements of the Company and general business
conditions. The Company presently intends to use its available cash flow for
expansion of the Company's business, including acquisition, development and
enhancement of oil and gas properties.
Recent Sales of Unregistered Securities
During the year ended July 31, 1996, the Company issued (i) effective
March 12, 1996, 58,800 shares of its common stock to Princeton Otolaryngology
Retirement Trust, an entity controlled by Dr. Howard S. Farmer, in payment of
indebtedness of Wexford Technology, Incorporated in the amount of $23,520, and
(ii) effective June 27, 1996, 85,000 shares of its common stock to Thomas J.
Patrick in payment of indebtedness of Wexford Technology, Incorporated in the
amount of $37,000. Following the year ended July 31, 1996 the Company issued a
total of 1,690,000 shares of its common stock to various officers and employees
as described in more detail at "Item 11. Executive Compensation -- Restricted
Stock Grants". In each of the referenced transactions, an exemption from
registration was claimed under Section 4(2) of the Securities Act of 1933, as
amended, and regulations promulgated thereunder because no public offering was
involved and the securities were issued for investment and not with a view to
the distribution thereof. No underwriter was involved in any of the referenced
transactions nor were any underwriting discounts or commissions paid. Each
certificate representing shares issued in the referenced transactions bears a
restrictive legend and stop transfer instructions were entered on the Company's
stock transfer records with respect thereto.
Item 6. Selected Financial Data.
The selected historical financial information presented in the table below
for and at the end of each of the years ended July 31, 1992, 1993, 1994, 1995
and 1996 is derived from the audited consolidated financial statements of the
Company, of which the consolidated balance sheets as of July 31, 1995 (restated)
and 1996, and the consolidated statements of income, shareholders' equity and
cash flows for the years ended July 31, 1994, 1995 (restated) and 1996 are
included under "Item 8. Financial Statements and Supplementary Data."
The selected financial information presented below should be read in
conjunction with the Company's audited consolidated financial statements and the
notes thereto included under Item 8 and Management's Discussion and Analysis of
Financial Condition and Results of Operations at Item 7.
24
<PAGE>
Selected Consolidated Financial and Operating Data
(In thousands, except per share amounts and average sales data)
<TABLE>
<CAPTION>
Years Ended
July 31(1)
=========================================================================
1996 1995 1994 1993 1992
============== ============== ============ ============ =============
(Restated)(6)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues:
Oil and gas sales................... $ 11,980 $ 8,586 $ 8,703 $ 8,489 $ 6,778
Crude oil and gas marketing......... 540 1,223 2,781 2,128 210
Lease operating and management fees. 1,011 634 601 860 561
----------- ----------- ----------- ----------- -----------
Total operating income............ 13,531 10,443 12,085 11,477 7,549
----------- ----------- ----------- ----------- -----------
Operating expenses:
Lease operating expense............. 6,608 5,265 4,840 4,735 4,092
Crude oil and gas marketing......... 134 744 2,216 1,740 193
Dry hole costs and abandonments..... 3,586 104 113 --- ---
General and administrative.......... 2,893 2,735 2,497 2,566 1,564
Depreciation, depletion and
amoritization...................... 4,706 2,711 2,214 2,899 1,724
----------- ----------- ----------- ----------- -----------
Total operating expenses.......... 17,927 11,559 11,880 11,940 7,573
----------- ----------- ----------- ----------- -----------
Other Income (expense):
Equity in losses and write offs of
investments in affiliates.......... (4,185) (299) (440) (16) (2)
Gain on sale of assets.............. 2,366 128 393 863 276
Interest income..................... 205 122 17 9 12
Interest expense.................... (2,410) (1,291) (598) (728) (724)
Net loss from continuing operations ----------- ----------- ----------- ----------- -----------
before income taxes.................. (8,420) (2,456) (423) (335) (462)
Provision for income taxes:
Current............................. --- 35 --- (145) (159)(2)
----------- ----------- ----------- ----------- -----------
Net loss from continuing operations... (8,420) (2,491) (423) (190) (303)
Income (loss) from discontinued
operations (net of income taxes).... --- --- --- 974 (962)
Gain (loss) on disposal of subsidiary
(net of income taxes)(7)............. (1,811) --- --- 123 ---
----------- ----------- ----------- ----------- -----------
Net income (loss)..................... $ (10,231) $ (2,491) $ (423) $ 907 $ (1,265)(2)
=========== =========== =========== =========== ===========
Preferred stock dividends............. 571 133 --- --- ---
Net income (loss) for common
shareholders......................... $ (10,801) $ (2,624) $ (423) $ 907 $ (1,265)(2)
Loss per share from continuing =========== =========== =========== =========== ===========
operations........................... $(0.50) $(0.15) $(0.02) $(0.01) $(0.02)
=========== =========== =========== =========== ===========
Income (loss) per common share........ $(0.60) $(0.15) $(0.02) $0.06 $(0.10)
=========== =========== =========== =========== ===========
Weighted average shares outstanding(3) 18,011,826 17,661,428 17,434,159 15,116,096 12,266,372
=========== =========== =========== =========== ===========
Balance Sheet Data (end of period):
Total assets........................ $ 38,966 $ 47,923 $ 21,259 $ 21,246 $ 35,399
Net property, plant and equipment... $ 31,945 $ 37,709 $ 13,077 $ 12,440 $ 12,304
Working capital (deficit)........... $ (28,420) $ (7,119) $ (1,111) $ (2,117) $ (10,353)
Long term debt...................... $ 0 $ 20,635 $ 4,467 $ 4,868 $ 2,544
Stockholders' equity................ $ 6,318 $ 16,001 $ 10,280 $ 8,216 $ 2,639
Reserve and Production Data:
Production:
Oil (MBbls)....................... 405 359 335 280 213
Gas (MMcf)........................ 3,481 2,612 2,107 1,941 1,798
Average sales prices:
Oil (per Bbl)..................... $ 15.24(4) $ 12.86(5) $ 14.56 $ 17.88 $ 17.64
Gas (per Mcf)..................... $ 1.67(4) $ 1.48(5) $ 1.81 $ 1.79 $ 1.57
Proved reserves (end of period):
Oil (MBbls)....................... 6,353.1 4,036.4 4,519.9 2,455.3 1,845.5
Gas (MMcf)........................ 28,172 27,730 10,933 9,391 8,214
Present value of estimated future
oil and gas net revenues before
income taxes (discounted 10%)...... $ 53,499 $ 29,685 $ 23,418 $ 15,658 $ 16,923
</TABLE>
(1) Included in the Company's historical consolidated financial information for
the years ended July 31, 1992, 1993, 1994, 1995 and 1996 are the assets,
liabilities and results of operations of LaTex Resources, Inc. The
financial information reflects (a) the 1991 pooling of Elite Enterprises,
Inc. and Sable Investments Corporation and the 1993 pooling of Panda
Resources, Inc. and its subsidiaries, Panada Exploration, Inc. and
Richfield Natural Gas, Inc., and (b) the discontinued operations from the
subsequent sale of Panda Resources, Inc. and Richfield Natural Gas, Inc.
effective July 1, 1993. The financial information of ENPRO, Inc. and
Phoenix Metals, Inc. has been included subsequent to their June 22, 1992
and December 8, 1992 respective dates of acquisition.
(2) LaTex Resources, Inc. and Sable Investment Corporation elected to be taxed
as C corporations under the Internal Revenue Code effective January 1,
1992. The net loss for fiscal 1992 is net of a proforma provision for
income taxes of $25 that would have been provided had these entities
elected to be taxed as C corporations effective August 1, 1991. Earnings
per share was not affected.
(3) The weighted average shares outstanding is as disclosed in the Notes to the
LaTex Resources, Inc. Consolidated Financial Statements included elsewhere
herein.
(4) After giving effect to the impact of the Company's price hedging
arrangements with the Company's principal bank. Without such hedging
arrangements, the average sales prices for the year ended July 31, 1996,
would have been $15.73 for oil and $2.03 for gas.
(5) The Company's price hedging arrangements did not have material effect on
average sales prices for the year ended July 31, 1995.
(6) See Note 16 to the Company's Consolidated Financial Statements included
elsewhere herein.
(7) See Note 1 to the Company's Consolidated Financial Statements included
elsewhere herein.
25
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
FASB Accounting Standards
The Financial Accounting Standards Board ("FASB") has issued Statements of
Financial Accounting Standards No. 114 ("SFAS 114"), Accounting by Creditors for
Impairment of a Loan and No. 118 ("SFAS 118"), Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures. In general, these
statements require that impaired loans be measured by creditors at the present
value of expected future cash flows discounted at the loan's effective interest
rate or at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. The Company has adopted SFAS
114 and 118 for the fiscal year ended July 31, 1996.
FASB has issued Statement of Financial Accounting Standard 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.
FASB has issued Statement of Financial Accounting Standard 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.
FASB has issued Statement of Financial Accounting Standard 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.
Results of Operations
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 depleted on a unit-of-production basis over the life of the
remaining proved reserves. Depletion of capitalized costs is provided on a
prospect-by-prospect basis. 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 oil and gas sales, (iii) the level of lease operating expenses, (iv) the
level of exploratory activities, and (v) 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 existing oil and gas properties through its development and
production enhancement activities. The Company does not expect compliance
with applicable government regulations, including environmental regulations, to
have a material effect on the Company's liquidity, capital commitments or
results of operations.
The following table reflects certain historical operating data for the
periods presented.
26
<PAGE>
<TABLE>
<CAPTION>
Year Ended July 31
--------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Net Sales Volumes:
Oil (MBbls) 335 359 405
Natural gas (MMcf) 2,107 2,612 3,481
Oil equivalent (MBOE) 686 794 985
Average Sales Prices:
Oil (per Bbl) $ 14.56 $ 12.86(1) $ 15.24(2)
Natural gas (per Mcf) $ 1.81 $ 1.48(1) $ 1.67(2)
Operating Expenses per BOE of Net Sales:
Lease operating $ 6.29 $ 5.91 $ 5.82
Severance tax $ 0.77 $ 0.72 $ 0.89
General and administrative $ 3.75 $ 3.56 $ 2.94
Depreciation, depletion and amortization $ 3.23 $ 3.34 $ 4.60
- --------------------------------------
</TABLE>
(1) The Company's price hedging arrangements did not have a material effect on
average prices for the year ending July 31, 1995.
(2) After giving effect to the impact of the Company's price hedging
arrangements with the Company's principal bank. Without such hedging
arrangements, the average sales prices for the year ended July 31, 1996
would have been $15.73 for oil and $2.03 for gas.
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. Prices received by the Company for sales of
oil and natural gas have fluctuated significantly from period to period. The
Company's ability to maintain current borrowing capacity and to obtain
additional capital on attractive terms is substantially dependent on oil and gas
prices. Domestic spot oil prices have ranged from a low of approximately $11 per
barrel in July 1986 to a high of approximately $40 per barrel in October 1991,
with a current price of approximately $24 per barrel. The fluctuations in oil
prices during these periods reflect market uncertainty regarding OPEC's ability
to control the production of its member countries, as well as concerns related
to the global supply and demand for crude oil. Since the end of the Gulf War in
early 1991, crude oil prices have experienced continued weakness, primarily as a
result of OPEC's inability to maintain disciplined production quotas by member
countries and the uncertainty associated with Iraq's return to the crude oil
export market. These factors continue to overhang the market and will create
significant price volatility for the foreseeable future.
Natural 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. However, natural gas
prices have rebounded recently and appear to be poised for further
strengthening. Domestic spot natural gas prices have ranged from a low of
approximately $0.90 per Mcf in January 1992 to a high of approximately $2.70 per
Mcf in April 1996, with a current price of approximately $2.10 per Mcf.
Environmental concerns coupled with recent increases in the use of natural gas
to produce electricity have combined to improve prices. Under FERC Order 636,
U.S. pipelines have been made more accessible to both buyers and sellers of
natural gas and, as a result, natural gas will be able to more effectively
compete for market share with other end-use energy forms. All of this suggests
a continued improvement in the demand for natural gas over the long term.
Within the oil and gas business, it appears that the substantial
restructuring of the major and large independent companies is slowing. The
merger activity of the 1980's has waned, and despite the continued exodus by
U.S. companies to international ventures, it appears that the mid-1990's will be
a "settling in" time for most companies. Nevertheless, there remains a large
inventory of properties available for acquisition within the United States.
However, it is anticipated that as crude oil and natural gas prices stabilize
and strengthen, fewer companies will be inclined to sell their properties in the
future.
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The Company's principal source of cash flow is the production and sale of
its crude oil and natural gas reserves, which are depleting assets. Cash flow
from oil and gas sales depends upon the quantity of production and the price
obtained for such production. Except as affected by the Company's current
commodity hedging arrangement, an increase in prices permits the Company to
finance its operations to a greater extent with internally generated funds. A
decline in oil and gas prices reduces the cash flow generated by the Company's
operations, which in turn reduces the funds available for servicing debt,
acquiring additional oil and gas properties and exploring for an developing new
oil and gas reserves.
In addition to the foregoing, the results of the Company's operations vary
due to seasonal fluctuations in the sales prices and volumes of natural gas. In
recent years, natural gas prices have been generally higher in the fall and
winter. 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.
The following events have directly affected the comparability of the
results of operations and financial position of the Company during the periods
presented:
. During the period between July 31, 1992 and July 31, 1996, the Company
completed 12 oil and gas property acquisitions that added substantial
amounts of proved oil and gas reserves for a total expenditure of
approximately $30.8 million. As a result of these transactions, the
Company's equivalent proved reserves increased approximately 560% in
fiscal 1992, 125% in fiscal 1993, 58% in fiscal 1994, 3.5% in fiscal
1995 and 68% in fiscal 1996, and the Company's oil and gas production,
revenues, lease operating expenses, interest expense and net income
have increased significantly.
. The Company acquired Panda Resources in February 1993 and subsequently
sold Panda's gas marketing and storage operations in July 1993.
. In April 1995 the Company completed the acquisition of Germany Oil
Company which approximately doubled the Company's oil and gas
properties and added significantly to the Company's liabilities. The
acquisition was accounted for using the purchase method of accounting.
In connection with this acquisition, the Company refinanced its senior
debt, issued preferred stock and entered into hedging arrangements
with respect to sales prices for its oil and gas production.
. In December 1995 the Company completed the sale of certain oil and gas
properties it had acquired from Phillips Petroleum and Sackett Oil
Company for approximately $2,857,275 net cash to the Company.
. In March 1995 the Company acquired Germany Oil Company in a purchase
transaction. The assets of Germany Oil consisted primarily of oil and
gas properties. In recording 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 Company's consolidated financial statements for the
year ended July 31, 1995 have been restated.
Year ended July 31, 1996 Compared to year ended July 31, 1995. Total
-------------------------------------------------------------
revenues from the Company's operations for the year ended July 31, 1996 were
$15,006,816 before reduction by $1,475,653 as a result of losses incurred from
the Company's oil and gas price hedging arrangements. This compares to total
revenues of $10,442,679 for the year ended July 31, 1995, which includes hedging
gains of $157,301. The increase is attributable to a 15% increase in oil and
gas prices and the inclusion of the oil and gas operations of the Company's
wholly-owned subsidiary, Germany Oil Company, for the full year ended July 31,
1996. The increased revenues were partially offset by lower revenues from the
Company's crude oil marketing activities.
Total operating expenses for the year ended July 31, 1996 were $17,926,639
compared to $11,559,488 for the same period a year earlier. Lease operating
expense increased 20% to $6,608,089
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compared to the prior year primarily as a result of including the full year of
operations of Germany Oil, while expenses associated with the Company's
marketing operations decreased $610,155 due to reduced oil and gas marketing
activity.
Depreciation, depletion and amortization expense increased from $2,710,574
in fiscal 1995 to $4,705,912 in fiscal 1996 primarily as a result of the
acquisition of Germany Oil.
General and administrative expenses for the year ended July 31, 1996 were
$2,893,146 compared to $2,736,261 for the prior year due to routine increases in
the Company's administrative expenses.
The Company incurred dry hole costs of $2,630,541 during the year ended
July 31, 1996 which was principally due to the write-off of the Company's
investment in the Tunisian Prospect. The Company also wrote off its investment
in the Kazakhstan Prospect in the amount of $955,496. See "Item 1. Business
and Item 2. Properties -- Exploration and Development".
The Company's equity in the net losses of its unconsolidated affiliates,
Wexford Technology, Incorporated and Imperial Petroleum, Inc. was $298,839
during the fiscal year July 31, 1995. The current year equity in the losses or
earnings from these unconsolidated affiliates was not subject to determination
by the Company and, therefore, is included in the write off of the investment in
and advances to these affiliates in the total amount of $4,184,881 for the
fiscal year ended July 31, 1996. See "Item 1. Business and Item 2. Properties -
- - Other Business".
The Company recognized gains on the sale of assets of $2,365,807 from the
disposition of non-strategic oil and gas properties during the fiscal year ended
July 31, 1996, an increase of $2,237,881 from the preceding year.
The Company had a net loss from continuing operations for the year ended
July 31, 1996 of $8,420,401 ($0.50 per common share), compared to a net loss
from continuing operations of $2,491,342 ($0.15 per common share) for the year
ended July 31, 1995. The increase in the net loss from continuing operations is
primarily a result of the write off of the cost of the Company's activities in
Tunisia and Kazakhstan (reflected as dry hole cost and abandonments), hedging
contract losses, and equity in losses and write-offs of investments in
affiliates. These increases were partially offset by a gain on the sale of
assets.
The Company also incurred additional losses of $1,810,382 from discontinued
operations in connection with litigation arising out of the sale of its Panda
subsidiary in July 1993. As a result, the Company incurred a net loss of
$10,801,404 ($0.60 per common share) for the year ended July 31, 1996 compared
to a net loss of $2,624,142 ($0.15 per common share) for the prior year.
Year ended July 31, 1995 compared to year ended July 31, 1994. Total
-------------------------------------------------------------
revenues from the Company's operations for the year ended July 31, 1995 were
$10,442,679 compared to $12,085,364 for the year ended July 31, 1994. The
decrease is primarily attributable to a 13% decrease in oil and gas prices which
also resulted in lower revenues from the Company's crude oil marketing
activities. The reduced revenues were partially offset by an increase in oil
and gas sales volume as a result of the acquisition of Germany Oil Company
effective in April 1995. However, oil and gas sales revenues for the fourth
quarter of fiscal 1995 increased 46% compared to revenues in the fourth quarter
of fiscal 1994 as a result of the acquisition of Germany Oil. The Company
anticipates that oil and gas sales revenues will further increase in subsequent
quarters due to this acquisition.
Total operating expenses for the year ended July 31, 1995 were $11,559,488
compared to $11,880,094 for the same period a year earlier. Lease operating
expense increased nine percent to $5,264,858 compared to the prior year
primarily as a result of the acquisition of Germany Oil, while expenses
associated with marketing operations decreased $1,472,684 due to lower product
prices.
Depreciation, depletion and amortization expense increased from $2,213,823
during fiscal 1994 to $2,710,574 during fiscal 1995 as a result of the
acquisition of Germany Oil and due to an increase in depletion rates as a result
of the year-end price impact on the Company's base of oil and gas reserves.
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<PAGE>
General and administrative expenses for the year ended July 31, 1995 were
$2,736,267 compared to $2,496,567 for the prior period. The increase was due to
increases in the Company's legal and accounting fees associated with the closing
of the acquisition of Germany Oil in April 1995.
The Company incurred losses from unconsolidated affiliates of $298,839
during the current fiscal year, with $216,998 of the losses attributable to
Wexford Technology Incorporated, a development stage company engaged in the
crude oil tank bottoms business. See "Item 1. Business and Item 2. Properties -
Other Business."
The Company recognized gains on the sale of assets of $127,926 from the
disposition of non-strategic oil and gas properties during the fiscal year ended
July 31, 1995, a reduction from gains of $265,281 in the previous year.
The Company had an after-tax net loss from continuing operations for the
year ended July 31, 1995 of $2,491,342 ($0.15 per common share) compared to a
net loss of $423,341 ($0.02 per common share) for the year. The increase in the
net loss is a result of lower oil and gas prices and increased operating,
financing, professional, and amortization costs associated with the purchase of
Germany Oil.
Year ended July 31, 1994 compared to year ended July 31, 1993. Total
-------------------------------------------------------------
revenues from the Company's operations for the year ended July 31, 1994 were
$12,085,366 as compared to $11,477,045 for the year ended July 31, 1993. The
increase in revenues is primarily due to the Swift Energy acquisition and
increased marketing margins from the sale of the Company's production in the
South Carlton field in Alabama which were offset partially by a reduction in
crude oil prices from $17.88 per barrel to $14.56 per barrel.
Total operating expenses for the year ended July 31, 1994 were $11,880,094
compared to $11,934,000 for the same period a year earlier. Lease operating
expense increased two percent to $4,840,000 compared to the prior year primarily
as a result of the acquisition of oil and gas properties from Swift Energy,
while expenses from marketing operations were up $476,410 due to increased
marketing efforts on the South Carlton field.
Depreciation, depletion and amortization expense in fiscal 1994 decreased
to $2,213,823 from $2,899,459 for the comparable period a year ago due to
significant downward revisions of oil and gas reserves in July 1993 for the
Wheat field in Loving County, Texas and the Flora field wells in Madison County,
Mississippi. Both of these properties were sold during the fiscal year with the
Company recording significant gains on sale.
General and Administrative expenses for the year ended July 31, 1994 were
$2,496,567 compared to $2,560,000 for the prior period. These expenses are
within 1% of the previous year's results reflecting the Company's commitment to
control overhead.
The Company had an after-tax net loss from continuing operations for the
year ended July 31, 1994 of $423,341 ($0.02 per common share) compared to a net
loss of $190,147 ($0.01 per common share) for the same period a year ago. The
Company wrote off its $222,918 investment in its Phoenix Metals, Inc. subsidiary
during fiscal 1994. To date this subsidiary has been unable to obtain financing
to initiate operations. The Company's equity in the net losses of its
unconsolidated affiliates was $216,998 during the current fiscal year, with
$174,050 of the losses attributable to Wexford Technology, Incorporated, a
start-up company engaged in the crude oil tank bottoms business. See "Item 1.
Business and Item 2. Properties -- Other Business."
The Company recognized gains on the sale of assets of $392,592, primarily
from the sale of non-strategic oil and gas assets during the fiscal year ended
July 31, 1994, a reduction of $470,888 from the previous fiscal year which
included the settlement of a natural gas contract in that period.
The net loss of the Company for the year ended July 31, 1994 was $423,341
($0.02 per common share) compared to net income of $906,839 ($0.06 per common
share) for the previous year. The decrease in net income is a result of a
$1,882,685 net gain (after income taxes) resulting primarily from the sale of a
gas purchasing contract in the prior period in addition to the write off of
Phoenix Metals and the
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Company's share of the losses of the unconsolidated affiliates.
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 in April 1995, the Company's new credit facility provided a source of long-
term financing. As a result of the Germany Oil 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 July 31, 1996, the
Company had current assets of $4.2 million and current liabilities of $32.6
million which resulted in negative working capital of $28.4 million. This
compares to the Company's current assets of $4.2 million and current liabilities
of $11.3 million, which resulted in negative working capital of $7.1 million, at
July 31, 1995. The increase in the Company's working capital deficit during
fiscal 1996 is primarily due to the current liability classification at July 31,
1996 of all indebtedness of the Company to its principal bank (see "Financing
Arrangements"), additional litigation costs principally resulting from
discontinued operations of $1.8 million, and increases in royalty and vendor
payables in the amount of $1.8 million resulting from the Company's inability to
fund its current obligations due primarily to product hedging losses of $1.5
million. These amounts were partially offset by an increase in oil and gas
receivables resulting from higher product prices of approximately $500,000. The
long-term portion of the Company's debt to its principal bank was $20.6 million
at July 31, 1995. At July 31, 1994, the long-term portion of the Company's debt
to its principal bank was $4.5 million and negative working capital was $1.11
million. The decline in the Company's working capital during the last two years
is primarily the result of the Company's assumption of approximately $4.3
million of indebtedness associated with the acquisition of Germany Oil and the
continued funding of its international operations and two unconsolidated
affiliates. 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. 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.
In order to address the Company's deteriorating financial condition,
management's plans to reduce the Company's 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 non-
essential. Initially, management would immediately seek to sell approximately
$6-7 million of non-operated oil and gas properties. These properties have been
previously identified and sales information compiled to effect a rapid sale. A
substantial amount of the proceeds from any such sale would be used to pay down
trade creditors. A second sale of oil and gas properties would then be pursued.
This sale could require up to 12 months to complete in an orderly fashion, and
would seek to eliminate the balance of the Company's debt to its principal
lender and trade creditor payables. Significant staff reductions, salary
adjustments and a reduction in the level of discretionary spending and capital
expenditures on its properties would accompany both sales of properties.
Ultimately, the plan anticipates the Company would close its Tulsa office,
eliminate 15 office staff employees and all of its field level employees, and
relocate its principal office to Evansville, Indiana. The Company would no
longer seek to operate any oil and gas properties. There can be no assurance
that the Company will be able to successfully execute the foregoing plan. Under
the terms of its credit facility with its principal bank, implementation of this
plan would be subject to the bank's prior approval. In the event the proposed
merger of the Company and Alliance Resources Plc is not completed and the bank
does not approve implementation of the plan, it may become necessary for the
Company to seek protection from its creditors.
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 anticipates that these efforts
will result in the introduction to the Company of third parties with interests
and resources which may be compatible with the financial needs of the Company.
There can be no assurance that the Company will be able to successfully locate
and negotiate any alliance or partnership arrangement or merger transaction.
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. See "Item 1. Business and Item 2. Properties -Proposed Merger with Alliance
Resources Plc."
For the year ended July 31, 1996, the Company's operating activities
resulted in positive cash flow of $3,359,885 compared to a positive cash flow of
$1,742,623 for the year ended July 31, 1995. The improvement in cash flow is due
to additional cash provided by operating activities, principally through
increased accounts payable and accrued expenses. For the year ended July 31,
1994, the Company's operating activities resulted in a positive cash flow of
$951,001 compared to providing deficit cash flow of $2,596,354 for the year
ended July 31, 1993.
Investing activities of the Company used $206,426 in net cash flow for the
year ended July 31, 1996 to fund the Company's oil and gas activities.
Investing activities of the Company used $16,750,182 in net cash flow for the
year ended July 31, 1995 compared to using $3,551,072 in net cash flow for the
year ended July 31, 1994. The increase in investing activities in fiscal 1995
was primarily due to the drilling of the first exploration well on the Company's
Tunisian prospect. Investing activities of the Company used $3,588,429 in net
cash flow for the year ended July 31, 1993. The decrease in cash flow used in
investing activities during fiscal 1994 compared to fiscal 1993 was a result of
a reduced number of oil and gas property acquisitions by the Company.
Financing activities used $3,448,351 in net cash flow for the year ended
July 31, 1996 compared to $15,113,389 provided in net cash flow for the year
ended July 31, 1995 and $1,665,499 provided for the year ended July 31, 1994.
The increase during fiscal 1996 was a result of the monthly amortization of the
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Company's indebtedness to its principal bank and additional debt reduction upon
the sale of oil and gas properties. The increase in fiscal 1995 compared to
fiscal 1994 was a result of the Company's new credit facility with Bank of
America associated with the Company's acquisition of Germany Oil Company in
April 1995. 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 assets from continuing operations. Sales of non-
strategic and minor interests oil and gas properties accounted for $2,365,807 in
gains during fiscal 1996, $127,248 in gains during fiscal 1995, and $565,932 in
gains during fiscal 1994. The Company expects to pursue a more aggressive
policy of disposition of oil and gas properties in fiscal 1997. Additionally,
the Company incurred a loss in fiscal 1994 of $173,340 on the disposition of the
40,000 shares of Electric & Gas Technology, Inc. common stock acquired in 1991.
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. The Company's
proposed merger with Alliance Resources Plc, if completed, would be a source of
such equity capital. See "Item 1. Business and Item 2. Properties - Proposed
Merger with Alliance Resources Plc."
Substantially all of the Company's capital expenditures over its recent
history have been made to acquire oil and gas properties. During fiscal 1993,
1994, 1995 and 1996, the Company made a number of significant acquisitions of
oil and gas properties. During the year ended July 31, 1993, the Company
completed two acquisitions of oil and gas properties for a cost of approximately
$3,013,000. During the year ended July 31, 1994, the Company completed one
acquisition of oil and gas properties for a cost of approximately $1,740,000.
During the year ended July 31, 1995 the Company completed the acquisition of
Germany Oil for a cost of approximately $18.1 million. Subsequent to July 31,
1995, the Company participated with Oakland Petroleum Operating Company in the
acquisition of producing oil and gas properties from Sackett Oil Company and The
Prudential Insurance Company of America for a total purchase price of
$5,850,000, less adjustments. The properties are located in Texas, Louisiana
and California. Of the total purchase price, the Company paid $2,885,320 for
the properties located in Texas and Louisiana. The Company provided Oakland a
loan in the principal amount of $2,300,000 to finance Oakland's purchase of the
properties. This acquisition was funded through additional borrowings under the
Company's principal credit facility. The Company's strategy is to continue to
expand its reserve base
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<PAGE>
principally through acquisitions of producing oil and gas properties. As a
result, it is likely that capital expenditures will exceed cash provided by
operating activities in 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 intends to continue its practice of reserve replacement and
growth through the acquisition of producing oil and gas properties, although at
this time it is unable to predict the number and size of such acquisitions, if
any, which will be completed. The Company's ability to finance its oil and gas
acquisitions is determined by its cash flow from operations and available
sources of debt and equity financing. 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 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 Company 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 July 31, 1996, the outstanding balance of the loans was
$22,206,707.
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 July 31, 1996, all advances to
the Company under the Credit Agreement are maintained as LIBO Rate Loans which
currently bear interest at the annual rate of 7.5%.
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 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 under
the Credit Agreement exceeds the collateral value
33
<PAGE>
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 pre-sold 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 324,288 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 1996 by $1,979,956 as a result
of additional payments to the Bank above scheduled principal and interest
payments. At July 31, 1996, the future impact of the hedging agreements are
anticipated to result in additional losses of $3,649,287 based upon the
prevailing commodity prices and interest rate at that time. See "Inflation and
Pricing" and Note 15 to the Company's consolidated financial statements at
Item 8.
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 terms of
Forbearance Agreement, the occurrence of any additional default by the Company
under the Credit Agreement, or the Company's cure of the defaults. The Bank has
indicated its willingness to further amend the Forbearance Agreement to extend
its agreement to forbear any action on the Company's default through February
28, 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 believes
that it is in compliance with the terms of 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,
34
<PAGE>
1996 ("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 term 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.
Proposed Merger With Alliance Resources Plc
As a result of the demands placed upon the Company by the Bank, the
Company's continuing working capital deficit, its deteriorating financial
condition and 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.
Subsequent to year end the Company agreed, subject to shareholder approval and
satisfaction of certain other conditions, to enter into an agreement pursuant to
which the Company will merge with Alliance. 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.
As a result of the refocus of the Company on its core oil and gas
operations and under the terms of the merger agreement with Alliance, the
Company has agreed to dispose of its interests in Wexford Technology, Inc.,
Imperial Petroleum, Inc., LaTex Resources International, Inc. and Phoenix
Metals, Inc. Despite attempts by management to locate potential purchasers for
these business interests, the financial condition of these entities and
additional capital requirements to achieve stable operations and cash flow have
been significant impediments to their sale. As a result, Imperial Petroleum,
Inc., an affiliate of the Company, has agreed to acquire the Company's interest
in these companies for 100,000 shares of the
35
<PAGE>
Company's common stock. Imperial is controlled by the Company's President and
largest stockholder, Jeffrey T. Wilson. Mr. Wilson will contribute to Imperial
the 100,000 shares of the Company's common stock to be used by Imperial in
acquiring the Company's interest in these companies. Prior to the completion of
the sale, the Company will obtain an opinion from an independent investment
banking firm as to the fairness of the transaction to its stockholders. See
"Item 1. Business and Item 2. Properties --Proposed Merger with Alliance
Resources Plc."
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.
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 last two years and the effects of the hedging arrangement described below.
<TABLE>
Oil Oil Gas Gas
(excluding the (including the (excluding the (including the
effects of effects of effects of effects of
Year Ended hedging hedging hedging hedging
July 31 transactions) transactions) transactions) transactions)
- ------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
1996 $ 15.73 $ 15.24 $ 2.03 $ 1.67
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. With respect to the
losses incurred by the Company as a result of this hedging arrangement, see
"Capital Resources and Liquidity -- Financing Arrangements". The following
table provides a summary of the Company's financial contracts.
36
<PAGE>
<TABLE>
<CAPTION>
Gas
- ------------------------------------------------------------
Contract
Percent of Direct Floor Price
Period Production Hedged (per mcf)
- ------------------- ------------------ ------------
<S> <C> <C>
08/01/96-07/31/97 79% $16.50
08/01/97-03/27/98 75% $16.50
<CAPTION>
Oil
- ------------------------------------------------------------
Contract
Percent of Direct Floor Price
Period Production Hedged (per mcf)
- ------------------- ----------------- ------------
<S> <C> <C>
08/01/96-07/31/97 71% $ 1.81
08/01/97-03/27/98 68% $ 1.81
</TABLE>
In addition, the Company has entered into interest rate hedging agreements
designed to protect the Company against fluctuations in interest rates with
respect to its indebtedness to the Bank under the Credit Agreement.
Item 8. Financial Statements and Supplementary Data.
Audited Financial Statements of LaTex Resources, Inc.
<TABLE>
Page
----
<S> <C>
Independent Auditor's Report............................................ F-1
Consolidated Balance Sheets as of July 31, 1996 and 1995................ F-3
Consolidated Statements of Operations for the years ended
July 31, 1996, 1995 and 1994;....................................... F-4
Consolidated Statements of Stockholders' Equity for the years
ended July 31, 1996, 1995 and 1994;................................. F-5
Consolidated Statements of Cash Flows for the years ended July 31,
1996, 1995
and 1994;........................................................... F-6
Notes to Consolidated Financial Statements.............................. F-8
</TABLE>
37
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
Directors and Executive Officers
The following table sets forth certain information regarding the directors,
executive officers and key employees of the Company.
Name Age Position
---- --- --------
Jeffrey T. Wilson 43 Director, Chairman of the Board, President,
and Chief Executive Officer
John L. Cox 46 Director, Vice President and Chief
Financial Officer
Malcolm W. Henley 45 Director and Vice President of Marketing
John R. Martinson 61 Director
Robert L. Hull 44 Vice President of Operations
John W. Heinsius 46 Vice President of Exploration
Stacey D. Smethers 28 Secretary
Jeffrey T. Wilson has been a Director, Chairman of the Board and Chief
-----------------
Executive Officer of the Company since December 1991. Mr. Wilson was a Director
and Executive Vice President of Vintage Petroleum, Inc. ("Vintage") from May
1990 to July 1991. He was Vice President--Production of Vintage from January
1984 to May 1990 and Manager--Acquisitions of Vintage from May 1983 to January
1984. From August 1980 to May 1983, Mr. Wilson was an engineer with Netherland,
Sewell & Associates, Inc, a petroleum engineering consulting firm, where his
assignments included annual reserve appraisals, reserve acquisition appraisals
and field studies. From May 1975 to August 1980, he gained experience in the
oil and gas industry with Exxon Company U.S.A. in various engineering and
supervisory capacities in the Louisiana and South Texas areas. Mr. Wilson holds
a Bachelor of Science Degree in Mechanical Engineering from the Rose-Hulman
Institute of Technology.
John L. Cox has served as a Director of the Company since November 1995.
-----------
Mr. Cox became Vice President of Finance and Chief Financial Officer of the
Company in January 1996. From February 1992 to December 1995, Mr. Cox held the
position of Controller for the Company. Mr. Cox held the positions of
Controller of Panada Exploration and Assistant Controller of Panda Resources
from November 1990 to January 1993. Prior to that time, he held various
managerial positions with Reading & Bates Petroleum Corporation. Mr. Cox holds
a Bachelor of Science Degree in Accounting from Oklahoma City University.
Malcolm W. Henley has been Vice President of Marketing of the Company since
-----------------
June 1992. Mr. Henley was elected to the Company's Board of Directors in
September 1993. Mr. Henley has been Chairman of the Board, President, Chief
Executive and Chief Operating officer of the Company's wholly-owned subsidiary
ENPRO, Inc. since August, 1984. From 1981 to 1984, Mr. Henley served as Manager
of Operations for a natural gas pipeline company subsidiary of Champlin
Petroleum (now Union Pacific Resources). From 1976 to 1979 he served as Vice
President and General Manager of Utilities Pipeline Company and between 1975 and
1976 held various positions with Continental Oil Company. Mr. Henley
38
<PAGE>
has a Bachelor of Arts Degree in Business Administration from Oklahoma State
University and an Associates Degree in Petroleum Land Technology from Tulsa
Junior College.
John R. Martinson has been a Director of the Company since May 4, 1995.
-----------------
From 1988 to 1996, Mr. Martinson was a principal in the investment banking firm
of Wood Roberts, Inc. where he engaged primarily in initiating and advising on
merger transactions and arranging financing in the petroleum industry. In
January 1996 Wood Roberts, Inc. joined J L Ogden & Co. to form Wood Roberts,
LLC. in order to pursue, in addition to its investment banking activities, fund
management advisory activities. In 1995 Mr. Martinson was a principal in the
merchant banking firm Martinson, O'Dell & Ogden, L.L.C., specializing in
corporate and project finance. From 1973 to 1988 Mr. Martinson was an
independent oil operator and investor. During this period he founded and managed
companies involved in oil and gas exploration and development, crude oil and
products trading, refining and marketing, natural gas gathering and processing,
and electric utility load management. Prior to that Mr. Martinson spent seven
years in the international division of Mobil Corporation, three years with
Kidder Peabody & Co. and four years with Oppenheimer & Co. Mr. Martinson earned
his Bachelor of Science in Engineering Degree at Princeton University and holds
a Masters in Business Administration Degree (with honors) from Northwestern
University.
Robert L. Hull has been Vice President of Operations of the Company since
--------------
January 1992. Prior to joining the Company, Mr. Hull had been employed for
seven years with Vintage Petroleum, Inc. in the position of Senior Operations
Engineer. Prior to that time, Mr. Hull had been employed by other oil related
companies, including Dowell-Schlumberger, Equitable Gas Co., Ladd Petroleum,
Unit Corp. and Mapco. Mr. Hull holds a Bachelor of Science Degree in Geology
from the University of Pittsburgh.
John W. Heinsius has been Vice President of Exploration since February
----------------
1993. From October 1989 to February 1993, Mr. Heinsius held the positions of
Vice President of Exploration and Manager of Gas supply for Panda Resources,
Inc. Mr. Heinsius held the positions of Director of Exploration and Manager of
Gas Marketing for Transok, Inc. from 1985 to October 1989. Prior to this time,
he held the titles of Exploration Manager and Vice President of Exploration for
Buttonwood Petroleum, Chief Geologist for Indian Wells Oil Co., Staff Geologist
for Ladd Petroleum Corp. and Exploration Geologist for Texaco, Inc. Mr.
Heinsius holds a Bachelor of Arts Degree in Geology from Hope College and a
Master of Science Degree in Geology from Western Michigan University.
Stacey D. Smethers has been Secretary of the Company since November 15,
------------------
1995. Ms. Smethers has been Executive Assistant to the President of ENPRO, Inc.
and Marketing Representative for the Company from August 1992 to present. Ms.
Smethers has more than seven years of varied experience in the oil and gas
industry. Her areas of concentration include marketing, administration, and
petroleum land management. Her prior titles include Executive Assistant,
Operations Analyst, Credit Analyst, and Secretary.
