<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 October 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 January 19, 1998, 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 OCTOBER 31, 1997
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements. Page
Consolidated Condensed Balance Sheets as of
October 31, 1997 and April 30, 1997 3
Consolidated Condensed Statements of Operations
for the three months and six months ended October 31,
1997 and 1996 5
Consolidated Condensed Statement of Stockholders'
Equity for the three months ended October 31, 1997 6
Consolidated Condensed Statements of Cash Flows
for the six months ended October 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. 12
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, Item 5.
Other Information has been omitted as either inapplicable or
because the answer thereto is negative.
SIGNATURES 22
Item 6. Exhibit and Reports on Form 8-K
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
ALLIANCE RESOURCES PLC
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31, 1997 APRIL 30, 1997
(UNAUDITED) (UNAUDITED)
---------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 2,376,080 $ 72,948
Accounts receivable - trade 2,651,767 2,124,855
Other current assets 280,109 54,176
---------------- --------------
Total current assets 5,307,956 2,251,979
---------------- --------------
Property, plant, and equipment, at cost:
Oil and gas properties (using full cost method) 46,571,847 36,107,310
Other depreciable assets 1,197,180 855,512
---------------- --------------
47,769,027 36,962,822
Less accumulated depreciation and depletion (17,251,691) (10,254,970)
---------------- --------------
Net property, plant and equipment 30,517,336 26,707,852
---------------- --------------
Other assets:
Other assets 146,791 282,920
Intangible assets, less accumulated amortization 1,628,995 1,554,561
---------------- --------------
Total other assets 1,775,786 1,837,481
---------------- --------------
TOTAL ASSETS $ 37,601,078 $ 30,797,312
================ ==============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
ALLIANCE RESOURCES PLC
CONSOLIDATED CONDENSED BALANCE SHEETS, CONTINUED
<TABLE>
<CAPTION>
OCTOBER 31, 1997 APRIL 30, 1997
(UNAUDITED) (UNAUDITED)
---------------- --------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 9,530,374 $ 10,943,149
Accrued expenses payable 446,488 437,736
Current portion long-term debt 325,000 -
---------------- --------------
Total current liabilities 10,301,862 11,380,885
Long-term Liabilities:
Long-term debt 20,241,762 18,095,497
Other liabilities 2,260,908 1,938,783
---------------- --------------
Total liabilities 32,804,532 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 October 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 October 31, 1997
and April 30, 1997 respectively - 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 (Pounds)40; 46,000,000
shares authorized; 31,152,603 issued and
outstanding at October 31, 1997 20,077,486 -
Additional paid-in capital 5,595,941 19,416,828
Accumulated deficit (20,876,881) (19,764,273)
Treasury stock 1,008,500 common shares at cost at
April 30, 1997 - (489,365)
---------------- --------------
Total stockholders' equity (deficit) 4,796,546 (617,853)
---------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 37,601,078 $ 30,797,312
================ ==============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
ALLIANCE RESOURCES PLC
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three Three Six Six
Months Ended Months Ended Months Ended Months Ended
October 31, 1997 October 31, 1996 October 31, 1997 October 31, 1996
(Unaudited) (Restated, Unaudited) (Unaudited) (Restated, Unaudited)
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Oil and gas revenue $ 3,248,700 $ 2,377,701 $ 5,976,036 $ 5,190,871
Crude oil and gas marketing - 90,227 - 209,385
Lease operations and management fees 200,243 249,889 436,037 604,586
--------------------------------------------------------------------------------------
Total operating income 3,448,943 2,717,817 6,412,073 6,004,842
--------------------------------------------------------------------------------------
Operating expenses:
Lease operating expense 1,691,519 1,465,548 3,100,957 2,911,415
Cost of crude oil and gas marketing - 17,271 - 24,826
Depreciation, depletion, and amortization 918,754 830,989 1,712,090 1,636,117
Dry hole costs and abandonments - - - 3,446,795
General and administrative expense 909,860 1,894,744 2,175,709 2,577,326
--------------------------------------------------------------------------------------
Total operating expenses 3,520,133 4,208,552 6,988,756 10,596,479
--------------------------------------------------------------------------------------
Net operating loss (71,190) (1,490,735) (576,683) (4,591,637)
Other income (expense):
Equity in losses and write offs
of investments in affiliates - - - (4,096,381)
Gain on sale of assets 165 - 18,496 -
Interest expense (468,280) (600,818) (1,009,506) (1,534,002)
Interest income 15,110 32,934 35,719 341,819
Miscellaneous income (expense) 79,051 - 404,204 (1,810,382)
--------------------------------------------------------------------------------------
Net loss from continuing operations
