<PAGE>
Draft Dated
9/5/98, 6:39pm
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by Registrant: [X]
Filed by a Party other than the Registrant: [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[_] Confidential, for Use of the Commission Only (as permitted by Rule 14a-
6(e)(2))
[_] Definitive Proxy Statement
[X] Definitive Additional Materials
[_] Soliciting Materials Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
ALLIANCE RESOURCES PLC
----------------------
(Name of Registrant as Specified in Its Charter)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required.
[_] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(2) or Item 22(a)(2) of
Schedule 14A
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
Ordinary Shares
2) Aggregate number of securities to which transaction applies:
28,083,300
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing is calculated and state how it was determined): The fee has been
calculated based on $.28 per Ordinary Share which, to the best
knowledge of the Company, was the last sale price in the United States
over-the-counter market for the Ordinary Shares prior to April 28,
1998.
4) Proposed maximum aggregate value of transaction: $7,863,324
5) Total fee paid: $2,325.00
[X] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
<PAGE>
Alliance Resources PLC
4200 East Skelly Drive, Suite 1000
Tulsa, Oklahoma 74135 October 7, 1998
TO THE SHAREHOLDERS OF ALLIANCE RESOURCES PLC:
This is a supplement to the Proxy Statement dated July 13, 1998 relating to
an Extraordinary General Meeting of the Shareholders of Alliance Resources PLC.
This supplement notifies you of changes in the Acquisitions described in the
original Proxy Statement, a proposal to reduce the par value of the Company's
ordinary shares and of a revised date for the Extraordinary General Meeting
called to approve the Acquisitions and related matters. The Extraordinary
General Meeting has been postponed and will be held on October 30, 1998, at
10:00 a.m., United Kingdom time, at the Company's offices, Kingsbury House, 15-
17 King Street, London SW1Y 6QU.
The terms of the Acquisitions have been changed to reduce both the property
interest to be acquired and the debt to be incurred by the Company by
approximately one-half. Under the revised terms of the Acquisitions, the
Company will acquire 10% of Burlington Resources' interest in the East Irish Sea
Properties (the "U.K. Interests"), the Difco shareholders will initially be
entitled to receive approximately 8.7% of the then outstanding shares of the
Company and could receive up to 28.3% of the shares of the Company then
outstanding based upon the production from, or reserves attributable to, the
U.K. Interests, and the cash consideration to be paid to acquire the U.K.
Interests will be approximately $17,000,000. In addition, the Company will
issue to one of its lenders 15,545,454 ordinary shares and grant the other
lender warrants to purchase 3,275,000 ordinary shares at a price of 1p per share
and an overriding royalty interest in the U.K. Interests of 0.3% beginning
January 1, 2001. The overriding royalty interest will entitle the lender to
receive a payment equal to the specified percentage of the net revenues
generated by the U.K. Properties. The overriding royalty interest would have
the effect of reducing the Company's revenues from the U.K. Interests. The
Company will also issue to its financial advisor, in payment of a fee of
(Pounds)200,000, 615,385 ordinary shares.
Based upon the average closing prices for the ordinary shares of the
Company as quoted on the London Stock Exchange for the five trading days
preceding April 29, 1998, the day trading in the ordinary shares on the London
Stock Exchange was suspended at the request of the Company, the cash
consideration to be paid to acquire the U.K. Interests, and not including the
shares, warrants and fees to the Company's lenders, the total consideration to
be paid to consummate the Acquisitions ranges from approximately $23,400,000 to
$29,800,000.
In addition, we are proposing that the par value of the Company's ordinary
shares be reduced from 40p to 1p per share. This reduction is proposed because
the ordinary shares have consistently traded at less than 40p per share, which
significantly restricts the options open to the Company in raising capital. The
reduction in par value will have no effect on the value of your interest in the
Company.
We have enclosed a revised Notice of Extraordinary General Meeting of
Shareholders, a revised description of the Acquisitions, and revised financial
and reserve information reflecting the new terms of the Acquisitions. For your
convenience, we have also enclosed a copy of the original Proxy Statement and a
form of proxy card. You are urged to read all of these materials carefully.
The board of directors of the Company has unanimously approved the revised
terms of the Acquisitions and unanimously recommends that shareholders vote for
approval of the proposals to be considered at the Extraordinary General Meeting.
Thank you, and we look forward to seeing you at the Extraordinary General
Meeting.
Sincerely,
JOHN A. KEENAN
Chairman and Managing Director
<PAGE>
Notice of Extraordinary General Meeting
ALLIANCE RESOURCES PLC
(Registered in England and Wales No. 2532955)
NOTICE IS HEREBY GIVEN that an Extraordinary General Meeting of the Company will
be held at the Company's offices, Kingsbury House, 15-17 King Street, London
SW1Y 6QU at 10:00 a.m., United Kingdom time on 30 October, 1998, for the purpose
of considering and, if thought fit, passing the following resolutions of which
resolutions 1 to 3 (inclusive) will be proposed as ordinary resolutions and
resolutions 4 and 5 will be proposed as special resolutions:
ORDINARY RESOLUTIONS
1. That:
(a) each of the ordinary shares of 40p each in the capital of the Company
in issue and each of 5,072,608 ordinary shares of 40p each in the
capital of the Company authorised but not in issue, in each case at
the date of this Resolution be sub-divided into and re-designated as
one ordinary share of 1p and 39 deferred shares of 1p each ("Deferred
Shares"), the Deferred Shares to have the rights and being subject to
the restrictions set out in Article 3.2 of the Articles of Association
of the Company to be adopted pursuant to Resolution 5 below; and
(b) each of the remaining 9,717,984 ordinary shares of 40p each in the
capital of the Company authorized but not in issue at the date of this
Resolution be sub-divided into forty ordinary shares of 1p each.
2. That the acquisition:
(a) by the Company of the whole of the issued share capital of Difco
Limited; and
(b) by Difco Limited of an undivided 10 per cent of the right, title and
interest of Burlington Resources (Irish Sea) Limited in and to up to
13 blocks in the East Irish Sea and Liverpool Bay areas off the West
Coast of the United Kingdom;
(together the "Acquisitions") in each case pursuant to and on the terms and
subject to the conditions of the amended acquisition agreements dated 23
September, 1998 and 5 October, 1998 be and are hereby approved (or upon
such terms and subject to such conditions as are approved by the Directors
or any duly authorised committee thereof and with authority to the
Directors or such committee to waive, amend, revise, vary or extend any of
the terms or conditions of the Acquisitions other than in any material
respect) and the entering into or performance or (as the case may be) grant
by the Company and/or any of its subsidiaries and/or subsidiary
undertakings and/or associates of all acts, agreements, arrangements and
indemnities which the Directors or such committee consider necessary or
desirable for the purposes of or in connection with the Acquisitions be and
are hereby approved.
3. That, conditional upon the Acquisitions (as defined in Resolution 2 above)
becoming unconditional:
(a) 10,000,000 ordinary shares of 1p each in the capital of the Company
authorised but not in issue following the passing of Resolution 1
above be converted into and redesignated as 10,000,000 convertible
restricted voting shares of 1p each with the right and subject to the
restriction set out in the document produced to the meeting and
initialed, for identification purposes only, by the Chairman; and
(b) the Directors be generally and unconditionally authorised in
accordance with section 80 of the Companies Act 1985 (as amended) (the
"Act"), to exercise all the powers of the Company to allot
i
<PAGE>
relevant securities (as defined in section 80(2) of the Act) up to an
aggregate nominal amount of (Pounds)687,151 PROVIDED THAT:
(i) in the case of any allotment (other than (A) an allotment of
relevant securities in pursuance of the Acquisitions, (B) the
allotment of 15,000,000 ordinary shares of 1p each to EnCap
Investments, L.C., (C) the allotment of warrants to Bank of
America to subscribe for up to 3,275,000 ordinary shares of 1p
each, or (D) as a consequence of the exercise of existing
warrants or the conversion of existing loan notes) the authority
hereby conferred shall be limited to the allotment of relevant
securities up to an aggregate nominal amount equal to one third
(1/3) of the aggregate nominal amount of all ordinary shares of
1p each in the Company either issued and fully paid or
unconditionally allotted and fully paid immediately after this
Resolution becomes unconditional; and
(ii) this authority (unless previously revoked, varied or renewed)
shall expire on 30 October, 2003 (save that the Company may
before such expiry make an offer or agreement which would or
might require relevant securities to be allotted after such
expiry and the Directors may allot relevant securities in
pursuance of such an offer or agreement as if the authority
conferred hereby had not expired);
such authority to be in substitution for any and all authorities
previously conferred upon the Directors for the purposes of Section 80
of the Act; and
(c) pursuant to Article 94.2 of the Company's Articles of Association, the
borrowing powers of the Directors be increased from the current
maximum of two and a half (2 1/2) times the amount calculated in
accordance with that Article 94.2 to a sum not exceeding ten (10)
times such an amount.
SPECIAL RESOLUTIONS
4. That, conditioned upon the Acquisition, (as defined in Resolution 2 above)
becoming unconstitutional, the Directors be and are hereby empowered
pursuant to section 95 of the Act and to the authority conferred by
Resolution 3 above to allot and make offers or agreements to allot equity
securities (as defined in section 94(2) of the Act) for cash or otherwise
as if section 89(1) of the Act did not apply to any such allotment,
provided that such power is limited to:
(a) the allotment of 15,000,000 ordinary shares of 1p each to EnCap
Investments, L.C.;
(b) the allotment of warrants to Bank of America to subscribe for up to
3,275,000 ordinary shares of 1p each;
(c) the allotment of equity securities in connection with issues to
holders of ordinary shares where the equity securities respectively
attributable to the interests of such holders are proportionate (as
nearly as may be practicable) to the respective numbers of ordinary
shares by them, but subject to such exclusions or other arrangements
as the Directors may deem necessary or expedient to deal with any
fractional entitlements or any legal or practical problems under the
laws of, or the requirements of, any regulatory body or Stock
Exchange, in any territory; and
(d) the allotment (otherwise than pursuant to sub-paragraphs (a), (b) or
(c) above) of equity securities for cash up to an aggregate nominal
amount equal to five per cent of the aggregate nominal amount of all
ordinary shares issued and fully paid immediately after this
Resolution becomes unconditional.
such power to expire on 30 October 2003 save that the Company may before
such expiry make an offer or agreement which would or might require equity
securities to be allotted after such expiry and that the Directors may
allot equity securities pursuant to such offer or agreement as if the power
conferred upon the Directors in relation to the allotment of equity
securities.
ii
<PAGE>
5. The Articles of Association of the Company be, and are hereby, altered:
(a) by the deletion of Article 3 in its entirety and the substitution
therefor of the following new Article 3.1:
"3.1 The authorized share capital of the Company at the date of the
adoption of this Article 3.1 is (Pounds)18,400,000 divided into
425,001,376 Ordinary Shares of 1p each (hereinafter referred to
as the "Ordinary Shares"), and 1,414,998,624 Deferred Shares of
1p each (hereinafter referred to as the "Deferred Shares").";
(b) by the addition after Article 3.1 of a new Article 3.2 in the
following form:
"3.2 The holders of the Deferred Shares shall not, by virtue of or
in respect of their holdings of Deferred Shares, have the right
to receive notice of any General Meeting of the Company nor the
right to attend, speak or vote at any such General Meeting. The
Deferred Shares shall not entitle their holders to receive any
dividend or other distribution. The Deferred Shares shall on a
return of capital on winding up or otherwise entitle the holder
only to the repayment of the amounts paid up on such shares
after repayment of the capital paid up on the Ordinary Shares.
The Company shall have irrevocable authority at any time after
the adoption of this Article to appoint any person to execute
on behalf of the holders of the Deferred Shares a transfer
therefor (and/or an agreement to transfer the same) to such
person as the Company may determine as custodian thereof and/or
to purchase the same (in accordance with the provisions of the
Statutes) in any case for not more than 1p for all of the
Deferred Shares without obtaining the sanction of the holder or
holders thereof and pending such transfer and/or purchase to
retain the certificate for the Deferred Shares."; and
(c) By the deletion of Article 38.3 in its entirety and the substitution
therefor of the following new Article 38.3:
"38.3 Subject to Article 75.3, the Directors may, in their absolute
discretion and without assigning any reason therefor, refuse to
register any transfer of any share which is not a fully paid
share (whether certificated or uncertificated) provided that,
where any such share are admitted to the Official List of The
London Stock Exchange, such discretion may not be exercised in
such a way as to prevent dealings in the shares of the relevant
class or classes from taking place on an open or proper basis.
The Directors may likewise refuse to register any transfer of a
share (whether certificated or uncertificated), whether fully
paid or not, in favor of more than four persons jointly.".
BY ORDER OF THE BOARD
Secretary
Registered Office:
Kingsbury House
15-17 King Street
London SW1Y 6QU
Note: A member entitled to attend and vote at the above meeting may appoint a
proxy or proxies who need not be a member of the Company to attend and on a poll
vote instead of him or her.
iii
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TABLE OF CONTENTS
PAGE
----
Notice of Extraordinary General Meeting..................................... i
Introduction................................................................ 1
The Meeting; Votes Required................................................. 2
Revised Terms of the Difco Acquisition...................................... 2
Revised Terms of the Interests Acquisition Agreement........................ 3
Proposed Terms of Debt Financing............................................ 4
Reduction of Par Value...................................................... 5
Related Matters............................................................. 5
The Board's Analysis of the Revised Terms of the Acquisitions............... 5
Recommendation.............................................................. 6
Summary Oil and Gas Reserve Information..................................... 6
Effect of Issuance of Shares and Warrants to Difco Shareholders and
Lenders.................................................................... 7
Pro Forma Condensed Combined Financial Information.......................... 7
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the Year Ended April 30, 1998 and Three Months Ended
July 31, 1998.............................................................. 14
INDEX TO FINANCIAL STATEMENTS...............................................F-1
iv
<PAGE>
This is a supplement to the Proxy Statement dated July 13, 1998 relating to
an Extraordinary General Meeting of the Shareholders of Alliance Resources PLC.
This supplement notifies you of changes in the Acquisitions described in the
original Proxy Statement, a proposal to reduce the par value of the Company's
ordinary shares and of an indefinite adjournment of the Extraordinary General
Meeting called to approve the Acquisitions and related matters. Except as
described in this supplement, there are no material changes in the terms of the
Acquisitions. Terms defined in the original Proxy Statement are used with the
same meaning in this supplement.
INTRODUCTION
In the Proxy Statement, we asked you to approve the Acquisitions on the
terms as they then existed. One of the conditions to completing the
Acquisitions, however, was that we raise $100,000,000 in debt on satisfactory
terms. We were not able to raise debt in that amount, and so the Extraordinary
General Meeting was adjourned. We now have proposals for debt in the amount of
$65,750,000. Therefore, we have proposed that the terms of the Acquisitions be
changed to reduce both the property interest to be acquired and the debt to be
incurred by the Company by approximately one-half. We are now asking you to
approve the Acquisitions and the related matters on the revised terms described
in this supplement.
