<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
XX SECURITIES EXCHANGE OF 1934
----
For the quarterly period ended July 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
----
For the transition period from ________________ to __________________
Commission file number : 333-19013
Alliance Resources PLC
----------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
England and Wales 73-1405081
- ------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
4200 East Skelly Drive, Suite 1000, Tulsa, Oklahoma 74135
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
918-491-1100
(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 No X
----- -----
As of December 18, 1997, there were 31,152,603 shares of the Registrant's
single class of common stock issued and outstanding.
<PAGE>
ALLIANCE RESOURCES PLC
Index to Form 10-Q for the Quarterly Period
Ended July 31, 1997
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements. Page
Consolidated Condensed Balance Sheets as of
July 31, 1997 and April 30, 1997 3
Consolidated Condensed Statements of Operations
for the three months ended July 31, 1997 and 1996 5
Consolidated Condensed Statement of Stockholders'
Equity for the three months ended July 31, 1997 6
Consolidated Condensed Statements of Cash Flows
for the three months ended July 31, 1997 and 1996 7
Notes to Consolidated Condensed Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 13
PART II - OTHER INFORMATION 19
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 and Item 5.
Other Information has been omitted as either inapplicable or
because the answer thereto is negative.
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES 20
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
ALLIANCE RESOURCES PLC
Consolidated Condensed Balance Sheets
<TABLE>
<CAPTION>
July 31, 1997 April 30, 1997
(unaudited) (unaudited)
-------------------- -------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 1,706,299 $ 72,948
Accounts receivable - trade 2,081,075 2,124,855
Other current assets 148,180 54,176
-------------------- -------------------
Total current assets 3,935,554 2,251,979
-------------------- -------------------
Property, plant, and equipment, at cost:
Oil and gas properties (using full cost method) 48,019,366 36,107,310
Other depreciable assets 1,189,477 855,512
-------------------- -------------------
49,208,843 36,962,822
Less accumulated depreciation and depletion (16,483,552) (10,254,970)
-------------------- -------------------
Net property, plant and equipment 32,725,291 26,707,852
-------------------- -------------------
Other assets:
Deposits and other assets 268,653 282,920
Intangible assets, less accumulated amortization 1,494,458 1,554,561
-------------------- -------------------
Total other assets 1,763,111 1,837,481
-------------------- -------------------
TOTAL ASSETS $ 38,423,956 $ 30,797,312
==================== ===================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE>
ALLIANCE RESOURCES PLC
Consolidated Condensed Balance Sheets, Continued
<TABLE>
<CAPTION>
July 31, 1997 April 30, 1997
(unaudited) (unaudited)
-------------------- -------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 10,432,675 $ 10,943,149
Accrued expenses payable 438,624 437,736
-------------------- -------------------
Total current liabilities 10,871,299 11,380,885
Long-term Liabilities:
Long-term debt 20,181,082 18,095,497
Other liabilities 2,182,700 1,938,783
-------------------- -------------------
Total liabilities 33,235,081 31,415,165
-------------------- -------------------
Stockholders' equity (deficit):
Preferred stock - par value $0.01;
5,000,000 shares authorized;
Series A convertible preferred stock ($10.00
liquidation preference), 0 and 457,401
issued and outstanding at July 31, 1997
and April 30, 1997 respectively - 4,571
Series B convertible preferred stock ($10.00
liquidation preference), 0 and 509,259
issued and outstanding at April 30, 1997 - 5,246
Common stock - par value $.01; 50,000,000 shares authorized;
20,913,995 issued and outstanding at April 30, 1997 - 209,140
Ordinary shares - par value(pound).40; 46,000,000 shares authorized;
31,052,603 issued and outstanding at July 31, 1997 20,013,082 -
Additional paid-in capital 5,618,483 19,416,828
Accumulated deficit (20,442,690) (19,764,273)
Treasury stock 1,008,500 common shares at cost at
April 30, 1997 - (489,365)
-------------------- -------------------
Total stockholders' equity (deficit) 5,188,875 (617,853)
-------------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 38,423,956 $ 30,797,312
==================== ===================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