before income taxes (445,144) (2,058,619) (1,127,770) (11,690,583)
Income tax expense - - - -
--------------------------------------------------------------------------------------
Net loss (445,144) (2,058,619) (1,127,770) (11,690,583)
Preferred stock dividends - (166,250) - (317,255)
--------------------------------------------------------------------------------------
Net loss for common shareholders $ (445,144) $ (2,224,869) $ (1,127,770) $ (12,007,838)
======================================================================================
Loss per share for common shareholders $ (0.01) $ (0.12) $ (0.04) $ (0.64)
======================================================================================
Weighted average number of shares
outstanding 31,137,386 19,326,060 31,094,994 18,674,128
======================================================================================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
ALLIANCE RESOURCES PLC
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED OCTOBER 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 - 256,250 165,904 78,958
Foreign exchange adjustment - - - -
Net loss current period - - - -
------------- ------------ ------------- ------------
Balance October 31, 1997 $ - 31,152,603 $ 20,077,486 $ 5,595,941
============= ============ ============= ============
<CAPTION>
Retained Earnings Total
(Accumulated Treasury Stockholders'
Deficit) Stock Equity
================= ============ =============
<S> <C> <C> <C>
Balance April 30, 1997 $ (19,764,273) $ (489,365) $ (617,853)
Alliance-LaTex merger
dissolution of shares - 489,365 (19,146,420)
Issue new ordinary shares to
LaTex shareholders - - 19,146,420
Issue new ordinary shares to
Alliance shareholders - - 3,910,845
Issued shares for acquisition
of overriding royalty interest - - 2,371,300
Issued shares for settlement
of various advisory and
banking fees - - 244,862
Foreign exchange adjustment 15,162 - 15,162
Net loss current period (1,127,770) - (1,127,770)
---------------- ------------ -------------
Balance October 31, 1997 $ (20,876,881) $ - $ 4,796,546
================ ============ =============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
ALLIANCE RESOURCES PLC
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Six Six
Months Ended Months Ended
October 31, 1997 October 31, 1996
(Unaudited) (Restated, Unaudited)
---------------- ---------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,127,770) $ (11,690,583)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation, amortization, and depletion 1,712,090 1,636,117
Gain on sale of assets (18,496) -
Equity in losses and write offs of investments in affiliates - 4,096,381
Dry hole costs and abandonments - 3,446,795
Employee bonus - 528,125
Forgiveness of debt - 385,391
Interest income - (150,467)
Miscellaneous expense - 1,810,382
Changes in assets and liabilities, net of effects
from acquisition:
Accounts receivable (26,237) 535,300
Accounts receivable - related party - 202,790
Accounts payable (2,880,880) 378,875
Accrued expenses payable 8,752 547,444
Other current assets (246,563) -
Deposits and other assets 136,129 (69,747)
Other liabilities (1,349,972) 615,000
Inventories - 64,091
---------------- ---------------------
Net cash (used in) provided by operating activities (3,792,947) 2,335,894
---------------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,289,926) (365,002)
Proceeds from sale of property and equipment 4,998,501 1,144,811
Acquisition of Alliance Resources PLC cash 1,460,555 -
Decrease in accounts and notes receivable - 340,000
Advances to unconsolidated affiliates and notes receivable - (326,394)
---------------- ---------------------
Net cash provided by investing activities 4,169,130 793,415
---------------- ---------------------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
ALLIANCE RESOURCES PLC
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Six Six
Months Ended Months Ended
October 31, 1997 October 31, 1996
(Unaudited) (Restated, Unaudited)
---------------- ---------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred loan and reorganization costs $ (428,391) $ (137,186)
Payments on notes payable - (3,150,416)
Proceeds from notes payable 2,355,340 178,014
---------------- ---------------------
Net cash provided by (used for) financing activities 1,926,949 (3,109,588)
---------------- ---------------------
Net increase in cash and cash equivalents 2,303,132 19,721
Cash and cash equivalents at beginning of period $ 72,948 $ -
---------------- ---------------------
Cash and cash equivalents at end of period $ 2,376,080 $ 19,721
================ =====================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 730,850 $ 1,480,520
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
Common stock issued for services and employee bonus - 562,500
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 -
Ordinary shares due in settlement of advisory fees 41,862 -
Convertible loan notes issued for acquisition of overriding
royalty interest 1,400,700 -
Convertible loan notes due in settlement of financing fees 150,000 -
Foreign exchange adjustment 15,162 -
</TABLE>
See accompanying notes to consolidatd condensed financial statements.