Under the revised terms of the Acquisitions, the Company will acquire Difco
from the Difco shareholders, who will initially be entitled to receive
approximately 8.7% of the outstanding shares of the Company and could receive up
to 28.3% of the outstanding shares of the Company based upon the production
from, or reserves attributable to, the U.K. Interests. The Company will then
acquire through Difco 10% of Burlington Resources' interest in the East Irish
Sea Properties for cash consideration of approximately $17,000,000. In
addition, the Company will issue to one of its lenders 15,000,000 ordinary
shares for a total cash consideration of approximately $250,000, and issue to
the lender 545,454 ordinary shares in payment of a fee of $292,500. The Company
will pay the other lender a cash fee of $850,000 and grant the lender warrants
to purchase 3,275,000 ordinary shares at a price of 1p per share and an
overriding royalty interest in the U.K. Interests of 0.3% beginning January 1,
2001. The overriding royalty interest will entitle the lender to receive a
payment equal to the specified percentage of the net revenues generated by the
U.K. Properties. The overriding royalty interest would have the effect of
reducing the Company's revenues from the U.K. Interests. The Company will also
issue to its financial advisor, in payment of a fee of (Pounds)200,000, 615,385
ordinary shares.
Based upon the average closing prices for the ordinary shares of the
Company as quoted on the London Stock Exchange for the five trading days
preceding April 29, 1998, the day trading in the ordinary shares on the London
Stock Exchange was suspended at the request of the Company, the shares to be
issued to the Difco shareholders would have a value of approximately $2,120,000
(5,000,000 ordinary shares) to $8,480,000 (20,000,000 ordinary shares). The
value of the ordinary shares to be issued to the Company's financial advisor to
settle a fee of $330,000, calculated on the same basis, is $261,000. Based upon
these values, and the cash consideration to be paid to acquire the U.K.
Interests, the total consideration and fees to be paid to consummate the
Acquisitions ranges from approximately $23,400,000 to $29,800,000.
On the same basis, the warrants to purchase 3,275,000 Shares have a value
of $1,335,000 and the difference between the fair value and the cash
consideration received for the issue of the 15,000,000 Shares amounts to
$6,110,000. Based upon these values, the value of the overriding royalty
interest ($2,100,000) and the fees settled in cash and Shares at market value
($850,000 and $292,000 respectively), the aggregate value of discount on loans
and fees payable on the financing totals approximately $10,700,000.
In addition, we are proposing that the par value of the Company's ordinary
shares be reduced from 40p to 1p per share. This reduction is proposed because
the ordinary shares have recently traded at less than 40p per share. Because the
Company is not permitted to issue shares at less than their par value, the par
value of 40p significantly restricts the options open to the Company in raising
capital. The reduction in par value will have no effect on the value of your
interest in the Company.
We have enclosed a revised Notice of Extraordinary General Meeting of
Shareholders, a description of the revised terms of the Acquisitions, and
financial and reserve information reflecting the new terms of the Acquisitions.
For your convenience, we have also enclosed a copy of the original Proxy
Statement and a form of proxy card. This supplement to the Proxy Statement also
includes revised financial statements for the year ended
1
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April 30, 1998, which supersede those included in the Proxy Statement. The
revised financial statements include an updated description of the Company's
financial condition on pages F-9 and F-10 and an independent auditors' report
that includes references to the uncertainty regarding the application of the
going concern concept. You are urged to read all of these materials carefully.
THE MEETING; VOTES REQUIRED
The Extraordinary General Meeting will be held on October 30, 1998, at
10:00 a.m., United Kingdom time, at the Company's offices, Kingsbury House, 15-
17 King Street, London SW1Y 6QU. At the Extraordinary General Meeting,
shareholders of the Company will be asked to consider and vote upon a proposal
to approve the Acquisitions and related matters. Completion of the Acquisitions
is conditioned upon, among other things, the Company's shareholders approving
the Acquisitions and the other matters to be considered at the Extraordinary
General Meeting. All shareholders of record at the time of the Extraordinary
General Meeting are entitled to vote at the meeting.
REVISED TERMS OF THE DIFCO ACQUISITION
Under the revised Difco Acquisition Agreement, Alliance will acquire all of
the capital stock of Difco and, indirectly a contract to acquire the U.K.
Interests, in exchange for 10,000,000 newly created Acquisition Shares and a
contingent right to receive additional Shares, subject to the sales production
actually achieved from the U.K. Interests, as set out in the table below. Each
Acquisition Share will be entitled to one-half vote on all matters in which the
Shares are entitled to vote and otherwise will have rights identical to the
Shares, except for certain restrictions on transfer. In addition to the
Acquisition Shares, the holders of Difco capital stock will receive a contingent
right to acquire up to 10,000,000 Shares over the next five years. The number
of Shares that are actually issued as a result of this contingent right will
depend on the sales production actually achieved from, or the estimated value
attributable to, the U.K. Interests, as described herein and as set out in the
table below. The Difco shareholders will receive only 5,000,000 Shares if none
of the production targets is achieved, will receive 20,000,000 Shares if all the
production targets or reserve values are achieved and will receive a number of
Shares within this range if only some of the production targets or reserve
valuations are achieved.
If any Sustained Production Level (as hereinafter defined) is achieved, the
Difco holders will be entitled to exchange that number of Acquisition Shares, on
a one-for-one basis, equal to the number of Shares set forth below corresponding
to such Sustained Production Level. Once all Acquisition Shares have been
converted, then the Difco shareholders shall receive a number of additional
Shares which, when aggregated with any Shares issuable on conversion of the
Acquisition Shares, equals the number of Shares set forth below corresponding to
such Sustained Production Level. "Sustained Production Level" means sales of
production attributable to the U.K. Interests for a period of at least 90
consecutive days at rates equal to or in excess of the levels described in the
table set out below.
If the first three Sustained Production Levels set out below are achieved,
but the fourth or fifth Sustained Production Levels set out below are not
achieved, and the Reserves Value (as hereinafter defined) is equal to or in
excess of that set out below with respect to such Sustained Production Level
which has not been achieved, then additional Shares shall be issued to the Difco
holders so that the total number of additional Shares issued to the Difco
holders is equal to the amount which would have been issued had the Sustained
Production Level been achieved which corresponds to such Reserves Value.
"Reserves Value" means the net present value of the following reserves, bearing
interest or discounted at the rate of 10%, as applicable, net of U.K. corporate
tax, and determined in accordance with generally accepted reservoir engineering
standards: (i) the proceeds previously received which are attributable to the
total volume of reserves produced and sold from the U.K. Interests from and
after January 1, 1998, less the aggregate amount of all capital expenditures and
operating costs incurred since January 1, 1998 which are attributable to the
U.K. Interests and (ii) the proceeds estimated to be received attributable to
the total volume of hydrocarbon reserves that geological and engineering data
demonstrate, with a greater than 50% certainty, as determined by statistical
means, to be recoverable from the U.K. Interests in the future from known
reservoirs under existing operating conditions based upon the most recent
reserve report prepared by Alliance's third-party engineering firm, which report
shall be prepared no less often than annually, less the aggregate amount of all
capital expenditures and operating costs attributable to such reserves.
2
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<TABLE>
<CAPTION>
Base Number of
Sustained Production Alliance Shares to be Reserves Estimated Issuance
Level Issued Value (1) Date (2)
- --------------------- --------------------- --------- ------------------
<S> <C> <C> <C>
8 MMcf/day 8,000,000 N/A First Quarter, 2000
12 MMcf/day 3,000,000 N/A First Quarter, 2001
16 MMcf/day 3,000,000 N/A Second Quarter, 2001
20 MMcf/day 3,000,000 $34.15 million Third Quarter, 2001
24 MMcf/day 3,000,000 $37.5 million Not Applicable
</TABLE>
- ---------------
(1) These Reserves Values are not comparable to the Pre-tax PV10 value or the
Standardized Measure of the reserves attributable to the Company's
properties or to the U.K. Interests described in the Proxy Statement and
this supplement because the calculation of "Reserves Value" is to be made
in the manner described in the paragraph preceding this table, which is
different than the manner in which the Pre-tax PV10 value and the
Standardized Measure are calculated.
(2) The Estimated Issuance Dates are based upon the reserve report prepared by
the Company's independent petroleum engineers. There can be no assurances,
however, as to the Sustained Production Levels or Reserves Values that will
ultimately be attributable to the U.K. Interests. See "Risk Factors--
Uncertainty of Reserve Information and Future Net Revenue Estimates" and
"Cautionary Statement Regarding Forward-looking Statements" in the Proxy
Statement.
If, after five years after the completion of the Difco Acquisition, none of
the Sustained Production Levels set out above has been achieved, the Acquisition
Shares will automatically convert on that date into 5,000,000 Shares and
5,000,000 deferred shares having nominal value and no voting rights. If by that
date more than 5,000,000 but less than all of the Acquisition Shares have
converted into Shares, then any remaining Acquisition Shares shall automatically
convert into deferred shares. The Company shall be entitled to purchase all
such deferred shares for an aggregate consideration of 1p.
The revised Difco Acquisition Agreement sets forth the principal terms by
which the Difco Acquisition will be consummated. The revised Difco Acquisition
Agreement contains representations, warranties and agreements of the parties,
and provides specific conditions to the completion of the Difco Acquisition and
terms under which the Difco Acquisition Agreement may be terminated or
abandoned. See "-- Other Provisions of the Difco Acquisition Agreement" in the
Proxy Statement.
REVISED TERMS OF THE INTERESTS ACQUISITION AGREEMENT
Difco and Burlington have revised the Interests Acquisition Agreement to
provide that Difco will acquire the U.K. Interests for cash consideration of
approximately $16.5 million, plus a pro rata share of expenditures incurred by
Burlington and interest from January 1, 1998, which are anticipated to be
approximately $0.5 million. Burlington and Difco will also enter into a Joint
Operating Agreement in conjunction with Difco's acquisition of the U.K.
Interests. See "Information With Respect to Difco and the U.K. Properties--Joint
Operating Agreement with Burlington" in the Proxy Statement.
The Interests Acquisition Agreement sets forth the principal terms by which
the U.K. Interests Acquisition will be consummated. The Interests Acquisition
Agreement contains representations, warranties and agreements of the parties,
and provides specific conditions to the completion of the U.K. Interests
Acquisition and terms under which the Interests Acquisition Agreement may be
terminated or abandoned.
3
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PROPOSED TERMS OF DEBT FINANCING
In connection with the Acquisitions, the Company intends to enter into
agreements providing up to $65,750,000 in debt to the Company. The Company has
received a proposals to provide portions of this debt financing from two
lenders.
Bank of America Debt. Bank of America National Trust & Savings Association
("BoA"), Alliance's principal lender, has proposed to increase the Company's
current revolving credit facility from $22,500,000 to $30,000,000 at an interest
rate, determined by the Company from time to time, of either (i) 0.5% above the
greater of BoA's reference rate and the federal funds effective rate plus 0.25%,
or (ii) 2.5% above the current Interbank rate. Interest on the credit line
would be payable quarterly and principal is due in equal quarterly payments
beginning three years after the Acquisitions and ending five years after the
Acquisitions. The Company's initial borrowing base under the credit line would
be $18,000,000 and would be redetermined semiannually.
At July 31, 1998, all of the $22,500,000 available under the current
revolving credit facility is outstanding. Of this amount, $6,000,000 will be
converted to subordinated debt, in addition to the revolving credit facility.
The interest rate on the subordinated debt would be 12% per year, payable
quarterly. Principal will be due in equal quarterly installments beginning two
years after closing and ending six years after closing.
In addition, BoA has proposed to provide an additional $20,000,000 of debt
at an interest rate of 10%. Interest on the additional debt would be payable
quarterly and principal is due $5,000,000 in two years, equal quarterly
installments of $2,000,000 for five quarters thereafter, and a final $5,000,000
payment due 42 months after the Acquisitions. The debt to BoA would be secured
by a first priority mortgage on substantially all of the Company's properties,
including the U.K. Interests.
The Company will pay BoA a cash fee of $850,000 and grant BoA warrants to
purchase 3,275,000 ordinary shares at a price of 1p per share. In addition, BoA
would receive an overriding royalty interest in the U.K. Interests of 0.3%
beginning January 1, 2001. The overriding royalty interest will entitle BoA to
receive a payment equal to the specified percentage of the net revenues
generated by the U.K. Properties. The overriding royalty interest would have
the effect of reducing the Company's revenues from the U.K. Interests. In
connection with obtaining the debt financing from BoA, the proposed terms
require the Company to enter into commodity price risk management contracts on
terms that are mutually agreeable to BoA and the Company for a period not less
than two years with respect to at least 50% of the Company's estimated proved
producing reserves at the date of closing. BoA also will require the Company to
enter into interest rate risk management contracts providing for a maximum
interest rate of 9.0% on the notional amount projected to be outstanding on the
revolving credit facility.
EnCap Debt. The Company will issue to affiliates of EnCap Investments,
L.C. ("EnCap") debt of $9,750,000, at an interest rate of 10% per year, and
15,000,000 Shares for a cash consideration of $10,000,000. Interest on the EnCap
debt will be payable semiannually; principal is payable in full seven years
after completing the Acquisitions. For the first three years, the Company would
have the option of increasing the amount of debt from EnCap in the amount of the
interest payments due, in lieu of paying the interest. The EnCap debt will be
unsecured.
Upon entering into the final debt agreement with EnCap, the Company will
also issue to EnCap 545,454 Shares in consideration of a fee of $292,500. On
the basis of the average closing prices for the ordinary shares of the Company
as quoted on the London Stock Exchange for the five trading days preceding April
29, 1998, the day trading in the ordinary shares on the London Stock Exchange
was suspended at the request of the Company, the 545,454 Shares to be issued to
EnCap have a value of $231,000. In addition, EnCap will have the right to
designate one member of the Company's board of directors.
This description of the proposed debt financing is based on the term sheets
provided to the Company by the lenders at the time of this proxy statement. The
actual terms of the debt will be included in definitive documents, which have
not yet been prepared or negotiated. We cannot assure you that the debt will be
obtained on these terms or at all.
4
<PAGE>
REDUCTION OF PAR VALUE
The existing ordinary shares of the Company have a par value of 40p, which
exceeds the price at which the Shares are being issued to the Difco holders and
EnCap in the Acquisitions and related financings. The Company is not permitted
to issue shares at a price below their par value and, accordingly, to proceed
with issue of the new Shares and to avoid the existence of two separate listed
classes of Shares, the Board has proposed to reduce the par value of the Shares.
This will be achieved by sub-dividing each of the Shares into one new ordinary
share with a par value of 1p and 39 deferred shares with a par value of 1p each.
The resulting ordinary shares will, for all practical purposes, have the same
rights as those currently attaching to the existing ordinary shares of 40p each.
The deferred shares will effectively have no rights, will not be represented by
certificates issued to shareholders and may be redeemed by the Company by the
payment of a total of 1p for all of the deferred shares. Therefore,
certificates representing a specific number of existing ordinary shares will
continue to represent the same number of ordinary shares having the same rights
after the change in par value. There will be no net change in the total
shareholders' equity reflected on the Company's balance sheet as a result of the
reduction of par value. The reduction in par value will not have any material
effect upon shareholders.
RELATED MATTERS
At the Extraordinary General Meeting, in addition to being asked to approve
the Acquisitions, the shareholders will be asked to approve several matters
related to the Acquisitions. The specific proposals and the reasons for their
adoption are described below.