ALLIANCE RESOURCES PLC
Consolidated Condensed Statement of Operations
<TABLE>
<CAPTION>
Three Three
Months Ended Months Ended
July 31, 1997 July 31, 1996
(Unaudited) (Restated, Unaudited)
-------------------- --------------------
<S> <C> <C>
Revenue:
Oil and gas revenue $ 2,727,336 $ 2,813,170
Crude oil and gas marketing - 119,158
Lease operations and management fees 235,794 354,697
-------------------- --------------------
Total operating income 2,963,130 3,287,025
-------------------- --------------------
Operating expenses:
Lease operating expense 1,409,438 1,445,867
Cost of crude oil and gas marketing - 7,555
Depreciation, depletion, and amortization 793,336 805,128
Dry hole costs and abandonments - 3,446,795
General and administrative expense 1,265,849 682,582
-------------------- --------------------
Total operating expenses 3,468,623 6,387,927
-------------------- --------------------
Net operating loss (505,493) (3,100,902)
Other income (expense):
Equity in losses and write offs of investments in affiliate - (4,096,381)
Gain on sale of assets 18,331 -
Interest expense (541,226) (933,184)
Interest income 20,609 308,885
Miscellaneous income (expense) 325,153 (1,810,382)
-------------------- --------------------
Net loss from continuing operations before income taxes (682,626) (9,631,964)
Income tax expense - -
-------------------- --------------------
Net loss (682,626) (9,631,964)
Preferred stock dividends - (151,005)
-------------------- --------------------
Net loss for common shareholders $ (682,626) $ (9,782,969)
==================== ====================
Loss per share for common shareholders $ (0.02) $ (0.54)
==================== ====================
Weighted average number of shares outstanding 31,052,603 18,022,195
==================== ====================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE>
ALLIANCE RESOURCES PLC
Consolidated Condensed Statements of Stockholders' Equity
Three Months Ended July 31, 1997
<TABLE>
<CAPTION>
Common Stock
---------------------------------- Additional
Preferred Number of Par Paid-In
Stock Shares Value Capital
============= ================ =============== ================
<S> <C> <C> <C> <C>
Balance April 30, 1997 $ 9,817 20,913,995 $ 209,140 $ 19,416,828
Alliance-LaTex merger
dissolution of shares (9,817) (20,913,995) (209,140) (19,416,828)
Issue new ordinary shares to
LaTex shareholders - 21,448,787 13,933,132 5,213,288
Issue new ordinary shares to
Alliance shareholders - 8,103,816 5,105,550 (1,194,705)
Issued shares for acquisition
of overriding royalty interest - 1,343,750 872,900 1,498,400
Issued shares for settlement
of various advisory and
banking fees - 156,250 101,500 101,500
Foreign exchange adjustment - - - -
Net loss current period - - - -
------------- ---------------- --------------- ----------------
Balance July 31, 1997 $ - 31,052,603 $ (20,013,082) $ 5,618,483
============= ================ =============== ================
</TABLE>
<TABLE>
<CAPTION>
Retained Earnings Total
(Accumulated Treasury Stockholders'
Deficit) Stock Equity
==================== ============== ================
<S> <C> <C>
$ (19,764,273) $ (489,365) $ (617,853)
- 489,365 (19,146,420)
- - 19,146,420
- - 3,910,845
- - 2,371,300
- - 203,000
4,209 - 4,209
(682,626) - (682,626)
-------------------- -------------- ----------------
$ (20,442,690) $ - $ 5,188,875
==================== ============== ================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
6
<PAGE>
ALLIANCE RESOURCES PLC
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Three Three
Months Ended Months Ended
July 31, 1997 July 31, 1996
(Unaudited) (Restated, Unaudited
------------------ ---------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (682,626) $ (9,631,964)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation, amortization, and depletion 793,336 805,128
Gain on sale of assets (18,331) -
Equity in losses and write offs of investments in affiliates - 4,096,381
Dry hole costs and abandonments - 3,446,795
Interest income - (150,467)
Miscellaneous expense - 1,810,382
Changes in assets and liabilities, net of effects from acquisition:
Accounts receivable 544,454 419,733
Accounts receivable - related party - 198,288
Accounts payable (2,899,487) (856,370)
Accrued expenses payable 888 561,715
Other assets (100,366) (84,616)
Other liabilities (1,578,180) 615,000
Inventories - 64,091
------------------ -------------------
Net cash (used in) provided by operating activities (3,940,312) 1,294,096
------------------ -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (638,835) (220,918)
Proceeds from sale of property and equipment 2,803,501 1,061,186
Acquisition of Alliance Resources PLC cash 1,460,555 -