Each director is elected for a period of one year at the Company's annual
meeting of shareholders and serves until his successor is duly elected by the
shareholders. Directors who are not officers of the Company receive no cash
compensation for their services. Officers are elected by and serve at the will
of the Board of Directors. There are no family relationships between any
director, officer or person nominated or chosen to become a director or officer
and any other such person.
The Board of Directors has established a Compensation Committee whose
current members are Jeffrey T. Wilson and John R. Martinson. The Compensation
Committee reviews the Company's executive compensation policies and practices
and administers the Company's 1993 Incentive Stock Plan. See "Compensation
Committee Interlocks and Insider Participation." The Board of Directors of the
Company has not established an audit or any other committee. Directors of the
Company do not receive fees for their services as directors.
Section 16(a) Reporting Deficiencies
Section 16(a) of the Securities Exchange Act of 1934 ("Exchange Act")
requires the Company's directors and officers, and persons who own more than
10% of a registered class of the Company's equity securities, to file initial
reports of ownership on Form 3 and reports of changes in ownership on Forms 4
and 5 with the Securities and Exchange Commission (the "SEC") and the National
Association of Securities Dealers ("NASD"). Such persons are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms they
file.
Based upon a review of Form 3, 4 and 5 filings made by the Company's
officers and directors during the fiscal year ended July 31, 1996 under Section
16(a) of the Exchange Act, the Company believes that: (i) Jeffrey T. Wilson,
Chief Executive Officer, Chairman of the Board, President, and a Director of the
39
<PAGE>
Company, failed to timely file one statement of change in beneficial ownership
on Form 4, respecting one transaction involving his acquisition of options to
purchase common stock; (ii) John L. Cox, Chief Financial Officer, Vice
President, and a Director of the Company, failed to timely file one statement of
change in beneficial ownership on Form 4, respecting one transaction involving
his acquisition of options to purchase common stock; (iii) Malcolm W. Henley,
Vice President of Marketing, and a Director of the Company, failed to timely
file one statement of change in beneficial ownership on Form 4, respecting one
transaction involving his acquisition of options to purchase common stock; (iv)
Philip J. Wade, a Director of the Company until his resignation on October 8,
1996, failed to timely file two statements of change in beneficial ownership on
Form 4, respecting 12 transactions involving the disposition of common stock of
the Company; (v) Robert L. Hull, Vice President of Operations, failed to timely
file one statement of change in beneficial ownership on Form 4, respecting one
transaction involving his acquisition of options to purchase common stock; (vi)
John W. Heinsius, Vice President of Exploration, failed to timely file one
statement of change in beneficial ownership on Form 4, respecting one
transaction involving his acquisition of options to purchase common stock; (vii)
John R. Martinson, a Director of the Company, failed to timely file one
statement of change in beneficial ownership on Form 4, respecting one
transaction involving his acquisition of warrants to purchase common stock;
(viii) Stacey D. Smethers, Secretary of the Company, failed to timely file one
statement of change in beneficial ownership on Form 4, respecting one
transaction involving her acquisition of options to purchase common stock. All
of the referenced delinquent filings have now been made. Except as set forth
above, the Company believes that its current officers and directors have made
all requisite filings under Section 16(a) of the '34 Act on a timely basis.
Item 11. Executive Compensation.
The table below sets forth, in summary form, (1) the compensation paid, for
the years shown, to Jeffrey T. Wilson, the Company's Chairman of the Board,
President and Chief Executive Officer, and the four other highest-paid executive
officers of the Company serving as executive officers on July 31, 1996 (the
"Named Officers"); (2) the stock options and stock appreciation rights granted
to the Named Officers for the years shown; and (3) long-term payouts and other
compensation to the Named Officers for the years shown.
40
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation
----------------------------------------
Annual Compensation Awards Payouts
--------------------------------------------------------------------------------
Restricted Securities
Other Annual Stock Underlying LTIP All Other
Name and Principal Salary Bonus Compensation Awards Options/ Payouts Compensation
Position Year ($) ($) ($)(1) ($) SARs (#) ($) ($)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jeffrey T. Wilson, 1996 100,800 --- --- --- 200,000(2) --- ---
Chairman, President 1995 97,200 200 --- --- 150,000(3) --- ---
and Chief Executive 1994 96,000 --- --- --- --- --- ---
Officer
John L. Cox, 1996 74,200 --- --- --- 150,000(2) --- ---
Vice President and 1995 55,500 200 --- --- 50,000(3) --- ---
Chief Financial Officer 1994 54,000 500 --- --- 25,000(4) --- ---
Malcolm W. Henley, 1996 91,000 --- --- --- 150,000(2) --- ---
Vice President of 1995 85,050 200 --- --- 50,000(3) --- ---
Marketing 1994 84,000 500 --- --- 100,000(5) --- ---
John W. Heinsius, 1996 90,400 --- --- --- 150,000(2) --- ---
Vice President of 1995 83,100 200 --- --- 50,000(3) --- ---
Exploration 1994 82,000 500 --- --- 50,000(4) --- ---
Robert L. Hull, 1996 90,400 --- --- --- 150,000(2) --- ---
Vice President of 1995 83,100 200 --- --- 50,000(3) --- ---
Operations 1994 82,000 500 --- --- 125,000(6) --- ---
Dewitt C. Shreve, 1996 9,300 --- --- --- --- --- ---
Executive Vice President 1995 72,900 --- --- --- 50,000(3)(7) --- ---
1994 72,000 --- --- --- 100,000(8)(7) --- ---
</TABLE>
- ------------------------------
(1) None of the executive officers listed received perquisites or other
personal benefits that exceeded the lesser of $50,000 or 10 percent of the
salary and bonus for such officers.
(2) Reflects options issued pursuant to the Company's 1993 Incentive Stock Plan
exercisable at any time until December 5, 2000, at an exercise price of
$0.4375 per share, the fair market value of the Company's common stock at
the time of grant. By agreement between the holder of the referenced
options and the Company, effective October 21, 1996, the referenced options
were terminated. See "Restricted Stock Grants".
(3) Reflects options issued pursuant to the Company's 1993 Incentive Stock Plan
exercisable at any time until August 1, 2000 at an exercise price of $0.47
per share, the fair market value of the Company's common stock on the date
of grant. By agreement between the holder of the referenced options and
the Company, effective October 21, 1996, the referenced options were
terminated. See "Restricted Stock Grants".
(4) Reflects options issued pursuant to the Company's 1993 Incentive Stock Plan
exercisable at any time until May 25, 1999 at an exercise price of $0.875
per share, the fair market value of the Company's common stock on the date
of grant. By agreement between the holder of the referenced options and
the Company, effective October 21, 1996, the referenced options were
terminated. See "Restricted Stock Grants".
(5) Reflects (a) options issued pursuant to the Company's 1993 Incentive Stock
Plan to purchase 50,000 shares of common stock exercisable at any time
until May 25, 1999 at an exercise price of $0.875 per share, the fair
market value of the Company's common stock on the date of grant, and (b)
options issued pursuant to the Company's 1993 Incentive Stock Plan to
purchase 50,000 shares of common stock, issued in replacement of 50,000
non-qualified options issued to Mr. Henley in 1992, exercisable at any time
until May 25, 1999 at an exercise price of $0.875 per share, the fair
41
<PAGE>
market value of the Company's common stock on the date of grant. By
agreement between Mr. Henley and the Company, effective October 21, 1996,
the referenced options were terminated. See "Restricted Stock Grants".
(6) Reflects (a) options issued pursuant to the Company's 1993 Incentive Stock
Plan to purchase 50,000 shares of common stock exercisable at any time
until May 25, 1999 at an exercise price of $0.875 per share, the fair
market value of the Company's common stock on the date of grant, and (b)
options issued pursuant to the Company's 1993 Incentive Stock Plan to
purchase 75,000 shares of common stock, issued in replacement of 75,000
non-qualified options issued to Mr. Hull in 1992, exercisable at any time
until May 25, 1999 at an exercise price of $0.875 per share, the fair
market value of the Company's common stock on the date of grant. By
agreement between Mr. Hull and the Company, effective October 21, 1996, the
referenced options were terminated. See "Restricted Stock Grants".
(7) Mr. Shreve resigned his positions as Executive Vice President and a
Director of the Company on January 31, 1996, and his options lapsed at that
time.
(8) Reflects (a) options issued pursuant to the Company's 1993 Incentive Stock
Plan to purchase 50,000 shares of common stock exercisable at any time
until May 25, 1999 at an exercise price of $0.875 per share, the fair
market value of the Company's common stock on the date of grant, and (b)
options issued pursuant to the Company's 1993 Incentive Stock Plan to
purchase 50,000 shares of common stock, issued in replacement of 50,000
non-qualified options issued to Mr. Shreve in 1992, exercisable at any time
until May 25, 1999 at an exercise price of $0.875 per share, the fair
market value of the Company's common stock on the date of grant.
Stock Options
The table below sets forth, in summary form, with respect to the Named
Officers, (i) the name of such officer receiving grants of stock options from
the Company during the fiscal year ended July 31, 1996; (ii) the number of
securities underlying the options; (iii) the percent such grant represents of
the total options granted to employees during the fiscal year ended July 31,
1996; (iv) the per-share exercise price of the options granted; (v) the
expiration date of the options; and(vi) the potential realizable value at
assumed annual rates of stock price appreciation.
Option Grants in Fiscal Year Ended July 31, 1996(1)
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Rates of Stock Price
Appreciation for
Individual Grants Option Term
- ----------------------------------------------------------------------------------- ----------------------
Percent of
Number of Total
Securities Options/SARS
Underlying Granted to Exercise or
Options/SARS Employees in Base Price Expiration
Name Granted (#) Fiscal Year ($/Share) Date 5% ($) 10% ($)
- ---------------------- ------------ ----------------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey T. Wilson 200,000 20.77% $0.4375 12/05/2000 $111,676 $140,920
John L. Cox 150,000 15.58% $0.4375 12/05/2000 $ 83,756 $105,690
Malcolm W. Henley 150,000 15.58% $0.4375 12/05/2000 $ 83,756 $105,690
John W. Heinsius 150,000 15.58% $0.4375 12/05/2000 $ 83,756 $105,690
Robert L. Hull 150,000 15.58% $0.4375 12/05/2000 $ 83,756 $105,690
Dewitt C. Shreve(2) --- --- --- --- --- ---
- -----------------------------------
</TABLE>
(1) By agreement between each of the individuals, other than Dewitt C. Shreve,
set forth in the table and the Company, effective October 21, 1996 the
referenced options were terminated. See
42
<PAGE>
"Restricted Stock Grants."
(2) Mr. Shreve resigned his positions as Executive Vice President and Director
of the Company on January 31, 1996 and his options lapsed at that time.
During the year ended July 31, 1996 (i) no restricted stock awards were
granted, (ii) other than as set forth above, no stock options or stock
appreciation rights were granted, (iii) no options or stock appreciation rights
were exercised, and (iv) no awards under any long-term incentive plan were made
to any of the Named Officers.
The following table sets forth information relating to the exercises of
stock options by each of the Company's Named Officers during the year ended July
31, 1996 and the value of unexercised stock options as of July 31, 1996.
Aggregated Option Exercises in the Fiscal
Year Ended July 31, 1996 and
July 31, 1996 Option Values(1)
<TABLE>
<CAPTION>
Option Exercises
During Year
Ended July 31, 1996 Number of Securities
---------------------
Number of Underlying Unexercised Value of Unexercised
Shares Options at In-the-Money Options
Acquired Value July 31, 1996 at July 31, 1996
-------------------------- --------------------------
Name on Exercise Realized Unexercisable Exercisable Unexercisable Exercisable
---- ----------- -------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey T. Wilson -- $ -- --- 350,000 $ --- $ ---
John L. Cox -- $ -- --- 225,000 --- ---
Malcolm W. Henley -- -- --- 300,000 --- ---
John W. Heinsius -- -- --- 250,000 --- --
Robert L. Hull -- -- --- 325,000 --- --
Dewitt C. Shreve (2) -- -- --- --- --- --
- ---------------------------------
</TABLE>
(1) By agreement between each of the individuals, other than Dewitt C. Shreve,
set forth in the table and the Company, effective October 21, 1996 the
referenced options were terminated. See "Restricted Stock Grants."
(2) Mr. Shreve resigned his positions as Executive Vice President and Director
of the Company on January 31, 1996 and his options to purchase 150,000
shares lapsed at that time.
The following table sets forth information relating to the repricing of
stock options held by any executive officer.
43
<PAGE>
Option Repricing Table
<TABLE>
<CAPTION>
Market
Number of Price
Securities of Exercise Length of Original
Underlying Stock Price at New Option Term
Date of Repriced at Time Time of Exercise Remaining at Date
Name and Position Repricing Options of Repricing Repricing Price of Repricing
- ----------------- --------- ---------- ------------ --------- -------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Malcolm W. Henley, May 24, 50,000 $0.91 $2.47 $.875 3 years, 7 months
Vice President of 1994
Marketing (1)
Robert L. Hull, May 24, 25,000 $0.91 $2.47 $.875 3 years, 7 months
Vice President 1994 50,000 $0.91 $ .85 $.875 1 year, 8 months
of Operations (2)
Dewitt C. Shreve, May 24, 50,000 $0.91 $2.47 $.875 3 years, 7 months
Executive Vice 1994
President (3)
- ---------------------------------
</TABLE>
(1) Reflects options issued pursuant to the Company's 1993 Incentive Stock Plan
to purchase 50,000 shares of common stock, issued in replacement of 50,000
non-qualified options issued to Mr. Henley in 1992, exercisable at any time
until May 25, 1999 at an exercise price of $0.875 per share, the fair
market value of the Company's common stock on the date of grant. By
agreement between Mr. Henley and the Company, effective October 21, 1996
the referenced options were terminated. See "Restated Stock Grants".
(2) Reflects options issued pursuant to the Company's 1993 Incentive Stock Plan
to purchase 75,000 shares of common stock, issued in replacement of 75,000
non-qualified options issued to Mr. Hull in 1992, exercisable at any time
until May 25, 1999 at an exercise price of $0.875 per share, the fair
market value of the Company's common stock on the date of grant. By
agreement between the Mr. Hull and the Company, effective October 21, 1996
the referenced options were terminated. See "Restated Stock Grants".
(3) Reflects options issued pursuant to the Company's 1993 Incentive Stock Plan
to purchase 50,000 shares of common stock, issued in replacement of 50,000
non-qualified options issued to Mr. Shreve in 1992, exercisable at any time
until May 25, 1999 at an exercise price of $0.875 per share, the fair
market value of the Company's common stock on the date of grant. Mr. Shreve
resigned his positions as Executive Vice President and Director of the
Company on January 31, 1996 and his options lapsed at that time.
Incentive Stock Plan
The Board of Directors adopted the LaTex Resources, Inc. 1993 Incentive
Stock Plan (the "Plan") effective December 8, 1993 and the Shareholders approved
the Plan at the Company's Annual Meeting on June 2, 1994. 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, consisting of not less than three members of the
Board, who are a "disinterested persons" within the meaning of Securities and
Exchange Commission ("SEC") Rule 16b-3, as in effect prior to August 1996, to
address decisions regarding participation by directors and executive officers.
The aggregate number of shares of the Company's common stock issuable under
the Plan is 2,000,000. The Plan authorizes the Committee to grant to key
employees options ("Options") to purchase the Company's common stock which may
be in the form of incentive stock options ("ISOs"), or in the form of non-
statutory options ("Non-Statutory Options"). Additionally, the Committee may
grant stock
44
<PAGE>
appreciation rights ("SARs") in connection with such Options. The term of each
Option shall be for such period as the Committee shall determine but no longer
than ten years from the date of grant or five years to an individual who is a
10% shareholder 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,
provided that in the case of an ISO, 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% shareholder, 110% of the fair market value)
of one share of common stock.
The Plan additionally 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 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 where deemed appropriate.
Through July 31, 1996, the Company has granted ISOs under the Plan to
Messrs. Wilson, Cox, Henley, Heinsius, and Hull as described in the Summary
Compensation Table and the Option Grants Table above, for a total of 1,450,000
shares (excluding options for 150,000 shares granted to Mr. Shreve which lapsed
upon his resignation as an officer and Director of the Company on January 31,
1996), as well ISOs under the Plan to non-executive officer employees for a
total of 240,000 shares. By agreement between the holders of all outstanding
ISOs and the Company, effective October 21, 1996 all outstanding ISOs were
terminated. See "Restricted Stock Grants."
Restricted Stock Grants
Effective October 21, 1996, each holder of options granted under the
Company's 1993 Incentive Stock Plan agreed to terminate all options held and
received grants of restricted common stock of the Company ("Restricted Stock").
The following table sets forth options cancelled and shares of Restricted Stock
issued with respect to each of the Company's Named Officers and other employees
of the Company as a group.
<TABLE>
<CAPTION>
Shares of
Restricted Stock
Name of Option Holder Options Cancelled Granted
--------------------- ----------------- ----------------
<S> <C> <C>
Jeffrey T. Wilson 350,000 300,000
John Cox 225,000 225,000
Malcolm Henley 300,000 300,000
John Heinsius 250,000 250,000
Robert Hull 325,000 325,000
Dewitt Shreve(1) --- ---
Other Employees as a Group 240,000 290,000
--------- ---------
Total 1,690,000 1,690,000
========= =========
- ----------------
</TABLE>
(1) Mr. Shreve resigned his positions as Executive Vice President and Director
of the Company on January 31, 1996, and his options lapsed at that time.
The terms of the Restricted Stock provide that a holder may not sell,
transfer, or otherwise dispose of any shares of Restricted Stock as long as the
Company has the right to a forfeiture of the Restricted Stock. 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. For the purpose of the Restricted
Stock, a "Change in Control" will be deemed to have occurred with respect to the
Company if: (a) any person becomes the beneficial owner, directly or
indirectly, of securities of the Company representing 50% or more of the
combined voting power of the Company's then outstanding securities; (b)
individuals who constitute the Company's Board of Directors on the date of grant
of the Restricted Stock cease for any
45
<PAGE>
reason to constitute at least a majority thereof; (c) there is a merger or
consolidation of the Company in which the Company does not survive as an
independent company; or (d) the business of the Company is disposed of by the
Company pursuant to a partial or complete liquidation of the Company, a sale of
assets (including stock of a subsidiary) of the Company, or otherwise.
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended July 31, 1996, Jeffrey T. Wilson, John R.
Martinson and Dennis G. Strauch served as members of the Compensation Committee
of the Board of Directors of the Company. Mr. Strauch resigned his position as
Director of the Company and member of the Compensation Committee on June 24,
1996. Mr. Wilson was, during the fiscal year, Chairman of the Board, President
and Chief Executive Officer of the Company. With respect to certain
relationships between the Company and Messrs. Wilson and Martinson, see "Item
13. Certain Relationships and Related Transactions."
During the last completed fiscal year, (i) no executive officer of the
Company served as a member of the Compensation Committee (or other board
committee performing equivalent functions or, in the absence of any such
committee, the entire board of directors) of another entity, one of whose
executive officers served on the Compensation Committee of the Company; (ii) no
executive officer of the Company served as a director of another entity, one of
who executive officers served on the Compensation Committee of the Company; and
(iii) no executive officer of the Company served as a member of the compensation
committee (or other board committee performing equivalent functions or, in the
absence of any such committee, the entire board of directors) of another entity,
one of whose executive officers served as a director of the Company.
Employment Agreements
The Company has no employment agreements with any of its officers or
employees. All officers of the Company devote substantially all their entire
business time and energies to the Company.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
As of October 25, 1996, the Company had 19,805,495 issued and outstanding
shares of common stock. The following table sets forth, as of October 25, 1996,
the number and percentage of shares of common stock of the Company owned
beneficially by (i) each director of the Company, (ii) each Named Officer of the
Company named in the Summary Compensation Table in Item 11 above, (iii) all
directors and executive officers of the Company as a group, and (iv) each person
known to the Company to own of record or beneficially more than 5% of the
Company's common stock. Except as otherwise indicated, the persons named in the
table have sole voting and investment power with respect to the shares
indicated. As of October 25, 1996, the Company had 502 holders of common stock
of record.
46
<PAGE>
<TABLE>
<CAPTION>
Name of Number of Shares
Beneficial Owner (1) Beneficially Owned Percent of Class (1)
-------------------- ------------------ --------------------
<S> <C> <C>
Jeffrey T. Wilson (2)(3) 4,135,000 20.9%
A. Dean Fuller 1,058,000 5.3%
Dewitt C. Shreve (4) 41,862 *
Malcolm W. Henley (2)(5) 510,000 2.6%
John R. Martinson (6) 536,000 2.6%
John W. Heinsius (2)(5) 271,500 1.4%
Robert L. Hull (2)(5) 325,000 1.6%
John L. Cox (2)(5) 230,500 1.2%
ENRON Reserve Acquisition
Corp. 3,296,173 14.3%
All Executive Officers and 5,597,000 28.3%
Directors as a group
(7 persons) (1)(8)
</TABLE>
- ------------------------------
* less than one percent.
(1) Based upon 19,805,495 issued and outstanding shares of common stock at
October 25, 1996. Shares of common stock which an individual has the right
to acquire within 60 days pursuant to the exercise of options, warrants, or
other convertible securities are deemed to be outstanding for the purpose
of computing the percentage ownership of such individual, but are not
deemed to be outstanding for the purpose of computing the percentage
ownership of any other person or group shown in the table.
(2) The mailing address of Messrs. Wilson, Henley, Heinsius, Hull and Cox is
4200 East Skelly Drive, Suite 1000, Tulsa, Oklahoma 74135.
(3) Includes 300,000 shares of Restricted Stock (See "Item 11. Executive
Compensation -- Restricted Stock Grants".) and excludes 300,000 shares held
by the Old National Bank in Evansville, Indiana, Trustee of the Jeffrey T.
and Annalee Wilson Irrevocable Family Trust for the benefit of the Wilson
children.
(4) The mailing address of Mr. Shreve is 2909 Cole Avenue, Suite 100, Dallas,
Texas 75204. Mr. Shreve resigned his positions as Executive Vice President
and a Director of the Company on January 31, 1996.
(5) Includes: (a) with respect to Mr. Henley, 300,000 shares of Restricted
Stock; (b) with respect to Mr. Heinsius, 250,000 shares of Restricted
Stock; (c) with respect to Mr. Hull, 325,000 shares of Restricted Stock;
and (d) with respect to Mr. Cox 225,000 shares of Restricted Stock. See
"Item 11. Executive Compensation -- Restricted Stock Grants".
(6) Includes presently exercisable warrants to purchase 436,000 shares held by
Wood Roberts, Inc., a corporation under the control of Mr. Martinson. The
mailing address of Mr. Martinson is Suite 3150, 1210 Louisiana Street,
Houston, Texas, 77007.
(7) Incudes 3,296,173 shares issuable upon conversion of 494,426 presently
convertible shares of the Company's Series B Senior Convertible Preferred
Stock.
(8) Excludes shares owned by Dewitt C. Shreve who resigned his positions as an
officer and Director of the Company on January 31, 1996.
With respect to the change in control of the Company which would result
upon completion of the proposed merger of the Company with Alliance Resources
Plc, see "Item 1. Business and Item 2. Properties -- Proposed Merger with
Alliance Resources Plc."
47
<PAGE>
Item 13. Certain Relationships and Related Transactions.
In connection with the sale by the Company of Panda Resources, Inc. in July
1993, the Company entered into separate agreements dated September 22, 1993 with
Philip J. Wade and Dean Fuller pursuant to which the Company and Messrs. Wade
and Fuller agreed to terminate their Non-Competition Agreements in exchange for
payment by the Company, on or before November 21, 1993, of $25,000 each to
Messrs. Wade and Fuller. In connection with the termination of the Non-
Competition Agreements, Jeffrey T. Wilson, Chairman, President and Chief
Executive Officer of the Company, assumed the indebtedness of Messrs. Wade and
Fuller to the Company in the principal amounts of $162,788 and $176,863,
respectively. At July 31, 1995, Mr. Wilson owed the Company a total of $339,651
pursuant to his assumption of this indebtedness. The Company has forgiven this
and additional indebtedness of Mr. Wilson to the Company as discussed below.
As of July 31, 1996 and subsequent to July 31, 1996, the Company agreed to
forgive the indebtedness of various officers, directors and employees to the
Company at July 31, 1996 as follows:
<TABLE>
<CAPTION>
Amount of Amount of
Indebtedness Indebtedness
Forgiven as of Forgiven Subsequent
July 31, 1996 to July 31, 1996
-------------- -------------------
<S> <C> <C>
Malcolm W. Henley $ 58,138 $ 37,655
Director and Vice President
of Marketing
Robert L. Hull $ --- $ 25,032
Vice President of Operations
Jeffrey T. Wilson $ 180,000 $321,483
Chairman of the Board and
Chief Executive Officer
Other Employees $ --- $ 2,550
---------- --------
Total $ 238,138 $386,720
========== ========
</TABLE>
A portion of the Company's oil and gas production is sold to its wholly-
owned subsidiary, ENPRO, under short-term contracts. The Company believes that
the terms of such contracts are fair and reasonable. The Company receives no
less from the sale of production to ENPRO than it would receive from sales to
unrelated third parties.
Since January 1993 the Company has leased a condominium located in Tulsa,
Oklahoma owned by Jeffrey T. Wilson, Chairman and Chief Executive Officer of the
Company. Under the terms of the oral lease arrangement, the Company pays Mr.
Wilson approximately $1,100 per month. The condominium is used by the Company
to house its out of town employees and guests. At July 31, 1996, the Company
owed Mr. Wilson approximately $8,000 for unpaid rent.
With respect to transactions between the Company and its affiliates,
Wexford Technology, Inc., and Imperial Petroleum, Inc., see "Item 1. Business
and Item 2. Properties - Other Business."
In connection with the proposed merger of the Company and Alliance
Resources Plc, the Company has entered into a Purchase Agreement with Imperial
Petroleum, Inc. ("Imperial") dated September 30, 1996 pursuant to which the
Company has agreed to sell to Imperial its interests in Imperial, Wexford
Technology, Inc., LaTex Resources International, Inc. and Phoenix Metals, Inc.
for 100,000 shares of the Company's common stock. Effective July 31, 1996 the
Company has written off its investments in Imperial, Wexford and LaTex Resources
International in the total amount of $5,139,642. Effective July 31, 1994 the
Company wrote off its investment in Phoenix Metals in the total amount of
$222,918. Imperial is controlled by Jeffrey T. Wilson, Chairman, President and
Chief Executive Officer of the Company. Mr. Wilson will contribute to Imperial
the 100,000 shares of the Company's common stock to be used by
48
<PAGE>
Imperial in acquiring the Company's interest in these companies. See "Item 1.
Business and Item 2. Properties - Exploration and Development" and "Other
Business" and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Proposed Merger with Alliance Resources."
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.
WRI assisted the Company in obtaining its credit facility with Bank of America.
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 $0.75 per share, of which WRI
has exercised and purchased 100,000 shares. 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.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Financial Statements (included at Item 8. Financial Statements and
Supplemental Data):
Audited Financial Statements of LaTex Resources, Inc.
Independent Auditor's Report;
Consolidated Balance Sheets as of July 31, 1996 and 1995;
Consolidated Statements of Operations for the years ended
July 31, 1996, 1995, and 1994;
Consolidated Statements of Stockholders' Equity for the years
ended July 31, 1996, 1995 and 1994;
Consolidated Statements of Cash Flows for the years ended
July 31, 1996,
1995 and 1994; and
Notes to Consolidated Financial Statements.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company with the Securities and
Exchange Commission during the fourth quarter of the Company's fiscal year ended
July 31, 1996.
(c) Exhibits.
Exhibit
Number Description Page
- ------- ----------- ----
2.1 Agreement and Plan of Merger dated February 10, 1993,
among Panda Resources, Inc., LRI Acquisition Corp., and
the Registrant. (10)
2.2 Agreement and Plan of Merger dated March 31, 1995, among
Germany Oil Company, LRI Acquisition, Inc., and the
Registrant. (16)
2.3 Purchase and Sale Agreement dated March 30, 1995, between
ENRON Reserve Acquisition Corp., ENRON Capital & Trade
Resources Corp., LaTex/GOC Acquisition, Inc., and
the Registrant. (17)
49
<PAGE>
Exhibit
Number Description Page
- ------ ----------- ----
3.1 Certificate of Incorporation of the Registrant. (1)
3.2 Bylaws of the Registrant. (2)
4.1 Form of common stock certificate of the Registrant (filed as
Exhibit 4.1 to the Registrant's Registration Statement on Form
S-1, Registration No. 33-49452 (the "Registration Statement")).
4.2 Form of common stock Purchase Warren of the Registrant (filed as
Exhibit 4.2 to the Registration Statement").
4.3 Form of Warrant Agreement (filed as Exhibit 4.3 to the
Registration Statement).
4.4 Form of Underwriters' Warrant (filed as Exhibit 4.4 to the
Registration Statement).
4.5 Certificate of Designation, Voting Powers and Rights of Series A
Convertible Preferred Stock of the Registrant. (18)
4.6 Certificate of Designation, Voting Powers and Rights of Series B
Senior Convertible Preferred Stock of the Registrant. (9)
9. Voting Trust Agreement. Not applicable.
10.1 Limited Partnership Agreement by and between LaTex Petroleum
Corporation, Mid-Continent Energy, Inc., and Panada Exploration,
Inc., dated October 26, 1990 (filed as Exhibit 10.1 to the
Registration Statement).
10.2 Letter Agreement by and between Elite Enterprises, Inc.,
Mid-Continent Energy, Inc., and Panada Exploration dated
December 12, 1990 (filed as Exhibit 10.2 to the Registration
Statement).
10.3 Loan Agreement for the principal amount of $100,000 by and
between LaTex Petroleum Corporation and First Texas Bank dated
January 23, 1991 (filed as Exhibit 10.3 to the Registration
Statement).
10.4 Lease Agreement by and between Sable Investment Corporation and
2800 East Skelly Drive, an Oklahoma partnership, dated March 20,
1991 (filed as Exhibit 10.4 to the Registration Statement).
10.5 Lease Agreement by and between Elite Enterprises, Inc. and 2800
East Skelly Drive, an Oklahoma partnership, dated March 20, 1991
(filed as Exhibit 10.5 to the Registration Statement).
10.6 Asset Sale Agreement for sale of oil and gas properties by and
between Latex Petroleum Corporation, Vintage Petroleum, Inc. and
American Exploration Company dated March 11, 1991 (filed as
Exhibit 10.6 to the Registration Statement).
10.7 General Partnership Agreement by and between Elite Enterprises,
Inc. and Panada Exploration, Inc., dated June 7, 1991 (filed as
Exhibit 10.7 to the Registration Statement).
10.8 Purchase Agreement for sale of oil and gas properties by and
between Latex Petroleum Corporation and Presidio Exploration,
Inc., dated September 25, 1991 (filed as Exhibit 10.8 to the
Registration Statement).
10.9 Promissory Note in the principal sum of $50,150 by and between
ENPRO, Inc., and Elite Enterprises, Inc., dated September 27,
1991 (filed as Exhibit 10.9 to the Registration Statement).
50
<PAGE>
Exhibit
Number Description Page
- ------ ----------- ----
10.10 Lease Agreement by and between LBR Associates, an Indiana
limited partnership, and LaTex Petroleum Corporation dated
October 3, 1991 (filed as Exhibit 10.10 to the Registration
Statement).
10.11 Purchase Agreement for sale of oil and gas properties by and
between Latex Petroleum Corporation and Chevron U.S.A., Inc.,
dated October 23, 1991 (filed as Exhibit 10.11 to the
Registration Statement).
10.12 Assignment and Substitution Agreement by and between LaTex
Petroleum Corporation, Chevron U.S.A. and Fig Equity Exchange,
Inc., dated November 13, 1991 (exhibits omitted) (filed as
Exhibit 10.12 to the Registration Statement).
10.13 Participation Agreement by and between Geodyne Tunisia, Ltd.,
Panada Exploration, Inc., Latex Petroleum Corporation and
Concord International, Corp. dated November 21, 1991 (filed as
Exhibit 10.13 to the Registration Statement).
10.14 Purchase and Sale Agreement for sale of oil and gas properties
by and between Latex Petroleum Corporation and Sun Operating
Limited Partnership dated November 25, 1991 (filed as Exhibit
10.14 to the Registration Statement).
10.15 Purchase Agreement for sale of oil and gas properties by and
between Latex Petroleum Corporation and Presidio Exploration,
Inc., dated November 27, 1991. (3)
10.16 Letter Agreement for the sale of oil and gas properties by and
between Latex Petroleum Corporation and Sands Reserve Company
dated December 1, 1991 (filed as Exhibit 10.16 to the
Registration Statement).
10.17 Letter Agreement for the sale of oil and gas properties by and
between Latex Petroleum Corporation and Sands Reserve Company
dated December 1, 1991 (filed as Exhibit 10.17 to the
Registration Statement).
10.18 Letter Agreement by and between Latex Petroleum Corporation and
Sands Reserve Company dated December 2, 1991 (filed as Exhibit
10.18 to the Registration Statement).
10.19 Amendment to General Partnership Agreement by and between Elite
Enterprises Limited Partnership and Panada Exploration, Inc.,
dated December 16, 1991 (filed as Exhibit 10.19 to the
Registration Statement).
10.20 Agreement and Plan of Merger by and between Latex Petroleum
Corporation, Sable Investment Corporation and Elite Enterprises,
Inc., dated December 16, 1991. (4)
10.21 Agreement to Exchange Stock and Plan of Reorganization by and
between Video Science Technology, Inc., Jeffrey T. Wilson, James
G. Borem and Dee C. Shreve dated December 18, 1991. (5)
10.22 Letter Agreement by and between Trans-Exchange Corporation and
Jeffrey T. Wilson dated January 22, 1992 (filed as Exhibit 10.22
to the Registration Statement).
10.23 Second Amended and Restated Credit Agreement by and between
Latex Petroleum Corporation and Bank of Oklahoma, National
Association, effective January 31, 1992 (filed as Exhibit 10.23
to the Registration Statement).
51
<PAGE>
Exhibit
Number Description Page
- ------ ----------- ----
10.24 Stock Option Agreement by and between the Registrant and Cynthia
A. Helms dated January 31, 1992 (filed as Exhibit 10.24 to the
Registration Statement).
10.25 Stock Option Agreement by and between the Registrant and Robert
Hull dated January 31, 1992 (filed as Exhibit 10.25 to the
Registration Statement).
10.26 Letter from Director General of Energy, Republic of Tunisia
dated February 11, 1992 (filed as Exhibit 10.26 to the
Registration Statement).
10.27 Agreement to Terminate the General Partnership Agreement of
Elite/Panada General Partnership by and between Latex Petroleum
Corporation, successor by merger to Elite Enterprises, Inc., and
Panada Exploration, Inc., dated February 13, 1992 (filed as
Exhibit 10.27 to the Registration Statement).
10.28 Purchase Agreement for sale of oil and gas properties by and
between the Registrant and Amax Exploration, Inc., dated
February 14, 1992. (6)
10.29 Agreement by and between Latex Petroleum Corporation and Virgle
Land-roth and Eclipse Petroleum Corporation dated as of February
17, 1992 (filed as Exhibit 10.29 to the Registration Statement).
10.30 Promissory Note in the principal sum of $50,200 by and between
ENPRO, Inc., and LaTex Petroleum Corporation dated February 28,
1992 (filed as Exhibit 10.30 to the Registration Statement).
10.31 Promissory Note in the principal sum of $600,000 by and between
Latex Petroleum Corporation and Bank of Oklahoma, National
Association, dated February 28, 1992 (filed as Exhibit 10.31 to
the Registration Statement).
10.32 Promissory Note in the principal sum of $3,280,000 by and
between Latex Petroleum Corporation and Bank of Oklahoma,
National Association, dated February 28, 1992 (filed as Exhibit
10.32 to the Registration Statement).
10.33 Restated Guaranty Agreement by and between Jeffrey T. Wilson and
Annalee C. Wilson and Bank of Oklahoma, National Association,
dated February 28, 1992 (filed as Exhibit 10.33 to the
Registration Statement).
10.34 Guaranty Agreement by and between Latex Petroleum Corporation
and David L. Wright dated March 4, 1992 (filed as Exhibit 10.34
to the Registration Statement).
10.35 Guaranty Agreement by and between Latex Petroleum Corporation
and Ed J. Wright dated March 4, 1992 (filed as Exhibit 10.35 to
the Registration Statement).
10.36 Amendment to Second Amended and Restated Credit Agreement by and
between Latex Petroleum Corporation and Bank of Oklahoma,
National Association, dated March 19, 1992, effective as of
February 28, 1992 (exhibits omitted). (Filed as Exhibit 10.36
to the Registration Statement).
10.37 Purchase and Sale Agreement for sale of oil and gas properties
by and between Latex Petroleum Corporation and American
Exploration Company dated March 20, 1992 (filed as Exhibit 10.37
to the Registration Statement).
10.38 Security Agreement by and between Latex Petroleum Corporation
and Phoenix Metals, Inc., dated March 27, 1992 (filed as Exhibit
10.38 to the Registration Statement).
52
<PAGE>
Exhibit
Number Description Page
- ------ ----------- ----
10.39 Promissory Note in the principal sum of $10,000 by and between
LaTex Petroleum Corporation and Phoenix Metals, Inc., dated
March 27, 1992 (filed as Exhibit 10.39 to the Registration
Statement).
10.40 Security Agreement by and between the Registrant and Bank of
Oklahoma, National Association, dated March 30, 1992 (filed as
Exhibit 10.40 to the Registration Statement).
10.41 Letter of Intent to License Certain Equipment and Proprietary
Processes by and between the Registrant, Carlton B. Foster, and
Waste Conversion Corporation dated March 31, 1992 (filed as
Exhibit 10.41 to the Registration Statement).
10.42 Agreement and Plan of Merger by and between the Registrant and
Video Science Technology, Inc., dated April 16, 1992. (7)
10.43 Letter from LaTex Petroleum Corporation dated April 20, 1992, to
Brumbaugh & Fulton amending lease agreement (filed as Exhibit
10.43 to the Registration Statement).
10.44 Agreement to Exchange Stock by and between the Registrant and
ENPRO, Inc., dated April 21, 1992 (filed as Exhibit 10.44 to the
Registration Statement).
10.45 Purchase and Sale Agreement for sale of oil and gas properties
by and between LaTex Petroleum Corporation and TOTAL Minatome
Corporation dated April 27, 1992 (filed as Exhibit 10.45 to the
Registration Statement).
10.46 Letter Agreement for sale of stock by and between the Registrant
and Agri-Quest Mining, Inc., dated May 28, 1992 (filed as
Exhibit 10.46 to the Registration Statement).
10.47 Letter Agreement by and between Latex Petroleum Corporation and
TOTAL Minatome Corporation dated June 1, 1992 (filed as Exhibit
10.47 to the Registration Statement).
10.48 Loan Agreement in the principal sum of $200,000 by and between
LaTex Petroleum Corporation and First Texas Bank dated June 1,
1992 (filed as Exhibit 10.48 to the Registration Statement).
10.49 Guaranty by and between S. Mort Zimmerman and First Texas Bank
dated June 1, 1992 (filed as Exhibit 10.49 to the Registration
Statement).
10.50 Security Agreement by and between Trans-Exchange Corporation and
First Texas Bank dated June 1, 1992 (filed as Exhibit 10.50 to
the Registration Statement).
10.51 Owner's Consent to pledge by S. Mort Zimmerman for
Trans-Exchange Corporation dated June 1, 1992 (filed as Exhibit
10.51 to the Registration Statement).