<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)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 payment of certain fees and 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
<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.
On September 15, 1997, Alliance issued 100,000 New Alliance Shares in
settlement of financial advisory fees and on November 5, 1997, Alliance issued
115,456 convertible loan notes to the Bank in settlement of arrangement fees of
$150,000 noted above which may, under certain circumstances, be converted into
New Alliance Shares.
In summary, as a result of the Merger and related transactions, Alliance
had outstanding at October 31, 1997 approximately 31,152,603 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 with LaTex on May 1,
1997 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>
<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
<PAGE>
Alliance Resources PLC
Notes to Consolidated Condensed Financial Statements
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
statement of pro forma revenues, loss before income taxes, net loss, and net
loss per share for the six months ended October 31, 1996 based on the assumption
that Alliance was acquired at the beginning of this period:
<TABLE>
<CAPTION>
Six months ended
October 31, 1996
----------------
<S> <C>
Revenues $ 8,002,842
Loss before income tax $ (12,369,583)
Net loss $ (12,369,583)
Net loss per share $ (0.66)
</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 adjusted to US GAAP.
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 with LaTex, 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 October 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
<PAGE>
Alliance Resources PLC
Notes to Consolidated Condensed Financial Statements
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, dry holes, and relevant
overheads) are capitalized. Capitalized costs 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.
<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 and six months ended October 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 and six
months ended October 31, 1997 represent the activities of the enlarged group
(Alliance and LaTex groups combined) while the results for the three months
ended October 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>
Six Months Ended October 31
---------------------------
1996 1997
---- ----
<S> <C> <C>
Net Sales Volumes:
Oil (Mbbls) 160 218
Natural Gas (Mmcf) 1,196 988
Oil Equivalent (MBOE) 359 382
Average Sales Prices:
Oil (per Bbl) $18.03 (1) $16.63 (2)
Natural Gas (per Mcf) $ 1.85 (1) $2.38 (2)
</TABLE>
<PAGE>
Alliance Resources PLC
Notes to Consolidated Condensed Financial Statements
<TABLE>
<S> <C> <C>
Operating Expenses per
BOE of Net Sales:
Lease operating $ 7.22 $7.11
Severance tax $ 0.95 $1.00
Depreciation, depletion,
and amortization $14.15 $4.48
General and administrative $ 7.17 $5.69
</TABLE>
(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 six months ended October 31, 1996 would have been
$20.26/bbl for oil and $2.26/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 October 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 October 31, 1997 compared to the Three Months Ended
----------------------------------------------------------------------
October 31, 1996
----------------
Total revenues from the Company's operations for the quarter ended October
31, 1997 were $3,448,943 compared to $2,717,817 for the quarter ended October
31, 1996. Revenues increased over the comparable period a year earlier due
principally to the beneficial effect of higher realized oil and gas prices (net
of the impact of the commodity price hedges), and higher barrel of oil
equivalent volumes, offset partially by the absence of marketing margins in the
revenue category. The revenues in the 1997 period benefited from the lack of
commodity price hedges and allowed the Company full exposure to market prices.
Revenues in the 1996 period were adversely effected by the LaTex hedge program
which effectively capped pricing at below market levels. Although sales volumes
for the quarter ended October 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.
Production from the Group's operated properties for the month of October
1997 stabilised at an average of 2,300 boepd (gross) and 1,450 boepd (net to the
Group's interests). It is estimated that production form the Group's
non-operated properties for the month of October 1997 averaged approximately 550
boepd (net to the Group's interests).
The Group commenced a 37 well recompletion programme in late October 1997.
Unusually adverse weather conditions, mainly heavy rain, have hindered progress
to date. This programme is expected to convert approximately 1.5 million boe of
reserves net to the Group's interests from the proved developed behind pipe
category into the proved developed producing category by December 1998.
Approximately 70% of the new production is expected to be gas.
<PAGE>
Alliance Resources PLC
Notes to Consolidated Condensed Financial Statements
Total operating expenses decreased to $3,520,133 for the quarter ended
October 31, 1997 compared to $4,208,552 for the same period in 1996. This
decrease was primarily due to the inclusion of employee restricted stock awards
which were charged in the 1996 period. Lease operating expenses were relatively
unchanged at $1,691,519 for the three-month period ended October 31, 1997
compared to $1,465,548 for the same period in 1996. The quarter ended October
31, 1997 was impacted by the remedial work program mentioned above and the
inclusion of the Alliance properties partially offset by lower operating costs
due to the sale of non-operated, non-strategic wells. Depreciation, depletion
and amortization increased to $918,754 from $830,989 a year earlier as a result
of higher sales volumes in the 1997 period. General and administrative expenses
decreased from $1,894,744 during the quarter ended October 31, 1996 to $909,860
for the quarter ended October 31, 1997 primarily due to the employee stock award
in the 1996 period noted above.