Decrease in accounts and notes receivable - 212,500
Advances to unconsolidated affiliates and notes receivable - (326,394)
------------------ -------------------
Net cash provided by investing activities 3,625,221 726,374
------------------ -------------------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
7
<PAGE>
ALLIANCE RESOURCES PLC
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Three Three
Months Ended Months Ended
July 31, 1997 July 31, 1996
(Unaudited) (Restated, Unaudited)
------------------ ---------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred loan and reorganization costs $ (21,218) $ (137,186)
Payments on notes payable - (2,041,961)
Proceeds from notes payable 1,969,660 178,014
------------------ ---------------------
Net cash provided by (used for) financing activities 1,948,442 (2,001,133)
------------------ ---------------------
Net increase in cash and cash equivalents 1,633,351 19,337
Cash and cash equivalents at beginning of period $ 72,948 $ -
------------------ ---------------------
Cash and cash equivalents at end of period $ 1,706,299 $ 19,337
================== =====================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 221,239 $ 909,765
Income taxes - 4,250
Supplemental schedules of noncash investing and financing activities:
Common stock issued for services $ - $ 78,125
Preferred stock issued for legal settlement - 500,000
Common stock issued to pay off debt of unconsolidated affiliate - 60,520
Convertible loan notes issued for acquisition of overriding
royalty interest 1,400,700 -
Ordinary shares issued to Alliance shareholders 3,910,845 -
Ordinary shares issued for acquisition of overriding
royalty interest 2,371,300 -
Ordinary shares issued for settlement of various advisory and
banking fees 203,000 -
Foreign exchange adjustment 4,209 -
Convertible loan notes due in settlement of financing fees, not -
issued as of 31 July 150,000
Oridnary shares due in settlement of advisory fees, not -
issued as of 31 July 150,000
</TABLE>
See accompanying notes to consolidatd condensed financial statements.
8
<PAGE>
Alliance Resources PLC
Notes to Consolidated Condensed Financial Statements
PART I--FINANCIAL INFORMATION
---------------------
ITEM 1. (CONTINUED) NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------
Organization, Business Combinations, and Summary of Significant Accounting
- --------------------------------------------------------------------------
Policies
- --------
(1) Organization: Alliance Resources PLC (the "Company" or "Alliance") is
------------
organized as a public limited company under the laws of England and Wales.
Alliance is a London-based holding company of a group whose principal activities
are the exploration, development, and production of oil and gas and the
acquisition of producing oil and gas properties. Alliance was incorporated and
registered under the laws of England and Wales on August 20, 1990. Alliance's
corporate headquarters are at Kingsbury House, 15-17 King Street, London SW1Y
6QU, England, but its operations office is located at 4200 East Skelly Drive,
Suite 1000, Tulsa, Oklahoma 74135.
(2) Merger with Alliance Resources PLC: Effective May 1, 1997, Alliance
----------------------------------
completed its merger (the "Merger") with LaTex Resources, Inc. ("LaTex") whereby
a newly formed wholly owned subsidiary of Alliance merged with and into LaTex
with LaTex being the surviving corporation for accounting purposes. In
consideration, the shareholders of LaTex received an aggregate of 21,448,787
shares of Alliance, par value (pounds) (Pounds)0.40 per share (the "New Alliance
Shares") and warrants to purchase an additional 1,927,908 New Alliance Shares.
As a result, after giving effect to a 40-to-1 reverse stock split of the
Alliance ordinary shares, each shareholder of LaTex at the close of business on
April 30, 1997 received 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
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 the LaTex common stock subject to warrants.
In connection with the Merger, a subsidiary of Alliance entered into a
Credit Agreement (the "Alliance Credit Agreement") with the Bank of America NT &
SA (the "Bank") effective March 19, 1997, which amended and restated LaTex's
Amended and Restated Credit Agreement (the "LaTex Credit Agreement") in order to
restructure LaTex's existing indebtedness to the Bank. As a restructuring fee,
in connection with entering into the Alliance Credit Agreement, Alliance issued
to the Bank 156,250 New Alliance Shares and has agreed to pay the Bank $150,000,
payable in cash or, at Alliance's option, convertible loan notes.