Creation of Acquisition Shares. As the initial consideration for the Difco
Acquisition is to be paid in the form of 10,000,000 Acquisition Shares of 1p
each, shareholders are also being asked to approve the creation of the
Acquisition Shares. These shares will have rights identical to the Company's
outstanding Shares, except that they will have only one-half vote per share and
will be subject to limited rights of transfer, as are more fully described under
"Description of Alliance Capital Stock" in the Proxy Statement.
Authorization of the Issuance of Additional Securities. Unlike in the
U.S., the Board of Directors of a U.K. company has no general authority to issue
shares or other equity securities without first obtaining shareholder approval.
Therefore, it is customary for the shareholders to routinely approve resolutions
permitting the Board of Directors to issue up to a specified amount of
additional securities on such terms as the Board of Directors may determine for
a specified period of time after the authorization. The Board of Directors has
proposed and recommended the adoption of a resolution that would permit the
Board to allot the Acquisition Shares and additional Shares issuable in
accordance with the terms of the revised Difco Acquisition Agreement or upon the
exercise of any warrants or loan notes and otherwise, to issue securities having
a nominal value up to one-third of the aggregate nominal value of all Shares
outstanding or unconditionally allotted and fully paid following completion of
the Acquisitions. This authority would expire at the Annual General Meeting of
the Company to be held in 2003, except with respect to any securities the
Company had agreed to issue before that time. The Company has no present
intention to issue additional securities except as described in the Proxy
Statement and this supplement, but may determine to issue securities in the
future.
Increase of Maximum Borrowing Authority. The Company's Articles of
Association limit the Company's ability to borrow money, as is customary for
U.K. companies. To permit the Company to obtain the financing necessary to
complete the Acquisitions and to have sufficient borrowing authority for
foreseeable future corporate purposes, the Board of Directors has recommended
that the shareholders approve an increase in the Company's borrowing authority
to a multiple of ten (10) times adjusted capital and reserves, which based on
the Pro Forma Condensed Combined Balance Sheet as of July 31, 1998, set out
elsewhere in the supplement, would be approximately $118.0 million.
THE BOARD'S ANALYSIS OF THE REVISED TERMS OF THE ACQUISITIONS
The Board approved the Acquisitions as originally agreed to and the Company
endeavored to complete the Acquisitions on that basis. However, to complete the
Acquisitions on the original terms required the Company to obtain debt financing
of $100,000,000. The Company has been unable to obtain such financing.
Therefore, the Company explored whether other alternatives might be available to
permit the Company to realize at least some of the benefits of the Acquisitions.
5
<PAGE>
In September 1998, the Company received Burlington's informal agreement
that the terms of the Acquisitions could be revised to provide for the purchase
of 10% of Burlington's interest in the U.K. Properties for approximately
$17,000,000, rather than 20% of Burlington's interest for approximately
$34,000,000. At the same time the Difco shareholders agreed that if the Company
acquired only 10% of Burlington's interest, they would reduce the number of
Shares they would be entitled to receive to minimum of 5,000,000 and a maximum
of 20,000,000, rather than a minimum of 7,020,825 and a maximum of 28,083,300.
The Company also received expressions of interest from two lenders to jointly
provide the Company a total of $65,750,000 in debt. In connection with
providing the debt financing, the lenders would receive Shares, warrants, a cash
fee and an overriding royalty interest in the U.K. Interests.
The Board has reviewed the revised terms of the Acquisitions and the
related debt financings and believes they are in the best interests of the
shareholders. In addition to the analysis described on page 18 of the Proxy
Statement under the heading "Reasons for the Acquisitions; Recommendation of the
Board of Directors," in determining the number of Shares the Difco shareholders
will be entitled to receive and the number of Shares to be issued to the
lenders, the Board considered that the Pre-tax PV10 value of the Company's 10%
interest in the U.K. Properties ($40.0 million), after subtracting the debt
incurred to purchase the properties ($17.0 million), the Pre-tax PV10 value of
the overriding royalty interest granted to the lender ($2,600,000), and the fees
payable by the Company in connection with the Acquisitions ($4,300,000) equaled
approximately $16.1 million, while the Pre-tax PV10 value of the Company's
existing U.S. properties prepared by Lee Keeling ($59.8 million) after
subtracting the Company's net liabilities at January 1, 1998 ($27.6 million)
equaled approximately $32.2 million. The Board also considered the decline in
oil prices since January 1, 1998 ($17.43) to September 22, 1998 ($15.67),
compared to the increase in gas prices from January 1, 1998 ($2.15) to September
22, 1998 ($2.19) and that the Company's existing properties contain primarily
oil whereas the U.K. Interests contain primarily gas. Based on the information
it reviewed, the Board determined that it was appropriate to issue securities of
the Company that would entitle the Difco shareholders, the lenders and the
Company's financial advisor to as much as 55.8% of the Shares outstanding after
completion of the Acquisitions and related debt financings.
RECOMMENDATION
The directors consider that the Difco Acquisition and the Interests
Acquisition are in the best interests of Alliance and its shareholders as a
whole and are fair to the shareholders of the Company. Your directors,
therefore, unanimously recommend all shareholders to vote in favor of all the
resolutions, as they intend to do in respect of their own beneficial holdings,
which together amount to approximately 1.3 percent of the present issued share
capital of the Company.
SUMMARY OIL AND GAS RESERVE INFORMATION
The estimates of net proved oil and gas reserves as of January 1, 1998 and
April 30, 1998, with respect to the Company's existing properties have been
prepared by Lee Keeling & Associates, Inc. ("Lee Keeling"), independent
petroleum engineers. The estimates of net proved oil and gas reserves as of
January 1, 1998, with respect to the U.K. Interests have been prepared by the
Company. Additional information about oil and gas reserves is discussed in
"Information With Respect to Alliance," "Information With Respect to Difco and
the U.K. Properties," in the Proxy Statement and Note 20 to the Consolidated
Financial Statements of the Company, in this supplement.
<TABLE>
<CAPTION>
PRO FORMA AS
AS OF JANUARY 1, OF JANUARY 1, AS OF
1998 1998 (1) (2) APRIL 30, 1998
---- ------------- ---------------
<S> <C> <C> <C>
Estimated Proved Reserves (1):
Oil (MBbls) 7,219 7,219 6,494
Gas (MMcf) 26,576 100,856 26,322
MMcfe (6 Mcf/Bbl) 68,890 144,164 65,286
Percent proved developed reserves 71% 34% 78%
Pre-tax PV10 value (in thousands) $59,787 99,747 $48,600
Standardized Measure (in thousands) $52,277 82,344 $45,106
</TABLE>
______________
6
<PAGE>
(1) NYMEX benchmark prices used in determining the proved reserves and future
net cash flow estimates at January 1, 1998 and April 30, 1998 were $18.32
and $15.39, respectively, per Bbl for oil and $2.41 and $2.22,
respectively, per MMBtu for gas for the U.S. properties and 16.05p per
therm (approximately $2.65 per MMBtu) for the U.K. Interests.
(2) Gives effect to the Acquisitions as if they had occurred as of January 1,
1998.
EFFECT OF ISSUANCE OF SHARES AND WARRANTS TO DIFCO SHAREHOLDERS AND LENDERS
The following table sets forth the possible ranges of share ownership,
after the completion of the Difco Acquisition, by the shareholders of Difco, the
Company's lenders and the Company's financial advisor as a result of Shares
issued in connection with the Acquisitions and related financings. In total, the
Difco shareholders, the lenders and the financial advisor will be entitled to
receive as much as 55.8% of the Shares as a result of the Acquisitions and
related debt financings.
<TABLE>
<CAPTION>
MINIMUM MAXIMUM
------- --------
PERCENTAGE PERCENTAGE
HOLDER SHARES OWNERSHIP SHARES OWNERSHIP
------ ------ --------- ------ ---------
<S> <C> <C> <C> <C>
F. Fox Benton, Jr. and Lizinka M. Benton... 2,600,000 4.5% (1) 10,400,000 14.7% (2)
F. Fox Benton III.......................... 800,000 1.4% (1) 3,200,000 4.5% (2)
Lizinka C. Benton.......................... 800,000 1.4% (1) 3,200,000 4.5% (2)
Lucia T. Benton............................ 800,000 1.4% (1) 3,200,000 4.5% (2)
Difco Holders Total................... 5,000,000 8.7% (1) 20,000,000 28.3% (2)
---------- ---- ---------- ----
EnCap Investments Ltd. 15,545,454 20.8% (3) 15,545,454 27.9% (4)
---------- ---- ---------- ----
Bank of America NT & SA (5) 3,275,000 4.5% (3) 3,275,000 5.9% (4)
---------- ---- ---------- ----
N M Rothschild & Sons Limited 615,385 0.8% (3) 615,385 1.1% (4)
---------- ---- ---------- ----
The above holders together 24,435,839 42.6% (1) 39,435,839 55.8% (2)
---------- ---- ---------- ----
</TABLE>
- ---------------
(1) Assumes issuance of the minimum number of shares to the Difco holders,
exercise of all of the warrants issued to BoA in these transactions and the
issuance of the maximum number of Shares to the other holders of the
Company's warrants and convertible loan notes. Differences in totals are
due to rounding.
(2) Assumes issuance of the maximum number of shares to the Difco holders,
exercise of all of the warrants issued to BoA in these transactions and the
issuance of no Shares to the holders of the Company's other warrants or
convertible loan notes. Differences in totals are due to rounding.
(3) Assumes issuance of the maximum number of shares to the Difco holders,
exercise of all of the warrants issued to BoA in these transactions and the
issuance of the maximum number of Shares to the other holders of the
Company's warrants and convertible loan notes. Differences in totals are
due to rounding.
(4) Assumes issuance of the minimum number of shares to the Difco holders,
exercise of all of the warrants issued to BoA in these transactions and the
issuance of no Shares to the other holders of the Company's warrants or
convertible loan notes. Differences in totals are due to rounding.
(5) In addition, as a result of previous transactions with the Company, BoA
holds warrants to purchase 1,210,938 Shares at an exercise price of
(Pounds)1.0 per share and convertible loan notes exercisable for 1,193,581
Shares at an exercise price of 81p per share.
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial information
and accompanying notes, which are an integral part of the financial information,
should be read in conjunction with the historical financial statements of
Alliance included in the Proxy Statement and elsewhere in this supplement. It
is prepared in
7
<PAGE>
accordance with accounting principles generally accepted in the
U.S. The unaudited pro forma condensed combined financial information is
provided for illustrative purposes only and does not purport to represent what
the financial position or results of operations of Alliance would have been if
the Acquisitions and the financing, the effects of which it illustrates, had in
fact occurred on the dates indicated or to project the financial position or
results of operations for any future date or period.
Pro Forma Condensed Combined Balance Sheet
The unaudited pro forma condensed combined balance sheet for Alliance set
forth below has been prepared to illustrate the estimated effect of the
Acquisitions. It is based upon the assumptions set forth below and in the notes
thereto. The unaudited pro forma condensed combined balance sheet as of July
31, 1998 gives effect to the purchase of the U.K. Interests as if this was
consummated on that date. The proposed financing for the purchase of the U.K.
Interests and their further development costs is also reflected as if completed
at that date.
Pro Forma Condensed Combined Statements of Operations
The pro forma condensed combined statements of operations have been
prepared to illustrate the effect of the Acquisitions and the financing
mentioned above.
The pro forma condensed combined statements of operations for the year
ended April 30, 1998 and the three months ended July 31, 1998 reflect the
Acquisitions and the financing as though completed May 1, 1997.
As Difco has had no operations and the U.K. Properties have had no
production or income to date, the primary effect of the Acquisitions will be to
increase the assets, debt, interest expense and outstanding Shares of Alliance,
but not to increase revenues or income.
8
<PAGE>
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JULY 31, 1998
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
ALLIANCE PRO FORMA PRO FORMA
(HISTORICAL) ADJUSTMENTS COMBINED
------------ ------------ ----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash........................................................... $ 262 $ 10,000 (b) $ -
10,229 (d)
(17,000) (c)
(2,641) (a)
(850) (d)
Receivables:
Trade.......................................................... 1,785 - 1,785
Other current assets............................................. 12 - 12
-------- -------- --------
Total current assets............................................. 2,059 (262) 1,797
-------- -------- --------
Net property, plant and equipment................................ 28,967 7,208 (a) 55,362
4,287 (a)
17,000 (c)
(2,100) (d)
Other assets:
Deposits and other assets due after one year................... 145 - 145
Deferred acquisition costs..................................... 3,063 (3,063) (a) -
Deferred loan costs, less accumulated.......................... (e)
amortization................................................. 966 (966) (b) 3,242
292 (d)
850 (d)
2,100
-------- -------- --------
Total assets..................................................... $ 35,200 $ 25,346 $ 60,546
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable......................................... $ 8,926 $ (1,747) (a) $ 7,179
Accrued expenses payable....................................... 934 - 934
Current portion of long term debt.............................. 5,250 (5,250) (d) -
-------- -------- --------
Total current liabilities........................................ 13,110 (4,997) 8,113
Other liabilities................................................ 3 - 3
Long-term debt, excluding current installments................... 17,317 5,250 (d) 35,101
10,229 (d)
9,750 (b)
(1,335) (d)
(6,110) (b)
Convertible subordinated unsecured loan notes.................... 1,551 - 1,551
-------- -------- --------
Total liabilities................................................ $ 33,981 $ 18,232 44,768
-------- -------- --------
Stockholders' equity
Ordinary shares, par value (Pounds)0.01; 415,001,376 shares
authorized; 31,209,408 issued and outstanding;
Deferred Shares, par value (Pounds)0.01; 1,414,998,624
shares authorized; 1,217,166,912 issued and
outstanding and Acquisition Shares, par value (Pounds)0.01;
10,000,000 shares authorized; 10,000,000 issued and
outstanding at July 31, 1998................................... $ 20,115 278 (a) 20,657
10 (a)
254 (b)
Additional paid in capital....................................... 5,911 6,930 (a) 20,894
320 (a)
6,398 (b)
Warrants......................................................... 1,335 (d)
Accumulated deficit.............................................. (24,807) (966) (e) (25,773)
-------- -------- --------
Total stockholders' equity....................................... 1219 14,559 15,778
-------- -------- --------
Total liabilities and stockholders' equity....................... $ 35,200 $ 25,346 $ 60,546
======== ======== ========
</TABLE>
9
<PAGE>
Notes to the Condensed Pro Forma Balance Sheet
The unaudited condensed pro forma balance sheet includes adjustments to
reflect:
(a) The acquisition of Difco by the issuance of 10,000,000 Acquisition
Shares (convertible into between 5,000,000 and 10,000,000 Shares) and
the commitment to issue up to a further 10,000,000 Shares depending
upon performance of the U.K. Interests. The value of $7.2 million
attributed to the acquisition of the U.K. Interests is based upon the
number of Shares expected to be issued pursuant to the Difco
Acquisition Agreement estimated by the Board of Directors to be
17,000,000, with an aggregate par value of $0.278 million, and the
average of Alliance's share price over the five days immediately prior
to their suspension of trading on the London Stock Exchange of
approximately $0.424 ((Pounds) 0.254) per Share. The estimated
professional fees payable in connection with the Acquisitions,
consisting of cash of $3.957 million (of which $1.316 million had been
paid at July 31, 1998, leaving $2.641 million to be paid) and $0.330
million settled by the issue of 615,385 Shares with an aggregate par
value of $0.010 million, have been added to give a total carrying
amount.