10.52 Security Agreement by and between Gary S. Williky and First
Texas Bank dated June 1, 1992 (filed as Exhibit 10.52 to the
Registration Statement).
10.53 Owner's Consent to pledge by Gary S. Williky dated June 1, 1992
(filed as Exhibit 10.53 to the Registration Statement).
10.54 Promissory Note in the principal sum of $85,145.55 by and
between LaTex Petroleum Corporation and ENPRO, Inc., dated
June 1, 1992 (filed as Exhibit 10.54 to the Registration
Statement).
53
<PAGE>
Exhibit
Number Description Page
- ------ ----------- ----
10.55 Employment Contract by and between ENPRO, Inc., and Malcolm W.
Henley dated June 1, 1992 (filed as Exhibit 10.55 to the
Registration Statement).
10.56 Letter from LaTex Petroleum Corporation dated June 2, 1992, to
Brumbaugh & Fulton amending lease agreements (filed as Exhibit
10.56 to the Registration Statement).
10.57 Letter Agreement by and between the LaTex Petroleum Corporation
and Ed Wright dated July 6, 1992 (filed as Exhibit 10.57 to the
Registration Statement).
10.58 Loan Agreement in the principal sum of $200,000 by and between
LaTex Petroleum Corporation and First Texas Bank dated August
28, 1992 (filed as Exhibit 10.58 to the Registration Statement).
10.59 Promissory Note in the principal sum of $249,351 from I.B.
Energy, Inc., to LaTex Petroleum Corporation dated June 1, 1992
(filed as Exhibit 10.59 to the Registration Statement).
10.60 Letter Agreement between LaTex Petroleum Corporation and I.B.
Energy, Inc., dated September 30, 1992 (filed as Exhibit 10.60
to the Registration Statement).
10.61 Form of Share Escrow Agreement between Jeffrey T. Wilson, James
G. Borem, the Registrant, and Bank of Oklahoma, National
Association (filed as Exhibit 10.61 to the Registration
Statement).
10.62 Agreement to Exchange Stock by and between the Registrant,
Wright & Wright, Inc., Ed J. Wright, David L. Wright, and
Phoenix Metals, Inc., dated September 24, 1992 (filed as Exhibit
10.62 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended July 31, 1993 (the "1993 Form 10-K")).
10.63 Stock Purchase Agreement by and between the Herokas Foundation,
James C. Hadsell and Zaskia Siefert-Hadsell, Howard Finley and
the Registrant dated January 29, 1993 (filed as Exhibit 10.63 to
the 1993 Form 10-K).
10.64 Stock Subscription Agreement by and between J.R. Bothe &
Associates, Inc., and the Registrant dated January 29, 1993
(filed as Exhibit 10.64 to the 1993 Form 10-K).
10.65 Non-Competition Agreement dated February 10, 1993, between the
Registrant and Philip J. Wade. (11)
10.66 Non-Competition Agreement dated February 10, 1993, between the
Registrant and A. Dean Fuller. (12)
10.67 Registration Rights Agreement by and among the Registrant,
Philip J. Wade, A. Dean Fuller, Robert R. Firth, Mark E.
Repasky, Charles M. Kelley, Donald B. Pettine, and Steven L.
Wilson dated February 10, 1993 (filed as Exhibit 10.67 to the
1993 Form 10-K).
10.68 Stock Subscription Agreement by and between Joseph Shoaf, an
individual, and the Registrant dated March 25, 1993 (filed as
Exhibit 10.68 to the 1993 Form 10-K).
10.69 Purchase and Sale Agreement between Mobil Exploration &
Producing U.S., Inc., and Panada Exploration, Inc., dated as of
January 15, 1993 (filed as Exhibit 10.69 to the 1993 Form 10-K).
54
<PAGE>
Exhibit
Number Description Page
- ------ ----------- ----
10.70 Purchase and Sale Agreement by and between AMAX Oil & Gas, Inc.,
and LaTex Petroleum Corporation dated March 16, 1993 (filed as
Exhibit 10.70 to the 1993 Form 10-K).
10.71 Loan Agreement among LaTex Petroleum Corporation, Panada
Exploration, Inc., Panda Resources, Inc., and First Interstate
Bank of Texas, N.A., dated April 15, 1993, together with
exhibits (filed as Exhibit 10.71 to the 1993 Form 10-K).
10.72 Stock Subscription Agreement by and between the Registrant and
Howard Finley dated May 10, 1993 (filed as Exhibit 10.72 to the
1993 Form 10-K).
10.73 Letter Agreement by and between Geodyne Resources, Inc., and the
Registrant dated November 27, 1992 (filed as Exhibit 10.73 to
the 1993 Form 10-K).
10.74 Letter Agreement by and between ARCO Tunisia, Inc., and Geodyne
Tunisia Ltd. dated April 2, 1993 (filed as Exhibit 10.74 to the
1993 Form 10-K).
10.75 Agreement by and between Geodyne Tunisia Ltd. and Warren
American Oil Company dated May 4, 1993 (filed as Exhibit 10.75
to the 1993 Form 10-K).
10.76 Operating Agreement among ARCO Tunisia, Inc., PICT Petroleum
(Tunisia) Limited, and Geodyne Tunisia Ltd. dated July 9, 1993,
but effective June 30, 1993 (filed as Exhibit 10.76 to the 1993
Form 10-K).
10.77 Letter Agreement by and between AMAX Oil and Gas, Inc., and
LaTex Petroleum Corporation dated May 6, 1993 (filed as Exhibit
10.77 to the 1993 Form 10-K).
10.78 Promissory Note in the principal sum of $254,288.35 by and
between LaTex Petroleum Corporation and AMAX Oil and Gas, Inc.,
dated May 6, 1993 (filed as Exhibit 10.78 to the 1993 Form 10-K).
10.79 Stock Purchase Agreement by and between Panda Resources, Inc.,
and Nuevo Liquids, Inc., dated as of July 16, 1993. (13)
10.80 Stock Purchase Agreement by and between the Registrant and Torch
Energy Marketing, Inc., dated July 26, 1993. (14)
10.81 Letter Agreement between the Registrant and Waste Conversion
Corporation dated August 3, 1993, as agreed to August 11, 1993
(filed as Exhibit 10.81 to the 1993 Form 10-K).
10.82 Agreement by and between the Registrant and Philip J. Wade dated
September 22, 1993 (filed as Exhibit 10.82 to the 1993
Form 10-K).
10.83 Agreement by and between the Registrant and A. Dean Fuller dated
September 22, 1993 (filed as Exhibit 10.83 to the 1993
Form 10-K).
10.84 Letter of LaTex Petroleum Corporation requesting consent of
First Interstate Bank of Texas, N.A., dated September 23, 1993,
together with consent of First Interstate Bank and exhibits
(filed as Exhibit 10.84 to the 1993 Form 10-K).
10.85 Stock Subscription Agreement by and between the Registrant and
Salaheddine Caid Essebsi dated October 8, 1993 (filed as Exhibit
10.85 to the 1993 Form 10-K).
10.86 Promissory Note in the principal sum of $25,000 by and between
Malcolm W. Henley and LaTex Petroleum Corporation dated
December 28, 1992 (filed as Exhibit 10.86 to the 1993
Form 10-K).
55
<PAGE>
Exhibit
Number Description Page
- ------ ----------- ----
10.87 Promissory Note in the principal sum of $25,000 by and between
Dewitt C. Shreve and LaTex Petroleum Corporation dated March 15,
1993 (filed as Exhibit 10.87 to the 1993 Form 10-K).
10.88 Promissory Note in the principal sum of $29,089 by and between
Malcolm W. Henley and ENPRO, Inc., dated July 30, 1993, marked
"Paid" (filed as Exhibit 10.88 to the 1993 Form 10-K).
10.89 Promissory Note in the principal sum of $5,000 by and between
Malcolm W. Henley and ENPRO, Inc., dated September 28, 1993
(filed as Exhibit 10.89 to the 1993 Form 10-K).
10.90 Promissory Note in the principal sum of $250,000 by and between
LaTex Resources International, Inc., and James G. Borem dated
October 5, 1993 (filed as Exhibit 10.90 to the 1993 Form 10-K).
10.91 Promissory Note in the principal sum of $130,000 by and between
LaTex Resources International, Inc., and Dewitt C. Shreve dated
October 5, 1993 (filed as Exhibit 10.91 to the 1993 Form 10-K).
10.92 Promissory Note in the principal sum of $100,000 by and between
the Registrant and James G. Borem dated October 21, 1993 (filed
as Exhibit 10.92 to the 1993 Form 10-K).
10.93 Promissory Note in the principal sum of $30,000 by and between
LaTex Resources International, Inc., and Dewitt C. Shreve dated
February 2, 1994 (filed as Exhibit 10.73 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended July 31,
1994 (the "1994 Form 10-K")).
10.94 Promissory Note in the principal sum of $50,000 by and between
LaTex Resources International, Inc., and James G. Borem dated
February 2, 1994 (filed as Exhibit 10.94 to the 1994 Form 10-K).
10.95 Promissory Note in the principal sum of $50,000 by and between
the Registrant and James G. Borem dated February 15, 1994 (filed
as Exhibit 10.95 to the 1994 Form 10-K).
10.96 Letter Agreement by and between LaTex Petroleum Corporation and
Petroleum Discovery Systems, Inc., dated December 2, 1992, as
agreed to December 3, 1992 (filed as Exhibit 10.96 to the 1994
Form 10-K).
10.97 Letter Agreement by and between the Registrant and J.R. Bothe &
Associates, Inc., dated December 23, 1992 (filed as Exhibit 10.
97 to the 1994 Form 10-K).
10.98 Letter Agreement by and between LaTex Petroleum Corporation and
Gulf Russia Ltd. dated December 27, 1992 (filed as Exhibit 10.98
to the 1994 Form 10-K).
10.99 Letter Agreement by and between the Registrant and Premier
Capital Ltd. dated January 19, 1993, as agreed to January 29,
1993 (filed as Exhibit 10.99 to the 1994 Form 10-K).
10.100 Agreement and Plan of Merger by and among the Registrant, MOE
Acquisition, Inc., Waste Conversion Corp., and Joseph W. Conerly
dated November 17, 1993 (filed as Exhibit 10.100 to the 1994
Form 10-K).
10.101 1993 Incentive Stock Plan, effective December 8, 1993 (filed as
Exhibit 10.101 to the 1994 Form 10-K).
56
<PAGE>
Exhibit
Number Description Page
- ------ ----------- ----
10.102 First Amendment to Loan Agreement among LaTex Petroleum
Corporation, Panada Exploration, Inc., and First Interstate Bank
of Texas, N.A., dated October 1, 1993 (exhibits omitted) (filed
as Exhibit 10.102 to the 1994 Form 10-K).
10.103 Second Amendment to Loan Agreement by and between LaTex
Petroleum Corporation and First Interstate Bank of Texas, N.A.,
dated January 18, 1994 (exhibits omitted) (filed as
Exhibit 10.103 to the 1994 Form 10-K).
10.104 Third Amendment to Loan Agreement by and between LaTex Petroleum
Corporation and First Interstate Bank of Texas, N.A., dated
July 26, 1994, (filed without exhibits) (filed as Exhibit 10.104
to the 1994 Form 10-K).
10.105 Purchase and Sale Agreement by and among LaTex Petroleum
Corporation, LoIn Energy, Inc., and Swift Energy Company dated
as of January 14, 1994. (15)
10.106 Offshore Securities Subscription Agreement by and between the
Registrant and Brentwood Financial Ltd. dated January 28, 1994
(filed as Exhibit 10.106 to the 1994 Form 10-K).
10.107 Offshore Securities Subscription Agreement by and between the
Registrant and Investment Development Corporation dated January
28, 1994 (filed as Exhibit 10.107 to the 1994 Form 10-K).
10.108 Offshore Securities Subscription Agreement by and between the
Registrant and Gilford Manor Ltd. dated January 28, 1994 (filed
as Exhibit 10.108 to the 1994 Form 10-K).
10.109 Offshore Securities Subscription Agreement by and between the
Registrant and Tesoma Overseas, Inc., dated January 28, 1994
(filed as Exhibit 10.109 to the 1994 Form 10-K).
10.110 Warrant Certificate for purchase of the Registrant's common
stock issued to Baytree Associates, Inc., dated January 26, 1994
(filed as Exhibit 10.110 to the 1994 Form 10-K).
10.111 Purchase and Sale Agreement by and between LaTex Petroleum
Corporation and Confed Oil Incorporated dated August 10, 1994
(filed as Exhibit 10.111 to the 1994 Form 10-K).
10.112 Credit Agreement dated as of March 31, 1995, among Bank of
America National Trust and Savings Association, LaTex Petroleum
Corporation, LaTex/GOC Acquisition, Inc., and LRI Acquisition,
Inc. (20)
10.113 Amended and Restated Credit Agreement dated as of October 20,
1995, among Bank of America National Trust and Savings
Association, LaTex Petroleum Corporation, LaTex/GOC Acquisition,
Inc., and Germany Oil Company (formerly known as LRI
Acquisition, Inc.) (filed as Exhibit 10.113 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended July 31,
1995 (the "1995 Form 10-K")).
+10.114 Amendment No. 1 to Amended and Restated Credit Agreement dated
December 29, 1995, among Bank of America National Trust and
Savings Association, LaTex Petroleum Corporation, LaTex/GOC
Acquisition, Inc., and Germany Oil Company (formerly known as
LRI Acquisition, Inc.).
57
<PAGE>
Exhibit
Number Description Page
- ------ ----------- ----
+10.115 Amendment No. 2 to Amended and Restated Credit Agreement dated
August 16, 1996, among Bank of America National Trust and
Savings Association, LaTex Petroleum Corporation, LaTex/GOC
Acquisition, Inc., and Germany Oil Company (formerly known as
LRI Acquisition, Inc.).
+10.116 Forbearance Agreement dated July 25, 1996, among Bank of America
National Trust and Savings Association, LaTex Petroleum
Corporation, LaTex/GOC Acquisition, Inc., Germany Oil Company
(formerly known as LRI Acquisition, Inc.), Enpro, Inc., and the
Registrant.
+10.117 Agreement and Plan of Merger dated August 12, 1996, among
Alliance Resources Plc, Alliance Resources (Delaware), Inc., and
the Registrant.
+10.118 Purchase Agreement dated September 30, 1996, between the
Registrant and Imperial Petroleum, Inc.
+10.119 Letter Agreement dated November 27, 1995, among Rauscher Pierce
& Clark, Inc., Rauscher Pierce & Clark Limited, and the
Registrant.
+10.120 Letter Agreement dated April 23, 1996, between Wood Roberts,
LLC, and the Registrant.
+10.121 Letter Agreement dated July 22, 1996, between Wood Roberts, LLC,
and the Registrant.
+10.122 Letter Agreement dated July 22, 1996, between Wood Roberts, LLC,
and the Registrant.
+10.123 Settlement Agreement dated as of December 7, 1995, among Torch
Energy Marketing, Inc., Nuevo Liquids, Inc., Panda Resources,
Inc., Wilson Tucker & Associates, Steve Wilson, an individual,
and the Registrant.
+10.124 Settlement Agreement dated as of June 6, 1996, between Northern
Natural Gas Company and the Registrant.
+10.125 Letter Agreement dated November 8, 1996 between Rauscher, Pierce
& Clark and the Registrant.
+10.126 First Amendment to Forbearance Agreement dated October 15, 1996
among Bank of America National Trust and Savings Association,
LaTex Petroleum Corporation, LaTex/GOC Acquisition, Inc.,
Germany Oil Company (formerly known as LRI Acquisition, Inc.),
ENPRO, Inc. and the Registrant.
+11 Statement re: computation of per share earnings.
12 Statement re: computation of ratios. Not applicable.
13 Annual Report to security holders, Form 10-Q, or quarterly
report to security holders. Not applicable.
16.1 Letter of Registrant dated November 1, 1991 informing Lane,
Gorman, Trubitt and Company of change in certifying accountants
to Jackson, Brophy and Company. (8)
16.2 Letter of Registrant's counsel dated April 10, 1992 informing
Jackson, Brophy and Company of change in certifying accountants
to Briscoe and Robinson Co. (9)
18 Letter re: change in accounting principles. Not applicable.
58
<PAGE>
Exhibit
Number Description Page
- ------ ----------- ----
21 Subsidiaries of the Registrant (filed as Exhibit 21 to the 1995
Form 10-K).
22 Published report regarding matters submitted to vote of security
holders. Not applicable.
+23.1 Consent of Briscoe & Burke
+23.2 Consent of Lee Keeling and Associates, Inc.
24 Power of Attorney. Not applicable.
27 Financial Data Schedule. Not applicable.
28 Information from reports furnished to state insurance
authorities. Not applicable.
99.1 Estimates of Reserves by Netherland, Sewell & Associates, Inc.,
dated January 1, 1991, regarding oil and gas reserves of the
Registrant (filed as Exhibit 28.1 to the Registration Statement).
99.2 Estimates of Reserves by Netherland, Sewell & Associates, Inc.,
dated July 31, 1991, regarding oil and gas reserves of the
Registrant (filed as Exhibit 28.2 to the Registration Statement).
99.3 Estimates of Reserves by Netherland, Sewell & Associates, Inc.,
dated January 1, 1992, regarding oil and gas reserves of the
Registrant (filed as Exhibit 28.3 to the Registration Statement).
99.4 Estimates of Reserves by Netherland, Sewell & Associates, Inc.,
dated July 31, 1992, regarding oil and gas reserves of the
Registrant (filed as Exhibit 28.4 to the Registration Statement).
99.5 Estimates of Reserves by Netherland, Sewell & Associates, Inc.,
dated September 7, 1993; regarding oil and gas reserves of the
Registrant (filed as Exhibit 99.5 to the 1993 Form 10-K).
99.6 Estimates of Reserves by Netherland, Sewell & Associates, Inc.,
dated October 21, 1994, regarding oil and gas reserves of the
Registrant (filed as Exhibit 99.6 to the 1994 Form 10-K).
99.7 Estimates of Reserves by Netherland, Sewell & Associates, Inc.,
dated November 3, 1995, regarding oil and gas reserves of the
Registrant as of July 31, 1995 (filed as Exhibit 99.7 to the
1995 Form 10-K).
+99.8 Estimates of reserves by Lee Keeling and Associates, Inc. dated
October 30, 1996 regarding oil and gas reserves of the
Registrant as of July 31, 1996.
- ------------------------------
* Filed herewith.
+Previously filed.
(1) Incorporated herein by reference to Exhibit 4.1 to the Registrant's Current
Report on Form 8-K filed with the Securities and Exchange Commission on
June 16, 1992.
(2) Incorporated herein by reference to Exhibit 4.2 to the Registrant's Current
Report on Form 8-K filed with the Securities and Exchange Commission on
June 16, 1992.
(3) Incorporated herein by reference to Exhibit 2.1 to the Registrant's Current
Report on Form 8-K filed with the Securities and Exchange Commission on
February 18, 1992.
(4) Incorporated herein by reference to Exhibit 2.2 to the Registrant's Current
Report on Form 8-K filed with the Securities and Exchange Commission on
January 10, 1992.
59
<PAGE>
(5) Incorporated herein by reference to Exhibit 2.1 to the Registrant's Current
Report on Form 8-K filed with the Securities and Exchange Commission on
January 10, 1992.
(6) Incorporated herein by reference to Exhibit 2.1 to the Registrant's Current
Report on Form 8-K filed with the Securities and Exchange Commission on
May 1, 1992.
(7) Incorporated herein by reference to Exhibit 2.1 to the Registrant's Current
Report on Form 8-K filed with the Securities and Exchange Commission on
June 16, 1992.
(8) Incorporated herein by reference to Exhibit 16.1 to the Registrant's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on December 11, 1991, and subsequently amended under cover of
Form 8 Amendment No. 2 filed with the Commission on May 1, 1992, and Form 8
Amendment No. 3 filed with the Commission on May 26, 1992.
(9) Incorporated herein by reference to Exhibit 16.1 to the Registrant's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on April 23, 1992, and subsequently amended under cover of Form
8 filed with the Commission on May 26, 1992.
(10) Incorporated herein by reference to Exhibit 2.1 to the Registrant's Current
Report on Form 8-K filed with the Securities and Exchange Commission on
February 24, 1993, and subsequently amended under cover of Form 8 Amendment
No. 1 filed with the Commission on April 26, 1993, and Form 8 Amendment No.
2 filed with the Commission on May 20, 1993.
(11) Incorporated herein by reference to Exhibit 28.1 to the Registrant's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on February 24, 1993, and subsequently amended under cover of
Form 8 Amendment No. 1 filed with the Commission on April 26, 1993, and
Form 8 Amendment No. 2 filed with the Commission on May 20, 1993.
(12) Incorporated herein by reference to Exhibit 28.2 to the Registrant's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on February 24, 1993, and subsequently amended under cover of
Form 8 Amendment No. 1 filed with the Commission on April 26, 1993, and
Form 8 Amendment No. 2 filed with the Commission on May 20, 1993.
(13) Incorporated herein by reference to Exhibit 2.1 to the Registrant's Current
Report on Form 8-K filed with the Securities and Exchange Commission on
August 9, 1993, and subsequently amended under cover of Form 8 Amendment
No. 1 filed with the Commission on October 12, 1993.
(14) Incorporated herein by reference to Exhibit 2.2 to the Registrant's Current
Report on Form 8-K filed with the Securities and Exchange Commission on
August 9, 1993, and subsequently amended under cover of Form 8 Amendment
No. 1 filed with the Commission on October 12, 1993.
(15) Incorporated herein by reference to Exhibit 2.1 to the Registrant's Current
Report on Form 8-K filed with the Securities and Exchange Commission on
February 10, 1994.
(16) Incorporated herein by reference to Exhibit 2.1 of the Registrant's Current
Report on Form 8-K filed with the Securities and Exchange Commission on
April 12, 1995.
(17) Incorporated herein by reference to Exhibit 2.2 of the Registrant's Current
Report on Form 8-K filed with the Securities and Exchange Commission on
April 12, 1995.
(18) Incorporated herein by reference to Exhibit 4.1 of the Registrant's Current
Report on Form 8-K filed with the Securities and Exchange Commission on
April 12, 1995.
(19) Incorporated herein by reference to Exhibit 4.2 of the Registrant's Current
Report on Form 8-K filed with the Securities and Exchange Commission on
April 12, 1995.
(20) Incorporated herein by reference to Exhibit 28.1 of the Registrant's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on April 12, 1995.
60
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 12, 1997 /s/ Jeffrey T. Wilson
-----------------------------------------
Jeffrey T. Wilson, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/ Jeffrey T. Wilson Director, Chairman of the March 12, 1997
- ------------------------ Board, President and Chief
Jeffrey T. Wilson Executive Officer
(Principal Executive Officer)
/s/ John L. Cox Director, Vice President and March 12, 1997
- ------------------------ Chief Financial Officer
John L. Cox
/s/ Malcolm W. Henley Director and Vice March 12, 1997
- ------------------------ President of Marketing
Malcolm W. Henley
- -------------------- Director March __, 1997
John R. Martinson
61
<PAGE>
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>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A2
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
XX SECURITIES EXCHANGE OF 1934
--
For the quarterly period ended October 31, 1996
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
Incorporation or organization) Identification No.)
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 February 20, 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 October 31, 1996
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements. Page
--------------------
Consolidated Balance Sheets as of
October 31, 1996 and July 31, 1996 4
Consolidated Statements of Operations
for the three months ended
October 31, 1996 and 1995 6
Consolidated Statements of Cash Flows
for the three months ended
October 31, 1996 and 1995 7
Consolidated Statements of Stockholders'
Equity for the three months ended
October 31, 1996 and the year ended
July 31, 1996 9
Notes to Consolidated Financial
Statements 10
Item 2. Management's Discussion and Analysis
of Financial Condition and Results 11
of Operations.
PART II - OTHER INFORMATION 22
Item 1. Legal Proceedings
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 25
2
<PAGE>
PART I
FINANCIAL INFORMATION
3
<PAGE>
ITEM 1. Financial Statements
LATEX RESOURCES, INC.
Consolidated Condensed Balance Sheet
<TABLE>
<CAPTION>
October 31, 1996 July 31, 1996
(unaudited) (audited)
-------------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 19,721 $ 19,337
Accounts receivable-net 3,208,742 3,324,309
Accounts receivable-other 513,378 515,820
Inventories 175,493 175,493
Other current assets 22,055 27,587
Assets held for resale 164,792 164,792
------------------- ----------------
TOTAL CURRENT ASSETS $ 4,104,181 $ 4,227,338
------------------- ----------------
Property, plant, and equipment:
Oil and gas properties - at cost $ 41,264,288 $ 41,264,573
Other depreciable assets 855,512 854,259
------------------- ----------------
$ 42,119,800 $ 42,118,832
Less accumulated depreciation
and depletion 12,571,037 10,173,524
------------------- ----------------
Net property, plant
and equipment $ 29,548,763 $ 31,945,308
------------------- ----------------
Other assets:
Notes Receivable-net of
current portion $ 630,000 $ 757,500
Deposits and other assets 123,839 130,734
Accounts and Notes Receivable
and related parties 2,404 392,297
Intangible assets, net-of
amortization 1,408,272 1,512,899
------------------- ----------------
TOTAL OTHER ASSETS 2,164,515 2,793,430
------------------- ----------------
TOTAL ASSETS $ 35,817,459 $ 38,966,076
=================== ===============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
LATEX RESOURCES, INC.
Consolidated Condensed Balance Sheet
<TABLE>
<CAPTION>
October 31, 1996 July 31,1996
(unaudited) (audited)
-------------------- ---------------
<S> <C> <C>
LIABILITIES AND
STOCKHOLDERS EQUITY
Current Liabilities:
Accounts payable $ 9,991,311 $ 9,057,707
Accounts payable-other 433,641 132,000
Accrued expenses payable 592,784 607,055
Current portion long-term debt 21,127,412 22,235,867
-------------------- ---------------
Total current liabilities $ 32,145,148 $ 32,032,629
-------------------- ---------------
Other liabilities 615,000 615,000
-------------------- ---------------
Total liabilities 32,760,148 32,647,629
-------------------- ---------------
Stockholders' equity:
Preferred stock - par value $0.01;
5,000,000 shares authorized:
Series A convertible preferred stock
($10 liquidation preference),
452,052 and 449,828 issued and
outstanding at October 31, 1996 and
July 31, 1996, respectively $ 4,520 $ 4,498
Series B convertible preferred stock
($10 liquidation preference),
494,426 and 480,025 issued and
outstanding at October 31, 1996 and
July 31, 1996, respectively 4,944 4,800
Common stock - par value $.01,
50,000,000 authorized; issued and
outstanding 20,813,995 and
19,123,995 at October 31, 1996
and July 31, 1996, respectively 208,140 191,240
Additional paid-in capital 19,032,443 18,355,134
Treasury stock (489,365) (489,365)
Accumulated deficit (15,703,371) (11,747,860)
-------------------- ---------------
Total stockholders' equity $ 3,057,311 $ 6,318,447
-------------------- ---------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 35,817,459 $ 38,966,076
==================== ===============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
LATEX RESOURCES, INC.
Consolidated Condensed Statement of Operations
<TABLE>
<CAPTION>
For The Three Months Ended For The Three Months Ended
October 31, October 31,
1996 1995 (Restated)
(unaudited) (unaudited)
-------------- -----------------
<S> <C> <C>
Revenue:
Oil and gas sales $ 2,377,701 $ 3,034,752
Crude Oil and Gas Marketing 90,227 188,843
Lease operations and management fees 249,889 235,733
------------ --------------
Total operating income $ 2,717,817 $ 3,459,328
------------ --------------
Operating expenses:
Lease operating expense $ 1,465,548 $ 1,561,516
Cost of Crude Oil & Gas Marketing 17,271 84,183
General & administrative expense 1,894,744 747,863
Depreciation, depletion and amortization 2,607,551 1,247,979
Dry hole costs and abandonments 22,113 73,293
------------ --------------
Total operating expenses $ 6,007,227 $ 3,714,834
------------ --------------
Net operating loss $ (3,289,410) $ (255,506)
Other income:
Equity in (losses) and writeoffs of
Investments in affiliates $ - $ (41,500)
Gain on sale of assets 68,033 -
Interest Income 32,934 38,653
Interest Expense (599,818) (580,667)
------------ --------------
Net loss $ (3,789,261) $ (839,020)
Preferred stock dividends $ 166,250 $ 136,230
------------ --------------
Net loss for common shareholders $ (3,955,511) $ (975,250)
============ ==============
Loss Per Share for common shareholders (.20) (.05)
============ ==============
Weighted avg. number of shares o/s 19,326,060 17,950,456
============ ==============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
LATEX RESOURCES, INC.
Consolidated Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Three Three
Months Ended Months Ended
October 31, October 31,
1996 1995 (unaudited)
(unaudited) (Restated)
============== ================
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (3,789,261) $ (839,020)
Adjustments to reconcile net loss to net cash
provided by operating activities: - -
Depreciation, amorization and depletion 2,607,551 1,247,979
Gain on sale of assets (68,033) -
Equity in losses and writeoffs of
investments in affiliates - 41,500
Dryhole costs and abandonments 22,113 73,293
Employee bonus 528,125 -
Forgiveness of debt 385,391
Changes in Assets and Liabilities:
Accounts receivable 115,567 (148,474)
Accounts and notes receivable-related parties 4,502
Accrued expenses payable (14,271) (12,257)
Accounts payable 1,235,245 (403,356)
Other assets 14,869 103,126
Prepaid expenses - (76,430)
------------- --------------
Net cash provided by (used in) operating activities $ 1,041,798 $ (13,639)
------------- --------------
Cash flows from investing activities:
Proceeds from sale of property and equipment $ 83,625 $ -
Purchases of property and equipment (144,084) (2,011,808)
Collections on notes receivable 127,500 -
------------- --------------
Net cash provided by (used for) investing activities $ 67,041 $ (2,011,808)
</TABLE>
See accompanying notes to financial statements.
<PAGE>
LATEX RESOURCES, INC.
Consolidated Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Three Three
Months Ended Months Ended
October 31, October 31,
1996 1995 (Restated)
(unaudited) (unaudited)
============== ==============
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable (1,108,455) 1,742,383
------------- -------------
Net cash provided by (used for) financing activities $ (1,108,455) $ 1,742,383
------------- -------------
Net increase (decrease) in cash and cash equivalents 384 $ (283,064)
Cash and cash equivalents beginning of period $ 19,337 $ 314,229
------------- -------------
Cash and cash equivalents end of period $ 19,721 $ 31,165
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 570,755 $ 580,667
============= =============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
LATEX RESOURCES, INC.
Consolidated Statements of Stockholders' Equity
Three Months Ended October 31, 1996; Year Ended July 31, 1996
<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 2,224 shares of Class A and
14,401 shares of Class B in lieu
of cash dividends 22 144 - 166,084 (166,250) - -
Issued 1,690,000 shares for
employee bonus - - 16,900 511,225 - - 528,125
Net loss - - - - (3,789,261) - (3,789,261)
---------- --------- -------- ---------- ----------- -------- ---------
Balance October 31, 1996 $ 4,520 4,944 208,140 19,032,443 (15,703,371) (489,365) 3,057,311
========== ========= ======== ========== =========== ======== =========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
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 three months ended October 31, 1996,
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
financial statements and footnotes thereto included in the Company's Form 10-K
for the year ended July 31, 1996.
RECLASSIFICATION. Certain amounts in the October 1995 consolidated condensed
financial statements have been reclassified to conform with the October 1996
presentation.
(2) 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 loss is included
in depreciation, depletion and amortization expense.
(3) 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>
10
<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 0.8806 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.
11
<PAGE>
Disposition of Oil and Gas Properties
- -------------------------------------
Subsequent to October 31, 1996, the Company closed two oil and gas property
sales for approximately $1,500,000. 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 months ended October 31, 1996. This discussion should be read in
conjunction with the Company's unaudited Consolidated 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. 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>
Three Months Ended October 31
-----------------------------
1996 1995
---- ----
<S> <C> <C>
Net Sales Volumes:
Oil (Mbbls) 86 110
Natural gas (Mmcf) 619 941
Oil equivalent (MBOE) 189 267
Average Sales Prices:
Oil (per Bbl) $18.62 $13.40
Natural Gas (per Mcf) $ 1.83 $ 1.52
Operating Exp. per BOE of Net Sales:
Lease operating $ 6.92 $ 5.11
Severance tax $ 0.70 $ 0.74
General and administrative $ 9.99 $ 2.80
Depreciation, depletion and amortization $13.75 $ 4.68
</TABLE>
12
<PAGE>
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 fiscal
1997 the Company has experienced a net loss of $431,238 as a result of its
hedging program.
The amended operating data table primarily reflects the adoption of Financial
Accounting Standards No. 121 recognized in Depreciation, Depletion and
Amortization, the issuance of restricted Common Stock to the employees reflected
in general and administrative expense and the recognition of a gas balancing
liability due to the Company's overproduced status resulting in reduced sales
volumes.
Three months ended October 31,1996 Total revenues from the Company's operations
- ----------------------------------
for the quarter ended October 31, 1996 were $2,717,817 compared to $3,459,328
for the quarter ended October 31, 1995. Revenues decreased over the comparable
period a year earlier due principally to the negative effect of the product
hedges, ($542,729) lower sales volumes ($4,991) and gas imbalance adjustments
($231,327).
Depreciation, depletion and amortization increased to $2,607,551 from $1,247,979
year earlier as a result of $1,424,079 impact of FAS 121 dealing with asset
impairments.
Lease operating expenses were $1,465,548 for the three-month period ending
October 31, 1996 compared to $1,561,516 for the period ending October 31,
1995. 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.
General and administrative expenses increased from $747,863 during the quarter
ended October 31, 1995 to $1,894,744 for the period ending October 31, 1996. The
increase is attributable to the issuance of restricted stock to employees and
additional legal fees associated with the Alliance Merger.
The net loss for common shareholders for the quarter ended October 31, 1996 was
$3,955,511 ($.20 per share) compared to a net loss of $975,250 ($.05 per share)
for the previous year. The increase in the loss was a result of lower sales
volumes, hedging costs, the asset impairments, employee restricted stock
issuance and the gas balancing liability.
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.
13
<PAGE>
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 October 31,
1996, the Company had current assets of $4.1 million and current liabilities of
$32.8 million which resulted in negative working capital of $28.7 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 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 quarter ended October 31, 1996, the Company's operating activities
resulted in positive cash flow of $1,041,798 compared to a negative cash flow of
$13,639 for the quarter ended October 31,1995. 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 generated $67,041 in net cash flow for the
quarter ended October 31, 1996 to fund the Company's oil and gas activities.
Investing activities of the Company used $2,011,808 in net cash flow for the
quarter ended October 31, 1995. The decrease in investing activities in fiscal
1997 was primarily due to decrease in property acquisitions.
Financing activities used $1,108,455 in net cash flow for the quarter ended
October 31, 1996 compared to $1,742,383 provided in net cash flow for the
quarter ended October 31, 1995. The decrease from 1996 was a result of the
monthly amortization of the Company's indebtedness to its principal bank. 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.
14
<PAGE>
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 $68,033 of gains in the current quarter. 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 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.
15
<PAGE>
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 October 31, 1996, the outstanding balance of the loan was $21,127,412.
16
<PAGE>
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 October 31, 1996, all advances to the Company
under the Credit Agreement are maintained as LIBO Rate Loans which currently
bear interest at the annual rate of 7.375%.
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 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
17
<PAGE>
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 563,212 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 and to date, 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 Bank has indicated its
willingness to further amend the Forbearance Agreement, or the Company's cure of
the defaults. The Bank has indicated its willingness to further amend the
Forbearance Agreement to extend its agreement to forbear any action on the
Company's default through February 28, 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 Forbearance 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 ("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.
18
<PAGE>
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.
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 last three years and the effects of the hedging arrangement described below.
19
<PAGE>
<TABLE>
<CAPTION>
Oil Oil Gas Gas
(excluding the (including the (excluding the (including the
effects of effects of effects of effects of
Year Ended hedging hedging hedging hedging
July 31 transactions) transactions) transactions) transactions)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997 $18.62 $15.45 $1.83 $1.63
1996 $15.73 $15.24 $2.03 $1.67
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.
20
<PAGE>
PART II
OTHER INFORMATION
21
<PAGE>
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
-----------------
Contingencies
- -------------
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
SEC
Exhibit
No. Description of Exhibits
--- -----------------------
(2) Plan of Acquisition, Reorganization,
Arrangement Liquidation or Succession
-------------------------------------
Not Applicable.
22
<PAGE>
(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
(27) Financial Data Schedule
-----------------------
*27.1 Financial Data Schedule of LaTex
Resources, Inc.
23
<PAGE>
(99) Additional Exhibits
-------------------
Not Applicable.
*Filed Herewith.
(b) Reports on Form 8-K
--------------------
Not Applicable.
24
<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.
By: /s/ JOHN L. COX
--------------------------------
John L. Cox, Vice President
and Chief Financial Officer
Date: March 12, 1997
25
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 20. Indemnification of Directors and Officers.
English law does not permit a company to indemnify a director or an officer
of the company against any liability which by virtue of any rule of law would
otherwise attach to him in respect to negligence, default, breach of duty or
breach of trust in relation to the company except liability incurred by such
director or officer in defending any legal proceeding (whether civil or
criminal, in which judgment is given in his favor or in which he is acquitted or
in certain instances where, although he is liable, a court finds that such
director or officer acted honestly and reasonably and that, having regard to all
the circumstances, he ought fairly to be excused and relief is granted by the
court.
Article 175 of the Registrant's present Articles of Association provides:
(a) Subject to the provisions of the Statutes, but without prejudice to
any indemnity to which he may otherwise be entitled, every Director or other
officer or auditor of the Company shall be indemnified out of the assets of the
Company against any liability, loss or expenditure incurred by him in defending
any proceedings, whether civil or criminal, which relate to anything done or
omitted to be done or alleged to have been done or omitted to be done by him
given in his favour or in which he is acquitted or which are otherwise disposed
of without any finding or admission of guilt or breach of duty on his part or
incurred in connection with any liability in respect of any such act or omission
or from liability to pay any amount in respect of shares acquired by a nominee
of the Company.
(b) To the extent permitted by the Statutes, the Directors may arrange
insurance cover at the cost of the Company in respect of any liability, loss or
expenditure incurred by any Director, officer or auditor of the Company in
relation to anything done or alleged to have been done as a Director, officer or
auditor.
Concurrently with the completion of the Merger, the Registrant will adopt
Amended Articles of Association.
Article 154 of the Amended Articles of Association will provide:
Subject to the provisions of the Statutes but without prejudice to any
indemnity to which the person concerned may otherwise be entitled, every person
who is or was at any time a Director or other officer or Auditor of the Company
shall be indemnified out of the assets of the Company against all costs,
charges, expenses, losses or liabilities which he may sustain or incur in or
about the actual or purported execution and/or discharge of the duties of his
office and/or the exercise or purported exercise of his powers or discretions
and/or otherwise in relation thereto or in connection therewith, including
(without prejudice to the generality of the foregoing) any liability incurred by
him in defending any proceedings, whether civil or criminal, in which judgment
is given in his favour or in which he is acquitted or in connection with any
application under section 144(3) or (4) or section 727 of the Companies Act
1985, in which relief is granted to him by the Court.