Alliance has also issued 1,343,750 New Alliance Shares, convertible loan
notes and warrants to the Bank in exchange for an overriding royalty interest
owned by the Bank. The convertible loan notes issued to the Bank may, under
certain circumstances, be converted into a maximum of 1,078,125 New Alliance
9
<PAGE>
Alliance Resources PLC
Notes to Consolidated Condensed Financial Statements
Shares. The warrants issued to the Bank may, under certain circumstances, be
converted into a maximum of 1,210,938 New Alliance Shares.
After giving effect to the 40-to-1 reverse stock split, Alliance's pre-
Merger shareholders were issued 8,103,816 New Alliance Shares as replacement for
their pre-reverse split ordinary shares.
In summary, as a result of the Merger and related transactions, Alliance
had outstanding at July 31, 1997 approximately 31,052,603 New Alliance Shares,
warrants to purchase up to 3,138,946 New Alliance Shares, and convertible loan
notes convertible into 1,078,125 New Alliance Shares.
Under the terms of the Merger Agreement, LaTex disposed of its interest in
its unconsolidated affiliates, Wexford Technology, Inc. ("Wexford") and Imperial
Petroleum, Inc. ("Imperial"), and its interest in its wholly owned subsidiaries
LaTex Resources International, Inc. and Phoenix Metals, Inc.
Because of the reverse takeover nature of the Merger transaction, LaTex is
deemed to be the acquiror for financial reporting purposes and Alliance the
acquiree. Hence, for financial reporting purposes, all financial data (and,
consequently, all oil and gas reserve information and all information associated
with financial or reserve information) prior to the Merger have been restated to
reflect LaTex as the predecessor company to Alliance.
Under US GAAP, the transaction was accounted for by application of the
purchase method in accordance with APB 16 "Business Combinations" and after due
consideration of EITF 95-19 "Determination of the Measurement Date for the
Market Price of Securities Issued in a Purchase Business Combination." The fair
value of the assets and liabilities of Alliance under US GAAP at the effective
date of the Merger was as follows:
<TABLE>
<CAPTION>
<S> <C>
Oil & gas properties $ 4,269,435
Other fixed assets 253,386
Other assets 202,253
Current assets 1,940,600
Current liabilities (2,504,938)
Other liabilities 121,397
</TABLE>
The purchase price was derived from LaTex's average market capitalization as
reported on NASDAQ during the three trading days either side of the Merger
announcement on August 13, 1996, based on the conclusion that LaTex was the
acquiror for financial reporting purposes.
The consolidated statements of operations include the results of operations
of Alliance since the effective date of the Merger. The following is a
10
<PAGE>
Alliance Resources PLC
Notes to Consolidated Condensed Financial Statements
statement of pro forma revenues, loss before income taxes, net loss, and net
loss per share for the quarter ended July 31, 1996 based on the assumption that
Alliance was acquired at the beginning of this period:
<TABLE>
<CAPTION>
Quarter ended
July 31, 1996
------------------
<S> <C>
Revenues $ 4,533,090
Loss before income tax $(10,055,426)
Net loss $(10,055,426)
Net loss per share $ (0.56)
</TABLE>
The relevant portion of the above pro forma figures covering Alliance was
derived from the published interim results of Alliance for the six months to
October 31, 1996. As Alliance did not publish results for the quarter ended July
31, 1996, the relevant Alliance portion of the above pro-forma figures has been
based on the six month interim results (adjusted to US GAAP) and allocated to
the quarter pro rata to the relevant sales volumes.
Because for corporate law purposes (but not financial accounting purposes)
Alliance is the surviving corporation, all references to the "Company" both
prior and subsequent to May 1, 1997 refer to Alliance Resources Plc and its
subsidiaries unless otherwise indicated. Unless the context requires otherwise,
all references to "LaTex" include LaTex Resources, Inc., and its consolidated
subsidiaries.