(b) The issuance to EnCap of 15,000,000 Shares with an aggregate par value
of $0.245 million and loan notes of $9.750 million for a total cash
consideration of $10 million and of 545,454 Shares with an aggregate
par value of $0.009 million to settle a fee for the issue of the loan
notes of $292,000. The difference between the fair value and the cash
consideration for the Shares ($6.110 million) has been treated as a
discount on the issuance of debt and has been credited to additional
paid in capital.
(c) The acquisition of the U.K. Interests by the payment of $17.0 million
of cash to Burlington Resources from the net cash proceeds. The
purchase price comprises a fixed amount of $16.5 million together with
Alliance's pro rata share of expenditures incurred by Burlington and
interest since January 1, 1998.
(d) The revised Bank of America credit agreement. All debt due to Bank of
America has been reclassified as long-term debt, a further $10.229
million is shown as being drawn to meet the acquisition cost in (c)
above. Fees payable in connection with the revised facility are a cash
fee of $0.850 million and the issuance to Bank of America of warrants
to subscribe for 3,275,000 Shares for cash consideration of 1p each.
The fair value of the warrants ($1.335 million) has been treated as
discount on the issuance of the debt. In addition, the value of the
overriding royalty interest granted to Bank of America ($2.100
million) has been treated as deferred loan costs and has been deducted
from net property, plant and equipment.
(e) The write-off of $0.966 million being the unamortized costs relating
to the repaid BoA debt.
10
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED APRIL 30, 1998
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ALLIANCE ADJUSTMENTS COMBINED
------------ ----------- ------------
(HISTORICAL)
<S> <C> <C> <C>
Revenues:
Oil and gas revenues and other operating
revenues......................................... $10,210 $ - $ 10,210
Direct operating expenses........................ (5,506) (5,506)
General and administrative expenses.................... (3,364) (3,364)
Depreciation, depletion and amortization............... (2,598) (2,598)
Loss on commodity derivatives.......................... (1,128) (1,128)
------- -----------
Loss from operations................................... (2,386) (2,386)
Other income (expenses):
Gain on sale of assets........................... 35 35
Interest (net)................................... (2,511) - (a) (2,511)
Cost of redemption of loan....................... - (1,222) (b) (1,222)
Miscellaneous income............................. 133 133
------- -----------
Net loss............................................... $(4,729) $ (1,222) $ (5,951)
======= ============ ===========
Basic loss per share (c)............................... $ (0.09)
===========
Weighted average number of shares outstanding (c)...... 64,286,528
</TABLE>
11
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JULY 31, 1998
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ALLIANCE ADJUSTMENTS
------------ -----------
(HISTORICAL)
<S> <C> <C> <C> <C>
Revenues:
Oil and gas revenues and other operating
revenues.......................................... $1,918 $ - $ 1,918
Direct operating expenses......................... (970) (970)
General and administrative expenses.................... (848) (848)
Depreciation, depletion and amortization............... (509) (509)
Loss on commodity derivatives.......................... - -
------ -----------
Loss from operations................................... (409) (409)
Other income (expenses):
Gain on sale of assets............................ (9) (9)
Interest (net).................................... (663) - (a) (663)
Cost of redemption of loan........................ - (966) (b) (966)
Miscellaneous income.............................. 132 132
------ -----------
Net loss............................................... $ (949) $ (966) $ (1,915)
====== ============ ===========
Basic loss per share (c)............................... $ (0.03)
===========
Weighted average number of shares outstanding (c)...... 64,370,247
</TABLE>
12
<PAGE>
Notes to the Pro Forma Condensed Combined Statements of Operations
The unaudited pro forma condensed combined statements of operations include
adjustments to reflect:
(a) The impact on net interest expense of the Acquisitions and financing
for the purchase of the U.K. Interests as if these had taken place on
May 1,1997. Net interest comprises the interest payable and the
amortization of the issue costs less amounts capitalized. Interest
payable on the debt drawn down for the acquisition of the U.K.
Interests has been capitalized to the cost of the assets. Such
interest capitalized amounted to $3.920 million for the year ended
April 30, 1998 and $0.980 million for the three months ended July 31,
1998. This amount will be amortized from the beginning of production
from the U.K. Interests.
(b) The write-off of the unamortized costs related to the repaid BoA debt.
(c) The number of shares issued pursuant to the acquisition of the U.K.
Interests is based upon the number of Shares expected to be issued
pursuant to the Difco Acquisition Agreement, estimated by the Board of
Directors to be 17,000,000, the 15,545,454 Shares to be issued to
EnCap and the 615,385 Shares to be issued to the financial advisor.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE YEAR ENDED APRIL 30, 1998 AND THREE MONTHS ENDED
JULY 31, 1998
General
The information in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" refers to the Consolidated Financial
Statements of Alliance included in this supplement to the Proxy Statement and
the Company's Quarterly Report on Form 10-Q for the Quarter Ended July 31, 1998,
which are presented in accordance with U.S. GAAP.
Unless otherwise indicated, the financial information contained in this
Proxy Statement has been prepared in accordance with U.S. generally accepted
accounting principles ("U.S. GAAP"). U.S. GAAP differs in certain respects from
generally accepted accounting principles in the U.K. ("U.K. GAAP"). As a result
of the Company's listing on the London Stock Exchange, the Company is required
to file reports with the London Stock Exchange prepared in accordance with U.K.
GAAP.
For financial reporting and accounting purposes, all financial data (and,
consequently, all oil and gas reserve information and all information associated
with financial, oil and gas production or reserve information) prior to the
LaTex Merger have been restated to reflect LaTex as the predecessor company to
Alliance. Therefore, the results for the year ended April 30, 1998 represent the
activities of Alliance and LaTex combined, while the results for all prior
periods represent the activities of LaTex alone. This discussion should be read
in conjunction with the Company's audited Consolidated Financial Statements
included in this Proxy Statement.
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.
Financial Condition. Management had planned to consummate the acquisition
of a 20 per cent interest in certain undeveloped oil and gas properties in the
East Irish Sea and Liverpool Bay areas ("the East Irish Sea Interests") which
would have involved a satisfactory refinancing of the Group's borrowings. On
July 30, 1998 the Board announced that financing for that transaction had not
been raised and that resolutions to approve the acquisition were not put to
shareholders.
Management's plans in the event that the acquisition and refinancing did
not proceed, were to seek other transactions of a similar nature, restructure
the existing credit facility or seek alternative forms of financing and to take
such steps as were necessary to allow the Group to meet its obligations as they
fell due. It was envisioned that such steps might have included the continued
reduction of the Group's overheads, deferral of elements of the recompletion
program and realization of oil and gas properties.
Since July 30, 1998, management has reduced the Group's overheads through
selective redundancies, has held discussions with Bank of America regarding the
existing credit facility but has primarily been evolving alternative financing
to allow the acquisition of part of the East Irish Sea Interests. Such
alternative financing has been formulated and it is anticipated that proposals
will be put to shareholders on or before October 31, 1998. This will also
include a restructuring of the existing credit facility. Management believe that
the satisfactory completion of this transaction will provide the Group with
financing which will allow it to meet its obligations as they fall due.
Management is mindful of the Group's financial condition should this
transaction not be consummated. The existing credit facility with Bank of
America requires monthly repayments of $325,000 to commence on October 31, 1998
with the balance remaining outstanding on March 31, 2000 being repayable in full
on that date. The Group's operating cash flow will not be sufficient to meet its
obligations under the existing credit facility and, given the passage of time
and the concentration of management's efforts on achieving the acquisition
outlined above, it may not be possible to take the necessary steps, which might
include property dispositions, to allow the Group to meet its obligations in a
timely manner.
14
<PAGE>
However, the pursuit by management of an alternative structure to acquire
the East Irish Sea Interests has been undertaken with the full support of Bank
of America, including the deferral of any property disposals pending final
resolution of the acquisition of part of the East Irish Sea Interests. Bank of
America has indicated to management that, in the event that the proposed
transaction is not consummated, it will work with the Group to achieve a
mutually satisfactory refinancing. There is, however, no guarantee that a
successful refinancing will be achieved in a timely manner if at all.
As a result of the Company's current financial condition, the Company has
added a statement to Note 1 of its Consolidated Financial Statements and the
Company's independent auditors have issued a report that includes references to
the uncertainty regarding the application of the going concern concept.
The Directors believe that there is reasonable assurance that the Group
will remain a going concern even if the proposed transaction is not consummated.
Cash Flows and Liquidity. At July 31, 1998, Alliance has current assets of
$2.059 million and current liabilities of $13.110 million, which resulted in a
net current deficit of $11.051 million. Since April 30, 1998, the net current
deficit has increased from $9.480 million to its current position of $11.051
million. The $1.571 million increase is primarily due to a transfer of a
portion of the credit facility from long term debt to current liabilities. The
accounts payable at July 31, 1998 were virtually unchanged at $8.927 million
compared to $8.973 million at April 30, 1998.
For the quarter ended July 31, 1998, net cash used in the Company's
operating activities was $.889 million compared to cash used of $2.673 million
for the quarter ended July 31, 1997. This improvement is substantially due to
the allocation of funds to improve the working capital deficit of the Company in
the quarter ended July 31, 1998.
Investing activities of the Company used $.757 million in net cash flow for
the quarter ended July 31, 1998 compared to $2.357 million generated for the
quarter ended July 31, 1997. The deterioration was principally due to property
sales of $2.424 million less than the 1997 period and the increase in deferred
acquisition costs of $.871 million. Financing activities provided $1.500
million for the quarter ended July 31, 1998 compared to cash provided of $1.948
million for the quarter ended July 31, 1997.
Overall, cash and cash equivalents decreased by $.146 million in the
quarter ended July 31, 1998 compared to an increase of $1.633 million in the
1997 period.
Capital Expenditures.
Existing United States Properties. The timing of most of the Company's
capital expenditures with respect to is existing U.S. properties 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.
U.K. Interests. The Company will be required to make substantial capital
expenditures in connection with the acquisition, development and exploitation of
the U.K. Interests. The purchase of the U.K. Interests pursuant to the Interests
Acquisition Agreement will require the payment of approximately $17.0 million in
cash. In addition, it is currently anticipated by the Company that approximately
$36.5 million (net to the Company's interest in the U.K. Properties) will be
required in the period to the end of the year 2005 in connection with the
development plans for the fields under the assumptions described in "Information
With Respect to Difco and the U.K. Properties--U.K. Properties--The U.K.
Interests" in the Proxy Statement, of which amount approximately $11.0 million
is forecast to be required through December 31, 1999. It is anticipated that
most of the remaining development expenditures incurred after 1999 will be
funded from the cash flow from the U.K. Interests, with initial production
currently
15
<PAGE>
forecast to occur in late 1999. However, the forecast development plans and
expenditures are subject to change and there can be no assurance that the U.K.
Interests will be developed according to the plans described or that a
significantly higher level of expenditures will not be required due to numerous
factors, including regulatory approvals, gas processing and sales arrangements
and rig and equipment availability. As Burlington will be the operator of the
majority of the U.K. Properties, the Company will not be able to compel the
operator to undertake any specific activities, although development and
operation of the U.K. Properties will be governed by the Operating Agreement
that will generally require concurrence of the Company. The development plans
will also be subject to the consent of the U.K. DTI.
It is currently anticipated that the funding of the Acquisitions and of the
development capital expenditures, at least until first production from the U.K.
Interests, will be funded from the BoA credit facility and the EnCap debt
financing and from cash flows from the Company's existing U.S. properties.
Financing Arrangements. Under the current credit facility with BoA,
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.
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 BoA credit facility, the borrowing base is redetermined annually
as of December 31 and June 30 of each year.
Borrowings under the existing credit facility maintained from time to time
as a "Base Rate Loan" bear interest, payable monthly, at a fluctuating rate
equal to the higher of (i) the rate of interest announced from time to time by
the Bank as its "reference rate" plus 1% or (ii) the "Federal Funds Rate" (as
defined in the Credit facility) plus 1 1/4%. Borrowings under the Credit
facility maintained from time to time as a "LIBO Rate Loan" bear interest,
payable on the last day of each applicable interest period (as defined in the
Credit facility), at a fluctuating rate equal to the LIBO Rate (Reserve
Adjusted) (as defined in the Credit facility) plus 2%. As of July 31, 1998, all
advances to Alliance under the Credit facility were maintained as LIBO Rate
Loans that bore interest at the annual rate of 7.5%.
At July 31, 1998, the outstanding balance under the Credit facility was
$22.567 million. The outstanding loan balance has increased $1.500 million
since April 30, 1998 as a result of advances by the Bank to pay Difco
Acquisition-related costs.
Results of Operations
The Company currently 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. The capitalized costs relating to
each pool operated by the Company (together with future development costs
necessary to bring proved reserves into production) are depleted using a unit of
production method based upon the estimated net proved reserve volumes
attributable to each pool. Prior to July 31, 1996, LaTex followed the
"successful efforts" method of accounting for its oil and gas properties. The
consolidated financial statements included elsewhere in this Proxy Statement and
all financial data prior to the LaTex Merger set out in this Proxy Statement has
been restated from the "successful efforts" method to the "full cost" method.
The factors which most significantly affect the Company's results of
operations are (i) the sales prices of crude oil and 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.
16
<PAGE>
The following table reflects certain historical operating data for the
periods presented.
<TABLE>
<CAPTION>
Quarter Ended
July 31,
-------------------
1997 1998
------ ------
<S> <C> <C> <C> <C>
Net Sales Volumes:
Oil (MBbls)................................ 102 66
Gas (MMcf)................................. 454 430
MMcfe (6Mcf/Bbl)........................... 1,066 826
Average Sales Prices
Oil (per Bbl).............................. $16.32 (1) $18.22 (2)
Gas (per Mcf).............................. $ 2.21 (1) $ 1.67 (2)
Operating Expenses per Boe of Net Sales (3):
Lease operating............................ $ 5.66 $ 6.41
Severance tax.............................. 0.87 0.54
Depreciation, depletion, amortization...... 3.62 3.65
General and administrative................. 7.03 6.08
</TABLE>
(1) No commodity price hedging arrangements were in effect during this period.
Therefore, these amounts reflect actual realized prices for the three
months ended July 31, 1997.
(2) After giving effect to the impact of the Company's commodity price hedging
arrangements. Without any hedging arrangements, the average sales prices
for the quarter ended July 31, 1998 would have been $12.35 per Bbl for oil
and $1.67 per Mcf for gas.
Three Months Ended July 31, 1998 compared to the Three Months
-------------------------------------------------------------
Ended July 31, 1997
-------------------
Total revenues from the Company's operations for the quarter ended July 31,
1998 were $1,917,966 compared to $2,727,336 for the quarter ended July 31, 1997.
Revenues decreased significantly over the comparable period a year earlier due
principally to lower oil sales volumes and realized gas prices, property
disposals and the depletion of producing reserves. Sales volumes for the
quarter ended July 31, 1998 were adversely affected by the Company's decision to
curtail oil sales in the South Carlton field in Alabama due to low posted oil
prices and property disposals completed in the last quarter of 1997 contributed
to the reduction in gas volumes.