The relevant provisions of the Statues are Section 310 and Section 727 of
the Companies Act 1985 which provides:
Section 310:
(1) This section applies to any provision, whether contained in a
company's articles or in any contract with the company or otherwise, for
exempting any officer of the company or any person (whether an officer or not)
employed by the company as auditor from, or indemnifying him against, any
liability which by virtue of any rule of law would otherwise attach to him in
respect of any negligence, default, breach of duty or breach of trust of which
he may be guilty in relation to the company.
(2) Except as provided by the following subsection, any such provision is
void.
(3) This section does not prevent a company --
(a) from purchasing and maintaining for any such officer or auditor
insurance against any such liability, or
(b) from indemnifying any such officer or auditor against any
liability incurred by him --
(i) in defending any proceedings (whether civil or criminal) in
which judgment is given in his favor or his is acquitted, or
II-1
<PAGE>
(ii) in connection with any application under Section 144(3) or
(4) (acquisition of shares by innocent nominee) or Section
727 (general power to grant relief in case of honest and
reasonable conduct) in which relief is granted by the court.
Section 727:
"(1) If in any proceedings for negligence, default, breach of duty or
breach of trust against an officer of a company or a person employed by a
company as auditor (whether he is or is not an officer of the company) it
appears to the court hearing the case that that officer or person is or may be
liable in respect of the negligence, default, breach of duty or breach of trust,
but that he has acted honestly and reasonably, and that having regard to all the
circumstances of the case (including those connected with his appointment) he
ought fairly to be excused for the negligence, default, breach of duty or breach
of trust, that court may relieve him, either wholly or partly, from his
liability on such terms as it thinks fit.
(2) If any such officer or person as above-mentioned has reason to
apprehend that any claim will or might be made against him in respect of any
negligence, default, breach of duty or breach of trust, he may apply to the
court for relief; and the court on the application has the same power to relieve
him as under this section it would have had if it had been a court before which
proceedings against that person for negligence, default, breach of duty or
breach of trust had been brought.
(3) Where a case to which subsection (1) applies is being tried by a
judge with a jury, the judge, after hearing the evidence, may, if he is
satisfied that the defendant or defender ought in pursuance of that subsection
to be relieved either in whole or in part from the liability sought to be
enforced against him, withdraw the case in whole or in part from the jury and
forthwith direct judgment to be entered for the defendant or defender on such
terms as to costs or otherwise as the judge may think proper."
The Registrant's directors and officers are insured against certain
liabilities which they may incur in their capacity as such under a liability
insurance policy carried by the Registrant.
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits.
The following documents are filed as a part of this registration statement.
Those exhibits previously filed and incorporated herein by reference are
identified below by asterisks.
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C> <C>
2.1 -- Agreement and Plan of Merger by and among Alliance Resources Plc,
Alliance Resources (Delaware), Inc. and LaTex Resources, Inc., dated
August 12, 1996 (attached as Appendix B to the Prospectus and Proxy
Statement included as a part of this Registration Statement).
2.2* -- Form of Proxy for Special Meeting of LaTex Resources, Inc.
2.3** -- Assignment of Overriding Royalty between Alliance Resources Plc
and Bank of America NT & SA.
3.1* -- Memorandum of Association of Alliance Resources Plc
3.2* -- Articles of Association of Alliance Resources Plc
3.3 -- Form of Warrant Agreement relating to Warrants to be issued to Society National Bank as
Warrant Agent for holders of certain LaTex Warrants.
3.4 -- Warrant Agreement and form of Warrant to be issued to all other holders of LaTex Warrants.
3.5** -- Warrant Agreement to be entered into between Alliance Resources Plc and affiliate of Bank of
America NT & SA.
3.6 -- Registration Rights Agreement between Alliance Resources Plc and affiliate of Bank of America NT & SA.
3.7 -- Form of Articles of Association of Alliance Resources Plc to be adopted concurrently
with Merger.
5.1 -- Form of Opinion of Ashurst Morris Crisp regarding validity of shares
8.1 -- Opinion of Jenkens & Gilchrist, a professional corporation regarding
United States federal income tax matters
8.2 -- Form of Opinion of Ashurst Morris Crisp regarding United Kingdom income tax matters (included in
their opinion filed as Exhibit 5.1)
10.1* -- Executive Service Agreement between Alliance Resources Plc and John A. Keenan dated October 15, 1996.
10.2* -- Executive Service Agreement between Alliance Resources Plc and Paul R.
Fenemore dated September 20, 1996.
10.3* -- Executive Service Agreement between Alliance Resources Plc and H. Brian
K. Williams dated December 16, 1996.
22.1* -- Subsidiaries
24.1* -- Consent of KPMG Audit Plc.
24.2 -- Consent of Briscoe & Burke
24.3** -- Consent of Ashurst Morris Crisp (included in their opinion filed as Exhibit 5.1).
24.4** -- Consent of Wood Roberts LLC.
24.5* -- Consent of Ryder Scott Company
24.6 -- Consent of Lee Keeling and Associates, Inc.
24.7* -- Consent of Jenkens & Gilchrist, a professional corporation (included
in their opinion filed as Exhibit 8.1)
25.1 -- Power of Attorney (contained on the Signature Page of this Registration Statement).
</TABLE>
* Previously filed.
** To be filed by amendment.
II-2
<PAGE>
(b) Financial Statement Schedules
Not applicable.
(c) Reports, Opinions or Appraisals
Form of opinions of Wood Roberts LLC (attached as Appendix C to the
Proxy Statement included in this registration statement).
Item 22. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file, during any period which offers or sales are being made,
a post-effective amendment to this registration statement;
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change in such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(4) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than payment by the Registrant
of expenses incurred or paid by a director, officer, or controlling person of
the Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(5) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A
II-3
<PAGE>
and contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4), or 497(h) under the Securities Act shall be deemed to be part
of this Registration Statement as of the time it was declared effective.
(6) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
The Registrant undertakes that every prospectus (i) that is filed pursuant
to paragraph (1) immediately preceding, or (ii) that purports to meet the
requirements of section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes that, for the purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes: (i) to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means; and (ii) to arrange or provide for a facility in the
U.S. for the purpose of responding to such requests. The undertaking in
subparagraph (i) above include information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction and the company
being acquired involved therein, that was not the subject of and included in the
registration statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, State of Texas,
on March 12, 1997.
ALLIANCE RESOURCES PLC
(Registrant)
By: JOHN A. KEENAN
-----------------------------------
John A. Keenan, Managing Director
II-5
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
JOHN A. KEENAN Managing Director March 12, 1997
- --------------
John A. Keenan
*
- -- Financial Director March 12, 1997
H. Brian K. Williams
*
- -- Director of Operations March 12, 1997
Paul R. Fenemore and Business Development
*
- -- Director March 12, 1997
Stanley Robinson
*
- -- Director March 12, 1997
Christopher Samuelson
*
- -- Chairman, Director March 12, 1997
D. Patrick Maley
*
- -- Director March 12, 1997
William Kennedy
*
- - Director March 12, 1997
Philip Douglas
</TABLE>
____________________
* By John A. Keenan, by Power of Attorney
II-6
<PAGE>
EXHIBIT 3.3
Dated 199_
----------------------------------------
(1) ALLIANCE RESOURCES PLC
- and -
(2) SOCIETY NATIONAL BANK
-------------------------
WARRANT AGREEMENT
-------------------------
ASHURST MORRIS CRISP
Broadwalk House
5 Appold Street
London EC2A 2HA
Tel: 0171-638-1111
Fax: 0171-972-7990
ASC/A90200030
<PAGE>
CONTENTS
CLAUSE PAGE
1. DEFINITIONS................................................... 1
2. APPOINTMENT OF WARRANT AGENT.................................. 2
3. WARRANTS AND ISSUANCE OF WARRANT CERTIFICATES................. 3
4. FORM AND EXECUTION OF WARRANT CERTIFICATES.................... 3
5. EXERCISE OF WARRANTS.......................................... 4
6. RESERVATION OF SHARES AND PAYMENT OF TAXES.................... 5
7. REGISTRATION OF TRANSFER OF WARRANT CERTIFICATES.............. 5
8. LOSS OR MUTILATION............................................ 6
9. ADJUSTMENT OF EXERCISE PRICE AND SHARES....................... 6
10. EXTENSION OF WARRANT EXERCISE PERIOD.......................... 9
11. PURCHASE OR REDEMPTION OF WARRANTS BY THE COMPANY............. 9
12. DUTIES, COMPENSATION AND TERMINATION OF WARRANT AGENT......... 10
13. MODIFICATION OF AGREEMENT..................................... 11
14. NOTICES....................................................... 12
15. PERSONS BENEFITING............................................ 12
16. FURTHER INSTRUMENTS........................................... 13
17. SEVERABILITY.................................................. 13
18. WAIVER........................................................ 13
19. GENERAL PROVISIONS............................................ 13
<PAGE>
WARRANT AGREEMENT
THIS AGREEMENT dated as of _____ __, ____ between Alliance Resources Plc, a
company incorporated under the laws of England and Wales (the "COMPANY") and
Society National Bank, a national banking association organised and existing
under the laws of the United States (the "WARRANT AGENT").
RECITALS
(A) The Company has determined by a resolution of its Board of Directors (being
duly empowered and authorised by the Memorandum and Articles of Association
of the Company to issue up to __________ warrants (the "Warrants") each
entitling the holder thereof, on specified subscription dates, to subscribe
for ordinary shares of 40p each in the capital of the Company ("Common
Shares", and such shares being the "Warrant Shares") and has determined to
constitute the same in the manner hereinafter appearing.
(B) The Warrants have been created in connection with the merger of a
subsidiary of the Company and LaTex Resources Inc pursuant to an Agreement
and Plan of Merger dated 12th August 1996 (the "Merger Agreement").
(C) The particulars subject to which the Warrants are created are set out in
this Agreement.
(D) The Company desires to provide for the issuance of warrant certificates
(the "WARRANT CERTIFICATES") representing the Warrants, upon completion of
the Merger Agreement.
(E) The Company desires the Warrant Agent to act on behalf of the Company, and
the Warrant Agent is willing to so act, in connection with the issuance,
registration, transfer and exchange of Warrant Certificates and exercise of
the Warrants.
NOW, THEREFORE, in consideration of the foregoing and the mutual agreements
hereinafter set forth and for the purpose of defining the terms and provisions
of the Warrant Certificates and the Warrants and the respective rights and
obligations thereunder of the Company, the registered holders of the Warrant
Certificates and the Warrant Agent, the parties hereto agree as follows:-
1. DEFINITIONS
As used herein:-
1.1 "COMMON SHARES" means shares of the Company of any class, whether now
or hereafter authorised, which have the right to participate in the
distribution of earnings and assets of the Company without limit as to
amount or percentage, which as of the date hereof consist of the
Company's Ordinary shares of 40p each;
"CORPORATE OFFICE" means the place of business of the Warrant Agent
located in Dallas, Texas, or its successor (for the mailing address of
the Warrant Agent, see clause [13] hereof);
<PAGE>
"EFFECTIVE DATE" means the date on which the Merger Agreement is
completed;
"EXERCISE PERIOD" means the period commencing on the Effective Date
and ending on the Expiration Date;
"EXERCISE PRICE" means a purchase price of __________ per Common Share
(the "WARRANT EXERCISE PRICE");
"EXPIRATION DATE" means 5.00 p.m. Central Standard or Daylight Time on
19 November 1997;
"REGISTERED HOLDER" means the person in whose name any Warrant
Certificate shall be registered on the books maintained by the Warrant
Agent pursuant to this agreement;
"SUBSIDIARY" means any corporation of which shares having ordinary
voting power to elect a majority of the board of directors of such
corporation (regardless of whether the shares of any other class or
classes of such corporation shall have or may have voting power by
reason of the happening of any contingency) are at the time directly
or indirectly owned by the Company or one or more subsidiaries of the
Company;
"TRANSFER AGENT" means the Company's transfer agent, Society National
Bank, or its successor;
"WARRANT" or "WARRANTS" means and includes up to __________ Warrants,
each to purchase 1 Common Share;
"WARRANT SHARES" means and includes up to __________ Common Shares and
any additional Common Shares or other property which may hereafter be
issuable or deliverable on exercise of the Warrants pursuant to clause
9 of this agreement.
2. APPOINTMENT OF WARRANT AGENT
The Company hereby appoints the Warrant Agent to act as agent for the
Company in accordance with the instructions set forth hereafter in this
agreement, and the Warrant Agent hereby accepts such appointment and agrees
to perform the duties and obligations required of it, as such duties and
obligations are set forth herein.
3. WARRANTS AND ISSUANCE OF WARRANT CERTIFICATES
3.1 Each Warrant shall initially entitle the Registered Holder of the Warrant
Certificate representing such Warrant to purchase one Common Share on
exercise thereof, subject to modification and adjustment as hereinafter
provided in clause 9. Warrant Certificates representing up to an aggregate
of __________ Warrants of the Company shall be executed by the proper
officers of the Company and delivered to the Transfer Agent of the
Company's Common Shares for countersignature at the closing of the proposed
public offering. The
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<PAGE>
Warrant Certificates will be issued and delivered by the Warrant Agent on
written order of the Company signed by its president and attested by its
secretary or assistant secretary. The Warrant Agent shall deliver Warrant
Certificates in required whole number denominations to the persons entitled
thereto in connection with any transfer or exchange permitted under this
agreement.
3.2 Except as provided in clause 9 hereof, the Warrant Shares shall be issued
only on or after the Exercise Date (hereinafter defined) on exercise of the
Warrants or on transfer or exchange of the Warrant Shares.
4. FORM AND EXECUTION OF WARRANT CERTIFICATES
4.1 The Warrant Certificates shall be substantially in the form attached as
exhibit "A" and may have such letters, numbers or other marks of
identification and such legends, summaries or endorsements printed,
lithographed or engraved thereon as the Company may deem appropriate and as
are not inconsistent with the provisions of this agreement. The Warrant
Certificates shall be dated as of the date of issuance, whether on initial
issuance, transfer, exchange or in lieu of mutilated, lost, stolen or
destroyed Warrant Certificates.
4.2 Warrant Certificates shall be executed on behalf of the Company by its
president and secretary, by manual signatures or by facsimile signatures
printed thereon, and shall have imprinted thereon a facsimile of the
Company's seal. Warrant Certificates shall be manually countersigned by
the Warrant Agent and shall not be valid for any purpose unless so
countersigned. In the event any officer of the Company who executed the
Warrant Certificates shall cease to be an officer of the Company before the
date of issuance of the Warrant Certificates or before countersignature and
delivery by the Warrant Agent, such Warrant Certificates may be
countersigned, issued and delivered by the Warrant Agent with the same
force and effect as though the person who signed such Warrant Certificates
had not ceased to be an officer of the Company.
5. EXERCISE OF WARRANTS
5.1 The Warrants shall be exercisable during the Exercise Period, beginning on
the Effective Date and continuing until the Expiration Date. A Warrant
shall be deemed to have been exercised immediately prior to the close of
business on the date of the surrender for exercise (the "EXERCISE DATE") of
the Warrant Certificate. The exercise form shall be executed by the
Registered Holder thereof or his attorney duly authorised in writing and
shall be delivered together with payment to the Warrant Agent, in cash or
by official bank or certified cheque, of an amount in lawful money of the
United States of America. Such payment shall be in an amount equal to the
Exercise Price per Warrant as hereinabove defined.
5.2 The person entitled to receive the number of Warrant Shares deliverable on
such exercise shall be treated for all purposes as the holder of such
Warrant Shares as of the close of business on the Exercise Date. The
Company shall not be obligated to issue any fractional share interests in
Warrant Shares issuable on exercise of a Warrant. If more than one Warrant
shall be exercised at one time by the same Registered Holder, the number of
full
-3-
<PAGE>
shares which shall be issuable on exercise thereof shall be computed on the
basis of the aggregate number of full shares issuable on such exercise.
5.3 As soon as practicable on or after the Exercise Date and in any event
within 30 days after such date, the Warrant Agent shall cause to be issued
and delivered to the person or persons entitled to receive the same, a
certificate or certificates for the number of Warrant Shares deliverable on
such exercise. No adjustment shall be made in respect of cash dividends on
Warrant Shares deliverable on exercise of any Warrant. The Warrent Agent
shall promptly notify the Company in writing of any exercise of any Warrant
and of the number of Warrant Shares delivered and shall cause payment of an
amount in cash equal to the Exercise Price to be made promptly to the order
of the Company. The parties contemplate such payments will be made by the
Warrant Agent to the Company on a weekly basis and will consist of
collected funds only. The Warrant Agent shall hold any proceeds collected
and not yet paid to the Company in a federally-insured escrow account at a
commercial bank selected by agreement of the Company and the Warrant Agent,
at all times relevant hereto. Following a determination by the Warrant
Agent that collected funds have been received, the Warrant Agent shall
cause share certificates to be issued representing the number of Warrants
exercised by the holder.
5.4 Expenses incurred by the Warrant Agent hereunder, including administrative
costs, costs of maintaining records and other expenses, shall be paid by
the Company according to the standard fees imposed by the Warrant Agent for
such services.
5.5 A detailed accounting statement setting forth the number of Warrants
exercised, the net amount of exercised funds and all expenses incurred by
the Warrant Agent shall be transmitted to the Company on payment of each
exercise amount. Such accounting statement shall serve as an interim
accounting for the Company during the Exercise Period. The Warrant Agent
shall render to the Company a complete accounting setting forth the number
of Warrants exercised, the identity of persons exercising such Warrants,
the number of shares issued, the amounts to be distributed to the Company
and all other expenses incurred by the Warrant Agent, at the completion of
the Exercise Period. [COPIES OF ALL OF THE ABOVE SHALL BE TRANSMITTED
PROMPTLY TO CHELSEA STREET SECURITIES, INC., 222 WEST LAS COLINAS
BOULEVARD, SUITE 2000, IRVING, TEXAS 75039.]
6. RESERVATION OF SHARES AND PAYMENT OF TAXES
6.1 The Company covenants that it will at all times keep available for issue
sufficient authorised but unissued Common Shares as shall then be issuable
on exercise of all outstanding Warrants. The Company covenants that all
Warrant Shares, when issued, shall be duly and validly issued, fully paid
and non-assessable, and free from all taxes, liens and charges with respect
to the issue thereof.
6.2 If any Warrant Shares require registration with or approval of any
government authority under any federal or state law before such shares may
be validly issued or delivered, the Company covenants it will in good faith
and as expeditiously as possible endeavour to secure such registration or
approval, as the case may be.
-4-
<PAGE>
6.3 The Warrant holder shall pay all documentary stamp or similar taxes and
other government charges that may be imposed with respect to the issuance
of the Warrants, or the issuance, transfer or delivery of any Warrant
Shares on exercise of the Warrants. In the event the Warrant Shares are to
be delivered in a name other than the name of the Registered Holder of the
Warrant Certificate, no such delivery shall be made unless the person
requesting the same has paid to the Warrant Agent the amount of any such
taxes or charges incident thereto.
6.4 The Warrant Agent is hereby irrevocably authorised to requisition
certificates for Warrant Shares from the Company's Transfer Agent as
required from time to time. The Company has, contemporaneously with the
execution of this agreement, authorised the Transfer Agent to comply with
all such requisitions. The Company will file with the Warrant Agent a
statement setting forth the name and address of its Transfer Agent for
Common Shares issuable on exercise of the Warrants and of each successor
Transfer Agent, if any.
7. REGISTRATION OF TRANSFER OF WARRANT CERTIFICATES
7.1 The Warrant Certificates may not be transferred in whole or in part except
as authorised in this agreement. Warrant Certificates to be exchanged
shall be surrendered to the Warrant Agent at its corporate office. The
Company shall execute, and the Warrant Agent shall countersign, issue and
deliver in exchange therefor, the Warrant Certificate or Certificates which
the holder making the transfer shall be entitled to receive.
7.2 The Warrant Agent shall keep transfer books at its corporate office in
which it shall register Warrant Certificates and the transfer thereof. On
due presentment for transfer of any Warrant Certificates at such office,
the Company shall execute, and the Warrant Agent shall issue and deliver to
the transferee or transferees, a new Warrant Certificate or Certificates
representing an equal aggregate number of Warrants.
7.3 The Warrants will not be listed or traded on a securities exchange.
8. LOSS OR MUTILATION
On receipt by the Company and the Warrant Agent of evidence satisfactory as
to the ownership of and the loss, theft, destruction or mutilation of any
Warrant Certificate, the Company shall execute, and the Warrant Agent shall
countersign and deliver in lieu thereof, a new Warrant Certificate
representing an equal aggregate number of Warrants. In the case of loss,
theft or destruction of any Warrant Certificate, the individual requesting
issuance of a new Warrant Certificate shall be required to indemnify the
Company and Warrant Agent in an amount satisfactory to each of them. In
the event a Warrant Certificate is mutilated, such certificate shall be
surrendered and cancelled by the Warrant Agent prior to delivery of a new
Warrant Certificate. Applicants for a substitute Warrant Certificate shall
also comply with such other regulations and pay such other reasonable
charges as the Company may prescribe.
-5-
<PAGE>
9. ADJUSTMENT OF EXERCISE PRICE AND SHARES
9.1 In the event, prior to the expiration of the Warrants by exercise or by
their terms, the Company shall issue any of its Common Shares as a stock
dividend or shall subdivide the number of outstanding Common Shares into a
greater number of shares, then, in either of such events, the Exercise
Price in effect at the time of such action shall be reduced proportionately
and the number of Common Shares purchasable pursuant to the Warrants shall
be increased proportionately. Conversely, in the event the Company shall
reduce the number of its outstanding Common Shares by combining such shares
into a smaller number of shares, then, in such event, the Exercise Price in
effect at the time of such action shall be increased proportionately and
the number of Common Shares at that time purchasable pursuant to the
Warrants shall be decreased proportionately. Such stock dividend paid or
distributed on the Common Shares in shares of any other class of the
Company or securities convertible into Common Shares shall be treated as a
dividend paid or distributed in Common Shares to the extent Common Shares
are issuable on the payment or conversion thereof.
9.2 In the event, prior to the expiration of the Warrants by exercise or by
their terms, the Company shall be recapitalised by reclassifying its
outstanding Common Shares into shares with a different par value, or by
changing its outstanding Common Shares to shares without par value or in
the event of any other material change of the capital structure of the
Company or of any successor corporation by reason of any reclassification,
recapitalisation or conveyance, prompt, proportionate, equitable, lawful
and adequate provision shall be made whereby any holder of the Warrants
shall thereafter have the right to purchase, on the basis and the terms and
conditions specified in this agreement, in lieu of the Common Shares of the
Company theretofore purchasable on the exercise of any Warrant, such
securities or assets as may be issued or payable with respect to or in
exchange for the number of Common Shares of the Company theretofore
purchasable on exercise of the Warrants had such reclassification,
recapitalisation or conveyance not taken place; and in any such event, the
rights of any holder of a Warrant to any adjustment in the number of Common
Shares purchasable on exercise of such Warrant, as set forth above, shall
continue and be preserved in respect of any stock, securities or assets
which the holder becomes entitled to purchase; provided, however, that a
merger, acquisition of a going business or a portion thereof (whether for
cash, stock, notes, other securities, or a combination of cash and
securities), exchange of stock for stock, exchange of stock for assets, or
like transaction involving the Company will not be considered a "MATERIAL
CHANGE" for purposes of this clause 9.2, and no adjustment shall be made
under this clause 9 by reason of any such merger, acquisition, exchange of
stock for stock, exchange of stock for assets, or like transaction.
9.3 In the event the Company, at any time while the Warrants shall remain
unexpired and unexercised, shall sell all or substantially all of its
property, or dissolves, liquidates or winds up its affairs, prompt,
proportionate, equitable, lawful and adequate provision shall be made as
part of the terms of such sale, dissolution, liquidation or winding up
such that the holder of a Warrant may thereafter receive, on exercise of
such Warrant, in lieu of each Common Share of the Company which such holder
would have been entitled to receive upon exercise of such Warrant, the same
kind and amount of any stock, securities
-6-
<PAGE>
or assets as may be issuable, distributable or payable on any such sale,
dissolution, liquidation or winding up with respect to each Common Share of
the Company; provided, however, that in the event of any such sale,
dissolution, liquidation or winding up, the right to exercise the Warrants
shall terminate on a date fixed by the Company, such date to be not earlier
than 5.00 p.m., Central Time, on the 30th day next succeeding the date on
which notice of such termination of the right to exercise the Warrants has
been given by mail to the holders thereof at such addresses as may appear
on the books of the Company.
9.4 In the event, prior to the expiration of the Warrants by exercise or by
their terms, the Company shall take a record of the holders of its Common
Shares for the purpose of entitling them to purchase its Common Shares at a
price per share more than ten per cent. below the then current market price
per share (as defined below) of its Common Shares at the date of taking
such record, then (a) the number of Common Shares purchasable pursuant to
the Warrants shall be redetermined as follows: the number of Common Shares
purchasable pursuant to a Warrant immediately prior to such adjustment
(taking in account fractional interests to the nearest 1,000th of a share)
shall be multiplied by a fraction, the numerator of which shall be the
number of Common Shares of the Company then outstanding (excluding the
Common Shares then owned by the Company) immediately prior to the taking of
such record, plus the number of additional shares offered for purchase, and
the denominator of which shall be the number of Common Shares of the
Company outstanding (excluding the Common Shares owned by the Company)
immediately prior to the taking of such record, plus the number of shares
which the aggregate offering price of the total number of additional shares
so offered would purchase at such current market price; and (b) the
Exercise Price per Common Share purchasable pursuant to a Warrant shall be
redetermined as follows: the Exercise Price in effect immediately prior to
the taking of such record shall be multiplied by a fraction, the numerator
of which is the number of Common Shares purchasable immediately prior to
the taking of such record, and the denominator of which is the number of
Common Shares purchasable immediately after the taking of such record as
determined pursuant to clause 9.4(a) above; provided, however (c) that any
adjustment in the number of shares issuable as set forth above shall be
effective only to the extent sufficient Common Shares have been registered
through a Registration Statement filed with the Securities and Exchange
Commission, and (d) that any adjustment in the Exercise Price does not
cause the Company to receive proceeds in excess of the amount authorised by
any such Registration Statement. For the purpose hereof, the current
market price per Common Share of the Company at any date shall be deemed to
be the average of the middle market price as derived from the London Stock
Exchange Daily Official List for 30 consecutive business days commencing 15
business days prior to the record date.
9.5 On exercise of the Warrants by the holders, the Company shall not be
required to deliver fractions of Common Shares; provided, however, that
prompt, proportionate, equitable, lawful and adequate adjustment in the
Exercise Price payable shall be made in respect of any such fraction of one
Common Share on the basis of the Exercise Price per share.
9.6 In the event, prior to expiration of the Warrants by exercise or by their
terms, the Company shall determine to take a record of the holders of its
Common Shares for the
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<PAGE>
purpose of determining shareholders entitled to receive any stock dividend,
distribution or other right which will cause any change or adjustment in
the number, amount, price or nature of the Common Shares or other stock,
securities or assets deliverable on exercise of the Warrants pursuant to
the foregoing provisions, the Company shall give to the Registered Holders
of the Warrants at the addresses as may appear on the books of the Company
at least 15 days' prior written notice to the effect that it intends to
take such a record. Such notice shall specify the date as of which such
record is to be taken; the purpose for which such record is to be taken;
and the number, amount, price and nature of the Common Shares or other
stock, securities or assets which will be deliverable on exercise of the
Warrants after the action for which such record will be taken has been
completed. Without limiting the obligation of the Company to provide notice
to the Registered Holders of the Warrant Certificates of any corporate
action hereunder, the failure of the Company to give notice shall not
invalidate such corporate action of the Company.
9.7 The Warrant shall not entitle the holder thereof to any of the rights of
shareholders or to any dividend declared on the Common Shares, unless the
Warrant is exercised and the Common Shares purchased prior to the record
date fixed by the board of directors of the Company for the determination
of holders of Common Shares entitled to such dividend or other right.
9.8 No adjustment of the Exercise Price shall be made as a result of or in
connection with (a) the establishment of one or more employee stock option
plans for employees of the Company, or the modification, renewal or
extension of any such plan, or the issuance of Common Shares on exercise of
any options pursuant to any such plan, (b) the issuance of individual
warrants or options to purchase Common Shares, the issuance of Common
Shares upon exercise of such warrants or options, or the issuance of Common
Shares in connection with compensation arrangements for directors,
officers, employees or agents of the Company or any Subsidiary, and the
like, or (c) the issuance of Common Shares in connection with a merger,
acquisition of a going business or a portion thereof (whether for cash,
stock, notes, other securities, or a combination of cash and securities),
exchange of stock for stock, exchange of stock for assets, or like
transaction.
10. EXTENSION OF WARRANT EXERCISE PERIOD
The Warrant Exercise Period may be extended one or more times, and from
time to time, in the sole discretion of the Company and the Warrant Agent.
Any such extension shall be evidenced by a written modification of this
Warrant Agreement executed by the Company and the Warrant Agent. Within
fifteen days of the execution of any such written modification of this
Warrant Agreement, the Company shall file with the Securities and the
Exchange Commission a Post-effective Amendment to the Registration
Statement registering the Common Shares underlying the Warrants.
11. PURCHASE OR REDEMPTION OF WARRANTS BY THE COMPANY
11.1 The Warrants are redeemable upon 30 days' notice to their holders for
$.01 per Warrant. Notice of any such redemption will be mailed by the
Company to the Registered Holders
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<PAGE>
of the Warrants at the addresses as may appear on the books of the Company.
Unless, prior to the expiration of such 30-day notice period, a Registered
Holder exercises his right to purchase the Shares of Common Stock covered
by his Warrants, such Registered Holder will forfeit his right to do so,
and will be entitled only to the redemption price of such Warrants, if
redeemed.
11.2 In the event the Company shall purchase, redeem, or otherwise acquire
Warrants, the same shall thereupon be delivered to the Warrant Agent and be
cancelled and retired by the Warrant Agent.
12. DUTIES, COMPENSATION AND TERMINATION OF WARRANT AGENT
12.1 The Warrant Agent shall act hereunder as agent and in a ministerial
capacity for the Company, and its duties shall be determined solely by the
provisions hereof. The Warrant Agent shall not, by issuing and delivering
Warrant Certificates or by any other act hereunder, be deemed to make any
representations as to the validity, value or authorisation of the Warrant
Certificates or the Warrants represented thereby or of the Common Shares or
other property delivered on exercise of any Warrant. The Warrant Agent
shall not be under any duty or responsibility to any holder of the Warrant
Certificates to make or cause to be made any adjustment of the Exercise
Price or to determine whether any fact exists which may require any such
adjustments.
12.2 The Warrant Agent shall not (a) be liable for any recital or statement of
fact contained herein or for any action taken or omitted by it in reliance
on any Warrant Certificate or other document or instrument believed by it
in good faith to be genuine and to have been signed or presented by the
proper party or parties, (b) be responsible for any failure on the part of
the Company to comply with any of its covenants and obligations contained
in this agreement or in the Warrant Certificates, or (c) be liable for any
act or omission in connection with this agreement except for its own
negligence or wilful misconduct.
12.3 The Warrant Agent may at any time consult with counsel satisfactory to it
(who may be counsel for the Company) and shall incur no liability or
responsibility for any action taken or omitted by it in good faith in
accordance with such notice, statement, instruction, request, direction,
order or demand.
12.4 Any notice, statement, instruction, request, direction, order or demand
of the Company shall be sufficiently evidenced by an instrument signed by
its president and attested by its secretary or assistant secretary. The
Warrant Agent shall not be liable for any action taken or omitted by it in
accordance with such notice, statement, instruction, request, direction,
order or demand.
12.5 The Company agrees to pay the Warrant Agent reasonable compensation for
its services hereunder and to reimburse the Warrant Agent for its
reasonable expenses. The Company further agrees to indemnify the Warrant
Agent against any and all losses, expenses and liabilities, including
judgments, costs and counsel fees, for any action taken or omitted by the
Warrant Agent in the execution of its duties and powers hereunder,
excepting losses,
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<PAGE>
expenses and liabilities arising as a result of the Warrant Agent's
negligence or wilful misconduct.
12.6 The Warrant Agent may resign its duties or the Company may terminate the
Warrant Agent and the Warrant Agent shall be discharged from all further
duties and liabilities hereunder (except liabilities arising as a result of
the Warrant Agent's own negligence or wilful misconduct) on 30 days' prior
written notice to the other party. At least 15 days prior to the date such
resignation is to become effective, the Warrant Agent shall cause a copy of
such notice of resignation to be mailed to the Registered Holder of each
Warrant Certificate. On such resignation or termination, the Company shall
appoint a new Warrant Agent. If the Company shall fail to make such
appointment within a period of 30 days after it has been notified in
writing of the resignation by the Warrant Agent, then the Registered Holder
of any Warrant Certificate may apply to any court of competent jurisdiction
for the appointment of a new Warrant Agent. Any new Warrant Agent, whether
appointed by the Company or by such court, shall be a bank or trust company
having a capital and surplus, as shown by its last published report to its
shareholders, of not less than $1,000,000.
12.7 After acceptance in writing of an appointment of a new Warrant Agent is
received by the Company, such new Warrant Agent shall be vested with the
same powers, rights, duties and responsibilities as if it had been
originally named herein as the Warrant Agent, without any further
assurance, conveyance, act or deed; provided, however, if it shall be
necessary or expedient to execute and deliver any further assurance,
conveyance, act or deed, the same shall be done at the expense of the
Company and shall be legally and validly executed. The Company shall file
a notice of appointment of a new Warrant Agent with the resigning Warrant
Agent and shall forthwith cause a copy of such notice to be mailed to the
Registered Holder of each Warrant Certificate.
12.8 Any corporation into which the Warrant Agent or any new Warrant Agent may
be converted or merged, or any corporation resulting from any consolidation
to which the Warrant Agent or any new Warrant Agent shall be a party, or
any corporation succeeding to the corporate trust business of the Warrant
Agent shall be a successor Warrant Agent under this agreement, provided
that such corporation is eligible for appointment as a successor to the
Warrant Agent. Any such successor Warrant Agent shall promptly cause
notice of its succession as Warrant Agent to be mailed to the Company and
to the Registered Holder of each Warrant Certificate. No further action
shall be required for establishment and authorisation of such successor
Warrant Agent.
12.9 The Warrant Agent, its officers or directors and its subsidiaries or
affiliates may buy, hold or sell Warrants or other securities of the
Company and otherwise deal with the Company in the same manner and to the
same extent and with like effect as though it were not the Warrant Agent.
Nothing herein shall preclude the Warrant Agent from acting in any other
capacity for the Company.
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<PAGE>
13. MODIFICATION OF AGREEMENT
The Warrant Agent and the Company may by supplemental agreement make any
changes or corrections in this agreement they shall deem appropriate to
cure any ambiguity or to correct any defective or inconsistent provision or
mistake or error herein contained. Additionally, the parties may make any
changes or corrections deemed necessary which shall not adversely affect
the interests of the holders of Warrant Certificates; provided, however,
this agreement shall not otherwise be modified, supplemented or altered in
any respect, except with the consent in writing of the Registered Holders
of Warrant Certificates representing not less than 66 2/3 per cent. of the
Warrants outstanding; provided, however, that no change in the number or
nature of the Warrant Shares purchasable on exercise of a Warrant, or the
Exercise Price or the Exercise Period thereof shall be made without the
consent, in writing, of the Registered Holder of the Warrant Certificate
representing such Warrant, other than such changes as are specifically
prescribed by this agreement.
14. NOTICES
All notices, demands, elections, opinions or requests (however
characterised or described) required or authorised hereunder shall be
deemed given sufficiently in writing and set by registered or certified
mail, return receipt requested and postage prepaid, or by tested telex,
telegram or cable to:-
in the case of the Company: Alliance Resources plc
Kingsbury House
15-17 King Street
London SW1Y 6QU
and, in the case of the Warrant Agent: Society National Bank
P. O. Box 2320
Dallas, Texas 75221-2320
and, if to the Registered Holder of a Warrant Certificate, at the address
of such holder as set forth on the books maintained by the Warrant Agent.
15. PERSONS BENEFITING
This agreement shall be binding upon and inure to the benefit of the
Company, the Warrant Agent and their respective successors and assigns, and
the holders from time to time of the Warrant Certificates. Nothing in this
agreement is intended to or shall be construed to confer on any other
person any right, remedy or claim or to impose on any other person any
duty, liability or obligation except that the parties agree that Argent
Securities, Inc. is relying on each party to properly perform its duties
and obligations under this agreement.
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<PAGE>
16. FURTHER INSTRUMENTS
The parties shall execute and deliver any and all such other instruments
and shall take any and all such other actions as may be reasonable or
necessary to carry out the intention of this agreement.
17. SEVERABILITY
If any provision of this agreement shall be held, declared or pronounced
void, voidable, invalid, unenforceable or inoperative for any reason by any
court of competent jurisdiction, government authority or otherwise, such
holding, declaration or pronouncement shall not adversely affect any other
provision of this agreement, which shall otherwise remain in full force and
effect and be enforced in accordance with its terms, and the effect of such
holding, declaration or pronouncement shall be limited to the territory or
jurisdiction in which made.
18. WAIVER
All the rights and remedies of either party under this agreement are
cumulative and not exclusive of any other rights and remedies as provided
by law. No delay or failure on the part of either party in the exercise of
any right or remedy arising from a breach of this agreement shall operate
as a waiver of any subsequent right or remedy arising from a subsequent
breach of this agreement. The consent of any party where required
hereunder to any act or occurrence shall not be deemed to be a consent to
any other act or occurrence.
19. GENERAL PROVISIONS
This agreement shall be construed and enforced in accordance with, and
governed by, the laws of the State of Texas. Except as otherwise expressly
stated herein, time is of the essence in performing hereunder. This
agreement embodies the entire agreement and understanding between the
parties and supersedes all prior agreements and understandings relating to
the subject matter hereof, and this agreement may not be modified or
amended or any term or provision hereof waived or discharged except in
writing signed by the party against whom such amendment, modification,
waiver or discharge is sought to be enforced. The headings of this
agreement are for convenience of reference only and shall not limit or
otherwise affect the meaning thereof. This agreement may be executed in
any number of counterparts, each of which shall be deemed an original, but
all of which taken together shall constitute one and the same instrument.
IN WITNESS whereof this agreement has been executed on the date first above
written.
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<PAGE>
Signed by )
)
for and on behalf of ALLIANCE RESOURCES PLC
in the presence of:- )
Signed by )
)
for and on behalf of SOCIETY NATIONAL )
BANK in the presence of:- )
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<PAGE>
EXHIBIT 3.4
DATED 1997
----------------------------------------
ALLIANCE RESOURCES PLC
--------------------
WARRANT INSTRUMENT
relating to the issue of Warrants entitling
the Warrantholder to subscribe for
Ordinary Shares of 40p each in
Alliance Resources PLC
--------------------
ASHURST MORRIS CRISP
Broadwalk House
5 Appold Street
London EC2A 2HA
Tel: 0171-638-1111
Fax: 0171-972-7990
ASC/PDG/A90200030
<PAGE>
THIS WARRANT INSTRUMENT is entered into by way of deed poll this day
of __________ 1997 by Alliance Resources Plc a company registered in England and
Wales with number 2532955 whose registered office is at Kingsbury House, 15-17
King Street, London, SW1Y 6QU ("the Company").
WHEREAS:-
(1) The Company has determined by a Resolution of its Board of Directors (being
duly empowered and authorised by the Memorandum and Articles of Association
of the Company) to issue up to __________ Warrants each entitling the
holder thereof, on specified subscription dates, to subscribe for ordinary
shares of 40 pence each in the capital of the Company ("Ordinary Shares")
and has determined to constitute the same in the manner hereinafter
appearing.