For financial, reserve, and associated information concerning Alliance
prior to the Merger, reference should be made to the Company's Registration
Statement on Form F-4 (which was filed in its final form with the Securities
Exchange Commission on April 9, 1997 and which contains information regarding
Alliance through January 31, 1997).
(3) 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 July 31, 1997,
are not necessarily indicative of the results that may be expected for the year
ended April 30, 1998. For further information, refer to the year ended April 30,
1997 Alliance annual report and financial statements mailed to the shareholders
in November 1997.
(4) Accounting Policy--Property and Equipment: The Company uses the full cost
-------------------------------------------
method of accounting for oil and gas properties. Separate cost centers are
maintained for each country in which the Company has its operations. All costs
incurred in the acquisition, exploration, and development of properties
(including costs of surrendered and abandoned leaseholds, delay rentals and dry
holes) are capitalized. Capitalized costs
11
<PAGE>
Alliance Resources PLC
Notes to Consolidated Condensed Financial Statements
applicable to each cost center are depleted using the units of production
method. Unusually significant investments in unproved properties are not
depleted pending the determination of the existence of proved reserves.
Depletion per unit of production is determined based on conversion to common
units of measure using six thousand cubic feet (Mcf) of natural gas as an
equivalent to one barrel (Bbl) of oil.
Pursuant to full cost accounting rules, capitalized costs less related
accumulated depletion and deferred income taxes for each cost center may not
exceed the sum of (1) the present value of future net revenue from estimated
production of proved oil and gas reserves; plus (2) the cost of properties not
being amortized, if any; plus (3) the lower of cost or estimated fair value of
unproved properties included in the costs being amortized, if any; less (4)
income tax effects related to differences in the book and tax basis of oil and
gas properties. If capitalized costs exceed this limit, the excess is charged
to depreciation, depletion, and amortization expense.
Gain or loss is recognized only on the sale of oil and gas properties
involving significant reserves. In other cases, the net proceeds of sales are
credited to the relevant cost center.
Costs incurred to operate, repair, and maintain wells and equipment are
generally expensed as incurred.
(5) Accounting Policy Change. During the nine months ended April 30, 1997,
------------------------
LaTex, in order to conform its accounting policies to that of Alliance, changed
its method of accounting for oil and gas exploration and development activities
from the "successful efforts" method to the "full cost" method (as described
above). The financial statements for the LaTex entities for all prior periods
have been restated to apply the new method retroactively. The effects of the
accounting change on the nine months ended April 30, 1997 and the years ended
July 31, 1996 and 1995 are as follows.
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- -------------
<S> <C> <C> <C>
Increase (decrease) in:
Net loss $(2,373,358) $1,221,856 $775,821
=========== ========== ========
Loss per common share $ (0.12) $ 0.07 $ 0.04
=========== ========== ========
</TABLE>
The balance of the accumulated deficit (net of income taxes) for each period
presented has been adjusted for the effect of retroactively applying the full
cost method.
12
<PAGE>
Alliance Resources PLC
Notes to Consolidated Condensed Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
---------------------
Results of Operations
- ---------------------
The following is a discussion of the results of operations of the Company
for the three months ended July 31, 1997. As stated above for financial
reporting purposes, all financial data (and, consequently, all oil and gas
reserve information and all information associated with financial or reserve
information) prior to the Merger have been restated to reflect LaTex as the
predecessor company to Alliance. Therefore, the results for the three months
ended July 31, 1997 represent the activities of the enlarged group (Alliance and
LaTex groups combined) while the results for the three months ended July 31,
1996 represent the activities of the LaTex group alone. This discussion should
be read in conjunction with the Company's unaudited Consolidated Condensed
Financial Statements above.
The Company follows the "full cost" method of accounting for its oil and
gas properties whereby all oil and gas capital costs, including exploratory
expenses such as geological and geophysical expenses, annual delay rentals and
dry hole costs, are capitalized. As a result of the Merger, the LaTex assets
were restated from "successful efforts" accounting to "full cost" accounting
effective with the April 30, 1997 financial statements.