Net sales volumes decreased 23% from the same period in 1997. According to
the independent reservoir engineering appraisal, net sales volumes should have
declined by approximately 10% due to natural depletion. The remainder of the
volume decrease is attributable to mechanical downtime and voluntary curtailment
due to the pricing environment. Production from the South Carlton field
increased 14% over the comparable period, although sales declined 62% due to the
low posted oil price environment. Gas production declines are in line with the
reservoir engineering forecasts. However, due to the successful efforts in the
Bacon and Balls Branch fields, gas sales actually increased while production
remained constant.
Total operating expenses decreased to $2,327,132 for the quarter ended July
31, 1998 compared to $3,360,553 for the same period in 1997. This decrease was
primarily due to remedial workover costs and expenses associated with sold non-
operated, non-strategic wells incurred in the 1997 period. Lease operating
expenses were significantly lower at $969,355 for the three month period ending
July 31, 1998 compared to $1,173,644 for the same period in 1997. The quarter
ended July 31, 1997 was impacted by the remedial work program mentioned above
and the sold non-operated, non-strategic wells. Depreciation, depletion and
amortization decreased to $509,355 from $652,489 a year earlier primarily as a
result of lower volumes. General and administrative expenses decreased from
$1,265,849 during the quarter ended July 31, 1997 to $848,422 for the quarter
ended July 31, 1998. The decrease is a result of continuing efforts by
management to reduce corporate overhead expenses although the 1997 period was
adversely affected by some costs associated with the LaTex/Alliance merger.
A net operating loss of $409,166 was realized for the quarter ended July
31, 1998 compared to a net operating loss of $633,217 for the same period in
1997
17
<PAGE>
In summary, due to the above factors, the net loss for the common
shareholders for the quarter ended July 31, 1998 decreased to $949,147 ($0.03
per share) compared to a net loss of $951,197 ($0.03 per share) for the same
period in 1997.
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 in recent years. The
following table sets forth the average price received by the Company for each of
the periods indicated and the effects of the various hedging arrangement noted
above.
<TABLE>
<CAPTION>
Oil Oil Gas Gas
(excluding the (including the effects (excluding the (including the effects
effects of hedging of hedging effects of hedging of hedging
Period transactions) transactions) transactions) transactions)
------ ------------------ ---------------------- ------------------- ----------------------
<S> <C> <C> <C> <C>
Three months ended
July 31, 1998.......... $12.35 $18.22 $1.67 $1.67
Three months ended
July 31, 1997.......... $16.32 $16.32 $2.21 $2.21
</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 purchase of put
options by the Company, and the associated cost was funded by additional
drawdowns under the Credit facility.
Currency Exchange Rates
The Company's current operations are entirely in the U.S. Therefore, the
Company is not currently subject to any currency exchange risk. However, upon
completion of the Acquisitions, the Company will have substantial pound sterling
denominated liabilities and, upon the commencement of production from the U.K.
Interests, substantial sales in pound sterling. This will subject the Company to
currency fluctuation risk which may adversely affect the financial condition of
the Company. The Company is currently reviewing alternatives to hedge this risk.
See "Risk Factors--Foreign Currency Exchange Rates" in the Proxy Statement.
At the present time the U.K. has not joined in the first wave of those
European Union states which will participate in Stage III of the European
Monetary Union ("EMU"). The U.K. government has stated that, before making any
decision to join the EMU, it will refer the issue to a referendum of U.K.
voters. Accordingly, the Company, believes that it is premature to commit to a
planning study on the implications of the Euro for the Company's operations
until the likely date for U.K. entry into EMU becomes more certain. On the basis
that the Acquisitions are completed, the future revenues/expenses in respect of
the Acquisitions will be predominantly transacted in pounds sterling until such
time as the U.K. resolves to participate in the Euro. The Company's existing
18
<PAGE>
operations will continue to be transacted predominantly in U.S. dollars.
Nevertheless, the Company does not expect to incur future significant costs on
issues in respect to the U.K.'s potential Euro participation and it is
therefore, not expected that it will have a material impact on the Company's
financial position results of operations or liquidity.
Issues Related to the Year 2000
As the year 2000 approaches, there are uncertainties concerning whether
computer systems will properly recognize date-sensitive information when the
year changes to 2000. Systems that do not properly recognize such information
could generate erroneous data or fail. Because of the nature of the oil and gas
industry and the necessity for the Company to make reserve estimates and other
plans well beyond the year 2000, the Company's computer systems and software
were already configured to accommodate dates beyond the year 2000. The Company
believes that the year 2000 will not pose significant operational problems for
the Company's computer systems. The Company has not, however, completed its
assessment of the computer systems of third parties with which it deals, and it
is not possible at this time to assess the effect of a third party's inability
to adequately address year 2000 issues.
19
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report.................................................F-2
Consolidated Balance Sheet...................................................F-3
Consolidated Statement of Operations.........................................F-5
Statement of Changes in Stockholders' Equity.................................F-6
Consolidated Statement of Cash Flows.........................................F-7
Notes to the Consolidated Financial Statements...............................F-9
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Alliance Resources Plc. and Subsidiaries
We have audited the consolidated balance sheets of Alliance Resources Plc. and
subsidiaries as of July 31, 1996 and April 30, 1997 and 1998 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year ended July 31, 1996, the nine months ended April 30, 1997 and the year
ended April 30, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Alliance Resources Plc. and subsidiaries as of July 31, 1996, April 30, 1997 and
April 30, 1998 and the results of their operations and their cash flows for the
year ended July 31, 1996, the nine months ended April 30, 1997 and the year
ended April 30, 1998 in conformity with generally accepted accounting principles
in the United States.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has suffered recurring losses from operations, has
current liabilities in excess of current assets and is obliged to commence
repayments on its borrowings from October 31, 1998 which raise substantial doubt
about the Company's ability to continue as a going concern. Management plans in
regard to these matters are also described in Note 1. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
KPMG Audit Plc
London, England
June 17, 1998 except for Note 1 - Financial Condition
which is as of September 22, 1998
F-2
<PAGE>
ALLIANCE RESOURCES PLC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, 1997 AND 1998
<TABLE>
<CAPTION>
ASSETS 1997 1998
------ ------------ ------------
<S> <C> <C>
Current assets:
Cash $ 72,948 $ 408,439
Accounts receivable - trade 2,119,406 2,132,654
Other current assets 54,176 73,977
------------ ------------
Total current assets 2,246,530 2,615,070
------------ ------------
Property, plant and equipment, at cost
Oil and gas properties, at cost, full cost method 36,107,310 43,200,388
Other depreciable assets 855,512 1,029,118
------------ ------------
36,962,822 44,229,506
Less accumulated depreciation and depletion (10,254,970) (14,421,400)
------------ ------------
Net property, plant and equipment 26,707,852 29,808,106
------------ ------------
Other assets:
Deposits and other assets 282,920 144,989
Deferred acquisition costs - 970,305
Deferred loan costs, less accumulated
amortization 1,620,185 1,221,650
------------ ------------
$ 30,857,487 34,760,120
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
ALLIANCE RESOURCES PLC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, 1997 AND 1998
(CONTINUED)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1998
------------------------------------ ------------ ------------
<S> <C> <C>
Current liabilities:
Accounts payable - trade $ 11,428,872 $ 8,972,704
Accrued expenses payable 437,736 847,190
Current portion of long-term debt - 2,275,000
------------ ------------
Total current liabilities 11,866,608 12,094,894
Other liabilities 810,783 139,626
Long-term debt, excluding current installments 18,095,497 18,791,762
Convertible subordinated unsecured loan notes - 1,550,700
------------ ------------
Total liabilities 30,772,888 32,576,982
------------ ------------
Stockholders' equity:
Common stock - par value 40 pence;
46,000,000 shares authorized representing:
LaTex Series A convertible preferred
stock
1,180,110 issued and outstanding at
April 30, 1997; aggregate liquidation
preference $4,570,510 766,599 -
LaTex Series B convertible preferred
stock
3,239,708 issued and outstanding at
April 30, 1997; aggregate liquidation
preference $5,245,370 2,104,515 -
Common stock issued and outstanding;
17,982,068 and 31,209,408 at April
30, 1997 and 1998, respectively 11,681,150 20,114,634
Additional paid-in capital 5,149,146 5,911,050
Accumulated deficit (19,127,446) (23,842,546)
Treasury stock 953,099 and nil at April 30,
1997 and April 30, 1998, respectively (489,365) -
------------ ------------
Total stockholders' equity 84,599 2,183,138
------------ ------------
Commitments and contingencies
$ 30,857,487 $ 34,760,120
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ALLIANCE RESOURCES PLC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JULY 31, 1996, NINE MONTHS ENDED APRIL 30, 1997
AND YEAR ENDED APRIL 30, 1998
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
JULY 31, 1996 APRIL 30, 1997 APRIL 30, 1998
------------- -------------- --------------
(AS RESTATED)
<S> <C> <C> <C>
Revenues
Oil and gas revenue $ 11,979,982 $ 5,698,490 $ 10,209,881
Crude oil and gas marketing 540,156 146,381 -
------------- -------------- --------------
Total revenues 12,520,138 5,844,871 10,209,881
------------- -------------- --------------
Operating expenses
Lease operating expenses 5,472,130 3,117,341 5,505,826
Cost of crude oil and gas marketing 133,455 15,798 -
Cessation of overseas exploration 3,446,795 - -
General and administrative expenses 2,893,146 3,481,003 3,363,885
Depreciation, depletion, and amortization 3,510,814 1,541,415 2,598,066
Loss on commodity derivatives - - 1,128,000
------------- -------------- --------------
Total operating expenses 15,456,340 8,155,557 12,595,777
------------- -------------- --------------
Loss from operations (2,936,202) (2,310,686) (2,385,896)
------------- -------------- --------------
Other income (expense):
Equity in net losses and write-offs of -
investments in affiliates (4,034,414) (19,823)
Interest expense (2,829,700) (2,102,933) (2,573,646)
Interest income 280,322 52,038 62,226
Miscellaneous income (expense) (1,810,382) ( 7,929) 132,951
Gain on sale of assets - - 35,442
------------- -------------- --------------
Total other income (expense) (8,394,174) (2,078,647) (2,343,027)
------------- -------------- --------------
Net loss (11,330,376) (4,389,333) (4,728,923)
Preferred stock dividends (570,621) (517,613) -
------------- -------------- --------------
Net loss for common shareholders $ (11,900,997) $ (4,906,946) $ (4,728,923)
============= ============== ==============
Basic loss per share for common shareholders $ (.77) $ (.30) $ (.15)
============= ============== ==============
Weighted average number of shares outstanding 15,507,551 16,585,113 31,125,689
============= ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ALLIANCE RESOURCES PLC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED JULY 31, 1996, NINE MONTHS ENDED APRIL 30, 1997
AND YEAR ENDED APRIL 30, 1998
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
PREFERRED ------------ PAID-IN ACCUMULATED TREASURY STOCKHOLDERS'
STOCK SHARES PAR VALUE CAPITAL DEFICIT STOCK EQUITY
----- ------ --------- ------- ------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at July 31, 1995,
as previously reported $ 2,268,733 16,233,381 $10,545,203 $ 4,532,470 $ (946,456) $(399,106) $ 16,000,844
Adjustment for the
cumulative effect of
retroactively applying full
cost method of accounting
for oil and gas
exploration and
development activities - - - - (1,373,047) - (1,373,047)
----------- ---------- ----------- ----------- ------------ --------- ------------
Balances at July 31, 1995,
as restated 2,268,733 16,233,381 10,545,203 4,532,470 (2,319,503) (399,106) 14,627,797
Issued for services - 85,981 55,853 22,272 - - 78,125
Issued for debt of
affiliate - 123,641 80,317 (19,797) - - 60,520
Issued for litigation
settlement 200,607 - - 299,393 - - 500,000
Issued for dividends 211,071 - - 359,550 (570,621) - -
Purchase of treasury stock - - - - - (90,259) (90,259)
Net loss, as restated - - - - (11,330,376) - (11,330,376)
----------- ---------- ----------- ----------- ------------ --------- ------------
Balances at July 31, 1996,
as restated 2,680,411 16,443,003 10,681,373 5,193,888 (14,220,500) (489,365) 3,845,807
Issued for services - 85,986 55,857 44,143 - - 100,000
Issued for employee bonus - 1,453,079 943,920 (415,795) - - 528,125
Issued for dividends 190,703 - - 326,910 (517,613) - -
Net loss - - - - (4,389,333) - (4,389,333)
----------- ---------- ----------- ----------- ------------ --------- ------------
Balances at April 30, 1997 2,871,114 17,982,068 11,681,150 5,149,146 (19,127,446) (489,365) 84,599
Exchange of Preference
Stock (2,871,114) 4,419,818 2,871,114 - - - -
Cancellation of treasury
stock - (953,099) (619,132) 129,767 - 489,365 -
Issued for LaTex
acquisition - 8,103,816 5,105,550 (1,066,211) - - 4,039,339
Acquisition of overriding
royalty - 1,343,750 872,900 1,498,400 - - 2,371,300
Exercise of Warrants - 56,805 37,148 12,852 - - 50,000
Issued for services - 256,250 165,904 187,096 - - 353,000
Foreign exchange - - - - 13,823 - 13,823
Net loss - - - - (4,728,923) - (4,728,923)
----------- ---------- ----------- ----------- ------------ --------- ------------
Balance at April 30, 1998 $ - 31,209,408 $20,114,634 $ 5,911,050 $(23,842,546) $ - $ 2,183,138
=========== ========== =========== =========== ============ ========= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
ALLIANCE RESOURCES PLC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JULY 31, 1996, NINE MONTHS ENDED APRIL 30, 1997
AND JANUARY 31, 1997 AND 1998
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
JULY 31, APRIL 30, APRIL 30,
1996 1997 1998
---- ---- ----
(AS RESTATED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(11,330,376) $(4,389,333) $(4,728,923)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation, depletion and amortization 3,510,814 1,541,415 2,598,066
Amortization of deferred loan costs 193,000 394,000 813,096
Employee bonus - 528,125 -
Litigation settlement 500,000 - -
Write-offs of investments in affiliates 4,034,414 - -
Cessation of overseas exploration 3,446,795 - -
Gain on sale of assets - - (35,442)
Changes in assets and liabilities, net of
effects from acquisition:
Accounts receivable 203,155 1,204,903 487,427
Due from related parties 198,288 392,297 -
Accrued expenses payable 467,942 (169,319) 409,454
Accounts payable 1,686,017 2,239,165 (4,032,763)
Other assets (40,290) 161,530 97,500
Other liabilities 615,000 195,783 (792,554)
------------ ----------- -----------
Net cash provided by (used in) operating 3,484,759 2,098,566 (5,184,139)
activities ------------ ----------- -----------
Cash flows from investing activities:
Proceeds from sale of property and equipment 3,984,491 1,573,625 5,729,300
Purchases of property and equipment (3,899,198) (350,322) (2,407,162)
Increase in accounts and notes receivable-other (2,300,000) - -
Decrease in accounts and notes receivable-other 1,032,500 1,273,320 -
Effect of LaTex acquisition - - 15,181
Deferred acquisition cost - - (221,987)
Advances to unconsolidated affiliates (326,334) - -
------------ ----------- -----------
Net cash provided by (used in) investing activities (1,508,541) 2,496,623 3,084,970
------------ ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
Continued
F-7
<PAGE>
ALLIANCE RESOURCES PLC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JULY 31, 1996, NINE MONTHS ENDED APRIL 30, 1997
AND YEAR ENDED APRIL 30, 1998
(CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS YEAR
YEAR ENDED ENDED ENDED
JULY 31, APRIL 30, APRIL 30,
1996 1997 1998
---- ---- ----
(AS RESTATED)
<S> <C> <C> <C>
Cash flows from financing activities:
Deferred loan and reorganization costs $ (137,186) $ (401,208) $ (385,680)
Proceeds from notes payable 6,233,192 - 2,770,340
Payments on notes payable (8,276,857) (4,140,370) 50,000
Purchase of Treasury stock (90,259) - -
----------- ----------- ----------
Net cash provided by (used in) financing activities (2,271,110) (4,541,578) 2,434,660
----------- ----------- ----------
Net increase (decrease) in cash and cash equivalents (294,892) 53,611 335,491
Cash and cash equivalents beginning of period 314,229 19,337 72,948
----------- ----------- ----------
Cash and cash equivalents end of period $ 19,337 $ 72,948 $ 408,439
=========== =========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 2,403,156 $ 1,623,985 $1,634,360
=========== =========== ==========
Cash paid for income taxes $ 5,275 $ - $ -
=========== =========== ==========
Supplemental disclosure of noncash investing and
financing activities:
Common stock issued for services and bonus $ 78,125 $ 562,500 $ 353,000
Preferred stock issued for litigation settlement 500,000 - -
Common stock issued to pay debt of - -
unconsolidated affiliate 60,520
Issuance of convertible loan notes - - 150,000
Common stock issued on acquisition of LaTex - - 4,039,339
Common stock issued for overriding royalty - - 2,371,300
Convertible loan notes issued for overriding royalty - - 1,400,700
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
ALLIANCE RESOURCES PLC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Alliance Resources Plc. ("Alliance" or "the Company") and its subsidiaries
are engaged in the exploration, development and production of oil and gas
and oil and gas marketing. Oil and gas production operations are currently
conducted principally in Oklahoma, Texas, Louisiana, Mississippi and
Alabama. Until the year ended July 31, 1996, exploration and development
of oil and gas properties was carried on in Tunisia and Kazakhstan, C.I.S.