(2) The Warrants have been created in connection with the merger of the Company
with LaTex Resources Inc. pursuant to an Agreement and Plan of Merger (the
"Merger Agreement") dated 12th August 1996, details of such merger being
set out in the listing particulars relating to the Company dated __________
1997.
(3) The particulars subject to which the Warrants are created are set out in
the Schedule hereto.
NOW THIS WARRANT INSTRUMENT WITNESSES AND THE COMPANY HEREBY AGREES AND DECLARES
AS FOLLOWS:-
I. INTERPRETATION
In this Warrant Instrument, unless the context otherwise requires, the
expressions defined in the particulars of Warrants set out in the Schedule
hereto shall have the meanings thereby given.
II. WARRANTS
A. The Warrants shall be constituted as follows:-
(a) __________ Series "A" Warrants entitling the holders to subscribe for
Ordinary Shares at a fixed price of __________ pence (subject to the
provisions of the Schedule hereto) at any time prior to __________;
(b) __________ Series "B" Warrants entitling the holders to subscribe for
Ordinary Shares at a fixed price of __________ pence (subject to the
provisions of the Schedule hereto) at any time prior to __________;
(c) __________ Series "C" Warrants entitling the holders to subscribe for
Ordinary Shares at a fixed price of __________ pence (subject to the
provisions of the Schedule hereto) at any time prior to __________;
(d) __________ Series "D" Warrants entitling the holders to subscribe for
Ordinary Shares at a fixed price of __________ pence (subject to the
provisions of the Schedule hereto) at any time prior to __________;
and
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<PAGE>
(c) __________ Series "E" Warrants entitling the holders to subscribe for
Ordinary Shares at a fixed price of __________ pence (subject to the
provisions of the Schedule hereto) at any time prior to __________,
each of the relative final dates for exercise of a Warrant being, in
respect of the Warrants to which it relates, the "Expiry Date" and each of
the relative prices payable upon exercise of a Warrant being, in respect of
the Warrants to which it relates, the "Subscription Price".
B. The Warrants shall only be issued at such time or times as may be required
from time to time to satisfy the Company's obligations pursuant to the
Merger Agreement to issue up to __________ Series "A" Warrants, __________
Series "B" Warrants, __________ Series "C" Warrants, __________ Series "D"
Warrants and __________ Series "E" Warrants and shall rank pari passu in
all respects and without discrimination or preference.
III. CERTIFICATES
Every Warrant holder shall be entitled to receive one certificate for each
Series of the Warrant(s) held by him but joint holders shall be entitled to
only one certificate in respect of the Warrants held jointly by them which
certificates shall be delivered to the joint holder whose name stands first
in the Register. Every certificate shall be under the securities seal of
the Company which shall be affixed in such manner as shall be permitted by
the Articles of Association of the Company. The Company shall comply with
the terms and conditions of the Schedule hereto and the Warrants shall be
held subject to such terms and conditions all of which terms shall be
deemed to be incorporated in this Warrant Instrument and shall be binding
on the Company and the Warrant holders and all persons claiming through or
under them respectively.
IV. APPOINTMENT OF WARRANT AGENT
The Company may in its absolute discretion by Resolution of its Board of
Directors (being duly empowered and authorised by the Memorandum and Articles of
Association of the Company) appoint as agent of the Company such person or
persons as it thinks fit to act in connection with the issue, registration,
transfer and exchange or otherwise of warrants (the "Warrant Agent"). The
Company agrees that the Warrant Agent shall perform the duties and obligations
required of it in accordance with the terms and conditions of the Schedule
hereto and any other terms that the Company sees fit and to undertake all
responsibilities hereby vested for the time being in the Company.
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IN WITNESS whereof the Company has executed this Warrant Instrument as a deed
the day and year first above written.
Executed as a deed by )
Alliance Resources Plc )
acting by two of its directors/ )
one of its directors and )
its secretary )
Director
Director/Secretary
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<PAGE>
SCHEDULE
1. Subscription Rights
(a) A registered holder (a "holder") of a Warrant shall have the right,
exercisable in accordance with paragraph 1(c) below, to subscribe
("the subscription rights") in cash on any date prior to the Expiry
Date in respect of such Warrant, on the following terms: for each
Warrant specified in the Warrant certificate one Ordinary Share at the
Subscription Price in respect of such Warrant payable in full on
subscription. The number and/or the nominal value of Ordinary Shares
to be subscribed and the subscription price are subject to adjustment
pursuant to paragraph 2 below. The subscription rights will not be
exercisable in respect of a fraction of an Ordinary Share. Failure to
exercise a Warrant prior to 5:00 p.m. on the relative Expiry Date will
mean that the Warrant shall become void and all rights attaching to
such Warrant shall cease.
(b) The number of Warrants to which each registered holder of Warrants
shall be entitled shall be evidenced by a Warrant certificate issued
by the Company. Warrant certificates shall be dated as at the date of
issue, whether on initial issue, transfer, exchange of or in lieu of
mutilated, lost, stolen or destroyed Warrant certificates. Warrants
shall be deemed to have been exercised immediately prior to the close
of business on the date of the surrender for exercise of the Warrant
certificate.
(c) In order to exercise the subscription rights in respect of any
Warrants, the registered Warrant holder must, having completed the
notice of subscription on his Warrant certificate, lodge it at the
office of the Registrars of the Company accompanied by a remittance
for the total subscription price of the Ordinary Shares in respect of
which the subscription rights are being exercised. Once lodged, a
notice of subscription shall be irrevocable save with the consent of
the Directors.
(d) Ordinary Shares issued pursuant to the exercise of subscription rights
will be allotted not later than 28 days after, and with effect from,
the date on which the relative duly completed subscription notice
shall be lodged with the Registrars of the Company (the "subscription
date") and Ordinary Share certificates in respect of such Ordinary
Shares will be issued free of charge and dispatched (at the risk of
the persons entitled thereto) not later than 28 days after the
relevant subscription date to the first named person in whose name the
Warrants are registered at the relevant subscription date on (subject
as provided by law) to such other persons as may be named in the form
of nomination upon the reverse of the Warrant certificate. In the
event that not all of the Warrants evidenced by a Warrant certificate
are exercised, the Company shall at the same time issue for no payment
a fresh Warrant certificate in the name of the Warrant holder for any
balance of the subscription rights remaining exercisable.
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<PAGE>
(e) Ordinary Shares allotted pursuant to the exercise of subscription
rights will not rank for any dividends or other distributions
declared, made or paid in respect of any financial year of the Company
prior to the financial year in which the relevant subscription date
falls, nor shall they rank for any dividends or other distributions
declared, made or paid on a date (or by reference to a record date)
prior to the relevant subscription date but, subject thereto, will
rank pari passu in all other respects with the Ordinary Shares in
issue at the relevant subscription date including ranking in full for
all dividends and other distributions in respect of the financial year
in which the relevant subscription date occurs provided that on any
allotment failing to be made pursuant to paragraph 3(c) or 3(d) below,
the Ordinary Shares so to be allotted shall not rank for any dividends
or other distributions declared, made or paid by reference to a record
date prior to the date of allotment.
(f) Application will be made to the London Stock Exchange for the Ordinary
Shares allotted pursuant to any exercise of subscription rights to be
admitted to the Official List and the Company will use all reasonable
endeavors to obtain the admission thereof not later than 28 days after
the relevant subscription date. To the extent not then exercised all
subscription rights in respect of any Series of Warrants shall lapse
at 5:00 pm on the Expiry Date in respect of such Warrants.
(g) The Company shall be entitled in its absolute discretion to impose
such conditions, restrictions, limitation, prohibitions and other
requirements as it may from time to time think fit for the purpose of
complying with relevant laws of the United States and/or Canada.
2. Adjustment of Subscription Price
(a) If, on a date (or by reference to a record date) on or before the
relative Expiry Date in respect of a Warrant, the Company shall allow
any Ordinary Shares fully paid by way of capitalisation of profits or
reserves to holders of Ordinary Shares on the register on a date (or
by reference to a record date) before the relative Expiry Date or upon
any consolidation on sub-division of the Ordinary Shares before such
Expiry Date, the number and/or nominal value of Ordinary Shares to be
subscribed on any subsequent exercise of the subscription rights in
respect of that Warrants will be increased or, as the case may be,
reduced in due proportion and the subscription price per Ordinary
Share will be adjusted accordingly. On an such capitalisation,
consolidation or sub-division the Company will procure that the
auditors for the time being of the Company will verify the correctness
of the appropriate adjustment and, within 28 days of such adjustments,
notice will be sent to each Warrant holder of the adjusted number of
Ordinary Shares to which the Warrant holder is entitled to subscribe
in consequence thereof, fractional entitlements being ignored, such
notice being accompanied by a new Warrant certificate in respect of
such adjusted number of Ordinary Shares.
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<PAGE>
(b) If, on a date (or by reference to a record date) on or before the
relative Expiry Date, the Company makes any offer or invitation
(whether by rights issue, rights offer or otherwise but not being an
offer to which paragraph 3(c) below applies or an offer of shares in
lieu of a cash dividend payment) to the holders of Ordinary Shares in
their capacity as such, or any offer or invitation (not being an offer
to which paragraph 3(d) below applies) is made to such holders
otherwise than by the Company, then the Company shall, as far as it is
able, procure that at the same time the same offer or invitation is
made to the then Warrant holders as if their subscription rights had
been exercisable and had been exercised on the date immediately
preceding the date (or record date) of such offer or invitation on the
terms (subject to any adjustment pursuant to paragraph 2(a) above) on
which the same could have been exercised on the basis then applicable
provided that, if the Directors shall so resolve, in the case of any
offer or invitation made by the Company, the Company shall not be
required to procure that the same offer or invitation is made to the
Warrant holders but the subscription price and/or the number of
Ordinary Shares to be subscribed on any subsequent exercise of the
subscription rights shall be adjusted accordingly. The Company will
procure that the auditors for the time being of the Company will
certify in writing the appropriateness of the adjustments and, within
28 days notice will be sent to each Warrant holder together with a new
Warrant certificate in respect of the adjusted number of Ordinary
Shares to which that Warrant holder is entitled to subscribe in
consequence thereof, fractional entitlements being ignored.
(c) No adjustment shall be made to the subscription price of a Series of
Warrants pursuant to paragraph 2(a) or (b) if such adjustment would
(taken together with the amount of any adjustment carried forward
under the provisions of this paragraph 2(c)) be less than 1 per cent
of the relative subscription price then in force and on any adjustment
the adjusted subscription price will be rounded down to the nearest
0.5p. Any adjustment not so made and any amount by which the
subscription price is rounded down will be carried forward and taken
into account in any subsequent adjustment.
3. Other provisions
So long as any subscription rights remain exercisable:
(a) the Company shall keep available for issue sufficient authorised but
unissued share capital to satisfy in full (without the need for the
passing of any resolution by shareholders) all subscription rights
remaining exercisable;
(b) the Company shall not (except with the sanction of an extraordinary
resolution of the Warrant holders) issue any Ordinary Shares credited
as fully paid by way of capitalisation of profits or reserves nor make
any such offer as is referred to in paragraph 2(b) above if as a
result the Company would on any subsequent exercise of the
subscription rights be obliged to issue Ordinary Shares at a discount;
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<PAGE>
(c) if at any time an offer or invitation is made by the Company to the
holders of the Ordinary Shares for the purchase by the Company of any
of its Ordinary Shares, the Company shall simultaneously give notice
thereof to the Warrant holders and each Warrant holder shall be
entitled at any time while such offer or invitation is open for
acceptance to exercise his subscription rights as if they were then
exercisable so as to take effect as if he had exercised his rights
immediately prior to the date (on record date) of such offer or
invitation;
(d) if at any time an offer is made to all holders of Ordinary Shares (or
all holders of Ordinary Shares other than the offeror and/or any
company controlled by the offeror and/or persons acting in concert
with the offeror) to acquire the whole or any part of the issued share
capital of the Company and the Company becomes aware that as a result
of such offer the right to cast a majority of the votes which may
ordinarily be cast on a poll at a general meeting of the Company has
or will become vested in the offeror and/or such persons or companies
as aforesaid, the Company shall give notice to the Warrant holders of
such vesting within 14 days of its becoming so aware, and each such
Warrant holder shall be entitled, at any time within the period of 60
days immediately following the date of such notice, to exercise his
subscription rights as if they were exercisable on the last day of the
said 60 day period on the basis (subject to any adjustment pursuant to
paragraph 2 above) then applicable. Upon the expiry of such period,
all Warrants shall lapse. Publication of a scheme of arrangement under
the Companies Act 1985 (as from time to time amended or re-enacted)
providing for the acquisition by any person of the whole or any part
of the issued share capital of the Company shall be deemed to be the
making of an offer for the purposes of this paragraph 3(d);
(c) if the Company commences liquidation, whether voluntary or compulsory
(except for the purpose of reconstruction, amalgamation or unitisation
on terms sanctioned by an extraordinary resolution of the holders of
the Warrants), it shall forthwith give notice thereof to all holders
of Warrants; thereupon each holder of a Warrant will (if in such
winding-up there shall be a surplus available for distribution amongst
the holders of the Ordinary Shares (including for this purpose the
Ordinary Shares which would arise on the exercise of all the
outstanding subscription rights) which taking into account the amounts
payable on the exercise of the subscription rights, exceeds in respect
of each Ordinary Share a sum equal to the subscription price) be
treated as if immediately before the date of such order or resolution
his subscription rights had been exercisable and had been exercised in
full and shall accordingly be entitled to receive out of the assets
available on liquidation pari passu with the holders of the Ordinary
Shares such a sum as he would have received had he been the holder of
the Ordinary Shares to which he would have become entitled by virtue
of such subscription after deducting a sum per share equal to the
subscription price; subject to the foregoing, all subscription rights
shall lapse on liquidation of the Company; and
-7-
<PAGE>
(f) the Company shall not (except with the sanction of an extraordinary
resolution of the Warrant holders) make any allotment of fully paid
Ordinary Shares by way of capitalisation of profits or reserves unless
at the date of such allotment the Directors have authority to grant
the additional rights to subscribe to which the Warrant holders will
by virtue of paragraph 2(a) above be entitled in consequence of such
capitalisation.
4. Modification of Rights and Warrant Instrument
All or any of the rights for the time being attached to the Warrants may
from time to time (whether or not the Company is being wound up) be altered
or abrogated with the sanction of an extraordinary resolution of the
holders of the Warrants. Such alteration or abrogation approved as
aforesaid shall be effected by deed poll executed by the Company and
expressed to be supplemental to this Warrant Instrument. Modifications to
this Warrant Instrument which are of a formal, minor or technical nature,
or made to correct a manifest error, or any modifications which the
Directors consider appropriate may be effected by deed poll executed by the
Company and expressed to be supplemental to this Warrant Instrument and
notice of such alteration or abrogation or modification shall be given by
the Company to the Warrant holders.
5. Purchase by the Company
The Company shall be entitled at any time to purchase Warrants. Any
Warrants so purchased shall be cancelled and shall not be available for
re-issue.
6. Transfer
Each Warrant will be registered and transferable by instrument of transfer
to any usual or common form or in any other form which may be approved by
the Directors except that no transfer of a right to subscribe for a
fraction of an Ordinary Share shall be effected. Save insofar as the same
would be inconsistent with this Warrant Instrument, the provisions of the
Articles of Association of the Company relating to the registration
transfer and transmission of shares shall apply mutatis mutandis to the
Warrants.
7. Indemnification of Warrant Agent
(a) The Warrant Agent shall act as agent of the Company. The Warrant Agent
shall not, by issuing and delivering Warrant Certificates or by any
other act be deemed to make any representations as to the validity or
value of the Warrant Certificates or the Warrants represented thereby
or of the Ordinary Shares or other property delivered on exercise on
any Warrant. The Warrant Agent shall not be under any duty or
responsibility to any holder of the Warrant Certificates to make or
cause to be made any adjustment of the Subscription Price or to
determine whether any fact exists which may require any such
adjustments.
(b) The Warrant Agent shall not (i) be liable for any statement or fact
contained in this instrument or for any action taken or omitted b it
in reliance on any
-8-
<PAGE>
Warrant Certificate or other document or instrument believed by it in
good faith to be valid and to have been signed or presented by the
proper party or parties, (ii) be responsible for any failure on the
part of the Company to comply with any of its covenants and
obligations contained in this instrument or in the Warrant
Certificates, or (iii) be liable for any act or omission in connection
with this Agreement except for its own negligence or wilful
misconduct.
(c) The Warrant Agent may at any time seek legal advice of any solicitors
(who may be solicitors to the Company) and shall incur no liability or
responsibility for any action taken or omitted by it in good faith in
accordance with such notice, statement, instrument, request,
direction, order or demand.
(d) Any notice, statement, instruction, request, direction, order or
demand of the Company shall be sufficiently evidenced by an instrument
signed by any Director or its Secretary. The Warrant Agent shall not
be liable for any action taken or omitted by it in accordance with
such notice, statement, instruction, request, direction, order or
demand.
(e) The Company agrees to pay the Warrant Agent reasonable compensation
for its services hereunder and to reimburse the Warrant Agent for its
reasonable expenses. The Company further agrees to indemnify the
Warrant Agent against any and all losses, expenses and liabilities,
including judgments, costs and fees, for any action taken or omitted
by the Warrant Agent in the execution of its duties and powers
excepting losses, expenses and liabilities arising as a result of the
Warrant Agent's negligence or wilful misconduct.
8. General
(a) The Company will concurrently with the issue of the same to holders of
Ordinary Shares send to each holder of a Warrant (or, in the case of
joint holders, to the first named) a copy of each published annual
report and accounts of the Company and unaudited interim report of the
Company together with all documents required by law to be annexed
thereto, and copies of every statement, notice or circular issued to
holders of Ordinary Shares.
(b) For the purposes of this Warrant Instrument, "business day" means a
day (excluding Saturdays and public holidays) on which banks in
England are open for business and "extraordinary resolution" means a
resolution proposed at a meeting of the Warrant holders duly convened
and held and passed by a majority consisting of not less than three-
fourths of the votes cast, whether on a show of hands or on a poll.
All the provisions of the Articles of Association for the time being
of the Company as to General Meetings shall apply mutatis mutandis as
though the warrants formed one class of Ordinary Shares forming part
of the capital of the Company but so that (i) the period of notice
shall be 21 days at least, (ii) the necessary quorum shall be Warrant
holders (present in person or by proxy) entitled to subscribe for one-
third in nominal amount of the Ordinary Shares attributable to the
then outstanding Warrants, (iii) every Warrant holder
-9-
<PAGE>
present in person at any such meeting shall be entitled on a show of
hands to one vote and every Warrant holder present in person or by
proxy shall be entitled on a poll to one vote for every Ordinary Share
for which he is entitled to subscribe, (iv) any Warrant holder present
in person or by proxy may demand or join in demanding a poll, and (v)
if at any adjourned meeting a quorum as defined above is not present,
a Warrant holder who is then present in person or by proxy shall be a
quorum.
(c) The invalidity of any undertaking, or any part of any undertaking, in
paragraph 3 shall not affect the validity of any other part of that
paragraph. If any event occurs which, but for any rule of law, would
be a breach of paragraph 3, the Company shall pay to the Warrant
holders such sum as the auditors of the Company shall determine to be
equal to the loss in value of the Warrants resulting from such event.
(d) Any determination or adjustment made pursuant to these terms and
conditions by the auditors of the Company shall be made by them as
experts and not arbitrators and shall be final and binding on the
Company and all Warrant holders.
8. Governing law
The above terms and conditions shall be construed in accordance with and be
governed by the laws of England.
-10-
<PAGE>
EXHIBIT 3.6
--------------------
| Draft Dated |
| 03/10/97, 9:53am |
--------------------
- --------------------------------------------------------------------------------
REGISTRATION RIGHTS AGREEMENT
among
ALLIANCE RESOURCES PLC,
AND
LASALLE STREET NATURAL RESOURCES CORPORATION
----------------------------------------
Dated as of March __, 1997
----------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
1. Background........................................................ 1
----------
2. Registration Under Securities Act, etc............................ 1
---------------------------------------
2.1 Registration on Request...................................... 1
-----------------------
2.2 Incidental Registration...................................... 3
-----------------------
2.3 Registration Procedures...................................... 4
-----------------------
2.4 Underwritten Offerings....................................... 8
----------------------
2.5 Preparation; Reasonable Investigation........................ 8
-------------------------------------
2.6 Indemnification.............................................. 9
---------------
3. Definitions....................................................... 11
-----------
4. Rule 144 and Rule 144A............................................ 13
----------------------
5. Amendments and Waivers............................................ 13
----------------------
6. Notices........................................................... 13
-------
7. Assignment........................................................ 14
----------
8. Calculation of Percentage Interests of Registrable Securities..... 14
-------------------------------------------------------------
9. No Inconsistent Agreements........................................ 14
--------------------------
10. Severability...................................................... 14
------------
11. Entire Agreement.................................................. 14
----------------
12. Descriptive Headings.............................................. 14
--------------------
13. Governing Law..................................................... 14
-------------
14. Counterparts...................................................... 14
------------
15. Termination....................................................... 15
-----------
i
<PAGE>
REGISTRATION RIGHTS AGREEMENT, dated as of March __, 1997 by and among
Alliance Resources Plc, (the "Company"), and LaSalle Street Natural Resources
Corporation ("LSNRC").
1. Background.
----------
(a) Pursuant to an Assignment of Overriding Royalty Interest,
dated as of the date hereof between the Company and LSNRC (the "Assignment"),
the Company has agreed to purchase from LSNRC in consideration for the issuance
by the Company to LSNRC of 1,500,000 of the Company's ordinary shares, par value
40p each (the "New Alliance Shares"), warrants to purchase ____________ New
Alliance Shares at an exercise price of __p per share (the "Bank Warrants").
Capitalized terms used in this Agreement but not otherwise defined have the
meanings given them in Section 3.
---------
(b) As an inducement to LSNRC to enter into the Assignment and
in satisfaction of a condition to the obligations of the Company under the
Assignment, the Company has agreed to register the New Alliance Shares
issuable pursuant to the Assignment and the New Alliance Shares issuable
upon exercise of LSNRC Warrants, upon the terms and subject to the conditions
contained in this Agreement.
2. Registration Under Securities Act, etc.
---------------------------------------
2.1 Registration on Request.
-----------------------
(a) Request. At any time, or from time to time, upon
-------
written request of one or more holders (the "Initiating Holders") of Registrable
Securities representing not less than 50% of the Registrable Securities that the
Company effect the registration under the Securities Act and any related
qualification under or compliance with blue sky or other state securities laws
of all or part of such Initiating Holders' Registrable Securities, the Company
promptly will give written notice of such requested registration to all
registered holders of Registrable Securities, and thereupon the Company will use
its best efforts to effect, within 120 days after receiving such request for
registration, the registration (including, without limitation, the execution of
an undertaking to file post effective amendments and appropriate qualifications
under or other compliance with applicable blue sky or other state securities
laws) under the Securities Act of
(i) the Registrable Securities that the Company has been so
requested to register by such Initiating Holders, and
(ii) all other Registrable Securities that the Company has
been requested to register by the holders thereof (such holders
together with the Initiating Holders hereinafter are referred to as the
"Selling Holders") by written request given to the Company within 30
days after the giving of such written notice by the Company, all to the
extent necessary to permit the disposition of the Registrable
Securities (in accordance with the methods of disposition thereof
intended by the Selling Holders) to be registered.
(b) Registration of Other Securities. Whenever the Company
--------------------------------
shall effect a registration pursuant to this Section 2.1, securities other than
-----------
Registrable Securities may be included in the registration; provided that, in
connection with an underwritten offering by one or
1
<PAGE>
more holders of Registrable Securities, no securities other than Registrable
Securities shall be included among the securities covered by such registration
unless (a) the managing underwriter of such offering shall have advised each
Selling Holder of Registrable Securities to be covered by such registration in
writing that the inclusion of such other securities would not adversely affect
such offering or (b) the Selling Holders of not less than 50% of all Registrable
Securities to be covered by such registration shall have consented in writing to
the inclusion of such other securities.
(c) Registration Statement Form. Registrations under this
---------------------------
Section 2.1 shall be on such appropriate registration form of the Commission (i)
- -----------
as shall be reasonably selected by the Company and (ii) as shall permit the
disposition of such Registrable Securities in accordance with the method or
methods of disposition intended by such holders.
(d) Effective Registration Statement. A registration
--------------------------------
requested pursuant to this Section 2.1 shall be deemed to have been effected if
-----------
(i) the Company shall have filed a registration statement as requested by the
holders and thereafter the holders shall have abandoned the intended sale of
their New Alliance Shares as contemplated by the registration statement
otherwise than for any failure on the part of the Company or (ii) (A) a
registration statement with respect thereto has become effective and remained
effective in compliance with the provisions of the Securities Act with respect
to the disposition of all Registrable Securities covered by such registration
statement until such time as all of such Registrable Securities have been
disposed of in accordance with the intended methods of disposition by the seller
or sellers thereof set forth in such registration statement; provided, that such
--------
period need not exceed 120 days (which period shall be increased by the
cumulative duration of all Blackout Periods), (B) after it has become effective,
such registration is interfered with by any stop order, injunction or other
order or requirement of the Commission or other governmental agency or court for
any reason not attributable to such Selling Holder, or (C) the conditions to
closing specified in the purchase agreement or underwriting agreement, if any,
entered into in connection with such registration are not satisfied or waived,
by reason of a failure on the part of the Company.
(e) Selection of Underwriters. The underwriter or
-------------------------
underwriters of each underwritten offering of the Registrable Securities by one
or more holders of Registrable Securities in connection with a registration
requested pursuant to this Section 2.1 shall be selected by the Selling Holders
-----------
of at least 50% of the Registrable Securities to be included in such
registration and shall be reasonably acceptable to the Company.
(f) Priority in Requested Registration. If the managing
----------------------------------
underwriter of any underwritten offering pursuant to this Section 2.1 shall
-----------
advise the Company in writing that, in its opinion, the number of securities
requested to be included in such registration exceeds the number that can be
sold in such offering within a price range acceptable to the Selling Holders of
more than 50% of the Registrable Securities requested to be included in such
registration, the Company will include in such registration, to the extent of
the number and type that the Company is so advised can be sold in such offering,
(A) first, all Registrable Securities requested to be included in such
registration, pro rata among the Selling Holders requesting such registration on
the basis of the estimated gross proceeds from the sale thereof and (B) second,
other securities to
2
<PAGE>
be included in such registration, to the extent of the number and type the
Company is so advised can be sold in such offering.
(g) Limitations on Registration on Request. The Company will
--------------------------------------
not be required to (i) file, in the aggregate, more than two registration
statements pursuant to this Section 2.1 each of which (A) has been declared or
-----------
ordered effective (including without limitation qualification under or other
compliance with state blue sky or securities laws requested) and which
effectiveness has not been suspended or stopped by any governmental or judicial
authority, and (B) remains continuously effective for a period of time not less
than the Effective Period, or (ii) effect a registration pursuant to this
Section 2.1 within the twelve-month period occurring immediately subsequent to
- -----------
the effectiveness (within the meaning of Section 2.1(d)) of a registration
---------------
statement filed pursuant to this Section 2.1.
-----------
(h) Notwithstanding the other provisions of this
Section 2.1, the Company shall not be obligated to effect a registration
- -----------
pursuant to this Section 2.1 during the period starting with the date 60 days
-----------
prior to the Company's good faith estimated date of filing of, and ending on a
date 120 days following the effective date of, a registration statement for the
underwritten public offering of securities for the account of the Company;
provided that the Company is at all times during that period diligently pursuing
such registration.
(i) Expenses. The Company will pay all Registration Expenses
--------
in connection with the registrations requested pursuant to this Section 2.1.
-----------
2.2 Incidental Registration.
-----------------------
(a) Right to Include Registrable Securities. If the Company
---------------------------------------
at any time proposes to register any of its securities under the Securities Act
by registration on Forms S-1, S-2, S-3, F-1, F-2 or F-3 or any successor or
similar form(s) (except registrations on such Forms or similar form(s) solely
for registration of securities in connection with an employee benefit plan or
dividend reinvestment plan or a merger, consolidation or exchange and except for
registrations pursuant to Section 2.1) (and any related qualification under or
-----------
compliance with blue sky or other state securities laws), whether or not for
sale for its own account, it will each such time give prompt written notice to
all registered holders of Registrable Securities of its intention to do so and
of such holders' rights under this Section 2.2. Upon the written request of any
-----------
such holder (each, a "Requesting Holder") made as promptly as practicable and in
any event within 30 days after the receipt of any such notice (20 days if the
Company states in such written notice or gives telephonic notice to all
registered holders of Registrable Securities, with written confirmation to
follow promptly thereafter, stating that (i) such registration will be on Form
S-3 or F-3 and (ii) such shorter period of time is required because of a planned
filing date) (which request shall specify the Registrable Securities intended to
be disposed of by such Requesting Holder), the Company will use its best efforts
to effect the registration under the Securities Act of all Registrable
Securities that the Company has been so requested to register by the Requesting
Holders thereof to the extent requisite to permit the disposition thereof in
accordance with the method or methods of disposition intended by such holders;
provided, however, that if, at any time after giving written notice of its
- -------- -------
intention to register any securities and prior to the effective date of the
registration statement filed in connection with such registration, the Company
shall determine for any reason not to register or to delay registration of such
securities, the Company may, at its election, give written notice of such
determination to each holder of Registrable Securities and (i) in the case of a
determination not to register, shall be relieved of its obligation to register
any Registrable Securities in connection with such registration (but not from
any
3
<PAGE>
obligation of the Company to pay the Registration Expenses in connection
therewith), without prejudice, however, to the rights of any holder or holders
of Registrable Securities entitled to do so to cause such registration to be
effected as a registration under Section 2.1, and (ii) in the case of a
-----------
determination to delay registering, shall be permitted to delay registering any
Registrable Securities, for the same period as the delay in registering such
other securities.
(b) Priority in Incidental Registrations. If the managing
------------------------------------
underwriter of any underwritten offering pursuant to this Section 2.2 shall
-----------
advise the Company in writing that, in its opinion, the number or type of
Registrable Securities requested to be included in such registration exceeds the
number or type that can be sold in such offering within a price range acceptable
to the Company, then the Company will include in such registration, to the
extent of the number and type that the Company is so advised can be sold in such
offering, (A) first, all the securities proposed by the Company to be sold for
its own account and (B) second, such Registrable Securities requested to be
included in such registration pursuant to this Section 2.2, pro rata among each
-----------
of the Requesting Holders on the basis of the estimated gross proceeds from the
sale thereof, to the extent of the number and type the Company is so advised can
be sold in such offering.
(c) Expenses. The Company will pay all Registration Expenses
--------
in connection with any registration effected pursuant to this Section 2.2.
-----------
2.3 Registration Procedures.
-----------------------
(a) If and whenever the Company is required to use its best
efforts to effect the registration of any Registrable Securities under the
Securities Act as provided in Sections 2.1 and 2.2, the Company will, as
------------ ---
expeditiously as possible:
(i) prepare and (as soon as possible but in any event no
later than 60 days after the end of the period within which requests
for registration may be given to the Company pursuant to Section 2.1(a)
--------------
or 2.2(a), as applicable) file with the Commission the requisite
------
registration statement to effect such registration and thereafter use
its best efforts to cause such registration statement to become
effective as soon as practicable thereafter; provided, however, that
-------- -------
the Company may discontinue any registration of its securities that are
not Registrable Securities (and, under the circumstances specified in
Section 2.2, its securities that are Registrable Securities) at any
------- ---
time prior to the effective date of the registration statement relating
thereto;
(ii) prepare and file with the Commission such amendments,
supplements and post-effective amendments to such registration
statement and the prospectus used in connection therewith as may be
necessary to keep such registration statement effective (the "Effective
Period") and to comply with the provisions of the Securities Act with
respect to the disposition of all securities covered by such
registration statement until such time as all of Registrable Securities
covered by such registration statement have been disposed of in
accordance with the intended methods of disposition by the seller or
sellers thereof set
4
<PAGE>
forth in such registration statement; provided, that such period need
--------
not exceed 180 days (which period shall be increased by the cumulative
duration of all Blackout Periods);
(iii) furnish to each seller of Registrable Securities
covered by such registration statement, such number of conformed copies
of such registration statement and of each such amendment, supplement
and post-effective amendment thereto (in each case including all
exhibits), such number of copies of the prospectus contained in such
registration statement (including each preliminary prospectus and any
summary prospectus) and any other prospectus filed under Rule 424 under
the Securities Act, in conformity with the requirements of the
Securities Act, and such other documents, as such seller may reasonably
request;
(iv) use its best efforts (x) to register or qualify all
Registrable Securities and other securities covered by such
registration statement under such other securities or blue sky laws of
such states, possessions and territories of the United States of
America where an exemption is not available and as each seller of
Registrable Securities covered by such registration statement shall
reasonably request, (y) to keep such registration or qualification in
effect for so long as such registration statement remains in effect,
and (z) to take any other action that may be reasonably necessary or
advisable to enable such seller to consummate the disposition in such
jurisdictions of the securities to be sold by such seller, except that
the Company shall not for any such purpose be required to qualify
generally to do business as a foreign corporation in any jurisdiction
wherein it would not be but for the requirements of this subdivision
(iv) be obligated to be so qualified or to consent to general service
of process in any such jurisdiction;
(v) use its best efforts to cause all Registrable
Securities covered by such registration statement to be registered with
or approved by such other federal, state or local governmental agencies
or authorities as may be necessary in the opinion of counsel to the
Company, to the seller or sellers of Registrable Securities or to the
underwriters to enable the seller or sellers thereof to consummate the
disposition of such Registrable Securities in accordance with the
method or methods of disposition intended by such seller or sellers;
(vi) furnish to each seller of Registrable Securities, and
each such seller's underwriters, if any, a signed counterpart of
(x) an opinion of counsel for the Company, dated the
effective date of such registration statement and, if
applicable, the date of the closing under the underwriting
agreement, reasonably satisfactory in form and substance to
such seller, and
(y) a "comfort" letter, dated the effective date of
such registration statement and, if applicable, the date of
the closing under the underwriting agreement, signed by the
independent public accountants who have certified the
Company's financial statements included or incorporated by
reference in such registration statement,
5
<PAGE>
covering substantially the same matters with respect to such
registration statement (and the prospectus included therein) and, in
the case of the accountants' comfort letter, with respect to events
subsequent to the date of such financial statements, as are customarily
covered in opinions of issuer's counsel and in accountants' comfort
letters delivered to the underwriters in underwritten public offerings
of securities;
(vii) promptly notify each seller of Registrable Securities
covered by such registration statement, at any time when a prospectus
relating thereto is required to be delivered under the Securities Act,
upon discovery that, or upon the happening of any event as a result of
which, the prospectus included in such registration statement, as then
in effect, includes an untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to
make the statements therein not misleading in the light of the
circumstances under which they were made, and at the request of any
such seller promptly prepare and furnish to it a reasonable number of
copies of a supplement to or an amendment of such prospectus as may be
necessary so that, as thereafter delivered to the holder of such
securities, such prospectus shall not include an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in
the light of the circumstances under which they were made;
(viii) otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available
to its security holders, as soon as reasonably practicable, an earnings
statement covering the period of at least twelve months, but not more
than eighteen months, beginning with the first full calendar month
after the effective date of such registration statement, which earnings
statement shall satisfy the provisions of Section 11(a) of the
Securities Act and Rule 158 promulgated thereunder, and furnish to each
such seller of Registrable Securities at least five business days prior
to the filing thereof a copy of any amendment, supplement or post-
effective amendment to such registration statement or prospectus and
shall not file any thereof to which any such seller shall have
reasonably objected on the grounds that such amendment, supplement or
post-effective amendment does not comply in all material respects with
the requirements of the Securities Act;
(ix) provide and cause to be maintained a transfer agent
and registrar for all Registrable Securities covered by such
registration statement from and after a date not later than the
effective date of such registration statement;
(x) use its best efforts to list all New Alliance Shares
covered by such registration statement on any securities exchange or
national market system on which New Alliance Shares covered by such
registration statement are then listed;
(xi) not later than the effective date of such
registration statement, provide a CUSIP number for all Registrable
Securities and provide the applicable transfer agent or trustee with
printed certificates for the Registrable Securities that are in a form
eligible for deposit with the Depositary Trust Company;
6
<PAGE>
(xii) in the event of the issuance of any stop order
suspending the effectiveness of such registration statement, or of any
order suspending or preventing the use of any related prospectus or
suspending the qualification of any Registrable Securities for sale in
any jurisdiction, promptly notify each holder of Registrable Securities
in writing of such occurrence and use its best efforts promptly to
obtain the withdrawal of such order; and
(xiii) promptly notify each seller of Registrable Securities
covered by such registration statement (A) when such registration
statement or any post-effective amendment thereto has become effective
under the Securities Act and each applicable state law and (B) of any
request by the Commission or any other federal or state governmental
authority for amendments or supplements to a registration statement or
the related prospectus or for additional information.
(b) The Company may require each seller of Registrable
Securities as to which any registration is being effected to furnish the Company
such information regarding such seller and the distribution of such securities
by such seller as the Company may from time to time reasonably request in
writing. Each holder of Registrable Securities agrees by acquisition of such
Registrable Securities that, upon receipt of any notice from the Company of the
happening of any event of any kind described in subdivision (a)(vi) of this
Section 2.3, such holder will forthwith discontinue such holder's disposition of
- -----------
Registrable Securities pursuant to the registration statement relating to such
Registrable Securities until such holder's receipt of the copies of the
supplemented or amended prospectus contemplated by subdivision (a)(vi) of this
Section 2.3 and, if so directed by the Company, will deliver to the Company (at
- ----------
the Company's expense) all copies, other than permanent file copies, then in
such holder's possession of the prospectus relating to such Registrable
Securities current at the time of receipt of such notice.
(c) If, prior to the effectiveness of any registration
statement otherwise required to be prepared and filed by the Company pursuant to
Section 2.1, or while a registration statement that includes Registrable
- -----------
Securities is effective under Section 2.1 or Section 2.2, the Board of Directors
----------- -----------
of the Company determines in good faith either (i) that the filing of the
registration statement would have a material adverse effect on the Company (an
"Information Blackout") or (ii) that the Company is required, pursuant to the
Exchange Act, to prepare financial statements in connection with a material
acquisition or other event (a "Financial Statement Blackout"), and in either
such case shall furnish to each holder of Registrable Securities a statement
regarding such determination (the "Blackout Period"), then the Company's
obligation to effect such registration hereunder or to maintain the
effectiveness of the registration statement hereunder shall be deferred or
suspended for a period not to exceed 120 days after the Company's Board of
Directors makes such good faith determination; provided, that if any such
registration statement is effective, the Company may, upon written notice of an
Information Blackout or a Financial Statement Blackout, as the case may be, to
each holder of Registrable Securities, suspend sales of Registrable Securities
pursuant to such registration statement for the Blackout Period. If the Company
shall postpone the filing of a registration statement pursuant to the preceding
provisions of this paragraph, holders of Registrable Securities with respect to
which registration has been requested, shall have the right to withdraw the
request for registration by giving written notice to the
7
<PAGE>
Company within 30 days after receipt of the notice of postponement and, if such
withdrawal reduces the amount of Registrable Securities to be included in the
registration to less than 50% of all the Registrable Securities, the
registration will be withdrawn and such requested registration shall not be
counted for purposes of the requested registrations to which holders of
Registrable Securities are entitled pursuant to this Section 2.1.