The factors which most significantly affect the Company's results of
operations are (i) the sales 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 July 31
--------------------------
1996 1997
---- ----
<S> <C> <C>
Net Sales Volumes:
Oil (Mbbls) 74 102
Natural Gas (Mmcf) 577 454
Oil Equivalent (MBOE) 170 180
Average Sales Prices:
Oil (per Bbl) $20.90 (1) $16.32 (2)
Natural Gas (per Mcf) $ 2.17 (1) $2.21 (2)
Operating Expenses per
BOE of Net Sales:
Lease operating $7.49 $6.96
Severance tax $1.01 $0.87
Depreciation, depletion, and amortization $4.73 $4.41
General and administrative $4.01 $7.03
</TABLE>
13
<PAGE>
Alliance Resources PLC
Notes to Consolidated Condensed Financial Statements
(1) After giving effect to the impact of the Company's commodity price hedging
arrangements with the Bank. Without such hedging arrangements, the average
sales prices for the quarter ended July 31, 1996 would have been $22.04/bbl
for oil and $2.60/mcf for gas.
(2) On May 15, 1997, the commodity price hedging agreements were terminated
with the Bank through a buyout, the cost of which was financed by a
drawdown under the terms of the Alliance Credit Agreement. Hence, the table
reflects actual realized prices for the three months ended July 31, 1997.
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 for
gas. Relatively modest changes in either oil or gas significantly impact the
Company's results of operations and cash flow and could significantly impact the
Company's borrowing capacity.
Three Months Ended July 31, 1997 compared to the Three Months Ended July 31,
- ----------------------------------------------------------------------------
1996
- ----
Total revenues from the Company's operations for the quarter ended July 31,
1997 were $2,963,130 compared to $3,287,025 for the quarter ended July 31, 1996.
Revenues decreased marginally over the comparable period a year earlier due
principally to lower realized oil prices, net of the impact of the commodity
price hedges, and the absence of marketing margins in the revenue category.
Although sales volumes for the quarter ended July 31, 1997 were adversely
affected by a decline in sales volumes from the LaTex properties, the inclusion
of Alliance's sales volumes and the favorable impact of the remedial work
program designed to restore production on the LaTex properties more than
compensated for this decline. In addition, revenues for the quarter ended July
31, 1997 benefited from the removal of the commodity price hedges.
The Company concentrated its efforts immediately after the acquisition of
LaTex on increasing production from eleven existing producing fields operated by
LaTex in the states of Alabama, Mississippi, Oklahoma, Texas, and Louisiana.
Workover operations on these fields commenced in early May 1997 and were
comprised mainly of returning shut-in wells to production. Gross production from
these eleven fields was increased from an average of 244 barrels of oil
equivalent per day ("boepd") in April 1997 to an average of 865 boepd by August
1997. Most of the production increase came from remedial workover operations in
the South Carlton field in Alabama. Gross
14
<PAGE>
Alliance Resources PLC
Notes to Consolidated Condensed Financial Statements
production from this field alone increased from an average of 89 boepd in April
1997 to an average of 575 boepd in September 1997.
Total operating expenses decreased to $3,468,623 for the quarter ended July
31, 1997 compared to $6,387,927 for the same period in 1996. This decrease was
primarily due to write-offs of $3,446,795 in relation to the Company's
Kazakhstan and Tunisia operations which were taken in the 1996 period. Lease
operating expenses were relatively unchanged at $1,409,438 for the three month
period ending July 31, 1997 compared to $1,445,867 for the same period in 1996.
Although lease operating expenses were flat compared to the previous period, the
quarter ended July 31, 1997 was impacted by the remedial work program mentioned
above and the inclusion of the Alliance properties offset by lower operating
costs due to the sale of non-operated, non-strategic wells. Depreciation,
depletion and amortization decreased to $793,336 from $805,128 a year earlier as
a result of lower volumes partially offset by a slightly higher cost base.
General and administrative expenses increased from $682,355 during the quarter
ended July 31, 1996 to $1,265,849 for the quarter ended July 31, 1997. The
increase is a result of the inclusion of the Alliance overhead as well as non-
capitalized merger-related cost.
In addition to the decrease in the net operating loss to $505,493 for the
quarter ended July 31, 1997 from $3,100,902 for the same period in 1996, there
was also a significant decrease in other income/expense. This decrease was due
to the write-offs in the 1996 period of $4,096,381 covering investments in
Wexford Technology, Inc. and Imperial Petroleum, Inc., and miscellaneous expense
of $1,810,382 in connection with litigation arising out of the sale in July 1993
of LaTex's Panda subsidiary.