In addition to the decrease in the net operating loss to $71,190 for the
quarter ended October 31, 1997 from $1,490,735 for the same period in 1996,
there was also an improvement in other income/expense due to the lower interest
charge in the 1997 period.
In summary, due to the above factors, the net loss for the common
shareholders for the quarter ended October 31, 1997 decreased to $445,144 ($0.01
per share) compared to a net loss of $2,224,869 ($0.12 per share) for the same
period in 1996.
Six Months Ended October 31, 1997 compared to the Six Months Ended
------------------------------------------------------------------
October 31, 1996
----------------
Total revenues from the Company's operations for the six months ended
October 31, 1997 were $6,412,073 compared to $6,004,842 for the six months ended
October 31, 1996. Revenues increased over the comparable period a year earlier
due principally to the beneficial effect of higher realized gas prices (net of
the impact of the commodity price hedge) and higher oil volumes, offset
partially by the absence of marketing margins in the revenue category. The
revenues in the 1997 period benefited from the lack of commodity price hedges
and allowed the Company full exposure to higher market prices. Revenues in the
1996 period were adversely affected by the LaTex hedge program which effectively
capped pricing at below market levels. Although sales volumes for the six
months ended October 31, 1997 were adversely affected by a decline in sales
volumes
<PAGE>
Alliance Resources PLC
Notes to Consolidated Condensed Financial Statements
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.
The group concentrated its efforts immediately after the acquisition of
LaTex in May 1997 on increasing production from remedial workover operations on
eleven existing producing fields operated by LaTex in the states of Alabama,
Mississippi, Oklahoma, Texas and Louisiana. Gross production from these eleven
fields was increased from an average of 240 boepd in April 1997 to an average of
980 boepd in October 1997.
The Group now operates a significant number of oil and gas properties in
the Mid-Continent and Gulf coast regions of the USA and gross production from
the Group's operated properties increased from an average of 870 barrels of oil
per day ("bopd") and 4.5 million standard cubic feet of gas per day (1,620
boepd) in April 1997 to 1,375 bopd and 5.8 million standard cubic feet of gas
per day (2,350 boepd) in August 1997.
During the period the Group participated in six successful new wells
drilled and completed by outside operators, with interests ranging from 2% to
11% net to the Group.
Following extensive negotiations the Group signed a farm-out agreement with
Continental Resources Ltd ("Continental") on its highly prospective Jefferson
Island lease, whereby Continental at its sole expense will conduct a 3-D seismic
programme and drill and complete two wells on the lease to earn a two thirds
working interest. The 3-D seismic survey is expected to take approximately
eighteen months to permit, shoot and process. Permitting of the survey is
already underway and the acquisition phase is expected to commence no later than
May 1998.
The Group continues to appraise international opportunities as they arise
and, now that the Group has stabilised its producing assets in the US, it is
focusing its attention on finding suitable development and exploration
opportunities in the international arena.
Total operating expenses decreased to $6,988,756 for the six months ended
October 31, 1997 compared to $10,597,479 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 $3,100,957 for the six
month period ended October 31, 1997 compared to $2,911,415 for the same period
in 1996. The six months ended October 31, 1997 was impacted by the remedial
work program mentioned above and the inclusion of the Alliance properties
partially offset by lower operating costs due to the sale of non-operated costs
due to the sale of non-operated, non-strategic wells. Depreciation, depletion,
and amortization increased to $1,712,090 from $1,636,117 a year earlier mainly
as a result of higher sales volumes in the 1997 period. General and
administrative expenses decreased from $2,577,326 during the six months ended
October 31, 1996 primarily due to the employee stock award in the 1996 period
noted above partially offset by 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 $576,683 for the
six months ended October 31, 1997 from $4,591,637 for the same period in 1996,
there was also a significant improvement in other income/expense. This
improvement 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 expenses 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 six months ended October 31, 1997 decreased to $1,127,770
($0.04 per share) compared to a net loss of $12,007,838 ($0.64 per share) for
the same period in 1996.
<PAGE>
Alliance Resources PLC
Notes to Consolidated Condensed Financial Statements
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 October 31, 1997, Alliance has current assets
------------------------
of $5.308 million and current liabilities of $10.302 million, which resulted in
a net current deficit of $4.994 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 $4.994 million. The $4.135 million improvement was
primarily due to the increase in cash balances and a reduction in accounts
payable. The current portion of long-term debt amounted to $0.325 million at
October 31, 1997 compared to $0 at April 30, 1997.