-----------
2.4 Underwritten Offerings.
----------------------
(a) Requested Underwritten Offerings. If requested by the
--------------------------------
underwriters for any underwritten offerings by holders of Registrable Securities
pursuant to a registration requested under Section 2.1, the Company will enter
-----------
into an underwriting agreement with such underwriters for such offering, such
agreement to be reasonably satisfactory in substance and form to each such
holder and the underwriters and to contain such representations and warranties
by the Company and such other terms as are generally prevailing in agreements of
that type, including, without limitation, indemnities to the effect and to the
extent provided in Section 2.6.
-----------
(b) Incidental Underwritten Offerings. If the Company at any
---------------------------------
time proposes to register any of its securities under the Securities Act as
contemplated by Section 2.2 and such securities are to be distributed by or
-----------
through one or more underwriters, then, if the holders of Registrable Securities
wish to have their Registrable Securities included in the registration
statement, those holders will enter into an underwriting agreement with the
underwriters for the offering, such agreement to be reasonably satisfactory in
form and substance to the Company and the underwriters and to contain such
representations and warranties by the holders and such other terms as are
generally prevailing in agreements of that type, including, without limitation,
indemnities to the effect and to the extent provided in Section 2.6.
-----------
2.5 Preparation; Reasonable Investigation. In connection with the
-------------------------------------
preparation and filing of each registration statement under the Securities Act
pursuant to this Agreement, the Company will (i) give the holders of Registrable
Securities registered or to be registered under such registration statement,
their underwriters, if any, and their respective counsel and accountants the
opportunity to participate in the preparation of such registration statement,
each prospectus included therein or filed with the Commission, and each
amendment, supplement or post-effective amendment thereto, (ii) prior to the
filing of any document that is to be incorporated by reference into any such
registration statement or prospectus (after initial filing of the registration
statement), promptly provide copies of such document to the holders of
Registrable Securities covered by such registration statement and to the
managing underwriters, if any, (iii) make the Company's representatives
available for discussion of any such document referred to in the preceding
clauses (i) or (ii) and (iv) give each of them such access to its books and
records and such opportunities to discuss the business of the Company with its
officers and the independent public accountants who have certified its financial
statements as shall be necessary, in the opinion of such holders' and such
underwriters' respective counsel, to conduct a reasonable investigation within
the meaning of the Securities Act.
8
<PAGE>
2.6 Indemnification.
---------------
(a) Indemnification by the Company. The Company will
------------------------------
indemnify and hold harmless, in the case of any registration statement filed
pursuant to Section 2.1 or 2.2, each seller of any Registrable Securities
----------- ---
covered by such registration statement and each other Person who participates as
an underwriter in the offering or sale of securities of the Company covered by
such registration statement and each other Person, if any, who controls such
seller or any such underwriter within the meaning of the Securities Act, and
their respective directors, officers, employees, stockholders, affiliates,
agents and partners, against any losses, claims, damages or liabilities, joint
or several, to which such seller, underwriter or controlling person or any such
director, officer or partner may become subject under the Securities Act or
otherwise, including, without limitation, the fees and expenses of legal
counsel, insofar as such losses, claims, damages or liabilities (or actions or
proceedings, whether commenced or threatened, in respect thereof) arise out of
or are based upon (i) any untrue statement or alleged untrue statement of any
material fact contained in any registration statement under which such
securities were registered under the Securities Act, any preliminary prospectus,
final prospectus or summary prospectus contained therein, or any amendment,
supplement or post-effective amendment thereto, (ii) any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading or (iii) any violation
by the Company, of the Securities Act, the Exchange Act, or any rule or
regulation promulgated thereunder applicable to the Company, or of any blue sky
or other state securities law or any rule of regulation promulgated thereunder
applicable to the Company, and the Company will reimburse each such seller,
underwriter and controlling person and each such director, officer and partner
for any legal or any other expenses reasonably incurred by them in connection
with investigating or defending any such loss, claim, liability, action or
proceeding; provided, that the Company shall not be liable in any such case to
--------
the extent that any such loss, claim, damage, liability (or action or proceeding
in respect thereof) or expense arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
such registration statement, preliminary prospectus, final prospectus, summary
prospectus, amendment, supplement or post-effective amendment in reliance upon
and in conformity with written information furnished to the Company by or on
behalf of such seller or underwriter, as the case may be; and provided, further,
-------- -------
that the Company shall not be liable to any Person who participates as an
underwriter in the offering or sale of Registrable Securities or any other
Person, if any, who controls such underwriter within the meaning of the
Securities Act, in any such case to the extent that any such loss, claim,
damage, liability (or action or proceeding in respect thereof) or expense arises
out of such Person's failure to send or give a copy of the final prospectus, as
the same may be then supplemented or amended, to the Person asserting an untrue
statement or alleged untrue statement or omission or alleged omission at or
prior to the written confirmation of the sale of Registrable Securities to such
Person if such statement or omission was corrected in such final prospectus.
Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of any such seller, underwriter or
controlling Person or any such director, officer or partner and shall survive
the transfer of such securities by such seller.
(b) Indemnification by the Sellers. As a condition to
------------------------------
including any Registrable Securities in any registration statement, the Company
shall have received an undertaking satisfactory to it from the prospective
seller of such Registrable Securities, to indemnify and hold harmless (in the
same manner and to the same extent as set forth in subdivision (a) of this
Section 2.6) the Company, and each director of the Company, each officer
- -----------
9
<PAGE>
of the Company and each other Person, if any, who participates as an underwriter
in the offering or sale of such securities and each other Person, if any, who
controls the Company or any such underwriter within the meaning of the
Securities Act, with respect to any untrue statement or alleged untrue statement
of any material fact contained in any registration statement under which such
securities were registered under the Securities Act, any preliminary prospectus,
final prospectus or summary prospectus contained therein, or any amendment or
supplement thereto, or any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, if such statement or alleged statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished to the Company by such seller. Such indemnity shall remain
in full force and effect, regardless of any investigation made by or on behalf
of the Company or any such director, officer or controlling Person and shall
survive the transfer of such securities by such seller.
(c) Notices of Claims, etc. Promptly after receipt by an
----------------------
indemnified party of notice of the commencement of any action or proceeding
involving a claim referred to in the preceding subdivisions of this Section 2.6,
-----------
such indemnified party will, if a claim in respect thereof is to be made against
an indemnifying party, give written notice to the latter of the commencement of
such action; provided, however, that the failure of any indemnified party to
-------- -------
give notice as provided herein shall not relieve the indemnifying party of its
obligations under the preceding subdivisions of this Section 2.6, except to the
-----------
extent that the indemnifying party is actually prejudiced by such failure to
give notice. In case any such action is brought against an indemnified party,
the indemnifying party shall be entitled to participate in and, unless the
indemnified party has been advised in writing by counsel that a conflict of
interest between such indemnified and indemnifying parties may exist in respect
of such claim, to assume the defense thereof, jointly with any other
indemnifying party similarly notified to the extent that it may wish, with
counsel reasonably satisfactory to such indemnified party, and after notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party shall not be liable to such
indemnified party for any legal or other expenses subsequently incurred by the
latter in connection with the defense thereof other than reasonable costs of
investigation. If, the indemnified party has been advised in writing by counsel
that a conflict of interest may exist between such Person and the indemnifying
party with respect to such claim, the indemnifying party shall not have the
right to assume the defense of such claim on behalf of such Person if such
Person notifies the indemnifying party in writing that such Person elects to
employ separate counsel at the expense of the indemnifying party. An
indemnifying party that is not entitled to, or elects not to, assume the defense
of a claim will not be obligated to pay the fees and expenses of more than one
counsel for all parties indemnified by such indemnifying party with respect to
such claim. No indemnifying party shall be liable for any settlement of any
action or proceeding effected without its written consent. No indemnifying party
shall, without the consent of the indemnified party, consent to entry of any
judgment or enter into any settlement that does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such indemnified party
of a release from all liability in respect to such claim or litigation or that
requires action other than the payment of money by the indemnifying party.
10
<PAGE>
(d) Contribution. If the indemnification provided for in
------------
this Section 2.6 shall for any reason be held by a court to be unavailable to an
-----------
indemnified party under subparagraph (a) or (b) hereof in respect of any loss,
claim, damage or liability, or any action or proceeding in respect thereof,
then, in lieu of the amount paid or payable under subparagraph (a) or (b)
hereof, the indemnified party and the indemnifying party under subparagraph (a)
or (b) hereof shall contribute to the aggregate losses, claims, damages and
liabilities (including legal or other expenses reasonably incurred in connection
with investigating or defending the same), (i) in such proportion as is
appropriate to reflect the relative fault of the indemnified party and the
indemnifying party that resulted in such loss, claim, damage or liability, or
action or proceeding in respect thereof, with respect to the statements or
omissions that resulted in such loss, claim, damage or liability, or action or
proceeding in respect thereof, as well as any other relevant equitable
considerations or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as shall be appropriate to
reflect the relative benefits received by the indemnified party and the
indemnifying party from the offering of the securities covered by such
registration statement. No Person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation. Such prospective sellers' obligations to contribute as
provided in this subparagraph (d) are several and not joint. In addition, no
Person shall be obligated to contribute hereunder any amounts in payment for any
settlement of any action or claim effected without such Person's consent, which
consent shall not be unreasonably withheld.
(e) Other Indemnification. Indemnification and contribution
---------------------
similar to that specified in the preceding subdivisions of this Section 2.6
-----------
(with appropriate modifications) shall be given by the Company and each seller
of Registrable Securities with respect to any required registration or other
qualification of securities under any federal or state law or regulation of any
governmental authority other than the Securities Act.
(f) Indemnification Payments. The indemnification and
------------------------
contribution required by this Section 2.6 shall be made by periodic payments of
-----------
the amount thereof during the course of the investigation or defense, as and
when bills are received or expense, loss, damage or liability is incurred.
3. Definitions. As used herein, unless the context otherwise requires,
-----------
the following terms have the following respective meanings:
"Blackout Period" is defined in Section 2.3.
--------------- -----------
"Commission" means the Securities and Exchange Commission or any other
----------
federal agency at the time administering the Securities Act.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or
------------
any similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time. Reference to a
particular section of the Securities Exchange Act of 1934,
11
<PAGE>
as amended, shall include a reference to the comparable section, if any, of any
such similar federal statute.
"Initiating Holder" is defined in Section 2.1.
----------------- -----------
"Person" means any individual, corporation, partnership, trust, estate,
------
incorporated or unincorporated association, joint venture, joint stock company,
government (or an agency or political subdivision thereof) or other entity of
any kind.
"Registrable Securities" means the New Alliance Shares issuable to the
----------------------
Bank pursuant to the Assignment, the New Alliance Shares issuable upon exercise
of LSNRC Warrants and all Related Registrable Securities. As to any particular
Registrable Securities, once issued such securities shall cease to be
Registrable Securities when (a) a registration statement with respect to the
sale of such securities shall have become effective under the Securities Act and
such securities shall have been disposed of in accordance with such registration
statement, (b) they shall have been sold to the public as permitted by Rule 144,
Regulation S or any other successor provision under the Securities Act, (c) they
shall have been otherwise transferred, new certificates for them not bearing a
legend restricting further transfer shall have been delivered by the Company and
subsequent distribution of them shall not require registration or qualification
of them under the Securities Act or any similar state law then in force or (d)
they shall have ceased to be outstanding. All references to percentages of
Registrable Securities shall be calculated pursuant to Section 8.
---------
"Registration Expenses" means all expenses incident to the Company's
---------------------
performance of or compliance with Section 2, including, without limitation, all
---------
registration, filing, NASD, listing fees, all fees and expenses of complying
with securities or blue sky laws, all word processing, duplicating and printing
expenses, messenger and delivery expenses, the fees and disbursements of counsel
for the Company and of its independent public accountants, including the
expenses of any special audit or "cold comfort" letters required by or incident
to such performance and compliance, but excluding any underwriting discounts or
commissions with respect to the Registrable Securities.
"Related Registrable Securities" means any securities of the Company
------------------------------
issued or issuable with respect to any Registrable Securities by way of a
dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization or otherwise.
"Securities Act" means the Securities Act of 1933, as amended, or any
--------------
similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time. References to a
particular section of the Securities Act of 1933 shall include a reference to
the comparable section, if any, of any such similar federal statute.
"Selling Holder" is defined in Section 2.1.
-------------- -----------
12
<PAGE>
4. Rule 144 and Rule 144A. The Company shall take all actions necessary
----------------------
or reasonably requested by any holder of Registrable Securities to enable
holders of Registrable Securities to sell such securities without registration
under the Securities Act within the limitation of the exemptions provided by (a)
Rule 144 under the Securities Act, as such Rule may be amended from time to
time, (b) Rule 144A under the Securities Act, as such Rule may be amended from
time to time, and (c) any similar rules or regulations hereafter adopted by the
Commission, including, without limiting the generality of the foregoing, filing
on a timely basis all reports required to be filed by the Exchange Act (or, if
the Company is not required to file such reports, making publicly available, at
the request of any holder of Registrable Securities, other information necessary
to enable such holder to sell such securities pursuant to such rule); provided
--------
that this provision will not prohibit the Company from ceasing to be registered
pursuant to Section 12 of the Exchange Act. Upon the request of any holder of
Registrable Securities, the Company will deliver to such holder a written
statement as to whether it has complied with such requirements.
5. Amendments and Waivers. This Agreement may be amended with the
----------------------
consent of the Company and the Company may take any action herein prohibited, or
omit to perform any act herein required to be performed by it, only if the
Company shall have obtained the written consent to such amendment, action or
omission to act, of the holder or holders of at least 50% of the Registrable
Securities affected by such amendment, action or omission to act. Each holder of
any Registrable Securities at the time or thereafter outstanding shall be bound
by any consent authorized by this Section 5, whether or not such Registrable
---------
Securities shall have been marked to indicate such consent.
6. Notices. All notices, demands and other communications provided for
-------
or permitted hereunder shall be made in writing and shall be by registered or
certified first-class mail, return receipt requested, telex, telegram,
telecopier, courier service or personal delivery:
(a) if to LSNRC, addressed to them in the manner set forth
in the Assignment, or at such other address as they shall have furnished to the
Company in writing;
(b) if to any other holder of Registrable Securities, at the
address that such holder shall have furnished to the Company in writing, or,
until any such other holder so furnishes to the Company an address, then to and
at the address of the last holder of such Registrable Securities who has
furnished an address to the Company; or
(c) if to the Company, addressed to it in the manner set
forth in the Assignment, or at such other address as the Company shall have
furnished to each holder of Registrable Securities at the time outstanding.
All such notices and communications shall be deemed to have been duly
given: when delivered by hand, if personally delivered; when delivered, if
mailed; when answered back, if telexed; and when receipt is confirmed, if
telecopied.
13
<PAGE>
7. Assignment. Neither party may assign its rights or obligations under
----------
this Agreement without the consent of the other party. This Agreement shall be
binding upon and inure to the benefit of and be enforceable by the parties
hereto and, with respect to the Company, its respective successors and assigns
and, with respect to each Purchaser, its successors and assigns, including any
holder of any Registrable Securities, subject to the provisions respecting the
minimum numbers of percentages of shares of Registrable Securities required in
order to be entitled to certain rights, or take certain actions, contained
herein.
8. Calculation of Percentage Interests of Registrable Securities. For
-------------------------------------------------------------
purposes of this Agreement, all references to a percentage of the Registrable
Securities shall be calculated based upon the number of shares of the
Registrable Securities with respect to which such calculation is required to be
made, assuming the exercise of all Bank Warrants into New Alliance Shares at the
then-current exercise price.
9. No Inconsistent Agreements. The Company will not hereafter enter into
--------------------------
any agreement with respect to its securities that is inconsistent or conflicts
with this Agreement or the rights granted to the holders of Registrable
Securities in this Agreement.
10. Severability. In the event that any one or more of the provisions
------------
contained herein, or the application thereof in any circumstances, is held
invalid, illegal or unenforceable in any jurisdiction, in any respect and for
any reason, the validity, legality and enforceability of any such provision in
every other respect, and in any other jurisdiction, and of the remaining
provisions contained herein shall not be in any way impaired thereby.
11. Entire Agreement. This Agreement, together with the Purchase
----------------
Agreement (including the schedules and exhibits thereto) and LSNRC Warrants is
intended by the parties as a final expression of their agreement and intended to
be a complete and exclusive statement of the agreement and understanding of the
parties hereto in respect of the subject matter contained herein or therein.
There are no restrictions, promises, warranties or undertakings, other than
those set forth or referred to herein or therein. This Agreement, the Purchase
Agreement (including the schedules and exhibits thereto) and the Warrants
supersede all prior agreements and understandings between the parties hereto
with respect to such subject matter.
12. Descriptive Headings. The descriptive headings of the several
--------------------
sections and paragraphs of this Agreement are inserted for reference only and
shall not limit or otherwise affect the meaning hereof.
13. Governing Law. This Agreement shall be construed and enforced in
-------------
accordance with, and the rights of the parties shall be governed by, the laws of
the State of Illinois applicable to agreements made and to be performed entirely
within such State.
14. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed an original, but all such
counterparts shall together constitute one and the same instrument.
14
<PAGE>
15. Termination. Notwithstanding anything to the contrary in this
-----------
Agreement, this Agreement shall terminate with respect to any holder on the
earlier to occur of (a) the date that the number of Registrable Securities held
by the holder is less than 1/2% of the Company's outstanding New Alliance
Shares and no Registrable Securities held by the holder are required to bear a
legend restricting their transfer as "restricted securities" under Rule 144 or
(b) seven years from the date of this Agreement.
[REST OF PAGE INTENTIONALLY LEFT BLANK]
15
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered by their respective officers thereunto duly authorized as
of the date first above written.
COMPANY:
ALLIANCE RESOURCES PLC
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
BANK:
BANK OF AMERICA NT & SA
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
<PAGE>
EXHIBIT 3.7
THE COMPANIES ACTS 1985 AND 1989
-----------------------
COMPANY LIMITED BY SHARES
-----------------------
ARTICLES OF ASSOCIATION
(adopted by special resolution passed on 1997)
- of -
ALLIANCE RESOURCES PLC
-----------------------
PRELIMINARY
1. The regulations contained in Table A in the schedule to The Companies
(Tables A to F) Regulations 1985 and in any Table A applicable to the
Company under any former enactment relating to companies shall not apply to
the Company except in so far as they are repeated or contained in these
Articles.
2. In these Articles, unless the context otherwise requires:-
"STATUTES" means the Companies Act 1985 as amended by the Companies Act
1989, the Companies Act 1989 and every other statute or subordinate
legislation for the time being in force concerning companies and affecting
the Company including every amendment or re-enactment (with or without
amendment) thereof for the time being in force;
"ARTICLES" means these Articles of Association as altered from time to
time;
"AUDITORS" means the Auditors for the time being of the Company;
"CLEAR DAYS' NOTICE" means that the notice shall be exclusive of the day on
which it is served or deemed to be served and of the day for which it is
given or on which it is to take effect;
"DIRECTORS" means the Directors for the time being of the Company, or, as
the case may be, the board of directors for the time being of the Company
or the persons present at a duly convened meeting of the board of directors
or any duly authorised committee thereof at which a quorum is present;
<PAGE>
"DIVIDEND" includes bonus;
"MONTH" means calendar month;
"OFFICE" means the registered office for the time being of the Company;
"PAID UP" includes credited as paid up;
"REGISTER" means the Register of Members of the Company required to be kept
by the Statutes;
"SEAL" means the common seal of the Company;
"SECRETARY" includes a joint, deputy or assistant secretary, and any person
appointed by the Directors to perform the duties of the Secretary of the
Company;
"UNITED KINGDOM" means Great Britain and Northern Ireland;
"IN WRITING" and "WRITTEN" includes printing, lithography, typewriting,
photography and other modes of representing or reproducing words in visible
form.
Words importing the singular number only shall include the plural, and vice
versa.
Words importing the masculine gender only shall include the feminine
gender.
Words importing individuals and words importing persons shall include
bodies corporate and unincorporated associations.
Any reference herein to the provisions of any Act or of any subordinate
legislation shall include any amendment or re-enactment (with or without
amendment) thereof for the time being in force.
Subject as aforesaid, and unless the context otherwise requires, words and
expressions defined in the Statutes shall bear the same meanings in these
Articles.
A Special or Extraordinary Resolution shall be effective for any purpose
for which an Ordinary Resolution is expressed to be required under any
provision of these Articles.
SHARES
3. The capital of the Company as at the date of the adoption of these Articles
as the Articles of Association of the Company is (Pounds)__________.
divided into shares of 40 pence each.
4. Without prejudice to any special rights previously conferred on the holders
of any existing shares or class of shares, any share in the Company may be
issued with such rights (including preferred, deferred or other special
rights) or such restrictions, whether in regard to dividend, voting, return
of capital or otherwise as the Company may from time to time by Ordinary
Resolution determine (or, in the absence of any such determination, as the
Directors may determine).
2
<PAGE>
5. Subject to the provisions of the Statutes:-
5.1 any shares may be issued which are to be redeemed or are liable to be
redeemed at the option of the Company or the shareholder on such terms and
in such manner as may be provided by these Articles; and
5.2 the Company may purchase any of its own shares (including any redeemable
shares).
6. The Company shall not give any financial assistance for the acquisition of
shares in the Company except and in so far as permitted by the Statutes.
7. The shares of the Company shall not be allotted at a discount and save as
permitted by the Statutes shall not be allotted except as paid up at least
as to one-quarter of their nominal value and the whole of any premium
thereon.
8. The Company may exercise the powers of paying commissions conferred by the
Statutes to the full extent thereby permitted. Such commission may be
satisfied by the payment of cash or the allotment of fully or partly paid
shares or partly in one way and partly in the other. The Company may also
on any issue of shares pay such brokerage as may be lawful.
9. Save as otherwise provided in the Statutes or in these Articles, all
unissued shares (whether forming part of the original or any increased
capital) shall be at the disposal of the Directors who may (subject to the
provisions of the Statutes) allot (with or without conferring a right of
renunciation), grant options over, offer or otherwise deal with or dispose
of them to such persons at such times and generally on such terms and
conditions as they may determine. The Directors may at any time after the
allotment of any share but before any person has been entered in the
Register as the holder, recognise a renunciation thereof by the allottee in
favour of some other person and may accord to any allottee of a share a
right to effect such renunciation upon and subject to such terms and
conditions as the Directors may think fit to impose.
10. Except as required by law or pursuant to the provisions of these Articles,
no person shall be recognised by the Company as holding any share upon any
trust, and (except only as by these Articles or by law otherwise provided
or under an order of a court of competent jurisdiction) the Company shall
not be bound by or be compelled in any way to recognise (even when having
notice thereof) any equitable, contingent, future or partial interest in
any share or any interest in any fractional part of a share or any other
rights in respect of any share except an absolute right to the entirety
thereof in the registered holder.
SHARE CERTIFICATES
11. Every share certificate shall specify the number and class and the
distinguishing number (if any) of the shares to which it relates and the
amount paid up thereon. No certificate shall be issued relating to shares
of more than one class.
12. Every person (other than a recognised clearing house (within the meaning of
the Financial Services Act 1986) or a nominee of a recognised clearing
house or of a recognised investment exchange (within the meaning of the
Financial Services Act
3
<PAGE>
1986) in respect of whom the Company is not by law required to complete and
have ready for delivery a certificate) whose name is entered as a Member on
the Register shall be entitled without payment to receive within two months
after allotment or lodgement of transfer (or within such other period as
the conditions of issue shall provide) one certificate for all the shares
registered in his name or, in the case of shares of more than one class
being registered in his name, a separate certificate for each class of
shares so registered, and where a Member (except such a clearing house or
nominee) transfers part of the shares of any class registered in his name
he shall be entitled without payment to one certificate for the balance of
shares of that class retained by him. If a Member shall require additional
certificates he shall pay for each additional certificate such reasonable
sum (if any) as the Directors may determine.
13. In respect of shares of one class held jointly by more than one person the
Company shall not be bound to issue more than one certificate, and delivery
of a certificate for such shares to one of the joint holders of such shares
shall be sufficient delivery to all such holders.
14. If any certificate be defaced then upon delivery thereof to the Directors
they may order the same to be cancelled and may issue a new certificate in
lieu thereof; and if any certificate be worn out, lost or destroyed, then
upon proof thereof to the satisfaction of the Directors and on such
indemnity with or without security as the Directors deem adequate being
given, a new certificate in lieu thereof shall be given to the party
entitled to such worn out, lost or destroyed certificate.
15. Every certificate issued under the last preceding Article shall be issued
without payment, but there shall be paid to the Company such exceptional
out-of-pocket expenses of the Company in connection with the request
(including, without limiting the generality of the foregoing, the
investigation of such request and the preparation and execution of any such
indemnity or security) as the Directors think fit.
VARIATION OF RIGHTS
16. If at any time the share capital is divided into different classes of
shares, the rights attached to any class or any of such rights may, subject
to the provisions of the Statutes, whether or not the Company is being
wound up, be modified, abrogated or varied with the consent in writing of
the holders of three-fourths in nominal value of the issued shares of that
class, or with the sanction of an Extraordinary Resolution passed at a
separate General Meeting of the holders of the shares of that class.
17. To every such separate General Meeting the provisions of sections 369, 370,
376 and 377 of the Companies Act 1985 and the provisions of these Articles
relating to General Meetings shall, mutatis mutandis, so far as applicable
apply, subject to the following provisions, namely:-
17.1 the necessary quorum at any such meeting, other than an adjourned meeting,
shall be two persons holding or representing by proxy at least one-third in
nominal value of the issued shares of the class in question and at an
adjourned meeting one person holding shares of the class in question or his
proxy;
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17.2 any holder of shares of the class in question present in person or by proxy
may demand a poll; and
17.3 every holder of shares of the class in question present in person or by
proxy shall be entitled on a poll to one vote for every share of that class
held by him.
18. The rights attached to any class of shares shall, unless otherwise
expressly provided by the terms of issue of the shares of that class or by
the terms upon which such shares are for the time being held, be deemed not
to be modified, abrogated or varied by the creation or issue of further
shares ranking pari passu therewith.
CALLS ON SHARES
19. The Directors may, subject to the terms of allotment thereof, from time to
time make such calls upon the Members as they think fit in respect of any
moneys unpaid on their shares (whether on account of the nominal value of
the shares or by way of premium) and each Member shall (subject to the
Company serving on him at least 14 days' notice specifying the time or
times and place of payment) pay to the Company at the time or times and
place so specified the amount called on his shares. A call may be revoked
or postponed, in whole or in part, as the Directors may determine. A person
upon whom a call is made shall remain liable for all calls made upon him
notwithstanding the subsequent transfer of the shares in respect of which
the call was made.
20. A call shall be deemed to have been made at the time when the resolution of
the Directors authorising the call was passed and may be required to be
paid by instalments.
21. The joint holders of a share shall be jointly and severally liable to pay
all calls in respect thereof.
22. If a sum payable in respect of any call or instalment is not paid on or
before the day appointed for payment thereof, the person from whom it is
due shall pay interest on the sum at such rate, not exceeding 15 per cent.
per annum, as the Directors may determine from the day appointed for the
payment thereof until the actual payment thereof, and all expenses that may
have been incurred by the Company by reason of such non-payment; but the
Directors may, if they shall think fit, waive the payment of such interest
and expenses or any part thereof.
23. Any sum which by the terms of issue of a share becomes payable on allotment
or at any fixed date, whether on account of the nominal value of the share
or by way of premium, shall for the purposes of these Articles be deemed to
be a call duly made and payable on the date on which by the terms of issue
the same becomes payable, and in case of non-payment all the relevant
provisions of these Articles as to payment of interest and expenses,
forfeiture or otherwise shall apply as if such sum had become payable by
virtue of a call duly made and notified.
24. The Directors may, on the issue of shares, make arrangements for a
difference between the holders of such shares in the amounts of calls to be
paid and in the times of payment of such calls.
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25. The Directors may, if they think fit, receive from any Member willing to
advance the same all or any part of the moneys, whether on account of the
nominal value of the shares or by way of premium, uncalled and unpaid upon
any shares held by him; and upon all or any of the moneys so paid in
advance the Directors may (until the same would, but for such advance,
become presently payable) pay interest at such rate not exceeding (unless
the Company in General Meeting shall otherwise direct) 12 per cent. per
annum, as may be agreed upon between the Directors and the Member paying
such moneys in advance.
FORFEITURE AND LIEN
26. If any Member fails to pay any call or instalment in full on or before the
day appointed for payment thereof, the Directors may, at any time
thereafter, serve a notice on him requiring him to pay so much of the call
or instalment as is unpaid, together with any interest which may have
accrued and any expenses incurred by the Company by reason of such non-
payment.
27. The notice shall name a further day (not earlier than the expiration of 14
days from the date of service of the notice) on or before which, and the
place where, such call or instalment and such interest and expenses as
aforesaid are to be paid. The notice shall also state that in the event of
non-payment at or before the time and at the place appointed, the shares in
respect of which such call or instalment is payable will be liable to be
forfeited.
28. If the requirements of any such notice as aforesaid are not complied with,
any share in respect of which such notice has been given may at any time
thereafter, before the payment required by the notice has been made, be
forfeited by a resolution of the Directors to that effect. Such forfeiture
shall extend to all dividends declared and other moneys payable in respect
of the shares so forfeited and not actually paid before such forfeiture.
Forfeiture shall be deemed to occur at the time of the passing of the said
resolution of the Directors. The Directors may accept a surrender of any
share liable to be forfeited hereunder upon such terms and conditions as
they think fit.
29. When any share has been forfeited notice of the forfeiture shall be served
upon the person who was before forfeiture the holder of the share, or any
person entitled to the share by transmission, and an entry of the
forfeiture or surrender, with the date thereof, shall forthwith be made in
the Register, but no forfeiture or surrender shall be invalidated by any
failure to give such notice or make such entry as aforesaid.
30. A share so forfeited or surrendered shall be deemed to be the property of
the Company, and may be sold, re-allotted or otherwise disposed of either
to the person who was, before forfeiture, the holder or to any other person
in such manner, either subject to or discharged from all calls made or
instalments due prior to the forfeiture or surrender, as the Directors
think fit: Provided that the Company shall not exercise any voting rights
in respect of such share and any such share not disposed of in accordance
with the foregoing within a period of three years from the date of its
forfeiture or surrender shall thereupon be cancelled in accordance with the
provisions of the Statutes. For the purpose of giving effect to any such
sale or other disposition the Directors may authorise some person to
transfer the share so sold or otherwise
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disposed of to, or in accordance with the directions of, the purchaser
thereof or other person becoming entitled thereto.
31. The Directors may, at any time before any share so forfeited or surrendered
shall have been cancelled or sold, re-allotted or otherwise disposed of,
annul the forfeiture or surrender upon such terms as they think fit.
32. Any person whose shares have been forfeited or surrendered shall cease to
be a Member in respect of those shares and shall surrender to the Company
for cancellation the certificate for the forfeited or surrendered shares,
but shall, notwithstanding such forfeiture or surrender, remain liable to
pay to the Company all moneys which, at the date of the forfeiture or
surrender, were presently payable by him to the Company in respect of the
shares, together with interest thereon at such rate, not exceeding 15 per
cent. per annum, as the Directors may determine from the time of forfeiture
or surrender until the time of payment, but his liability shall cease if
and when the Company shall have received payment in full of all such moneys
in respect of the shares, together with interest as aforesaid. The
Directors may, if they shall think fit, waive the payment of such interest
or any part thereof. The Company may enforce payment of such moneys without
being under any obligation to make any allowance for the value of the
shares forfeited or surrendered or for any consideration received on their
disposal.
33. The Company shall have a first and paramount lien on every share (not being
a fully paid share) for all moneys (whether presently payable or not)
called or payable at a fixed time in respect of such share; but the
Directors may at any time waive any lien which has arisen and may declare
any share to be wholly or in part exempt from the provisions of this
Article. The Company's lien, if any, on a share shall extend to all amounts
payable in respect of it.
34. The Company may sell, in such manner as the Directors think fit, any share
on which the Company has a lien, but no sale shall be made unless a sum in
respect of which the lien exists is presently payable, nor until the
expiration of 14 days after a notice in writing, (i) stating, and demanding
payment of, the sum presently payable, and (ii) giving notice of intention
to sell in default of such payment, has been given to the registered holder
for the time being of the share, or the person entitled thereto by reason
of his death or bankruptcy or otherwise by operation of law.
35. The net proceeds of such sale, after payment of the costs thereof, shall be
applied in or towards satisfaction of such part of the amount in respect of
which the lien exists as is presently payable. The residue, if any, shall
(subject to a like lien for sums not presently payable as existed upon the
shares before the sale) be paid to the person entitled to the shares at the
date of sale. For giving effect to any such sale the Directors may
authorise some person to transfer the shares sold to, or in accordance with
the directions of, the purchaser.
36. A statutory declaration in writing that the declarant is a Director or the
Secretary of the Company, and that a share has been duly forfeited or
surrendered or sold to satisfy a lien of the Company on a date stated in
the declaration, shall be conclusive evidence of the facts stated therein
against all persons claiming to be entitled to the share. Such declaration
and the receipt of the Company for the consideration (if any) given for the
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share on the sale, re-allotment or disposal thereof, together with the
share certificate delivered to a purchaser or allottee thereof, shall
(subject to the execution of a transfer if the same be required) constitute
a good title to the share and the person to whom the share is sold, re-
allotted or disposed of shall be registered as the holder of the share and
shall not be bound to see to the application of the purchase money (if any)
nor shall his title to the share be affected by any irregularity or
invalidity in the proceedings in reference to the forfeiture, surrender,
sale, re-allotment or disposal of the share.
TRANSFER OF SHARES
37. The instrument of transfer of any share in the Company shall be signed by
or on behalf of the transferor (and, in the case of a share which is not
fully paid, shall be signed by or on behalf of the transferee). The
transferor shall be deemed to remain the holder of the share until the name
of the transferee is entered in the Register in respect thereof.
38. All transfers of shares shall be effected by instrument in writing in any
usual or common form or any other form which the Directors may approve.
39. The Directors may, in their absolute discretion and without assigning any
reason therefor, refuse to register any transfer of any share which is not
a fully paid share. The Directors may likewise refuse to register any
transfer of a share, whether fully paid or not, in favour of more than four
persons jointly.
40. The Directors may decline to recognise any instrument of transfer unless:-
40.1 the instrument of transfer is left at the Office, or at such other place as
the Directors may from time to time determine, accompanied by the
certificate(s) of the shares to which it relates and such other evidence as
the Directors may reasonably require to show the right of the transferor to
make the transfer (and, if the instrument of transfer is executed by some
other person on his behalf, the authority of that person so to do); and
40.2 the instrument of transfer is in respect of only one class of share.
41. If the Directors refuse to register a transfer they shall, within two
months after the date on which the transfer was lodged with the Company,
send to the transferee notice of the refusal and (except in the case of
fraud) return to him the instrument of transfer. All instruments of
transfer which are registered may be retained by the Company.
42. No fee shall be charged by the Company on the registration of any
instrument of transfer, probate, letters of administration, certificate of
death or marriage, power of attorney, stop notice or other document or
instruction relating to or affecting the title to any shares or otherwise
for making any entry in the Register affecting the title to any shares.
43. The registration of transfers may be suspended at such times and for such
periods as the Directors may from time to time determine, and either
generally or in respect of
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any class of shares: Provided always that such registration shall not be
suspended, either generally or otherwise, for more than 30 days in any
year.
44. The Company shall be entitled to destroy:-
44.1 any instrument of transfer or other document which has been registered, or
on the basis of which registration was made, at any time after the
expiration of six years from the date of registration thereof;
44.2 any dividend mandate or any variation or cancellation thereof or any
notification of change of address, at any time after the expiration of two
years from the date of recording thereof; and
44.3 any share certificate which has been cancelled, at any time after the
expiration of one year from the date of such cancellation,
and it shall conclusively be presumed in favour of the Company that every
entry in the Register purporting to have been made on the basis of an
instrument of transfer or other document so destroyed was duly and properly
made, that every instrument of transfer so destroyed was a valid and
effective instrument duly and properly registered, that every share
certificate so destroyed was a valid certificate duly and properly
cancelled and that every other document destroyed hereunder was a valid and
effective document in accordance with the recorded particulars thereof in
the books or records of the Company: Provided always that:-
(a) the provisions aforesaid shall apply only to the destruction of a
document in good faith and without express notice to the Company that
the preservation of such document was relevant to any claim
(regardless of the parties thereto);
(b) nothing contained in this Article shall be construed as imposing upon
the Company any liability in respect of the destruction of any such
document earlier than as aforesaid or in any case where the conditions
of proviso (a) above are not fulfilled; and
(c) references in this Article to the destruction of any document include
references to its disposal in any manner.
TRANSMISSION OF SHARES
45. In case of the death of a Member the survivor or survivors where the
deceased was a joint holder, and the legal personal representatives of the
deceased where he was a sole or only surviving holder, shall be the only
persons recognised by the Company as having any title to his interest in
the shares; but nothing herein contained shall release the estate of a
deceased Member from any liability in respect of any share which had been
solely or jointly held by him.
46. Any person becoming entitled to a share in consequence of the death or
bankruptcy of a Member or otherwise by operation of law may, upon such
evidence being produced as may from time to time properly be required by
the Directors and subject as hereinafter provided, elect either to be
registered himself as holder of the share or
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to have some person nominated by him registered as the transferee thereof,
but the Directors shall, in either case, have the same right to decline or
suspend registration as they would have had in the case of a transfer of
the share by the Member registered as the holder of any such share before
his death or bankruptcy or other event, as the case may be.
47. If the person so becoming entitled shall elect to be registered himself, he
shall deliver or send to the Company a notice in writing signed by him
stating that he so elects. If he shall elect to have another person
registered he shall testify his election by executing to that person a
transfer of the share. All the limitations, restrictions and provisions of
these Articles relating to the right to transfer and the registration of
transfers of shares shall be applicable to any such notice or transfer as
aforesaid as if the death or bankruptcy of the Member or other event had
not occurred and the notice or transfer were a transfer signed by the
Member registered as the holder of any such share.
48. A person becoming entitled to a share by reason of the death or bankruptcy
of the holder or otherwise by operation of law shall, upon supplying to the
Company such evidence as the Directors may reasonably require to show his
title to the share, be entitled to the same dividends and other advantages
to which he would be entitled if he were the registered holder of the
share, except that he shall not, before being registered as a Member in
respect of the share, be entitled in respect of it to exercise any right
conferred by membership in relation to meetings of the Company (including
meetings of the holders of any class of shares in the Company): Provided
always that the Directors may at any time give notice requiring any such
person to elect either to be registered himself or to transfer the share,
and, if the notice is not complied with within 60 days, the Directors may
thereafter withhold payment of all dividends, bonuses or other moneys
payable in respect of the share until the requirements of the notice have
been complied with.
UNTRACED SHAREHOLDERS
49. The Company shall be entitled to sell, at the best price reasonably
obtainable at the time of sale, any share of a Member or any share to which
a person is entitled by transmission if and provided that:-
49.1 for a period of 12 years no cheque, warrant or order sent by the Company in
the manner authorised by these Articles in respect of the share in question
has been cashed and no communication has been received by the Company from
the Member or the person entitled by transmission; provided that, in such
period of 12 years, at least three dividends whether interim or final on or
in respect of the share in question have become payable and no such
dividend during that period has been claimed; and
49.2 the Company has, on or after expiration of the said period of 12 years, by
advertisement in both a national newspaper and a newspaper circulating in
the area in which the last known address of the member or the address at
which service of notices may be effected in the manner authorised in
accordance with the provisions of these Articles is located, given notice
of its intention to sell such share (but so that such advertisements need
not refer to the names of the holder(s) of the share or identify the share
in question); and
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49.3 the Company has not, during the further period of three months after the
publication of such advertisements and prior to the exercise of the power
of sale, received any communication from the Member or person entitled by
transmission; and
49.4 if the shares are listed or dealt in on the London Stock Exchange Limited,
the Company has given notice in writing to such Stock Exchange of its
intention to sell such share.