In summary, due to the above factors, the net loss for the common
shareholders for the quarter ended July 31, 1997 decreased to $682,626 ($0.02
per share) compared to a net loss of $9,782,969 ($0.54 per share) for the same
period in 1996.
Capital Resources and Liquidity
- -------------------------------
The Company's capital requirements relate primarily to the development of
its oil and gas properties and undeveloped leasehold acreage, exploration
activities, and the servicing of the Company's debt. In general, because the
Company's oil and gas reserves are depleted by production, the success of its
business strategy is dependent upon a continuous exploration and development
program and the acquisition of additional reserves.
Cash Flows and Liquidity. At July 31, 1997, Alliance has current assets of
------------------------
$3.936 million and current liabilities of $10.871 million, which resulted in a
net current deficit of $6.935 million. Since the Merger, the net current
deficit has been reduced from $9.129 million at year ended April 30, 1997 to
its current position of $6.935 million. The $2.194 million improvement was
primarily
15
<PAGE>
Alliance Resources PLC
Notes to Consolidated Condensed Financial Statements
due to the addition of Alliance's cash balances and a reduction in accounts
payable. The reduction in accounts payable in the quarter ended July 31, 1997 to
$10.433 million from $10.493 million previously masks a much larger improvement
as this reduction occurred despite the additional $2.505 million of current
liabilities which were absorbed from Alliance in the Merger.
For the quarter ended July 31, 1997, net cash used in the Company's
operating activities was $3.940 million compared to cash provided of $1.294
million for the quarter ended July 31, 1996. This deterioration in cash from
operating activities is substantially due to the allocation of funds to improve
the working capital deficit of the Company.
Investing activities of the Company generated $3.625 million in net cash
flow for the quarter ended July 31, 1997 compared to $0.726 million for the
quarter ended July 31, 1996. The improvement was principally due to property
sales of $2.804 million and the acquisition of cash balances of $1.461 million
from Alliance arising from the Merger. Financing activities provided $1.948
million for the quarter ended July 31, 1997 compared to a use of $2.001 million
for the quarter ended July 31, 1996. The improvement was due to the drawdown of
additional funds under the Alliance Credit Agreement and the abatement of
scheduled principal payments until October 31, 1998.
Overall, cash and cash equivalents improved by $1.633 million in the
quarter ended July 31, 1997 compared to $0.019 million in the 1996 period.
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 banking 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. As a result, the Company will continue its current policy of funding
capital expenditures with internally generated cash flow and the proceeds from
oil and gas property divestitures.
Financing Arrangements. Under the Alliance Credit Agreement, principal
----------------------
payments are suspended until October 31, 1998. However, cash flows generated by
Alliance and its subsidiaries in excess of amounts provided for 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.
16
<PAGE>
Alliance Resources PLC
Notes to Consolidated Condensed Financial Statements
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 has received
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 annually 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 of July 31, 1997, all advances to Alliance under the Alliance Credit
Agreement were maintained as LIBO Rate Loans that bore interest at the annual
rate of 7.5%.
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.
At July 31, 1997, the outstanding balance under the Alliance Credit
Agreement was $20.181 million. The outstanding loan balance has increased
$2.086 million since the Company's April 30, 1997 year-end as a result of the
following items which have been added to the outstanding loan balance: $0.116
million of loan interest; $0.732 million related to unpaid product hedge
payments as of April 30, 1997 (the hedge liability was provided for in the April
30, 1997 financial statements and has subsequently been reclassified to the bank
debt). Other additions to the outstanding loan balance covered the cost of the
buyout of the commodity price hedges (noted above) of $1.128 million on May 15,
1997 and an advance by the Bank to pay Merger-related legal costs to the Bank's
attorneys of $0.110 million.
17
<PAGE>
Alliance Resources PLC
Notes to Consolidated Condensed Financial Statements
In connection with the Merger and the Alliance Credit Agreement, the
Company, effective May 1, 1997 acquired an overriding royalty interest in all of
LaTex's existing producing oil and gas properties, other than those located in
the State of Oklahoma, the Perkins Field in Louisiana, and certain other minor
value properties located in other states, from an affiliate of the Bank in
exchange for 1,343,750 New Alliance Shares, convertible loan notes and warrants.