For the six months ended October 31, 1997, net cash used in the Company's
operating activities was $3.793 million compared to cash provided of $2.336
million for the six months ended October 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 $4.169 million in net cash
flow for the six months ended October 31, 1997 compared to $0.793 million for
the six months ended October 31, 1996. The improvement was principally due to
property sales of $4.999 million and the acquisition of cash balances of $1.461
million from Alliance arising from the Merger. Financing activities provided
$1.927 million for the six months ended October 31, 1997 compared to a use of
$3.110 million for the six months ended October 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 $2.303 million in the six
months ended October 31, 1997 compared to $0.020 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
<PAGE>
Alliance Resources PLC
Notes to Consolidated Condensed Financial Statements
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 on which date the first scheduled
repayment of $325,000 is due. 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.
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 at October 31, 1997, advances to Alliance under the Alliance Credit
Agreement were maintained as LIBO Rate Loans that bore interest at the annual
rate of 7.625%.
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
<PAGE>
Alliance Resources PLC
Notes to Consolidated Condensed Financial Statements
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 October 31, 1997, the outstanding balance under the Alliance Credit
Agreement was $20.567 million of which $0.325 million in included as the current
portion on the balance sheet. The outstanding loan balance has increased $2.472
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 drawdowns in respect of
the cost of the buyout of the commodity price hedges (noted above) of $1.128
million on May 15, 1997, merger-related legal costs of the Bank's attorneys of
$0.110 million, and the $0.386 million cost of new commodity price hedges
purchased on October 23, 1997 for the twelve months ended October 31, 1998.
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.
<PAGE>
Alliance Resources PLC
Notes to Consolidated Condensed Financial Statements
<TABLE>
<CAPTION>
Oil Oil Gas Gas
Six Months Ended (excluding the (including the (excluding the (including the
October 31 effects of hedging effects of hedging effects of hedging effects of hedging
- ---------------------- $/BBL $/BBL $/MCF $/MCF
transactions) transactions) transactions) transactions)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997 $16.63 $16.63 $2.38 $2.38
1996 $20.26 $18.03 $2.26 $1.85
1995 $12.62 $12.62 $1.38 $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
volatility in oil and natural gas spot prices. Unlike the previous hedging
agreements entered into by LaTex, the new commodity price hedge agreements,
while protecting the downside, also provide the Company with exposure to price
increases beyond certain agreed price levels. The commodity price hedges have
been achieved through the purchase of put options (floors) by the Company, and
the associated premia cost was funded by additional drawdowns under the Alliance
Credit Agreement. The commodity price hedges cover the year to October 31, 1998
and cover in excess of 90% of Alliance's current monthly sales volumes. The
floors currently equate to approximately $18.50/bbl Nymex WTI contract and
$2.20/mmbtu Nymex Natural Gas contract.
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.
<PAGE>
Alliance Resources PLC
Notes to Consolidated Condensed Financial Statements
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
*Filed Herewith.
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: January 19, 1998
<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> AUG-01-1997 AUG-01-1996
<PERIOD-END> OCT-31-1997 OCT-31-1996
<CASH> 2,376,080 19,721
<SECURITIES> 0 0
<RECEIVABLES> 2,651,767 3,722,120
<ALLOWANCES> 0 0
<INVENTORY> 0 175,493
<CURRENT-ASSETS> 5,307,956 4,104,181
<PP&E> 47,769,027 42,119,800
<DEPRECIATION> (17,251,691) (12,571,037)
<TOTAL-ASSETS> 37,601,078 35,817,459
<CURRENT-LIABILITIES> 10,301,862 32,145,148
<BONDS> 0 0
0 0
0 9,464
<COMMON> 20,077,486 208,140
<OTHER-SE> (15,280,940) 2,839,707
<TOTAL-LIABILITY-AND-EQUITY> 37,601,078 35,817,459
<SALES> 3,248,700 2,377,701
<TOTAL-REVENUES> 3,448,943 2,717,817
<CGS> 1,691,519 1,465,548
<TOTAL-COSTS> 3,520,133 6,007,227
<OTHER-EXPENSES> (94,326) (100,967)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 468,280 599,818
<INCOME-PRETAX> (445,144) (3,789,261)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (445,144) (3,789,261)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 166,250
<NET-INCOME> (445,144) (3,955,511)
<EPS-PRIMARY> (.01) (.20)
<EPS-DILUTED> (.01) (.20)
</TABLE>