50. If, during any 12 year period or three month period referred to in
paragraphs 49.1 and 49.3 of the preceding Article, further shares have been
issued in respect of those held at the beginning of such 12 year period or
of any previously issued during such periods and all the other requirements
of such Article have been satisfied in respect of the further shares, the
Company may also sell such further shares.
51. To give effect to any sale pursuant to the previous two Articles, the
Directors may authorise any person to execute as transferor an instrument
of transfer of the said share and such instrument of transfer shall be as
effective as if it had been executed by the registered holder of or person
entitled by transmission to such share. The transferee shall not be bound
to see to the application of the purchase moneys and the title of the
transferee shall not be affected by any irregularity or invalidity in the
proceedings relating thereto. The net proceeds of sale shall belong to the
Company which shall be obliged to account to the former Member or other
person previously entitled as aforesaid for an amount equal to such
proceeds and shall enter the name of such former Member or other person in
the books of the Company as a creditor for such amount. No trust shall be
created in respect of the debt, no interest shall be payable in respect of
the same and the Company shall not be required to account for any money
earned on the net proceeds, which may be employed in the business of the
Company or invested in such investments (other than shares of the Company
or its holding company (if any)) as the Directors may from time to time
think fit.
52. If either (i) on two consecutive occasions cheques, warrants or orders in
payment of dividends or other moneys payable in respect of any share have
been sent through the post or otherwise in accordance with the provisions
of these Articles but have been returned undelivered or left uncashed
during the periods for which the same are valid or any transfer by bank or
other funds transfer system has not been satisfied; or (ii) following one
such occasion reasonable enquiries have failed to establish any new address
of the registered holder; the Company need not thereafter despatch further
cheques, warrants or orders and need not thereafter transfer any sum (as
the case may be) in payment of dividends or other moneys payable in respect
of the share in question until the Member or other person entitled thereto
shall have communicated with the Company and supplied in writing to the
Office an address for the purpose.
ALTERATION OF CAPITAL
53. The Company may from time to time by Ordinary Resolution increase its share
capital by such sum, to be divided into shares of such amount, as the
resolution shall prescribe. All new shares shall be subject to the
provisions of these Articles with reference to allotment, payment of calls,
forfeiture, lien, transfer and transmission and otherwise.
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54. The Company may by Ordinary Resolution:-
54.1 consolidate and divide all or any of its share capital into shares of
larger amount than its existing shares;
54.2 sub-divide its existing shares, or any of them, into shares of smaller
amount, provided that:-
(a) in the sub-division the proportion between the amount paid and the
amount, if any, unpaid on each reduced share shall be the same as it
was in the case of the share from which the reduced share is derived;
and
(b) the resolution whereby any share is sub-divided may determine that as
between the resulting shares one or more of such shares may be given
any preference or advantage or be subject to any restriction as
regards dividend, capital, voting or otherwise over the others or any
other of such shares;
54.3 cancel any shares which, at the date of the passing of the resolution, have
not been taken or agreed to be taken by any person, and diminish the amount
of its share capital by the amount of the shares so cancelled.
55. Subject to any direction by the Company in General Meeting, whenever as the
result of any consolidation or division of shares Members of the Company
are entitled to any issued shares of the Company in fractions, the
Directors may deal with such fractions as they shall determine and in
particular may sell the shares to which Members are so entitled in
fractions to any person (including, subject to the provisions of the
Statutes, the Company) and pay and distribute to and amongst the Members
entitled to such shares in due proportions the net proceeds of the sales
thereof. For the purpose of giving effect to any such sale the Directors
may nominate some person to execute a transfer of the shares sold on behalf
of the Members so entitled to, or in accordance with the directions of, the
purchaser thereof and may cause the name of the transferee(s) to be entered
in the Register as the holder(s) of the shares comprised in any such
transfer, and such transferee(s) shall not be bound to see to the
application of the purchase money nor shall such transferee(s) title to the
shares be affected by any irregularity or invalidity in the proceedings in
reference to the sale.
56. Subject to the provisions of the Statutes, the Company may by Special
Resolution reduce its share capital, any capital redemption reserve and any
share premium account in any way.
GENERAL MEETINGS
57. The Company shall in each year hold a General Meeting as its Annual General
Meeting in addition to any other meetings in that year, and not more than
15 months shall elapse between the date of one Annual General Meeting of
the Company and that of the next. The Annual General Meeting shall be held
at such time and place as the Directors shall appoint.
58. All General Meetings other than Annual General Meetings shall be called
Extraordinary General Meetings.
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59. The Directors may, whenever they think fit, convene an Extraordinary
General Meeting, and Extraordinary General Meetings shall also be convened
on such requisition, or, in default, may be convened by such
requisitionists, as provided by the Statutes. If at any time there are not
within the United Kingdom sufficient Directors capable of acting to form a
quorum the Directors in the United Kingdom capable of acting may convene an
Extraordinary General Meeting in the same manner as nearly as possible as
that in which meetings may be convened by the Directors.
NOTICE OF GENERAL MEETINGS
60. An Annual General Meeting and a meeting called for the passing of a Special
Resolution shall be called by not less than 21 clear days' notice in
writing, and a meeting of the Company other than an Annual General Meeting
or a meeting for the passing of a Special Resolution shall be called by not
less than 14 clear days' notice in writing. The notice shall specify the
place, the day and the time of meeting and, in the case of any special
business, the general nature of that business. It shall be given, in the
manner hereinafter mentioned or in such other manner, if any, as may be
prescribed by the Company in General Meeting, to such persons as are, under
these Articles, entitled to receive such notices from the Company and shall
comply with the provisions of the Statutes as to informing Members of their
right to appoint proxies. A notice calling an Annual General Meeting shall
specify the meeting as such and a notice convening a meeting to pass an
Extraordinary Resolution or a Special Resolution as the case may be shall
specify the intention to propose the resolution as such.
61. A meeting of the Company shall, notwithstanding that it is called by
shorter notice than that specified in the last preceding Article, be deemed
to have been duly called if it is so agreed:-
61.1 in the case of a meeting called as the Annual General Meeting, by all the
Members entitled to attend and vote thereat; and
61.2 in the case of any other meeting, by a majority in number of the Members
having a right to attend and vote at the meeting, being a majority together
holding not less than 95 per cent. in nominal value of the shares giving
that right .
62. The accidental omission to give notice of a meeting, or to send a form of
proxy with a notice where required by these Articles, to any person
entitled to receive notice, or the non-receipt of notice of a meeting or
form of proxy by any such person, shall not invalidate the proceedings at
that meeting.
PROCEEDINGS AT GENERAL MEETINGS
63. All business shall be deemed special that is transacted at an Extraordinary
General Meeting, and also all that is transacted at an Annual General
Meeting, with the exception of declaring a dividend, the consideration of
the annual accounts and the reports of the Directors and Auditors on those
accounts, the appointment of Directors in place of those retiring, and the
appointment of (when special notice of the resolution for such appointment
is not required by the Statutes) and the fixing of the
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remuneration of the Auditors or the determination of the manner in which
such remuneration is to be fixed.
64. No business shall be transacted at any General Meeting unless a quorum is
present at the time when the meeting proceeds to business; save as herein
otherwise provided, two Members present in person or by proxy and entitled
to vote shall be a quorum. The appointment of a Chairman in accordance with
the provisions of these Articles shall not be treated as part of the
business of the meeting.
65. If within five minutes (or such longer time as the Chairman may decide)
from the time appointed for the meeting a quorum is not present, the
meeting, if convened by or upon the requisition of Members, shall be
dissolved. In any other case it shall stand adjourned to such time (being
not less than 14 days nor more than 28 days later) and place as the
Chairman shall appoint. If at such adjourned meeting a quorum be not
present within five minutes from the time appointed therefor, the Member or
Members present in person or by proxy and entitled to vote shall have power
to decide upon all matters which could properly have been disposed of at
the meeting from which the adjournment took place. The Company shall give
not less than seven clear days' notice of any meeting adjourned for want of
a quorum, and the notice shall state that the Member or Members present as
aforesaid shall form a quorum and shall have the power aforesaid.
66. The Chairman, if any, of the board of directors shall preside as Chairman
at every General Meeting of the Company. If there be no such Chairman, or
if at any General Meeting he shall not be present within five minutes after
the time appointed for holding the meeting or is unwilling to act as
Chairman, the Directors present shall select one of their number to be
Chairman; or if no Director be present and willing to take the chair the
Members present and entitled to vote shall choose one of their number to be
Chairman of the meeting.
67. The Chairman may, with the consent of any meeting at which a quorum is
present (and shall if so directed by the meeting), adjourn the meeting from
time to time and from place to place; but no business shall be transacted
at any adjourned meeting other than the business left unfinished at the
meeting from which the adjournment took place. When a meeting is adjourned
for 30 days or more, not less than seven clear days' notice in writing of
the adjourned meeting shall be given specifying the day, the place and the
time of the meeting as in the case of an original meeting, but it shall not
be necessary to specify in such notice the nature of the business to be
transacted at the adjourned meeting. Save as aforesaid it shall not be
necessary to give any notice of an adjournment.
68. If an amendment shall be proposed to any resolution under consideration but
shall in good faith be ruled out of order by the Chairman of the meeting
the proceedings on the substantive resolution shall not be invalidated by
any error in such ruling. In the case of a resolution duly proposed as a
Special or Extraordinary Resolution no amendment thereto (other than an
amendment to correct a patent error) may in any event be considered or
voted upon.
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69. At any General Meeting a resolution put to the vote of the meeting shall be
decided on a show of hands unless a poll is (before or on the declaration
of the result of the show of hands) demanded:-
69.1 by the Chairman; or
69.2 by at least three Members present in person or by proxy and entitled to
vote; or
69.3 by any Member or Members present in person or by proxy and representing not
less than one-tenth of the total voting rights of all the Members having
the right to vote at the meeting; or
69.4 by a Member or Members present in person or by proxy holding shares in the
Company conferring a right to vote at the meeting being shares on which an
aggregate sum has been paid up equal to not less than one-tenth of the
total sum paid up on all shares conferring that right.
Unless a poll be so demanded a declaration by the Chairman that a
resolution has on a show of hands been carried or carried unanimously, or
by a particular majority, or lost and an entry to that effect in the book
containing the minutes of the proceedings of the Company shall be
conclusive evidence of the fact without proof of the number or proportion
of the votes recorded in favour of or against such resolution.
Except as provided in Article 71, if a poll is duly demanded it shall be
taken in such manner (including the use of ballot or voting papers or
tickets) as the Chairman of the meeting directs and he may appoint
scrutineers and fix a time and place for declaring the result of the poll.
The result of the poll shall be deemed to be the resolution of the meeting
at which the poll was demanded.
70. In the case of an equality of votes, whether on a show of hands or on a
poll, the Chairman of the meeting at which the show of hands takes place or
at which the poll is demanded, shall be entitled to a second or casting
vote.
71. A poll demanded on the election of a Chairman or on the question of an
adjournment shall be taken forthwith. A poll demanded on any other question
shall be taken either immediately or at such subsequent time (not being
more than 30 days after the date of the meeting or adjourned meeting at
which the poll is demanded) and place as the Chairman may direct. No notice
need be given of a poll not taken immediately. Any business other than that
upon which a poll has been demanded may be proceeded with pending the
taking of the poll. The demand for a poll may be withdrawn with the consent
of the Chairman at any time before the close of the meeting or the taking
of the poll, whichever is the earlier, and in that event shall not
invalidate the result of a show of hands declared before the demand was
made.
VOTES OF MEMBERS
72. Subject to any rights or restrictions for the time being attached to any
class or classes of shares and to any other provisions of these Articles,
on a show of hands every Member present in person shall have one vote, and
on a poll every Member present in person or by proxy shall have one vote
for each share of which he is the holder.
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73. In the case of joint holders of a share, the vote of the senior who tenders
a vote, whether in person or by proxy, shall be accepted to the exclusion
of the votes of the other joint holders; and for this purpose seniority
shall be determined by the order in which the names stand in the Register
in respect of the share.
74. A Member in respect of whom an order has been made by any court having
jurisdiction (in the United Kingdom or elsewhere) in matters concerning
mental disorder may vote, whether on a show of hands or on a poll, by his
receiver curator bonis or other person authorised in that behalf appointed
by that court, and such receiver curator bonis or other person may, on a
poll, vote by proxy, provided that evidence to the satisfaction of the
Directors of the authority of the person claiming to exercise the right to
vote has been delivered at the Office (or at such other place as may be
specified in accordance with these Articles for the delivery of instruments
appointing a proxy) not later than the last time at which an instrument of
proxy should have been delivered in order to be valid for use at that
meeting or on the holding of that poll.
75.1 No Member shall, unless the Directors otherwise determine, be entitled, in
respect of any share in the capital of the Company held by him, to be
present or to vote on any question, either in person or by proxy, at any
General Meeting, or separate General Meeting of the holders of any class of
shares of the Company, or to be reckoned in a quorum, if any call or other
sum presently payable by him to the Company in respect of such share
remains unpaid.
75.2 If any Member, or any other person appearing to the Directors to be
interested in any shares in the capital of the Company held by such Member,
has been duly served with a notice under section 212 of the Companies Act
1985 and is in default for the period of 14 days from the date of service
of the notice under the said section 212 in supplying to the Company the
information thereby required, then the Company may (at the absolute
discretion of the Directors) at any time thereafter by notice (a
"restriction notice") to such Member direct that, in respect of the shares
in relation to which the default occurred and any other shares held at the
date of the restriction notice by the Member, or such of them as the
Directors may determine from time to time, (the "restricted shares" which
expression shall include any further shares which are issued in respect of
any restricted shares), the Member shall not, nor shall any transferee to
which any of such shares are transferred other than pursuant to a permitted
transfer or pursuant to paragraph 75.3(c) below, be entitled to be present
or to vote on any question, either in person or by proxy, at any General
Meeting of the Company or separate General Meeting of the holders of any
class of shares of the Company, or to be reckoned in a quorum.
75.3 Where the restricted shares represent at least 0.25 per cent. (in nominal
value) of the issued shares of the same class as the restricted shares,
then the restriction notice may also direct that:-
(a) any dividend or any part thereof or other moneys which would otherwise
be payable on or in respect of the restricted shares shall be withheld
by the Company; shall not bear interest against the Company; and shall
be payable (when the restriction notice ceases to have effect) to the
person who would but for the restriction notice have been entitled to
them; and/or
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(b) where an offer of the right to elect to receive shares of the Company
instead of cash in respect of any dividend or part thereof is or has
been made by the Company, any election made thereunder by such Member
in respect of such restricted shares shall not be effective; and/or
(c) no transfer of any of the shares held by such Member shall be
recognised or registered by the Directors unless the transfer is a
permitted transfer or:-
(i) the Member is not himself in default as regards supplying the
information required; and
(ii) the transfer is of part only of the Member's holding and, when
presented for registration, is accompanied by a certificate by
the Member in a form satisfactory to the Directors to the effect
that after due and careful enquiry the Member is satisfied that
none of the shares the subject of the transfer are restricted
shares.
Upon the giving of a restriction notice its terms shall apply accordingly.
75.4 The Company shall send a copy of the restriction notice to each other
person appearing to be interested in the shares the subject of such notice,
but the failure or omission by the Company to do so shall not invalidate
such notice.
75.5 Any restriction notice shall have effect in accordance with its terms until
7 days after the Directors are satisfied that the default in respect of
which the restriction notice was issued no longer continues but shall cease
to have effect in relation to any shares which are transferred by such
Member by means of a permitted transfer or in accordance with paragraph
75.3(c) above on receipt by the Company of notice that a transfer as
aforesaid has been made. The Company may (at the absolute discretion of the
Directors) at any time give notice to the Member cancelling, or suspending
for a stated period the operation of, a restriction notice in whole or in
part.
75.6 For the purposes of this Article:-
(a) a person shall be treated as appearing to be interested in any shares
if the Member holding such shares has given to the Company a
notification whether following service of a notice under the said
section 212 or otherwise which either (1) names such person as being
so interested or (2) (after taking into account the said notification
and any other relevant information in the possession of the Company)
the Company knows or has reasonable cause to believe that the person
in question is or may be interested in the shares; and
(b) a transfer of shares is a permitted transfer if but only if:-
(i) it is a transfer by way of, or in pursuance of, acceptance of a
takeover offer for the Company (as defined in section 428 of the
Companies Act 1985); or
(ii) the Directors are satisfied that the transfer is made pursuant
to a bona fide sale of the whole of the beneficial ownership of
the shares to a
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third party unconnected with the transferring Member or with any
other person appearing to the Directors to be interested in such
shares (and for the purposes of this paragraph 75.6(b)(ii) any
associate (as that term is defined in section 435 of the
Insolvency Act 1986) of the Member or of any other person
appearing to the Directors to be interested in any of the
restricted shares shall be deemed to be connected with the
transferring Member); o r
(iii) the transfer results from a sale made on or through the London
Stock Limited or any stock exchange outside the United Kingdom
on which the Company's shares of the same class as the
restricted shares are normally dealt in.
75.7 The provisions of this Article are in addition and without prejudice to the
provisions of the Statutes.
76. No objection shall be raised to the qualification of any voter except at
the meeting or adjourned meeting at which the vote objected to is given or
tendered, and every vote not disallowed at such meeting shall be valid for
all purposes. Any such objection made in due time shall be referred to the
Chairman of the meeting, whose decision shall be final and conclusive.
77. On a poll votes may be given personally or by proxy and a Member entitled
to more than one vote need not, if he votes, use all his votes or cast all
the votes he uses in the same way.
78. The instrument appointing a proxy shall be in writing in any usual or
common form, or any other form which the Directors may approve, under the
hand of the appointor or of his attorney duly authorised in writing, or if
the appointor is a corporation, either under seal, or under the hand of an
officer or attorney duly authorised. The signature on such instrument need
not be witnessed.
79. A proxy need not be a Member of the Company. A Member may appoint more than
one proxy to attend on the same occasion. Deposit of an instrument of proxy
shall not preclude a Member from attending and voting in person at the
meeting or any adjournment thereof.
80. An instrument appointing a proxy and (failing previous registration with
the Company) the power of attorney or other authority, if any, under which
it is executed, or a notarially certified copy or a copy certified in
accordance with the Powers of Attorney Act 1971 of that power or authority,
or a copy certified in some other manner approved by the Directors, shall
be deposited at the Office or at such other place or one of such places (if
any) within the United Kingdom as is or are specified for that purpose in
or by way of note to the notice convening the meeting or any document
accompanying such notice, not less than 48 hours before the time for
holding the meeting or adjourned meeting at which the person named in the
instrument proposes to vote, or, in the case of a poll taken otherwise than
at or on the same day as the meeting or adjourned meeting, not less than 24
hours before the time appointed for the taking of the poll at which it is
to be used, and in default the instrument of proxy shall not be treated as
valid.
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81. An instrument appointing a proxy shall, unless the contrary is stated
thereon, be valid as well for any adjournment of the meeting to which it
relates. No instrument of proxy shall be valid after the expiration of 12
months from the date of its execution except at an adjourned meeting or on
a poll demanded at a meeting or adjourned meeting in cases where the
meeting was originally held within 12 months from that date.
82. The instrument appointing a proxy shall be deemed to confer authority to
demand or join in demanding a poll.
83. A vote given or poll demanded in accordance with the terms of an instrument
of proxy or by the duly authorised representative of a corporation shall be
valid notwithstanding the previous death or insanity of the principal or
revocation of the proxy or determination of the authority of the person
voting or demanding a poll, provided that no intimation in writing of such
death, insanity, revocation or determination shall have been received by
the Company at the Office or such other place (if any) as is specified for
depositing the instrument of proxy before the commencement of the meeting
or adjourned meeting or the holding of a poll subsequently thereto at which
such vote is given.
84. Subject to the provisions of the Statutes, a resolution in writing signed
by all the Members for the time being entitled to receive notice of and to
attend and vote at General Meetings (or being corporations by their duly
authorised representatives) shall be as valid and effective as if the same
had been passed at a General Meeting of the Company duly convened and held,
and may consist of two or more documents in like form each signed by one or
more of the Members.
85. Any corporation which is a Member of the Company may by resolution of its
directors or other governing body authorise such person as it thinks fit to
act as its representative at any meeting of the Company or of any class of
Members of the Company, and the person so authorised shall be entitled to
exercise the same powers on behalf of the corporation which he represents
as that corporation could exercise if it were an individual Member of the
Company and such corporation shall for the purposes of these Articles be
deemed to be present in person at any such meeting if a person so
authorised is present thereat.
DIRECTORS
86. Unless and until the Company in General Meeting shall otherwise determine,
the number of Directors shall be not more than 20 nor less than 2.
87. A Director shall not be required to hold any shares in the capital of the
Company. A Director who is not a Member shall nevertheless be entitled to
receive notice of and attend and speak at all General Meetings of the
Company and all separate General Meetings of the holders of any class of
shares in the capital of the Company.
88. The provisions of section 293 of the Companies Act 1985 (which regulate the
appointment and continuation in office of Directors who have attained the
age of 70) shall apply to the Company.
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89. A Director of the Company may be or continue as or become a director or
other officer servant or member of, or otherwise interested in, any body
corporate promoted by the Company or in which the Company may be interested
as shareholder or otherwise, and no such Director shall be accountable to
the Company for any remuneration or other benefits received or receivable
by him as a director or other officer servant or member of, or from his
interest in, such other body corporate.
90.1 The Directors shall be paid out of the funds of the Company by way of fees
for their services as Directors such sums (if any) as the Directors may
from time to time determine (not exceeding in the aggregate an annual sum
(excluding amounts payable under any other provision of these Articles) of
(Pounds)100,000 or such larger amount as the Company may by Ordinary
Resolution determine) and such remuneration shall be divided between the
Directors as they shall agree or, failing agreement, equally. Such
remuneration shall be deemed to accrue from day to day.
90.2 The Directors may also be paid all reasonable travelling, hotel and other
expenses properly incurred by them in attending and returning from meetings
of the Directors or any committee of the Directors or General Meetings of
the Company or of the holders of any class of shares or debentures of the
Company or otherwise in connection with the business of the Company.
91. Any Director who is appointed to any executive office or who serves on any
committee or who devotes special attention to the business of the Company,
or who otherwise performs services which in the opinion of the Directors
are outside the scope of the ordinary duties of a Director, may be paid
such extra remuneration by way of salary, percentage of profits or
otherwise as the Directors may determine.
92. The Company shall in accordance with the provisions of the Statutes duly
keep a register showing, as respects each Director, interests of his in
shares in, or debentures of, the Company or associated companies.
ALTERNATE DIRECTORS
93.1 Each Director shall have the power at any time to appoint as an alternate
Director either (1) another Director or (2) any other person approved for
that purpose by a resolution of the Directors, and, at any time, to
terminate such appointment. Every appointment and removal of an alternate
Director shall be in writing signed by the appointor and (subject to any
approval required) shall (unless the Directors agree otherwise) only take
effect upon receipt of such written appointment or removal at the Office or
at a meeting of the Directors. An alternate Director shall not be required
to hold any shares in the capital of the Company and shall not be counted
in reckoning the maximum and minimum numbers of Directors allowed or
required by Article 86.
93.2 An alternate Director so appointed shall not be entitled as such to receive
any remuneration from the Company except only such part (if any) of the
remuneration otherwise payable to his appointor as such appointor may by
notice in writing to the Company from time to time direct, but shall
otherwise be subject to the provisions of these Articles with respect to
Directors. An alternate Director shall during his appointment be an officer
of the Company and shall alone be responsible to the
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Company for his own acts and defaults and shall not be deemed to be an
agent of his appointor.
93.3 An Alternate Director shall be entitled (subject to his giving to the
Company an address within the United Kingdom at which notices may be
served upon him) to receive notices of all meetings of the Directors
and of any committee of the Directors of which his appointor is a
member, and shall be entitled to attend and vote as a Director at any
such meeting at which his appointor is not personally present and
generally in the absence of his appointor to perform and exercise all
functions, rights, powers and duties as Director of his appointor.
93.4 The appointment of an alternate Director shall automatically determine
on the happening of any event which, if he were a Director, would
cause him to vacate such office or if his appointor shall cease for
any reason to be a Director otherwise than by retiring and being re-
appointed at the same meeting.
93.5 A Director or any other person may act as alternate Director to
represent more than one Director and an alternate Director shall be
entitled at meetings of the Directors or any committee of the
Directors to one vote for every Director whom he represents in
addition to his own vote (if any) as a Director, but he shall count as
only one for the purpose of determining whether a quorum is present.
BORROWING POWERS
94.1 Subject as hereinafter provided the Directors may exercise all the
powers of the Company to borrow money, and to mortgage or charge its
undertaking, property and assets (present and future) and uncalled
capital, or any part thereof, and, subject to the provisions of the
Statutes to issue debentures, debenture stock, and other securities
whether outright or as security for any debt, liability or obligation
of the Company or of any third party.
94.2 The Directors shall restrict the borrowings of the Company and
exercise all voting and other rights or powers of control exercisable
by the Company in relation to its subsidiary undertakings (if any) so
as to secure (so far, as regards subsidiary undertakings, as by such
exercise they can secure) that the aggregate amount for the time being
remaining outstanding of all moneys borrowed by the Group (which
expression in this Article means the Company and its subsidiary
undertakings for the time being) and for the time being owing to
persons outside the Group shall not at any time, without the previous
sanction of an Ordinary Resolution of the Company in General Meeting,
exceed a sum equal to two and a half times the aggregate of:-
(a) the amount paid up on the issued share capital of the Company;
and
(b) the total of the capital and revenue reserves of the Group
(including any share premium account, capital redemption reserve
and credit balance on the profit and loss account) in each case,
whether or not such amounts are available for distribution;
all as shown in the latest audited consolidated balance sheet of the
Group but after:-
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(i) making such adjustments as may be appropriate in respect of any
variation in such amount paid up on the issued share capital or
share premium account or capital redemption reserve or merger
reserve since the date of such latest audited consolidated
balance sheet and so that for this purpose if any issue or
proposed issue of shares for cash or otherwise has been
underwritten or otherwise agreed to be subscribed (for cash or
otherwise) then, at any time when the underwriting of such
shares or other agreement as aforesaid shall be unconditional,
such shares shall be deemed to have been issued and the amount
(including any premium) payable (or which would be credited as
payable) in respect thereof (not being moneys payable later than
six months after the date of allotment) shall be deemed to have
been paid up to the extent that the underwriters or other
persons are liable therefor;
(ii) deducting (to the extent included):-
(A) any amounts distributed or proposed to be distributed (but
not provided in such latest audited consolidated balance
sheet) other than distributions attributable to the Company
or any subsidiary undertaking;
(B) any amounts attributable to goodwill (other than goodwill
arising on consolidation);
(C) the aggregate amount of moneys borrowed for the purposes of
this Article 94.2 an amount equal to the aggregate for the
time being outstanding of all cash deposits with banks (not
being the Company or any subsidiary of the Company),
certificates of deposit, securities of governments, and
securities of public companies traded on a Recognised
Investment Exchange or an overseas stock exchange and
similar instruments owned by the Company and/or and
subsidiary or subsidiary undertaking of the Company net of
a proportion of the total amount for the time being
outstanding of cash deposits and certificates of deposit
and securities of governments, or securities of public
companies traded on a Recognised Investment Exchange or an
overseas stock exchange and similar instruments owned by
any partly owned subsidiary or any subsidiary undertaking
which would otherwise fall to be included, such proportion
being that which the issued equity share capital of such
partly owned subsidiary or such subsidiary undertaking
which is not for the time being beneficially owned directly
or indirectly by the Company bears to the whole of its
issued equity share capital; and
(D) moneys borrowed for the purpose of repaying the whole or
any part of any moneys previously borrowed and then
outstanding (including any premium payable on final
repayment) and to be applied for that purpose within 6
months of the borrowing shall not, pending such
application, be taken into account as moneys borrowed;
(iii) excluding:-
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(A) any sums set aside for taxation;
(B) any amounts attributable to outside shareholders in
subsidiary undertakings of the Company;
(iv) deducting any debit balance on the profit and loss account; and
(v) making such adjustments (if any) as the Auditors may consider
appropriate.
94.3 For the purpose of the foregoing limit "moneys borrowed" shall be
deemed to include the following except in so far as otherwise taken
into account (together in each case with any fixed or minimum premium
payable on final redemption or repayment):-
(a) the principal amount for the time being owing (other than to a
member of the Group) in respect of any loan capital, whether
secured or unsecured, issued by a member of the Group in whole or
in part for cash or otherwise;
(b) the principal amount raised by any member of the Group by
acceptances or under any acceptance credit opened on its behalf
by any bank or accepting house other than acceptances relating to
the purchase of goods in the ordinary course of trading and
outstanding for not more than 90 days;
(c) the nominal amount of any issued share capital, and the principal
amount of any moneys borrowed or other indebtedness, the
redemption or repayment of which is guaranteed or secured or is
the subject of an indemnity given by any member of the Group and
the beneficial interest in the redemption or repayment of which
is not owned within the Group; and
(d) the nominal amount of any issued share capital (not being equity
share capital which as regards capital has rights no more
favourable than those attached to its ordinary share capital) of
any subsidiary undertaking of the Company owned otherwise than by
other members of the Group,
but "moneys borrowed" shall not include and shall be deemed not to
include:-
(i) amounts borrowed for the purpose of repaying the whole or any
part (with or without premium) of any moneys borrowed by any
member of the Group then outstanding and so to be applied within
six months of being so borrowed, pending their application for
such purpose within such period; and
(ii) the proportion of the excess outside borrowing of a partly owned
subsidiary undertaking which corresponds to the proportion of its
equity share capital which is not directly or indirectly
attributable to the Company and so that, for this purpose, the
expression "excess outside borrowing" shall mean so much of the
moneys borrowed by such partly owned subsidiary undertaking
otherwise than from members of the Group as exceeds the moneys
borrowed (if any) from and owing to it by other members of the
Group.
When the aggregate amount of moneys borrowed required to be taken into
account for the purposes of this Article on any particular day is
being ascertained, any of such
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moneys denominated or repayable (or repayable at the option of any
person other than the Company or any subsidiary undertaking) in a
currency other than sterling shall be translated, for the purpose of
calculating the sterling equivalent, at the rate(s) of exchange
prevailing on that day in London, or on the last business day six
months before such day if thereby such aggregate amount would be less
(and so that for this purpose the rate of exchange prevailing shall be
taken as the spot rate in London quoted at or about 11.00 a.m. on the
day in question by a London clearing bank, approved by the Directors,
as being the rate for the purchase by the Company of the currency and
amount in question for sterling).
94.4 A certificate or report by the Auditors as to the amount of the limit
in paragraph 94.2 of this Article or the aggregate amount of moneys
borrowed falling to be taken into account under paragraph 94.3 of this
Article or to the effect that the limit imposed by this Article has
not been or will not be exceeded at any particular time or times or
during any period shall be conclusive evidence of such amount or fact
for the purposes of this Article.
No lender or other person dealing with the Company or any of its
subsidiary undertakings shall be concerned to see or inquire whether
the said limit is observed, and no debt incurred or security given in
excess of such limit shall be invalid or ineffectual, except in the
case of express notice to the lender or the recipient of the security
at the time when the debt was incurred or security given that the said
limit has been or would thereby be exceeded.
94.5 In this Article "subsidiary undertaking" means a subsidiary
undertaking of the Company which is required by the Statutes to be
included in consolidated group accounts.
94.6 Notwithstanding any other provision of this Article, the Board may at
any time act in reliance on a bona fide estimate of the amount of the
adjusted capital and reserves and if in consequence the limit herein
before contained is inadvertently exceeded, an amount borrowed equal
to the excess may be disregarded until the expiration of 90 days after
the date on which by reason of a determination of the Auditors, the
publication of group accounts or an Interim Report or otherwise the
Board became aware that such a situation has or may have arisen.
POWERS AND DUTIES OF DIRECTORS
95. The business of the Company shall be managed by the Directors, who may
exercise all the powers of the Company subject, nevertheless, to the
provisions of these Articles and of the Statutes, and to such
directions as may be given by the Company in General Meeting by
special resolution: Provided that no alteration of the memorandum of
association or these Articles and no such direction shall invalidate
any prior act of the Directors which would have been valid if such
alteration had not been made or such direction had not been given. The
general powers conferred upon the Directors by this Article shall not
be deemed to be abridged or restricted by any specific power conferred
upon the Directors by any other Article.
96.1 The Directors may exercise all the powers of the Company to give or
award pensions, annuities, gratuities or other retirement,
superannuation, death or disability allowances
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or benefits (whether or not similar to the foregoing) to (or to any
person in respect of) any persons who are or have at any time been
Directors of or employed by or in the service of the Company or of any
body corporate which is or was a subsidiary undertaking or a parent
undertaking of the Company or another subsidiary undertaking of a
parent undertaking of the Company or otherwise associated with the
Company or any such body corporate, or a predecessor in business of
the Company or any such body corporate, and to the wives, widows,
children and other relatives and dependants of any such persons and
may establish, maintain, support, subscribe to and contribute to all
kinds of schemes, trusts and funds (whether contributory or non-
contributory) for the benefit of such persons as are hereinbefore
referred to or any of them or any class of them, and so that any
Director or former Director shall be entitled to receive and retain
for his own benefit any such pension, annuity, gratuity, allowance or
other benefit (whether under any such trust, fund or scheme or
otherwise).
96.2 Without prejudice to any other provisions of these Articles, the
Directors may exercise all the powers of the Company to purchase and
maintain insurance for or for the benefit of any persons who are or
were at any time Directors, officers, employees or auditors of the
Company, or of any other body (whether or not incorporated) which is
or was its parent undertaking or subsidiary undertaking or another
subsidiary undertaking of any such parent undertaking (together "Group
Companies") or otherwise associated with the Company or any Group
Company or in which the Company or any such Group Company has or had
any interest, whether direct or indirect, or of any predecessor in
business of any of the foregoing, or who are or were at any time
trustees of (or directors of trustees of) any pension, superannuation
or similar fund, trust or scheme or any employees' share scheme or
other scheme or arrangement in which any employees of the Company or
of any such other body are interested, including (without prejudice to
the generality of the foregoing) insurance against any costs, charges,
expenses, losses or liabilities suffered or incurred by such persons
in respect of any act or omission in the actual or purported execution
and/or discharge of their duties and/or the exercise or purported
exercise of their powers and discretions and/or otherwise in relation
to or in connection with their duties, powers or offices in relation
to the Company or any such other body, fund, trust, scheme or
arrangement.
97. The Directors may make such arrangements as they think fit for the
management and transaction of the Company's affairs in the United
Kingdom and elsewhere and may from time to time and at any time
establish any local boards or agencies for managing any of the affairs
of the Company in any specified locality, and may appoint any persons
to be members of such local board, or any managers or agents, and may
fix their remuneration. And the Directors from time to time, and at
any time, may delegate to any person so appointed any of the powers,
authorities, and discretions for the time being vested in the
Directors (other than the powers of borrowing and of making calls),
with power to sub-delegate, and may authorise the members for the time
being of any such local board, or any of them, to fill up any
vacancies therein, and to act notwithstanding vacancies; and any such
appointment or delegation may be made on such terms and subject to
such conditions as the Directors may think fit, and the Directors may
at any time remove any person so appointed, and may annul or vary any
such delegation.
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98. The Directors may from time to time and at any time by power of
attorney appoint any body corporate, firm or person or body of
persons, whether nominated directly or indirectly by the Directors,
to be the attorney or attorneys of the Company for such purposes and
with such powers, authorities and discretions (not exceeding those
vested in or exercisable by the Directors under these Articles) and
for such period and subject to such conditions as they may think fit,
and any such powers of attorney may contain such provisions for the
protection and convenience of persons dealing with any such attorney
as the Directors may think fit and may also authorise any such
attorney to sub-delegate all or any of the powers, authorities and
discretions vested in him.
99. The Company may exercise the powers conferred by the Statutes with
regard to having an official seal for use abroad and the powers
conferred by section 40 of the Companies Act 1985 with regard to
having an official seal for sealing and evidencing securities, and
such powers shall be vested in the Directors.
100. The Company may exercise the powers conferred upon the Company by the
Statutes with regard to the keeping of an overseas branch register,
and the Directors may (subject to the provisions of the Statutes)
make and vary such regulations as they may think fit respecting the
keeping of any such register.
101.1 Subject to the provisions of the Statutes, a Director may hold any
other office or place of profit under the Company, except that of
Auditor, in conjunction with the office of Director and may act by
himself or through his firm in a professional capacity for the
Company, and in any such case on such terms as to remuneration and
otherwise as the Directors may arrange. Any such remuneration shall
be in addition to any remuneration provided for by any other Article.
No Director or intending Director shall be disqualified by his office
from entering into any contract, arrangement, transaction or proposal
with the Company either with regard to his tenure of any such other
office or place of profit or any such acting in a professional
capacity or as a vendor, purchaser or otherwise. Subject to the
provisions of the Statutes and save as therein provided no such
contract, arrangement, transaction or proposal entered into by or on
behalf of the Company in which any Director or person connected with
him is in any way interested, whether directly or indirectly, shall
be liable to be avoided, nor shall any Director who enters into any
such contract, arrangement, transaction or proposal or who is so
interested be liable to account to the Company for any profit or
other benefit realised by any such contract, arrangement, transaction
or proposal by reason of such Director holding that office or of the
fiduciary relationship thereby established, but he shall declare the
nature of his interest in accordance with the Statutes.
101.2 Save as herein provided, a Director shall not vote in respect of any
contract, arrangement, transaction or any other proposal whatsoever
in which he has an interest which (together with any interest of any
person connected with him within the meaning of section 346 of the
Companies Act 1985) is to his knowledge a material interest otherwise
than by virtue of interests in shares or debentures or other
securities of or otherwise in or through the Company. A Director
shall not be counted in the quorum at a meeting in relation to any
resolution on which he is debarred from voting.
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101.3 A Director shall (in the absence of some other material interest than
is indicated below) be entitled to vote (and be counted in the
quorum) in respect of any resolution concerning any of the following
matters, namely:-
(a) the giving of any guarantee, security or indemnity in respect of
money lent or obligations incurred by him or by any other person
at the request of or for the benefit of the Company or any of
its subsidiary undertakings;
(b) the giving of any guarantee, security or indemnity in respect of
a debt or obligation of the Company or any of its subsidiary
undertakings for which he himself has assumed responsibility in
whole or in part under a guarantee or indemnity or by the giving
of security;
(c) any proposal concerning an offer of shares or debentures or
other securities of or by the Company or any of its subsidiary
undertakings for subscription or purchase in which offer he is
or may be entitled to participate as a holder of securities or
in the underwriting or sub-underwriting of which he is to
participate;
(d) any contract, arrangement, transaction or other proposal
concerning any other body corporate in which he or any person
connected with him (within the meaning of section 346 of the
Companies Act 1985) is interested, directly or indirectly and
whether as an officer or shareholder or otherwise howsoever,
provided that he and any persons so connected with him do not
to his knowledge hold an interest (within the meaning of
sections 198-211 of the Companies Act 1985) in one per cent. or
more of any class of the equity share capital of such body
corporate or of the voting rights available to members of the
relevant body corporate;
(e) any contract, arrangement, transaction or other proposal
concerning the adoption, modification or operation of a
pension, superannuation or similar fund, trust or scheme or
retirement, death or disability benefit scheme under which he
may benefit which has been approved by the Inland Revenue or
which is conditional upon such approval or which does not
accord to him any privilege or advantage not generally accorded
to the employees to whom such scheme, trust or fund relates;
(f) any contract, arrangement, transaction or other proposal
concerning the adoption, modification or operation of any
employees share scheme (within the meaning of section 743 of
the Companies Act 1985) which has been approved by the Inland
Revenue or which is conditional upon such approval, or which
does not accord to him any privilege or advantage not generally
accorded to the employees to whom the scheme relates; and
(g) any proposal concerning any insurance which the Company is to
purchase and/or maintain for or for the benefit of any
Directors or for or for the benefit of persons who include
Directors.