Alliance is a London-based public limited company organized under the laws
of England and Wales and its shares are listed on the London Stock
Exchange. The Company prepares its statutory financial statements in
accordance with U.K. law and U.K. generally accepted accounting principles.
These financial statements are prepared in accordance with generally
accepted accounting principles in the United States.
On May 1, 1997, Alliance completed its acquisition of LaTex Resources, Inc.
("LaTex"), a US independent oil and gas exploration and production company.
The acquisition resulted in the issue of 21,448,747 ordinary shares to the
shareholders of LaTex compared to the 8,103,816 then outstanding. As a
result, the LaTex shareholders had a controlling interest in the combined
group and so for accounting and financial reporting purposes, LaTex is
treated as having acquired Alliance ("Reverse Acquisition"). Accordingly,
in the consolidated financial statements for the period beginning May 1,
1997, the assets and liabilities of Alliance are recorded at fair values
while the assets and liabilities of LaTex and its subsidiaries are recorded
at their historical costs as shown in LaTex's existing financial
statements. The consolidated financial statements of Alliance for all
financial periods to April 30, 1997, reflect the results of operations and
assets and liabilities of LaTex and its subsidiaries. Adjustments have
been made to reflect, in those periods, the changes in the capital
structure resulting from the acquisition and earnings per share has been
restated on the basis of the number of Alliance shares which, based on the
exchange ratio used in the acquisition, represents the weighted average
number of LaTex common shares outstanding in the relevant period.
In these financial statements the "Group" refers to Alliance and its
subsidiaries for periods ending on or after May 1, 1997 and to LaTex
Resources, Inc. and its subsidiaries for periods ending on or before April
30, 1997.
CHANGE OF FISCAL YEAR END
LaTex's fiscal year end was July 31 whereas that of Alliance was April 30.
As a result, the fiscal year end changed from July 31 to April 30 effective
April 30, 1997.
FINANCIAL CONDITION
Management had planned to consummate the acquisition of a 20 percent
interest in certain undeveloped oil and gas properties in the East Irish
Sea and Liverpool Bay areas ("the East Irish Sea Interests") which would
have involved a satisfactory refinancing of the Group's borrowings. On July
30, 1998 the Board announced that financing for that transaction had not
been raised and that the resolutions to approve the acquisition were not
put to shareholders.
Management's plans in the event that the acquisition and refinancing did
not proceed, were to seek other transactions of a similar nature,
restructure the existing credit facility or seek alternative forms of
financing and to take such other steps as were necessary to allow the Group
to meet its obligations as they fell due. It
F-9
<PAGE>
ALLIANCE RESOURCES PLC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
was envisaged that such steps would have included the continued reduction
of the Group's overheads, deferral of elements of the recompletion
programme and the disposition of oil and gas properties.
Since July 30, 1998, management has reduced the Group's overheads through
selective redundancies, has held discussions with Bank of America regarding
the existing credit facility but has primarily been evolving alternative
financing to allow the acquisition of part of the East Irish Sea Interests.
Such alternative financing has been formulated and it is anticipated that
proposals will be put to shareholders on or before October 31, 1998. This
will also include a restructuring of the existing credit facility.
Management believe that the satisfactory completion of this transaction
will provide the Group with financing which will allow it to meet its
obligations as they fall due.
Management is mindful of the Group's financial condition should this
transaction not be consummated. The existing credit facility with Bank of
America requires monthly repayments of $325,000 to commence on October 31,
1998 with the balance remaining outstanding on March 31, 2000 being
repayable in full on that date. The Group's operating cash flow will not be
sufficient to meet its obligations under the existing credit facility and,
given the passage of time and the concentration of management's efforts on
achieving the acquisition outlined above, it may not be possible to take
the necessary steps, which might include property dispositions, to allow
the Group to meet its obligations in a timely manner.
In the event that the proposed acquisition of part of the East Irish Sea
Interests and related refinancing is not consummated management will seek
to restructure the existing credit facility. There is, however, no
guarantee that a successful refinancing will be achieved in a timely manner
if at all.
REPORTING CURRENCY
The current operations are in the oil and gas industry in the United States
and are conducted through subsidiaries, LaTex Resources, Inc., Alliance
Resources (USA) Inc. and Source Petroleum Inc. Transactions are conducted
primarily in US dollars. As a result, the directors consider that the US
dollar is the functional currency of the Group and the Group's consolidated
financial statements have been prepared in US dollars.
CONSOLIDATION
The consolidated financial statements comprise the financial statements of
the Company and all other companies in which the Group's holding exceeds 50
percent. Transactions and balances between group companies are eliminated
on consolidation.
EARNINGS PER SHARE
Basic loss per share has been computed by dividing the net loss
attributable to common shareholders by the weighted average number of
common shares outstanding during the period.
The effect of potential common shares (warrants, options and convertible
subordinated unsecured loan notes) is anti-dilutive. Accordingly, diluted
loss per share is not presented.
FOREIGN CURRENCY TRANSLATION
The financial statements of companies of the Group whose functional
currency is not US dollars are translated for consolidation purposes at the
rate of exchange ruling at the balance sheet date. Exchange differences
arising on the retranslation of net assets are taken directly to
stockholders' equity.
F-10
<PAGE>
ALLIANCE RESOURCES PLC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
In the underlying financial statements, transactions with third parties are
translated into the functional currency at the exchange rate prevailing at
the date of each transaction. Monetary assets and liabilities denominated
in currencies other than the functional currency are translated into US
dollars at the exchange rate prevailing at the balance sheet date. Any
exchange gain or loss is dealt with through the consolidated statement of
operations.
The Group's share capital is denominated in sterling and for the purposes
of the consolidated financial statements, is translated into US dollars at
the rate of exchange at the time of its issue.
REVENUES
Revenues represents income from production and delivery of oil and gas,
recorded net of royalties in kind. The Group follows the sales method of
accounting for gas imbalances. A liability is recorded only if the Group's
excess takes of gas volumes exceed its estimated recoverable reserves from
the relevant well and no receivable is recorded where the Group has taken
less than its entitlement to gas production.
OIL AND GAS INTERESTS
The Group follows the full cost method of accounting for oil and gas
operations whereby all costs of exploring for and developing oil and gas
reserves are capitalized as tangible fixed assets. Such costs include
lease acquisition costs, geological costs, the costs of drilling both
productive and non-productive wells, production equipment and related
overhead costs. Capitalized costs, plus estimated future development costs
are accumulated in pools on a country-by-country basis and depleted using
the unit-of-production method based upon estimated net proved reserve
volumes. Reserve volumes are combined into equivalent units using
approximate relative energy content.
Costs of acquiring and evaluating unproved properties and major development
projects are excluded from the depletion calculation until it is determined
whether or not proved reserves are attributable to the properties, the
major development projects are completed, or impairment occurs, at which
point such costs are transferred into the pool.
Proceeds from the sale or disposal of properties are deducted from the
relevant cost pool except for sales involving significant reserves where a
gain or loss is recognized.
The Group performs a "ceiling test" calculation in line with industry
practice. Costs permitted to be accumulated in respect of each cost pool
are limited to the future estimated net recoverable amount from estimated
production of proved reserves. Future estimated net recoverable amounts
are determined after discounting and using prices and cost levels at the
balance sheet date.
Provision is made for abandonment costs net of estimated salvage values, on
a unit-of-production basis, where appropriate.
F-11
<PAGE>
ALLIANCE RESOURCES PLC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DEPRECIATION OF OTHER FIXED ASSETS
Other tangible fixed assets are stated at cost less accumulated
depreciation. Depreciation is provided on a straight line basis to write
off the cost of assets, net of estimated residual values, over their
estimated useful lives as follows:
Fixtures and equipment - 3 to 7 years
Buildings - 30 years
DEFERRED TAXATION
Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in the consolidated statement of operations in the period that includes the
enactment date.
JOINT VENTURES
The Group's exploration, development and production activities are
generally conducted in joint ventures with other companies. The
consolidated financial statements reflect the relevant proportions of
turnover, production, capital expenditure and operating costs applicable to
the Group's interests.
The effects of redeterminations of equity interests in joint ventures are
accounted for when the outcome of the redetermination is known.
LEASES
Rentals under operating leases are charged to the consolidated statement of
operations on a straight line basis over the lease term.
DEBT ISSUANCE COSTS
Debt issuance costs are initially capitalized as intangible assets and are
amortized over the term of the debt to which they relate.
DERIVATIVES
Changes in value of financial instruments, utilized to hedge commodity
price and interest rate risk are recognized in the consolidated statement
of operations when the underlying transactions are recognized. Changes in
value of financial instruments which do not meet the criteria to be treated
as a hedge of an underlying risk are recognized in the consolidated
statement of operations as they occur.
The Group's criteria for a derivative instrument to qualify for hedge
accounting treatment are as follows:
-- the timing or duration, quantum and characteristics of the
underlying exposure must have been identified with reasonable
certainty;
F-12
<PAGE>
ALLIANCE RESOURCES PLC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
-- changes in the value of the derivative must correlate to a high
degree with changes in the present value of the exposure under a
wide range of possible circumstances;
-- the derivative has been designated as a hedge or is a synthetic
alteration of a specific asset, liability or anticipated
transaction; and
-- the derivative instrument either: (a) reduces exposure of net
income or cash flow to fluctuations caused by movements in
commodity prices, currency exchange rates or interest rates,
including fixing the cost of anticipated debt issuance; or (b)
alters the profile of the group's interest rate or currency
exposures, or changes the maturity profile of the investment
portfolio, to achieve a resulting overall exposure in line with
policy guidelines.
For any termination of derivatives receiving hedge accounting treatment,
gains and losses are deferred when the relating underlying exposures remain
outstanding and are included in the measurement of the related transaction
or balance. In addition, upon any termination of the underlying exposures,
the derivative is marked-to-market and the resulting gain or loss is
included with the gain or loss on the terminated transaction. The Group
may re-designate the remaining derivative instruments to other underlying
exposures provided the normal criteria are all met.
CASH FLOW STATEMENT
For the purposes of the consolidated statement of cash flows, the Group
treats all investments with an original maturity of three months or less to
be cash equivalents.
STOCK AWARDS
The Group follows the intrinsic value method of accounting for common stock
options and awards to employees.
ACCOUNTING ESTIMATES
In the course of preparing financial statements, management makes various
assumptions and estimates to determine the reported amounts of assets,
liabilities, revenue and expenses and in relation to the disclosure of
commitments and contingencies. Changes in these assumptions and estimates
will occur as a result of the passage of time and the occurrence of future
events and, accordingly, the actual results could differ from the amounts
estimated.
BUSINESS SEGMENTS
The Group adopted Financial Accounting Standard (FAS) 131 "Segment
Disclosures and Related Information" during the year ended April 30, 1998.
Prior to April 30, 1997 the Group sold a portion of its oil and gas
production volumes through its oil and gas marketing subsidiary although
the operations and net assets of that subsidiary were not separately
managed. The Group considers itself to be involved in one business
activity and does not meet the criteria established by FAS 131.
Accordingly, information regarding marketing activities has not been
included for any periods presented.
COMPARATIVE FIGURES
Certain comparative figures have been restated to conform to the current
basis of presentation.
F-13
<PAGE>
ALLIANCE RESOURCES PLC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(2) ACQUISITION OF LATEX
On May 1, 1997, Alliance, completed its acquisition of 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 and warrant holders 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 on May 1, 1997,
received 0.85981 of a New Alliance Share for each share of the LaTex's
common stock, 2.58201 new Alliance shares for each share of the LaTex's
Series A preferred stock then held, 6.17632 New Alliance Shares for each
share of LaTex's Series B preferred stock then held, and a warrant to
purchase 0.85981 of a New Alliance Share for each share of LaTex's Common
Stock subject to warrants.
The purchase price has been arrived at as follows:
Value of 8,103,816 Alliance shares outstanding $4,039,339
Acquisition costs 871,000
----------
$4,910,339
==========
The value of the Alliance shares outstanding has been arrived at by using
the share price of LaTex at the time of announcement of the acquisition
adjusted by the exchange ratio.
Transaction costs incurred by Alliance reduced the fair value of Alliance's
monetary assets and liabilities at the date of the acquisition.
The fair value of the assets and liabilities of the acquired business at
the effective date of acquisition is as follows:
Cash $ 1,460,555
Other current assets 480,045
Other assets 202,253
Oil and gas assets 5,268,929
Other fixed assets 253,386
Debt (85,420)
Other liabilities and provisions (2,669,409)
-----------
$ 4,910,339
===========
In connection with the acquisition, Alliance issued to Bank of America
156,250 Alliance Shares and convertible subordinated unsecured loan notes
of (Pounds)93,519 convertible into 115,456 Alliance Shares to settle fees
of $200,000 and $150,000 payable upon restructuring of LaTex's bank debt.
In addition the Company has conditionally agreed to issue 116,895 Shares to
Rothschild Natural Resources, LLC in settlement of outstanding fees of
$150,000.