Seasonality. The results of operations of the Company are somewhat
-----------
seasonal due to fluctuations in the price for crude oil and natural gas.
Recently, crude oil prices have been generally higher in the third calendar
quarter, and natural gas prices have been generally higher in the first calendar
quarter. Due to these seasonal fluctuations, results of operations for
individual quarterly periods may not be indicative of results which may be
realized on an annual basis.
Inflation and Prices. In recent years, inflation has not had a significant
--------------------
impact on the operations or financial condition of the Company. 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.
Prices obtained for oil and gas production depend upon numerous factors
that are beyond the control of the Company including the extent of domestic and
foreign production, imports of foreign oil, market demand, domestic and world-
wide economic and political conditions, and government regulations and tax laws.
Prices for oil and gas have fluctuated significantly from 1995 through 1997.
The following table sets forth the average price received by the Company for
each of the last three years and the effects of the various hedging arrangement
noted above.
<TABLE>
<CAPTION>
Three Months Oil Oil Gas Gas
Ended July 31 (excluding the (including the (excluding the (including the
- --------------- effects of hedging effects of hedging effects of hedging effects of hedging
transactions) transactions) transactions) transactions)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997 $16.32 $16.32 $2.21 $2.21
1996 $22.04 $20.90 $2.60 $2.17
1995 $12.34 $12.30 $1.50 $1.66
</TABLE>
On October 23, 1997, the Company entered into new commodity price hedge
agreements to protect against price declines which may be associated with the
volatile environment of oil and natural gas spot pricing. Unlike the previous
hedging agreements entered into by LaTex, the new commodity price hedge
agreements, while protecting against oil and natural gas price declines, also
provide the Company with exposure to price increases beyond certain agreed price
levels. The commodity price hedges were executed through the
18
<PAGE>
Alliance Resources PLC
Notes to Consolidated Condensed Financial Statements
purchase of put options by the Company, and the associated cost was funded by
additional drawdowns under the Alliance Credit Agreement.
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
-----------------
Contingencies
- -------------
In addition to the litigation set forth in the Company's Registration Statement
on Form F-4, 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 6. Exhibits and Reports on Form 8-K
---------------------------------
(a) Exhibits
SEC
Exhibit
No. Description of Exhibits
------- -----------------------
(27) Financial Data Schedule
*27.1 Financial Data Schedule of Alliance Resources PLC
19
<PAGE>
Alliance Resources PLC
Notes to Consolidated Condensed Financial Statements
*Filed Herewith.
(b) Reports on Form 8-K
-------------------
Form 8-K filed on June 13, 1997 reporting completion of the
merger of Alliance Resources PLC with LaTex Resources, Inc.
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.
Alliance Resources PLC
/s/ H.B.K WILLIAMS
---------------------------------
H.B.K Williams, Finance Director
Date: December 19, 1997
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> APR-30-1998 APR-30-1997
<PERIOD-START> MAY-01-1997 MAY-01-1996
<PERIOD-END> JUL-01-1997 JUL-31-1996
<CASH> 1,706,299 72,948
<SECURITIES> 0 0
<RECEIVABLES> 2,081,075 2,124,855
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 3,935,554 2,251,979
<PP&E> 32,725,291 26,707,852
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 38,423,956 30,797,312
<CURRENT-LIABILITIES> 10,871,299 29,476,382
<BONDS> 0 0
0 0
0 9,817
<COMMON> 20,013,082 209,140
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 38,423,956 30,797,312
<SALES> 2,727,336 2,813,170
<TOTAL-REVENUES> 2,963,130 3,287,025
<CGS> 1,409,438 1,445,867
<TOTAL-COSTS> 3,468,623 6,387,927
<OTHER-EXPENSES> (364,093) 5,597,878
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 541,226 933,184
<INCOME-PRETAX> (682,626) (9,631,964)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 (9,631,964)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (682,626) (9,782,969)
<EPS-PRIMARY> (.02) (0.54)
<EPS-DILUTED> (.02) (0.54)
</TABLE>