101.4 A Director shall not vote or be counted in the quorum on any
resolution concerning his own appointment as the holder of any office
or place of profit with the Company
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or any company in which the Company is interested including fixing or
varying the terms of his appointment or the termination thereof.
101.5 Where proposals are under consideration concerning the appointment
(including fixing or varying the terms of appointment) of two or more
Directors to offices or employments with the Company or any body
corporate in which the Company is interested, such proposals may be
divided and considered in relation to each Director separately and in
such cases each of the Directors concerned (if not debarred from
voting under paragraph 101.3(d) of this Article) shall be entitled to
vote (and be counted in the quorum) in respect of each resolution
except that concerning his own appointment.
101.6 If any question shall arise at any meeting as to the materiality of
an interest or as to the entitlement of any Director to vote and such
question is not resolved by his voluntarily agreeing to abstain from
voting, such question shall be referred to the Chairman of the
meeting and his ruling in relation to any Director other than himself
shall be final and conclusive except in a case where the nature or
extent of the interests of the Director concerned have not been
fairly disclosed.
101.7 Subject to the provisions of the Statutes the Company may by Ordinary
Resolution suspend or relax the provisions of this Article to any
extent or ratify any contract, arrangement or transaction not duly
authorised by reason of a contravention of this Article.
102. The Directors may exercise or procure the exercise of the voting
rights conferred by the shares in any other body corporate held or
owned by the Company or any power of appointment in relation to any
other body corporate, and may exercise any voting rights or power of
appointment to which they are entitled as directors of such other
body corporate, in such manner as they shall in their absolute
discretion think fit, including the exercise thereof in favour of
appointing themselves or any of them as directors, officers or
servants of such other body corporate, and fixing their remuneration
as such, and may vote as Directors of the Company in connection with
any of the matters aforesaid.
103. All cheques, promissory notes, drafts, bills of exchange and other
negotiable instruments, and all receipts for moneys paid to the
Company, shall be signed, drawn, accepted, endorsed, or otherwise
executed, as the case may be, in such manner as the Directors shall
from time to time determine.
104. The Directors shall cause minutes to be made in books provided for
the purpose:-
104.1 of all appointments of officers made by the Directors;
104.2 of the names of the Directors present at each meeting of the
Directors and of any committee of the Directors;
104.3 of all resolutions and proceedings at all meetings of the Company,
and of the Directors, and of committees of Directors.
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It shall not be necessary for Directors present at any meeting of
Directors or committee of Directors to sign their names in the Minute
Book or other book kept for recording attendance. Any such minute as
aforesaid, if purporting to be signed by the Chairman of the meeting
at which the proceedings were had, or by the Chairman of the next
succeeding meeting, shall be receivable as prima facie evidence of
the matters stated in such minutes without any further proof.
DISQUALIFICATION OF DIRECTORS
105. The office of a Director shall be vacated in any of the following
events, namely:-
105.1 if he ceases to be a Director by virtue of section 293 of the
Companies Act 1985;
105.2 if a bankruptcy order is made against him or he makes any arrangement
or composition with his creditors generally;
105.3 if he becomes prohibited by law from acting as a Director;
105.4 if, in England or elsewhere, an order is made by any court claiming
jurisdiction in that behalf on the ground (however formulated) of
mental disorder for his detention or for the appointment of a
guardian or receiver or other person to exercise powers with respect
to his property or affairs;
105.5 if he resigns his office by notice in writing under his hand to the
Company or offers in writing under his hand to resign and the
Directors resolve to accept such offer;
105.6 if, not having leave of absence from the Directors, he and his
alternate (if any) fail to attend the meetings of the Directors for
six successive months, unless prevented by illness, unavoidable
accident or other cause which may seem to the Directors to be
sufficient, and the Directors resolve that his office be vacated;
ROTATION OF DIRECTORS
106. At each Annual General Meeting of the Company one-third of the
Directors who are subject to retirement by rotation, or, if their
number is not three or a multiple of three, then the number nearest
to but not exceeding one-third, shall retire from office. A Director
retiring at a meeting shall, if he is not reappointed at such
meeting, retain office until the meeting appoints someone in his
place, or if it does not do so, until the dissolution of such
meeting.
107. The Directors to retire by rotation in each year shall be those who
have been longest in office since their last appointment or
reappointment, but as between persons who became or were last
reappointed Directors on the same day those to retire shall (unless
they otherwise agree among themselves) be determined by lot. A
retiring Director shall be eligible for reappointment. The Directors
to retire on each occasion (both as to number and identity) shall be
determined by the composition of the Directors at the start of
business on the date of the notice convening the Annual General
Meeting and no Director shall be required to retire or be relieved
from retiring by reason of any change in the number or identity of
the Directors after that time on the date of the notice but before
the close of the meeting.
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108. If at any General Meeting at which a Director retires by rotation,
the place of any Director retiring by rotation be not filled up, then
such retiring Director shall, if willing, be deemed to have been
reappointed, unless at the meeting it is resolved not to fill the
vacancy or unless a resolution for his reappointment shall have been
put to the meeting and lost.
109. A single resolution for the appointment of two or more persons as
Directors shall not be put at any General Meeting, unless a
resolution that it shall be so put has first been agreed to by the
meeting without any vote being given against it.
110. No person other than a Director retiring at the meeting shall, unless
recommended by the Directors, be eligible for appointment to the
office of Director at any General Meeting unless not less than seven
nor more than 42 days before the date appointed for the meeting there
shall have been left at the Office notice in writing, signed by a
Member duly qualified to attend and vote at such meeting, of his
intention to propose such person for appointment, and also notice in
writing signed by that person of his willingness to be appointed.
111. Subject as aforesaid, the Company may from time to time by Ordinary
Resolution appoint a person who is willing to act to be a Director
either to fill a casual vacancy or as an additional director, and may
also determine the rotation in which any such appointed Directors are
to retire.
112. The Directors shall have power at any time, and from time to time, to
appoint any person to be a Director of the Company, either to fill a
casual vacancy or as an addition to the existing Directors, but so
that the total number of Directors shall not at any time exceed the
maximum number, if any, fixed by or pursuant to these Articles. Any
Director so appointed shall hold office only until the next following
Annual General Meeting, and shall then be eligible for reappointment
but shall not be taken into account in determining the Directors who
are to retire by rotation at such meeting. If not reappointed at such
meeting, he shall vacate office at the conclusion thereof.
113. The Company may by Ordinary Resolution, of which special notice has
been given in accordance with the provisions of the Statutes, remove
any Director before the expiration of his period of office
notwithstanding anything in these Articles or in any agreement
between the Company and such Director. Such removal shall be without
prejudice to any claim such Director may have for damages for breach
of any contract of service between him and the Company.
114. Subject to Article 110, the Company may by Ordinary Resolution
appoint another person in place of a Director removed from office
under the immediately preceding Article. A person appointed in place
of a Director so removed shall be treated (for the purpose of
determining the time at which he or any other Director is to retire
by rotation) as if he had become a Director on the day on which the
Director in whose place he is appointed was last appointed or
reappointed a Director.
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PROCEEDINGS OF DIRECTORS
115. The Directors may meet for the despatch of business, adjourn and
otherwise regulate their meetings as they think fit. Without prejudice
to the foregoing, all or any of the Directors or of the members of any
committee of the Directors may participate in a meeting of the
Directors or of that committee by means of a conference telephone or
any communication equipment which allows all persons participating in
the meeting to hear each other. A person so participating shall be
deemed to be present in person at the meeting and shall be entitled to
vote and be counted in the quorum accordingly. Such a meeting shall be
deemed to take place where the largest group of those participating is
assembled, or, if there is no such group, where the Chairman of the
meeting is then present. The word "meeting" in these Articles shall be
construed accordingly.
The Directors may determine the quorum necessary for the transaction
of business. Until otherwise determined two Directors shall constitute
a quorum. Questions arising at any meeting shall be decided by a
majority of votes. In case of an equality of votes, the Chairman shall
have a second or casting vote. A Director may, and the Secretary on
the requisition of a Director shall, at any time summon a meeting of
the Directors. It shall not be necessary to give notice of a meeting
of Directors to a Director who is not within the United Kingdom. Any
Director may waive notice of any meeting and any such waiver may be
retrospective.
116. Notice of a meeting of the Directors shall be deemed to be duly given
to a Director if it is given to him personally or by word of mouth or
sent in writing to him at his last known address or any other address
given by him to the Company for this purpose. A Director absent or
intending to be absent from the United Kingdom may request the
Directors that notices of meetings of the Directors shall during his
absence be sent in writing to him at his last known address or any
other address given by him to the Company for this purpose, whether or
not out of the United Kingdom.
117. The continuing Directors or sole continuing Director may act
notwithstanding any vacancy in their body, but, if and so long as
their number is reduced below the number fixed by or pursuant to these
Articles as the necessary quorum of Directors, the continuing
Directors or Director may act for the purpose of increasing the number
of Directors to that number, or of summoning a General Meeting of the
Company, but for no other purpose.
118. The Directors may elect one of their number as a Chairman of their
meetings, and one of their number to be the Deputy Chairman and may at
any time remove either of them from such office; but if no such
Chairman or Deputy Chairman be elected, or if at any meeting neither
the Chairman nor the Deputy Chairman is present within five minutes
after the time appointed for holding the meeting and willing to act,
the Directors present shall choose one of their number to be Chairman
of such meeting.
119. The Directors may delegate any of their powers or discretions
(including without prejudice to the generality of the foregoing all
powers and discretions whose exercise involves or may involve any
payment to or the conferring of any other benefit on all or any of the
Directors) to committees consisting of one or more members of their
body and (if thought fit) one or more other persons co-opted as
hereinafter provided.
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Insofar as any such power or discretion is delegated to a committee
any reference in these Articles to the exercise by the Directors of
such power or discretion shall be read and construed as if it were a
reference to the exercise of such power or discretion by such
committee. Any committee so formed shall in the exercise of the powers
and discretions so delegated conform to any regulations that may from
time to time be imposed by the Directors in default of which the
meetings and proceedings of a committee consisting of more than one
member shall be governed mutatis mutandis by the provisions of these
Articles regulating the proceedings and meetings of the Directors. Any
such regulations may provide for or authorise the co-option to the
committee of persons other than Directors and for such co-opted
members to have voting rights as members of the committee.
120. All acts done by any meeting of the Directors or of a committee of the
Directors or by any person acting as a Director or as a member of a
committee shall, notwithstanding that it be afterwards discovered that
there was some defect in the appointment or continuance in office of
any of the persons acting as aforesaid, or that any of such persons
were disqualified from holding office or not entitled to vote, or had
in any way vacated office, be as valid as if every such person had
been duly appointed or had duly continued in office and was qualified
and had continued to be a Director or member of the committee and was
entitled to vote.
121. A resolution in writing, signed by all the Directors for the time
being entitled to receive notice of a meeting of the Directors or by
all the members of a committee for the time being, shall be as valid
and effective for all purposes as a resolution passed at a meeting
duly convened and held, and may consist of two or more documents in
like form each signed by one or more of the Directors or members of
such committee. Provided that such a resolution need not be signed by
an alternate Director if it is signed by the Director who appointed
him.
MANAGING AND EXECUTIVE DIRECTORS
122. Subject to the provisions of the Statutes the Directors may from time
to time appoint one or more of their body to the office of Managing
Director or to hold such other Executive Office in relation to the
management of the business of the Company as they may decide, for such
period and on such terms as they think fit, and, subject to the terms
of any service contract entered into in any particular case and
without prejudice to any claim for damages such Director may have for
breach of any such service contract, may revoke such appointment. A
Director so appointed shall not, whilst holding such office, be
subject to retirement by rotation or be taken into account in
determining the rotation of retirement of Directors but, without
prejudice to any claim for damages such Director may have for breach
of any service contract between him and the Company, his appointment
shall be automatically determined if he ceases from any cause to be a
Director.
123. The salary or remuneration of any Managing Director or such Executive
Director of the Company shall, subject as provided in any contract, be
such as the Directors may from time to time determine, and may either
be a fixed sum of money, or may altogether or in part be governed by
the business done or profits made, and may include the making of
provisions for the payment to him, his widow or other dependants, of a
pension on retirement from the office or employment to which he is
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appointed and for the participation in pension and life assurance and
other benefits, or may be upon such other terms as the Directors
determine.
124. The Directors may entrust to and confer upon a Managing Director or
such Executive Director any of the powers and discretions exercisable
by them upon such terms and conditions and with such restrictions as
they may think fit, and either collaterally with or to the exclusion
of their own powers and discretions and may from time to time revoke,
withdraw, alter or vary all or any of such powers or discretions.
SECRETARY
125. Subject to the provisions of the Statutes the Secretary shall be
appointed by the Directors for such term, at such remuneration and
upon such conditions as they think fit; and any Secretary may be
removed by them.
THE SEAL
126.1 The Directors shall provide for the safe custody of the Seal and any
official seal kept under section 40 of the Companies Act 1985, and
neither shall be used without the authority of the Directors or of a
committee of the Directors authorised by the Directors in that
behalf. Every instrument to which either shall be affixed shall be
signed autographically by one Director and the Secretary or by two
Directors, save that as regards any certificates for shares or
debentures or other securities of the Company the Directors may by
resolution determine that such signatures or either of them shall be
dispensed with or affixed by some method or system of mechanical
signature.
126.2 Where the Statutes so permit, any instrument signed by one Director
and the Secretary or by two Directors and expressed to be executed by
the Company shall have the same effect as if executed under the Seal,
provided that no instrument shall be so signed which makes it clear
on its face that it is intended by the person or persons making it to
be a deed without the authority of the Directors or of a committee
authorised by the Directors in that behalf.
RESERVE
127. The Directors may from time to time set aside out of the profits of
the Company such sums as they think proper as a reserve or reserves
which shall, at the discretion of the Directors, be applicable for
any purpose to which the profits of the Company may be properly
applied, and pending such application may, at the like discretion,
either be employed in the business of the Company or be invested in
such investments as the Directors think fit. The Directors may divide
the reserve into such special funds as they think fit, and may
consolidate into one fund any special funds or any parts of any
special funds into which the reserve may have been divided as they
think fit. The Directors may also without placing the same to reserve
carry forward any profits which they may think prudent not to divide.
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DIVIDENDS
128. The Company in General Meeting may declare dividends, but no dividend
shall exceed the amount recommended by the Directors.
129. Subject to the provisions of the Statutes, the Directors:-
129.1 may from time to time pay such interim dividends as they think fit;
129.2 may also pay the fixed dividends payable on any shares of the Company
half-yearly or otherwise on fixed dates.
If the Directors act in good faith, they shall not incur any
liability to the holders of shares conferring preferred rights for
any loss they may suffer in consequence of the payment of an interim
dividend on any shares having non-preferred or deferred rights.
130. No dividend or interim dividend shall be paid otherwise than in
accordance with the provisions of the Statutes.
131. Subject to the rights of persons, if any, entitled to shares with any
priority, preference or special rights as to dividend, all dividends
shall be declared and paid according to the amounts paid up on the
shares in respect whereof the dividend is paid, but no amount paid up
on a share in advance of calls shall be treated for the purpose of
this Article as paid up on the share. All dividends shall be
apportioned and paid proportionately to the amounts paid up on the
shares during any portion or portions of the period in respect of
which the dividend is paid; but if any share is issued on terms
providing that it shall rank for dividend as if paid up in full or in
part from a particular date, whether past or future, such share shall
rank for dividend accordingly.
132.1 The Directors may deduct from any dividend or other moneys payable to
any Member on or in respect of a share all sums of money (if any)
presently payable by him to the Company on account of calls or
otherwise in relation to shares of the Company.
132.2 The waiver in whole or in part of any dividend on any share by any
document (whether or not under seal) shall be effective only if such
document is signed by the shareholder (or the person entitled to the
share in consequence of the death or bankruptcy of the holder or
otherwise by operation of law) and delivered to the Company and if or
to the extent that the same is accepted as such or acted upon by the
Company.
133. Any General Meeting declaring a dividend may, upon the recommendation
of the Directors, direct payment of such dividend wholly or in part
by the distribution of specific assets and in particular of paid up
shares or debentures of any other body corporate, and the Directors
shall give effect to such direction. Where any difficulty arises in
regard to such distribution, the Directors may settle the same as
they think expedient, and in particular may issue fractional
certificates and fix the value for distribution of such specific
assets or any part thereof and may determine that cash payments shall
be made to any Members upon the footing of the value so fixed in
order to adjust the rights of all parties, and may vest any such
specific assets in trustees as may seem expedient to the Directors.
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134. All dividends and other distributions shall be paid (subject to any
lien of the Company) to those Members whose names shall be on the
Register at the date at which such dividend shall be declared or at
such other date as the Company by Resolution or the Directors may
determine.
The Company may pay any dividend or other moneys payable in cash in
respect of shares by direct debit, bank or other funds transfer
system, or by cheque, dividend warrant or money order and may remit
the same by post directed to the registered address of the holder or
person entitled thereto (or, in the case of joint holders or of two
or more persons entitled thereto, to the registered address of the
person whose name stands first in the Register), or to such person
and to such address as the holder or joint holders or person or
persons may in writing direct, and the Company shall not be
responsible for any loss of any such cheque, warrant or order nor for
any loss in the course of any such transfer or where it has acted on
any such directions. Every such cheque, warrant or order shall be
made payable to, or to the order of, the person to whom it is sent,
or to, or to the order of, such person as the holder or joint holders
or person or persons entitled may in writing direct, and the payment
of such cheque, warrant or order shall be a good discharge to the
Company. Any one of two or more joint holders of any share, or any
one of two or more persons entitled jointly to a share in consequence
of the death or bankruptcy of the holder or otherwise by operation of
law, may give effectual receipts for any dividends or other moneys
payable or property distributable on or in respect of the share.
135. Subject to the rights attaching to, or the terms of issue of, any
shares, no dividend or other moneys payable on or in respect of a
share shall bear interest against the Company.
136. All dividends or other sums payable on or in respect of any share
which remain unclaimed may be invested or otherwise made use of by
the Directors for the benefit of the Company until claimed. All
dividends unclaimed for a period of 12 years or more after becoming
due for payment shall be forfeited and shall revert to the Company.
The payment of any unclaimed dividend or other sum payable by the
Company on or in respect of any share into a separate account shall
not constitute the Company a trustee thereof.
CAPITALISATION OF PROFITS AND SCRIP DIVIDENDS
137. Subject to the provisions of Article 138, the Directors may
capitalise any part of the amount for the time being standing to the
credit of any of the Company's reserve accounts (including any share
premium account and capital redemption reserve) or to the credit of
the profit and loss account (in each case, whether or not such
amounts are available for distribution), and appropriate the sum
resolved to be capitalised either:-
137.1 to the holders of Ordinary Shares (on the Register at the close of
business on such date as may be specified in, or determined as
provided in, the resolution of the General Meeting granting authority
for such capitalisation) who would have been entitled thereto if
distributed by way of dividend and in the same proportions; and the
Directors shall apply such sum on their behalf either in or towards
paying up any amounts, if any, for the time being unpaid on any
shares held by such holders of
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Ordinary Shares respectively or in paying up in full at par unissued
shares or debentures of the Company to be allotted credited as fully
paid up to such holders of Ordinary Shares in the proportions
aforesaid, or partly in the one way and partly in the other; or
137.2 to such holders of Ordinary Shares who may, in relation to any
dividend or dividends, validly accept an offer or offers on such
terms and conditions as the Directors may determine (and subject to
such exclusions or other arrangements as the Directors may consider
necessary or expedient to deal with legal or practical problems in
respect of overseas shareholders or in respect of shares represented
by depositary receipts) to receive new Ordinary Shares, credited as
fully paid up, in lieu of the whole or any part of any such dividend
or dividends (any such offer being called a "Scrip Dividend Offer");
and the Directors shall apply such sum on their behalf in paying up
in full at par unissued shares (in accordance with the terms,
conditions and exclusions or other arrangements of the Scrip Dividend
Offer) to be allotted credited as fully paid up to such holders
respectively.
138.1 The authority of the Company in General Meeting shall be required
before the Directors implement any Scrip Dividend Offer (which
authority may extend to one or more offers).
138.2 The authority of the Company in General Meeting shall be required for
any capitalisation pursuant to paragraph 137.1 above.
138.3 A share premium account and a capital redemption reserve and any
other amounts which are not available for distribution may only be
applied in the paying up of unissued shares to be allotted to holders
of Ordinary Shares of the Company credited as fully paid up.
139. Whenever a capitalisation requires to be effected, the Directors may
do all acts and things which they may consider necessary or expedient
to give effect thereto, with full power to the Directors to make such
provision as they think fit for the case of shares or debentures
becoming distributable in fractions (including provisions whereby
fractional entitlements are disregarded or the benefit thereof
accrues to the Company rather than to the Members concerned) and also
to authorise any person to enter on behalf of all Members concerned
into an agreement with the Company providing for any such
capitalisation and matters incidental thereto and any agreement made
under such authority shall be effective and binding on all concerned.
ACCOUNTS
140. The Directors shall cause accounting records to be kept in accordance
with the provisions of the Statutes.
141. The accounting records shall be kept at the Office or, subject to the
provisions of the Statutes, at such other place or places as the
Directors think fit, and shall always be open to the inspection of
the officers of the Company.
142. The Directors shall from time to time determine whether and to what
extent and at what times and places and under what conditions or
regulations the accounting records
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of the Company or any of them shall be open to the inspection of
Members not being Directors, and no Member (not being a Director)
shall have any right of inspecting any account or book or document of
the Company except as conferred by statute or authorised by the
Directors or by the Company in General Meeting.
143. The Directors shall from time to time, in accordance with the
provisions of the Statutes, cause to be prepared and to be laid
before the Company in General Meeting copies of the Company's annual
accounts, the Directors' report and the Auditors' report on those
accounts.
144. A copy of the Company's annual accounts, together with a copy of the
Auditors' report and Directors' report, which is to be laid before
the Company in General Meeting, shall not less than 21 days before
the date of the meeting be sent to every Member (whether or not he is
entitled to receive notices of General Meetings of the Company) and
every holder of debentures of the Company (whether or not he is so
entitled) and to every other person who is entitled to receive
notices of meetings from the Company under the provisions of the
Statutes or these Articles. Provided that this Article shall not
require a copy of these documents to be sent to any Member or holder
of debentures to whom a summary financial statement is sent in
accordance with the Statutes and provided further that this Article
shall not require a copy of these documents to be sent to any person
of whose address the Company is not aware or to more than one of the
joint holders of any shares or debentures.
AUDIT
145. Auditors shall be appointed and their duties regulated in accordance
with the provisions of the Statutes.
NOTICES
146.1 A notice or other document (including a share certificate) may be
given by the Company to any Member either personally or by sending it
by post addressed to him at his registered address, or (if he has no
registered address within the United Kingdom) to the address, if any,
within the United Kingdom supplied by him to the Company for the
giving of notice to him.
146.2 If at any time by reason of the suspension or any curtailment of
postal services in the United Kingdom the Company is unable in the
opinion of the Directors effectively to convene a General Meeting by
notices sent through the post, a General Meeting may be convened by a
notice advertised in at least one national newspaper and such notice
shall be deemed to have been duly served on all Members and other
persons entitled thereto at noon on the day when the advertisement
has appeared. In any such case the Company shall send confirmatory
copies of the notice by post if at least seven days prior to the date
of the Meeting the posting of notices to addresses throughout the
United Kingdom again becomes in the opinion of the Directors
practicable.
147. A Member who has no registered address within the United Kingdom, and
has not supplied an address within the United Kingdom as aforesaid,
shall not be entitled to receive any notice from the Company.
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148. Where a notice or other document is sent by post, service of the
notice or other document shall be deemed to be effected by properly
addressing, prepaying, and posting a letter containing the notice or
other document, and to have been effected at the latest within 24
hours if prepaid as first-class and within 72 hours if prepaid as
second-class after the letter containing the same is posted; and in
proving such service it shall be sufficient to prove that the letter
containing the same was properly addressed and stamped and put in the
post.
149. A notice or other document may be given by the Company to the joint
holders of a share by giving the notice or other document to the
joint holder first named in the Register in respect of the share.
150. A notice or other document may be given by the Company to the persons
entitled to a share in consequence of the death or bankruptcy of a
Member or otherwise by operation of law by sending it through the
post in a prepaid letter addressed to them by name, or by the title
of representatives of the deceased, or trustee of the bankrupt, or by
any like description, at the address, if any, within the United
Kingdom supplied for the purpose by the persons claiming to be so
entitled, or (until such an address has been so supplied) by giving
the notice or other document in any manner in which the same might
have been given if the death or bankruptcy or other event had not
occurred.
151. Subject to such restrictions affecting the right to receive notice as
are for the time being applicable to the holders of any class of
shares, notice of every General Meeting shall be given in any manner
hereinbefore authorised to:-
151.1 every Member except those Members who (having no registered address
within the United Kingdom) have not supplied to the Company an
address within the United Kingdom for the giving of notices to them;
151.2 the Auditors.
No other person shall be entitled to receive notices of General
Meetings.
PROVISION FOR EMPLOYEES
152. The power conferred upon the Company by section 719 of the Companies
Act 1985 to make provision for the benefit of persons employed or
formerly employed by the Company or any of its subsidiaries, in
connection with the cessation or the transfer to any person of the
whole or part of the undertaking of the Company or any subsidiary
shall only be exercised by the Company with the prior sanction of a
Special Resolution. If at any time the capital of the Company is
divided into different classes of shares, the exercise of such power
as aforesaid shall be deemed to be a variation of the rights attached
to each class of shares in issue and shall accordingly require either
(i) the prior consent in writing of the holders of three-fourths of
the issued shares or (ii) the prior sanction of an Extraordinary
Resolution passed at a separate General Meeting of the holders of the
shares, of each class, in accordance with the provisions of Article
16 hereof.
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WINDING UP
153. If the Company shall be wound up the Liquidator may, with the sanction
of an Extraordinary Resolution of the Company and any other sanction
required by the Statutes, divide amongst the Members in specie or kind
the whole or any part of the assets of the Company (whether they shall
consist of property of the same kind or not) and may, for such
purpose, set such value as he deems fair upon any property to be
divided as aforesaid and may determine how such division shall be
carried out as between the Members or different classes of Members.
The Liquidator may, with the like sanction, vest the whole or any part
of such assets in trustees upon such trusts for the benefit of the
contributories as the Liquidator, with the like sanction, shall think
fit, but so that no Member shall be compelled to accept any shares or
other securities or other assets whereon there is any liability.
INDEMNITY
154. Subject to the provisions of the Statutes but without prejudice to any
indemnity to which the person concerned may otherwise be entitled,
every person who is or was at any time a Director or other officer or
Auditor of the Company shall be indemnified out of the assets of the
Company against all costs, charges, expenses, losses or liabilities
which he may sustain or incur in or about the actual or purported
execution and/or discharge of the duties of his office and/or the
exercise or purported exercise of his powers or discretions and/or
otherwise in relation thereto or in connection therewith, including
(without prejudice to the generality of the foregoing) any liability
incurred by him in defending any proceedings, whether civil or
criminal, in which judgment is given in his favour or in which he is
acquitted or in connection with any application under section 144(3)
or (4) or section 727 of the Companies Act 1985, in which relief is
granted to him by the Court.
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EXHIBIT 5.1
March 17, 1997
TO: Alliance Resources Plc
Dear Sirs,
We have acted as legal advisers in England to Alliance Resources PLC (the
"Company") in connection with the proposed issue by the Company of up to
27,096,020 ordinary shares of 40p each in the capital of the Company (the "New
Shares") and up to 3,116,558 warrants to subscribe for ordinary shares of 40p
each (the "Consideration Warrants") pursuant to an Agreement and Plan of Merger
dated 12th August 1996, and thereafter amended, providing for the merger (the
"Merger") of Alliance Resources (Delaware) Inc. a newly formed wholly owned
subsidiary of the Company into LaTex Resources, Inc. a Delaware corporation (the
"Plan of Merger").
We have been provided with the following documents:-
(a) a draft circular (Draft [ ]: ___ March 1997) addressed to the holders
of ordinary shares on the Company's register of shareholders setting
out details of the Merger, the New Shares and the Consideration
Warrants and comprising listing particulars required by the London
Stock Exchange in accordance with the listing rules made under Section
142 of the Financial Services Act 1986 (the "Circular");
(b) the US registration statement on Form F-4 (Registration No. 333-19013)
under the US Securities Act of 1933 as amended (the "Registration
Statement") as filed with the Securities and Exchange Commission
("SEC");
(c) a certified copy of the resolutions of the Board of Directors (and/or
a duly constituted and authorised committee thereof) of the Company
relating (inter
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alia) to the creation and issue of the New Shares and the
Consideration Warrants and the issue of the Circular and the
Registration Statement;
(d) a certified copy of the resolution of the Board of Directors (and/or
a duly constituted and authorised committee thereof) of the Company
relating (inter alia) to the approval of the Plan of Merger;
(e) a copy of the instrument constituting the Consideration Warrants
proposed to be executed by the Company (the "Warrant Instrument");
and
(f) a certified copy of the Memorandum of Association and Articles of
Association of the Company.
We have today carried out a company search at the Companies Registry, in respect
of the Company, which did not reveal the existence of any order or resolution to
wind up the Company or of the appointment of any receiver or administrator.
Notice of an order, resolution or appointment does not appear immediately on the
microfiche and a company search will not in any event reveal the existence of a
petition to wind up or appoint an administrator.
Except as stated above, we have not examined any contracts, instruments or other
documents entered into by, or affecting, the Company or any corporate records of
the company and have not made any other enquiries concerning the Company or
carried out any due diligence exercise. It is not customary for solicitors in
the United Kingdom to examine any such contracts, instruments or other documents
or any corporate records other than those described above in order to give the
opinion stated below.
In giving this opinion, we have assumed:-
(i) the Registration Statement as amended, and filed by the Company with
the SEC is effective under US law;
(ii) the genuineness of all signatures;
(iii) the authenticity and completeness of all documents submitted to us as
originals;
(iv) that the resolutions of the board of directors of the Company and/or
committee thereof certified as being true and accurate and provided
to us in connection with the giving of this opinion were duly passed
at a properly convened meeting of duly appointed directors (or
committee) of the Company and that a duly qualified quorum of such
directors (or committee) present throughout the meeting voted in
favour of approving the resolutions, that any provisions contained in
the Companies Act 1985 or the Company's Articles of Association
relating to the declaration of directors' interests or the power of
interested directors to vote were duly observed and that such
resolutions have not been amended or rescinded and are in full force
and effect;
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(v) the conformity to original documents of all documents submitted to
us as copies and the authenticity and completeness of such original
documents;
(vi) that any certificates and other documents dated the date hereof or
dated earlier than the date and on which we have expressed reliance
remain accurate and that no additional matters would have been
disclosed by company searches at the Companies Registry being
carried out since the carrying out of the search referred to above;
(vii) that the Company has not passed a voluntary winding-up resolution
and that no petition has been presented to or order made by the
court for the winding-up of the Company or the appointment of an
administrator of the Company and that no receiver has been appointed
in respect of the Company or any of its respective assets which in
any such case has not been revealed by the Company search referred
to above;
(viii) that there have been no amendments to the Company's Memorandum or
Articles of Association as compared to the form certified as at
_________ as being in force provided to us in connection with the
giving of this opinion;
(ix) that a notice under Paragraph 7.1 of the London Stock Exchange
Listing Rules will be posted in relation to the new Ordinary Shares;
(x) that the Warrant Instrument will be duly executed by the Company in
the form produced to us on or prior to completion of the Merger;
(xi) that no material amendments will be made to the Circular from the
draft we have been provided with and that all of the resolutions set
out in the Circular will be duly passed unamended; and
(xii) that the Merger is completed in accordance with the terms and
conditions of the Plan of Merger without waiver or variation of any
such terms and conditions.
We have not investigated the laws of any country other than England and we
assume that no foreign law affects any of the conclusions stated below.
Accordingly, this opinion is given only with respect to, and is itself governed
by, English law. We have not investigated whether the Company is or will by
reason of the matters contemplated by the Plan of Merger be in breach of any of
its obligations under any agreement, document, deed or instrument except such
documents as stated herein.
Based upon the foregoing and subject to any matters not disclosed to us, and
subject to the qualifications set out below we are of the opinion that:-
(A) the Company is a public limited company, duly incorporated and subsisting
under the laws of England and Wales;
(B) the New Ordinary shares will, upon completion of the Plan of Merger and
when issued in accordance with the Circular:-
(i) be duly and validly authorised; and
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(ii) be validly issued, fully paid and not subject to calls for additional
payments of any kind;
(C) the Consideration Warrants will, upon completion of the Plan of Merger and
when constituted in accordance with the Warrant Instrument and issued in
accordance with the Circular:-
(i) be duly and validly authorised; and
(ii) be validly issued, fully paid and (subject to the terms of exercise of
the Consideration Warrants) not subject to calls for additional
payments of any kind; and
(D) the statements in the Registration Statement under the caption "Taxation",
insofar as they constitute summaries of the laws of the United Kingdom and
of current Inland Revenue Practice, are accurate and complete in all
material respects as of the date of this letter.
This opinion is subject to the following qualifications:-
(a) an English company only has authority to carry on those businesses
specified in the objects clause of its Memorandum of Association;
(b) we have not been involved in the drafting, preparation or negotiation
of the Registration Statement and accordingly express no opinion as to
the sufficiency or effectiveness of it to achieve the purposes
contemplated by the parties thereto;
(c) we have not obtained any further information as to whether there are
any breach of warranties or covenants and in particular have not
analysed whether the issue of the shares, the entering into of the
Plan of Merger or the completion thereof, would breach any financial
covenants of the Company;
(d) we have conducted no due diligence in respect of the Registration
Statement, and accordingly accept no liability save in relation to the
limited issues addressed in this opinion.
We confirm that enforcement of judgments obtained outside the United Kingdom is
subject to detailed rules deriving in part from treaty, in part from statute
and in part from English common law. In particular, enforcement may not be
permitted if a judgment was obtained by fraud, was contrary to public policy of
English law, relates to foreign penal or revenue laws, is contrary to natural
justice, amounts to judgment on a matter previously determined by an English
court, is given in proceedings brought in breach of an agreement for settlement
of disputes or if enforcement of the judgment is restricted by the provisions of
the Protection of Trading Interests Act 1980 (which primarily relates to
multiple damages awards).
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Prospectus forming a
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part of the Registration Statement. In giving such consent, we do not admit that
we come within the category of persons whose consent is required by Section 7 of
the US Securities Act of 1933, as amended, or the rules and regulations of the
Securities Exchange Commission thereunder.
This opinion is governed by English law and is given for the sole benefit of the
persons to whom it is addressed and is not to be relied upon by or communicated
to any other person or for any other purpose, nor save as referred to in the
preceding paragraph, is it to be quoted or made public in any way without our
prior written consent.
Yours faithfully,
ASHURST MORRIS CRISP
5
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Exhibit 8.1
[LETTERHEAD OF JENKENS & GILCHRIST]
March 12, 1997
Alliance Resources Plc
Kingsbury House
15-17 King Street
London SWIY 6QU
Gentlemen:
We have acted as United States tax counsel to Alliance Resources Plc, a
United Kingdom public limited company (the "Company"), in connection with the
merger (the "Merger") of LaTex Resources, Inc. ("LaTex") with and into Alliance
Resources (Delaware), Inc. ("Newco"), a newly formed wholly owned subsidiary of
the Company and the Company's registration under the Securities Act of 1933, as
amended, of (i) 21,631,895 shares of the Company's ordinary shares of 40p each
(the "Shares"), and (ii) warrants to purchase 2,242,250 shares of the Company's
ordinary shares of 40p each (the "Warrants").
In connection with this representation, we have examined the following
documents and instruments:
(a) the Registration Statement on Form F-4 (the "Registration Statement"),
including the Proxy Statement/Prospectus contained therein, filed with
the Securities Exchange Commission (the "Commission"), pertaining to
the registration of the Shares and the Warrants;
(b) the merger agreement (the "Merger Agreement") between LaTex, Newco and
the Company included as Appendix B to the Proxy Statement/Prospectus.
In connection with this opinion, we have examined and are familiar with
originals or copies, certified or otherwise identified, of such documents and
records of the Company and such statutes, regulations and other instruments as
we have deemed necessary or advisable for the purposes of this opinion. In
rendering this opinion we have relied upon the facts and disclosures set forth
in the Registration Statement and the Merger Agreement regarding the offering
and terms of the Shares and Warrants. We have not independently verified the
accuracy of such representations or the matters set forth in such documents or
records. As to certain facts material to its opinion, we have assumed that all
signatures on all documents presented to use are genuine, that all documents
submitted to us as originals are accurate and complete, that all information
submitted to us is accurate and complete, and that all persons executing and
delivering originals or copies of documents examined by us are competent to
execute and deliver such documents.
<PAGE>
Alliance Resources PLC
Feburary 20, 1997
Page 10
Based on the foregoing, this firm is of the opinion that the discussion in
the Registration Statement of the United States tax treatment, tax effect or tax
consequences under the caption "Material Tax Considerations" is an accurate
summary of the material United States income tax consequences related to the
Merger and the issuance of the Shares and Warrants. This firm's opinion is
based on the provisions of the Internal Revenue Code of 1986, as amended,
proposed regulations which have not yet taken effect and which may not be
finally adopted in their current form, and regulations, rulings and judicial
decisions now in effect, all of which are subject to change. Any such changes
may be retroactive with respect to transactions entered into prior to the date
of such changes and could modify this firm's opinion.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. Consent is also given to the reference to this firm
in the Registration Statement. In giving this consent, this firm does not
thereby admit that it comes into the category of persons whose consent is
required under Section 7 of the Securities Act or the rules and regulations of
the Commission promulgated thereunder.
Respectfully submitted,
JENKENS & GILCHRIST,
a Professional Corporation
By: /s/ ANDRIUS R. KONTRIMAS
-------------------------
Andrius R. Kontrimas
Authorized Signatory
<PAGE>
Exhibit 24.2
CONSENT OF INDEPENDENT AUDITORS
-------------------------------
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated November 6, 1996 except as to information presented in
Notes 1 and 5, for which the date is November 30, 1996, in the Registration
Statement (Form F-4, Registration No. 333-19013) and related combined
Prospectus/Proxy Statement and all amendments thereto of Alliance Resources Plc
and LaTex Resources, Inc. filed with the Securities and Exchange Commission.
BRISCOE & BURKE
Certified Public Accountants
March 12, 1997
Tulsa, Oklahoma
<PAGE>
Exhibit 24.6
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS
---------------------------------------------------------
We hereby consent to the inclusion of our oil and gas reserve report for
the oil and gas reserves of LaTex Resources, Inc. (the "Company") as of July 31,
1996, and to all references to our firm included or made as part of the
Company's Registration Statement on Form F-4 and all amendments thereto filed
with the Securities and Exchange Commission.
LEE KEELING AND ASSOCIATES, INC.
By: KENNETH RENBERG
-----------------
Kenneth Renberg, Vice President
March 12, 1997
Tulsa, Oklahoma