F-14
<PAGE>
ALLIANCE RESOURCES PLC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Under the terms of the Alliance Merger Agreement effective May 1, 1997,
LaTex disposed of its interest in its unconsolidated affiliates, Wexford
and Imperial, and its interests in its wholly-owned subsidiaries LaTex
Resources International, Inc. and Phoenix Metals, Inc. (See notes 6 and
14).
Alliance has also issued 1,343,750 Alliance Shares, convertible
subordinated unsecured loan notes of (Pounds)873,281 convertible into
1,078,125 Alliance Shares and 1,210,938 warrants to Bank of America in
exchange for an overriding royalty interest in most of LaTex's properties
held by Bank of America.
The purchase price was allocated to oil and gas properties and has been
arrived at as follows:
Value of 1,343,750 ordinary shares and warrants issued $2,371,300
Value of convertible subordinated unsecured loan note issued 1,400,700
----------
$3,772,000
==========
(3) ACCOUNTING CHANGE
Effective August 1, 1996, the Group changed its method of accounting for
oil and gas exploration and development activities from the "successful
efforts" method to the "full cost" method. The Group believes the full
cost method more properly reflects the economic facts associated with the
discovery and development of oil and gas reserves in the circumstances of
the enlarged Group and allows for better comparability with similar
companies which tend to use this method. Consolidated financial statements
for all prior periods have been restated to apply the new accounting method
retroactively. The effects of the accounting change on the year ended July
31, 1996 and the nine months ended April 30, 1997 are as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
JULY 31, 1996 APRIL 30, 1997
------------- --------------
<S> <C> <C>
Increase (decrease) in:
Oil and gas properties (cost) (at period end) $ 114,967 $ 648,723
========= ==========
Net loss $ 1,099,593 $ (2,373,358)
========= ==========
Basic loss per common share $ .07 $ (0.14)
========= ==========
</TABLE>
The balance of the consolidated accumulated deficit (net of income taxes)
for each period presented has been adjusted for the effect of retroactively
applying the full cost method.
(4) FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivables and
accounts payable approximate the estimated fair value of those financial
instruments due to their short maturities. The estimated fair value of the
interest rate swap agreement, based on current market rates, approximated a
net payable of $468,834 at April 30, 1997 and $445,767 at April 30, 1998.
The estimated fair value of the commodity derivative instruments
approximates net payable of $1,017,816 at April 30, 1997 and a net
receivable of $409,395 at April 30, 1998. The carrying value of long-term
debt approximates to the fair value, as advised by the Group's bankers.
See note 16.
F-15
<PAGE>
ALLIANCE RESOURCES PLC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Fair value is defined as the amount at which the instrument could be
exchanged in a current transaction between willing parties.
(5) INVESTMENTS
The Group acquired 32.3% of Wexford Technology, Incorporated ("Wexford")
through a series of transactions culminating in May 1994. During fiscal
1996, the Group recorded a charge to operations of $2,270,102 to write off
its investment. The Group owned 12% of common stock of Imperial Petroleum,
Inc. ("Imperial") and certain officers, directors and employees of the
Group owned 28.8%. During fiscal 1996, the Group recorded a charge to
operations of $1,764,312 to write off this investment. Such write-offs
also included advances made to the two companies.
Wexford and Imperial are both development stage enterprises that are
seeking capital infusion to complete their facilities and achieve
commercial operations. Neither Wexford nor Imperial have been able to
raise additional debt or equity capital and the Group did not guarantee any
of their liabilities. Further, there can be no assurance, assuming Wexford
and Imperial successfully raise additional funds or enter into a business
alliance, that they will achieve commercial operation or positive cash
flow. As a result, as noted, above the Group wrote off its investments in
these affiliates.
In connection with the acquisition of LaTex, the Group entered into an
agreement to dispose of its interests in Wexford and Imperial. (See notes
2 and 14)
(6) INCOME TAXES
Income taxes different from the amounts computed by applying the U.S.
federal tax rate of 34% as a result of the following (in thousands):
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
JULY 31, APRIL 30, APRIL 30,
1996 1997 1998
---- ---- ----
(As restated)
Computed expected tax benefit $(3,852) $(1,492) $(1,608)
Increase in valuation allowance for 4,218 1,301 6,792
deferred tax, assets
Net Operating losses acquired - - (5,513)
Other (366) 191 329
------- ------- -------
Actual income tax expense (benefit) $ - $ - $ -
======= ======= =======
F-16
<PAGE>
ALLIANCE RESOURCES PLC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The tax effects of temporary differences that give rise to
significantportions of the deferred tax assets and liabilities are
presented below in thousands:
1997 1998
-------- ---------
Total deferred tax liabilities -
Property, plant and equipment $ 498 $ 1,754
------- --------
Deferred tax assets:
Net operating and other loss carryovers 7,266 15,473
Investment write-downs 917 917
Percentage depletion carryforward 390 390
Accrued expenses not deductible
until paid 378 219
------- --------
Total deferred tax assets 8,951 16,999
Valuation allowance (8,453) (15,245)
------- --------
Net deferred tax assets 498 1,754
------- --------
Net deferred tax asset (liability) $ - $ -
======= ========
In the year ended April 30, 1998, the valuation allowance increased by
$5,513,000 resulting from net operating loses attributable to Alliance at
the date of acquisition by LaTex.
A valuation allowance is required when it is more likely than not that all
or a portion of the deferred tax assets will not be realized. The ultimate
realization of the deferred tax assets is dependent upon future
profitability. Accordingly, a valuation allowance has been established to
reduce the deferred tax assets to a level which, more likely than not, will
be realized.
The Group has net operating loss carryovers to offset future taxable
earnings of approximately $45,510,000. If not previously utilized, the net
operating losses will expire in varying amounts from 2004 to 2013.
(7) LONG-TERM DEBT
Long-term debt at April 30, 1997 and April 30, 1998 was as follows:
1997 1998
---- ----
Borrowing under Credit Agreement $18,095,497 $21,066,762
Less current maturities - (2,275,000)
----------- -----------
$18,095,497 $18,791,762
=========== ===========
Prior to May 1, 1997, the Group's debt agreement contained certain
covenants, including but not limited to maintaining a positive current
ratio of 1.0, excluding the current portion of long-term debt, maintaining
a minimum tangible net worth of $10,000,000, maintaining a minimum cash or
cash equivalents balance of $500,000 and maintaining working capital of at
least $500,000. The Group was not in compliance with certain covenants at
July 31, 1996 and the bank had not waived the requirements and so debt was
classified as a currently liability at that date. The Group was not in
compliance with the current ratio, cash equivalent, minimum tangible net
worth, and working capital covenants at April 30, 1997 and was operating
under a "forbearance" agreement which together with the Alliance Credit
Agreement mentioned below allowed the debt to be classified as long term.
The "forbearance" agreement expired on April 30, 1997.
F-17
<PAGE>
ALLIANCE RESOURCES PLC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
A subsidiary of Alliance entered into a Credit Agreement (the "Alliance
Credit Agreement") with the Bank of America effective May 1, 1997, amending
and restating the Group's previous credit agreement. Under the Alliance
Credit Agreement principal payments are suspended until October 31, 1998.
However, cash flows generated by the Group in excess of amounts shown in
the business plan that formed the basis of negotiation with Bank of America
will be used to reduce outstanding principal indebtedness. The maturity
date of the line of credit remains March 31, 2000. Substantially all of
the existing security for the outstanding indebtedness remains in place.
As additional security, the Bank of America received mortgages on
substantially all of Alliance's producing oil and gas properties and
pledges of the stock of Alliance's subsidiaries.
The Alliance Credit Agreement contains certain covenants, which include,
but are not limited to, maintenance of a current ratio of .35 to 1 during
the period commencing on May 1, 1997 and ending on April 30, 1998. The
Group has not timely filed with the Bank of America copies of the required
financial filings covering the nine month period ended April 30, 1997. The
Bank of America has agreed to waive compliance with the covenant for these
outstanding filings.
A portion of the borrowings under the Alliance Credit Agreement bears
interest, payable monthly, at a rate equal to the higher of the Bank of
America Reference Rate plus 1% and the Federal Funds Rate plus 1-1/4%.
Another portion of the borrowings bears interest, payable monthly, at a
rate equal to the London Interbank Offered Rate plus 2%. The rate at April
30, 1998 was 7.875%. The note matures on March 31, 2000. Amounts
outstanding are secured by mortgages which cover the majority of the
Group's oil and gas properties.
The contractual maturities of long term debt as at April 30, 1998 are as
follows:
Year ending April 30, 1999 $ 2,275,000
2000 18,791,762
(8) SAVINGS AND PROFIT SHARING PLAN
The Group maintains an employee savings and profit sharing plan (the Plan)
which covers substantially all of its employees. The Plan is comprised of
a 401(k) saving portion and a noncontributory defined contribution portion.
Employees are qualified to participate after approximately one year of
service. Participating in the 401(k) plan is voluntary, and the Group
matches contributions up to four percent of the employees' salary at a rate
of 33 1/3 percent of the employee's contribution. Employees are allowed to
contribute the maximum amount allowed by Internal Revenue Code each year,
subject to nondiscrimination rules.
The noncontributory defined contribution portion of the Plan allows the
Group to share annual profits with employees. Annual payments to the Plan
are elective. Management elected to make no contributions to the Plan for
the year ended July 31, 1996, the nine months ended April 30, 1997 and the
year ended April 30, 1998. The Group is under no obligation to make
contributions to the Plan in the future.
(9) CAPITAL STOCK
On May 1, 1997, the Company's share capital was consolidated such that
every 40 ordinary shares of 1 pence each were consolidated into 1 ordinary
share of 40 pence. All prior capital stock amounts have been restated to
reflect this reverse stock split. At the same date, the Company issued
21,448,747 ordinary shares of 40 pence each to the holders of the issued
ordinary shares and preference shares of LaTex outstanding at that date.
F-18
<PAGE>
ALLIANCE RESOURCES PLC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
For the periods ended on or before April 30, 1997, in these consolidated
financial statements, the share capital reflects the Alliance shares issued
on May 1, 1997 as though issued at the date of issue of the LaTex shares
for which Alliance shares were exchanged. The Alliance shares issued in
exchange for preference shares in LaTex are treated as preference shares up
to the date of exchange from which time they have been treated as equity
shares.
The Series A Convertible Preferred Stock (i) paid annual dividends at the
rate of $0.07 per share payable quarterly in cash (or, if payment of cash
dividends was prohibited by the senior lender, payable in additional shares
of Series A Convertible Preferred Stock), (ii) had no voting rights except
as otherwise required under Delaware law, (iii) had a liquidation
preference over shares of Common Stock of $3.87 per share plus accrued and
unpaid dividends, (iv) was convertible by the holder into shares of Common
Stock at a conversion price of $1.29 per share, and (v) had piggyback
registration rights in the event of a registered public offering of Common
Stock. The aggregate liquidation preference of Series A Convertible
Preferred Stock at April 30, 1997 was $4,570,510.
The Series B Convertible Preferred Stock (i) paid annual dividends at the
rate of $0.19 per share payable quarterly in cash (or, if payment of cash
dividends was prohibited by the senior lender, payable in additional shares
of Series B Convertible Preferred Stock), (ii) had no voting rights except
as otherwise required under Delaware law, (iii) had a liquidation
preference over shares of Series A Convertible Preferred Stock and Common
Stock of $1.62 per share plus accrued and unpaid dividends, and (iv) was
convertible by the holder into shares of Common Stock at an initial
conversion price of $0.24 per share, subject to adjustment from time to
time to prevent dilution. By separate agreement, the Group granted certain
demand registration rights and piggyback registration rights in the event
of a registered public offering of its Common Stock. The aggregate
liquidation preference of the Series B Convertible Stock at April 30, 1997
was $5,245,370.
During the period under review, LaTex held stock in treasury. The total
common stock in treasury at the date of acquisition by Alliance was 953,099
shares. No Alliance shares were issued in exchange for those treasury
shares and, as LaTex became a wholly-owned subsidiary of Alliance, these
treasury shares have been treated as having been canceled.
During the nine months ended April 30, 1997, 85,981 shares were taken into
treasury in return for the transfer of the Group's interests in two
affiliates and two subsidiaries. As the carrying amounts of the companies
was nil, no consideration has been recorded for these shares.
Preferred Stock activity during the periods indicated follows:
ALLIANCE COMMON STOCK
---------------------
REPRESENTING:
-------------
SERIES A SERIES B
-------- --------
Balance at July 31, 1996 1,161,460 2,964,787
Issued for dividends 18,650 274,921
--------- ---------
Balance at April 30, 1997 1,180,110 3,239,708
========= =========
(10) STOCK OPTIONS
Effective October 21, 1996, each holder of options granted under the
Group's 1993 Incentive Stock Plan agreed to terminate all options held and
receive grants of 1,690,000 Restricted shares of LaTex Common Stock which,
on May 1, 1997, was exchanged for Alliance shares. The Group recognized an
employee
F-19
<PAGE>
ALLIANCE RESOURCES PLC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
bonus of $528,125 related to this transaction based on the market value of
LaTex's stock on the date of grant. No tax gross up rights were granted in
connection with the issue of the Restricted Stock.
Since May 1, 1997, the Group operates two employee share option schemes.
Both schemes have similar terms, the principal terms being:
-- any director or employee may be granted options over Shares;
-- the subscription price will be no less than market price at the date of
grant;
-- options granted to an individual are limited such that the aggregate
market value of shares subject to option taken together with the
aggregate market value of shares which have been acquired under rights
granted under the schemes in the previous ten years does not exceed
four times cash salary;
-- the exercise of options may be subject to performance tests. Ordinary
options (exercisable after three years) may be subject to attainment of
a specified profit level or performance. Long term options (exercisable
after 5 years) may be subject to growth in earnings per share over the
immediately preceding five years matching or exceeding growth in
earnings per share of the companies ranked in the top 25 of the FTSE-
100 share index.
A summary of the status of the share option schemes is as follows:
WEIGHTED AVERAGE
SHARES SERVICE PRICE
As at May 1, 1997 - -
Granted 675,000 24.5 pence
On acquisition of LaTex 237,500 80 pence
-------
As at April 30, 1998 912,500 38.9 pence
=======
No performance tests have been set for any of the above options.
The Group's accounting policy for compensation cost is in line with
Accounting Principles Board Opinion 25. Accordingly, compensation cost has
not been recognized for share option plans except to deal with any
discounts on option exercise prices, compared with market prices at the
measurement date. For the year ended April 30, 1998, had compensation
costs been charged against income based on the fair value at the grant-
dates for awards under the share option plans, consistent with Statement of
Financial Accounting Standards No. 123, the net loss and net loss per share
would not have been materially different. This was determined using the
Black Scholes option pricing model utilizing the following assumptions:
Risk free interest rate 6%
Expected life 10 years
Volatility 14%
No equivalent information is provided in respect of earlier periods in view
of the cancellation of all outstanding awards in the year ended July 31,
1996.
F-20
<PAGE>
ALLIANCE RESOURCES PLC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
At April 30, 1998, the Company also had outstanding 50,000 options to
purchase shares at 300 pence per share which have been issued other than
pursuant to the employee share options schemes.
(11) WARRANTS
On May 1, 1997 the Company issued warrants to subscribe for 1,927,908
common shares of 40 pence each in exchange for the then outstanding
warrants to subscribe for common shares in LaTex. For periods ended on or
before April 30, 1997, the warrants outstanding reflect the Alliance
warrants issued on May 1, 1997, as though issued at the date of issue of
the LaTex warrants for which the Alliance warrants were exchanged.
In addition warrants to subscribe for 1,210,938 Common Shares were issued
to Bank of America as part consideration for the acquisition of the
overriding royalty interest (see note 2).
Warrants to purchase 1,927,908 and 2,916,527 common shares were outstanding
at April 30, 1997 and 1998, respectively. The warrants expire at various
dates ranging from November 1998 to May 2007, at prices ranging from $.87
to $4.94.
(12) CONVERTIBLE SUBORDINATED UNSECURED LOAN NOTES
At April 30, 1998 the Group had outstanding loan notes convertible into
1,193,581 common shares of which loan notes convertible into 1,078,125
common shares were issued in part consideration for the acquisition of the
overriding royalty interest amounting to $1,400,700 (see note 2) and loan
notes convertible into 115,456 common shares were issued to settle
restructuring and arrangement fees of $150,000 in connection with the LaTex
acquisition. The loan notes, which are non interest bearing, are
convertible by the holders (on the payment of a nominal cash consideration)
any time up to ten years following their date of issue. They are
convertible in the following six months on like terms at the option of the
Company. Any loan notes not converted prior to the date ten years and six
months from issue will be repaid on that date at an amount equal to twice
the amount paid up on the notes.
(13) CONTINGENCIES AND COMMITMENTS
On October 7, 1994, Northern Natural Gas Company ("Northern") filed a
lawsuit against the Group alleging that the Group had breached two
transportation service agreements dated December 1, 1990, between Northern
and Panda Resources, Inc. (Panda), a former wholly-owned subsidiary of the
Group. On June 6, 1996, Northern and the Group entered into a settlement
agreement pursuant to which (a) the Group issued to Northern 50,000 shares
of LaTex's Series B Senior Convertible Preferred Stock at fair market value
of $500,000, and (b) the Group agreed to pay Northern $465,000 in
installments of $50,000 by June 21, 1996, $150,000 by May 1, 1997, $125,000
by May 1, 1998, and $140,000 by May 1, 1999. An agreed judgment was
entered in the case, but Northern has agreed not to seek to enforce the
judgment unless the Group defaults in its payment obligations. Once the
required payments have been made, Northern has agreed to execute a release
of the judgment. These amounts have been reflected in the Group's
consolidated financial statements in the year ended July 31, 1996.
On November 17, 1994, Associated Storage Corporation ("Associated") filed a
lawsuit against the Group alleging that the Group had breached a July 21,
1993 agreement between Associated and the Group. On May 15, 1997,
Associated and the Group entered into a settlement agreement pursuant to
which the Group agreed to pay $100,000 in twelve monthly installments.
These amounts have been reflected in the Group's consolidated financial
statements in the nine months ended April 30, 1997.
F-21
<PAGE>
ALLIANCE RESOURCES PLC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
In connection with the sale of Panda, the Group became a party to disputes
between Torch Energy Marketing, Inc. ("Torch"), Nuevo Liquids, Inc.
("Nuevo") and Panda. On December 7, 1995, the Group entered into a
settlement agreement (the "Settlement") to settle all matters related to
the sale and the related litigation. Pursuant to the Settlement, the Group
agreed to pay to Torch and Nuevo (a) $20,000 on December 7, 1995, and an
additional $30,000 over the course of 90 days following execution of the
Settlement, and (b) to pay $50,000 within one year of the Settlement, an
additional $50,000 within two years of the Settlement, and an additional
$150,000 within three years of the Settlement, together with interest in
the amount of $36,000. These amounts have been reflected in the Group's
consolidated financial statements. To secure its obligation under the
Settlement, the Group stipulated in an agreed judgment that it would be
liable in the amount of $1,000,000 (less any amounts paid pursuant to the
Settlement) upon the Group's default of its obligation under the
Settlement. In addition, the Group agreed to assume and indemnify Panda
and Torch against all obligations and amounts owed under a May 2, 1989
agreement between Panda and Northern relating to the transportation of
natural gas through a facility located in Dewey County, Oklahoma. Pursuant
to this indemnification, the Group has been asked to indemnify Torch with
respect to claims brought against it by Northern in a lawsuit filed March
7, 1996, as more fully discussed below.
On March 7, 1996, Northern filed a lawsuit against Torch Energy Advisors,
Inc. ("Torch") for alleged breach of a May 2, 1989 agreement (the "Dewey
County Contract") between Torch, Panda and Northern relating to the
transportation of natural gas through a facility located in Dewey County,
Oklahoma. The Group has assumed the defense of this matter pursuant to the
indemnification agreement entered into as part of the December 7, 1995,
settlement among Torch, Panda and the Group discussed above. Northern
contended that Panda failed to transport the required volumes. Northern
sued Torch under a written guaranty agreement and has claimed that Torch
denuded the assets of Panda and is therefore liable for the debts of Panda.
On March 23, 1998, the Group agreed to execute a promissory note for
$150,000 plus accrued interest to Northern Natural Gas Company in
consideration for Northern's agreement not to sue the Group. Provision for
this settlement had been made in the consolidated financial statements for
the nine months ended April 30, 1997.
As at the date of these financial statements, the Group has made all
required payments under the above settlements on a timely basis.
Germany Oil Company (a wholly owned subsidiary) was named as a defendant in
three wrongful death actions which were settled during the year ended April
30, 1998. The Group's liability insurance was adequate to cover the loss.
On September 12, 1996 Alliance received a writ from Best Royalties Plc
claiming $186,368 and a declaration that Best Royalties Plc is entitled to
a sum equal to 40 percent of Alliance Resources (USA), Inc.'s net cash
proceeds received from the Arrowhead No. 1 well (and payment of such sum).
Alliance denies the claim and is vigorously defending this matter.
On March 9, 1998 Alliance filed a lawsuit in Louisiana, USA alleging
malpractice against a law firm of Baldwin & Haspel, LLC, for acts and
omission in certain property and securities transactions during the period
June 1994 to October 1996. The total amount of Alliance's claim has not yet
been ascertained.
On April 8, 1998, Union Pacific Resources Company ("UPRC") filed a lawsuit
in the District Court of Denver, Colorado against Germany Oil Company
alleging breach of contract arising out of oil and gas property in Cheyenne
County, Colorado. Germany Oil Company filed an answer and counterclaim on
May 18, 1998, vigorously denying the allegation and alleging breach of
contract, breach of fiduciary duty, conversion and other related claims.
The total amount of the claims will be determined at trial.
F-22
<PAGE>
ALLIANCE RESOURCES PLC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
On April 17, 1998, UPRC filed a lawsuit in the District Court of Tarrant
County, Texas against Germany Oil Company alleging breach of contract
arising out of oil and gas property in Crockett County, Texas and claiming
damages of approximately $351,000. Germany Oil Company intends to
vigorously defend the claim and counterclaim for breach of contract, breach
of fiduciary duty, and other related claims.
In addition to the aforementioned litigation, the Group is a named
defendant in lawsuits, and is subject to claims of third parties from time
to time arising in the ordinary course of business. While the outcome of
lawsuits or other proceedings and claims against the Group cannot be
predicted with certainty, management does not expect these additional
matters to have material adverse effect on the financial position or
results of operations or liquidity of the Group.
The Group leases office space and certain property and equipment under
various lease agreements. As of April 30, 1998, future minimum lease
commitments were approximately as follows:
Year Ending April 30
----------------------
1999 $158,970
2000 193,701
2001 196,905
2002 200,098
2003 203,301
2004 16,964
Rent expense under all operating leases was $175,470, $160,780, and
$235,732 during the year ended April 30, 1998, the nine months ended April
30, 1997, and the year ended July 31, 1996, respectively.
The Company announced on April 29, 1998 that it is in discussions which
may, or may not, lead to the acquisition of a minority interest in certain
United Kingdom gas interests. Such acquisition would be classified as a
reverse takeover under The Rules of the London Stock Exchange and
accordingly subject to Alliance Resources PLC shareholders approval.
Accordingly on April 29, 1998 the London Stock Exchange, at the Company's
request, temporarily suspended the listing of the Company's ordinary shares
pending shareholders approval of the acquisition. The Company is currently
in discussions with various parties regarding financing arrangements to
allow for the completion of the acquisition. These discussions include
potential revisions to the existing Credit Agreement with Bank of America
to provide the Company with additional funding and liquidity until
completion of the acquisition.
(14) RELATED PARTY TRANSACTIONS
The Group from time to time has made loans to certain officers, directors
and stockholders. During the nine months ended April 30, 1997, the board
of directors forgave $391,218, of notes and accrued interest, due from
directors and former officers of the Group. This amount is included in
general and administrative expenses.
Under the terms of the acquisition of LaTex by Alliance, the Group disposed
of its interests in Wexford and Imperial, and its interests in its wholly-
owned subsidiaries LaTex Resources International, Inc. (LaTex Resources
International) and Phoenix Metals, Inc. (Phoenix Metals) to Imperial for
85,981 shares of Common Stock. Imperial is controlled by the former
president of LaTex. A fairness opinion was obtained from the investment
banking firm of Wood Roberts, Inc. (WRI) a company controlled by John R.
Martinson, a Director, concluding that the transaction was fair to the
Group's stockholders. The Common Stock is included in Treasury Stock at
April 30, 1997.
F-23
<PAGE>
ALLIANCE RESOURCES PLC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Group was previously a party to an agreement with WRI, pursuant to
which WRI acted as a financial advisor to the Group. Under the agreement,
the Group agreed to pay WRI a success fee in connection with any merger or
acquisition involving a party introduced to the Group by WRI, and any
financing facility arranged by WRI. In addition, the Group has issued to
WRI six year common stock purchase warrants to purchase 460,858 shares at
$.87 per share, of which 374,877 and 318,072 are outstanding as of April
30, 1997 and January 31, 1998, respectively. As of March 4, 1996, the
financial advisor agreement between the Group and WRI was terminated by
agreement of the parties. By separate agreement, the Group agreed to pay
WRI a fee of $240,000 upon acquisition of LaTex by Alliance and a fee equal
to 0.5% of the amount of any credit facility obtained by the Group from a
bank or other financial institution introduced by WRI in order to refinance
its indebtedness to its principal lender (or 85,986 shares of Common
Stock). This fee ($100,000) was settled by issue of the Common Stock which
is included in the stock outstanding at April 30, 1997.
During the year ended April 30, 1998, the Company received $123,000 of
proceeds from the sale of 10,351,966 shares in the Company which had
previously been owned by Mr. John O' Brien, the former Chief Executive of
the Company. The right to receive the proceeds from the sale of the shares
arose from a settlement agreed between the Company and Mr. O'Brien
following the discovery that the Company had suffered a financial loss as a
result of a number of transactions involving Mr. O'Brien or parties
connected with him.
(15) DERIVATIVES
OIL AND GAS
The Group was required, by agreement with its primary lender in 1995, to
participate in a price protection program, for a majority of its oil and
gas sales. Under the commodity collar transaction, oil prices were fixed
at a floor of $16.50/Bbl and a ceiling of $19.82/Bbl based on projected
monthly production. Under the commodity swap transaction, the price of gas
was fixed at $1.806 MMBTU based on projected monthly production. The
production rates were calculated by the primary lender from reserve report
data and were fixed by the lender (24,352 bbls and 173,868 MMBTU's per
month). The monthly hedge amount was calculated by the lender from
published market rates. The pricing agreement did not allow for full
benefits from prices above the ceiling amount. The settlement gains and
losses are included in oil and gas revenue.
As allowed under the Alliance Credit Agreement, the oil and gas pricing
derivatives were terminated on May 15, 1997, at a cost of $1,128,000
settled by an increase in the Bank of America loan. The loss relating to
the buy-out has been recognized in its entirety during the year ended April
30, 1998, consequent upon the Group entering into a new price protection
agreement.
On October 23, 1997, the Group entered into new commodity price hedge
agreements to protect against price declines which may be associated with
the volatility in oil and gas spot prices. Unlike the previous hedging
agreements, the new commodity price hedge agreements, while protecting the
downside, also provide the Group 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 Group, and the
associated premium cost was funded by additional drawdowns under the
current credit agreement. The commodity price hedges cover 32,000 bbls and
100,000 MMBTUs per month for the year to October 31, 1998, and cover in
excess of 90% of the Group'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.
F-24
<PAGE>
ALLIANCE RESOURCES PLC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
INTEREST
The Group is required, by agreement with its primary lender (see Note 8) to
participate in an interest rate protection program, for interest on the
debt payable to the primary lender until February 29, 2000. Interest is
hedged to achieve a fixed rate of 7.49% calculated on a monthly basis
based on a fixed amortization schedule determined on loan origination. The
notional principal is reduced each month by $365,000. The notional
principal outstanding at April 30, 1998 was $17,799,000 and this will have
reduced at termination to $9,769,000. The hedging gains/losses are
included in interest expense.
(16) DISPOSITION OF OIL AND GAS PROPERTIES
The Group made two oil and gas property sales during the nine months ended
April 30, 1997, for approximately $1,500,000. During the year ended April
30, 1998, the Group sold oil and gas properties for approximately
$5,600,000. Proceeds of such sales were credited to the full cost pool.
(17) SUPPLEMENTAL FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
RESULTS OF OPERATIONS FROM OIL AND GAS PRODUCING ACTIVITIES
The following sets forth certain information with respect to the Group's
results of operations from oil and gas producing activities for the year
ended July 31, 1996, the nine months ended April 30, 1997 and the year
ended April 30, 1998. All of the Group's oil and gas producing activities
are located within the United States. The abandonment costs include
$2,491,299 and $955,496 related to the Tunisia and Kazakhstan projects,
respectively.
<TABLE>
<CAPTION>
1996 1997 1998
-------------- -------------- --------------
(AS RESTATED)
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C>
Revenues $ 11,980 $ 5,698 $ 10,210
Production costs (4,601) (2,550) (4,849)
Gross production taxes (871) (567) (657)
Cessation of overseas exploration (3,447) - -
Depreciation and depletion (3,208) (1,457) (2,571)
Loss on commodity derivatives - - (1,128)
Income (loss) from operations before (147) 1,124 1,005
income taxes
Income tax expense - - -
------ ------ ------
Results of operations (excluding
corporate overhead and interest costs) $ (147) $ 1,124 $ 1,005
====== ====== ======
</TABLE>
F-25
<PAGE>
ALLIANCE RESOURCES PLC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
CAPITALIZED COSTS AND COST INCURRED RELATING TO OIL AND GAS ACTIVITIES
<TABLE>
<CAPTION>
1996 1997 1998
-------------- -------------- --------------
(AS RESTATED)
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C>
United States $ 41,379 $ 36,107 $ 43,200
Foreign - - -
----------- ----------- -----------
Total capitalized costs 41,379 36,107 43,200
Less accumulated depreciation,
depletion and amortization (12,022) (9,432) (13,571)
----------- ----------- -----------
Net capitalized costs $ 29,357 $ 26,675 $ 29,629
=========== =========== ===========
Costs incurred during the year:
Exploration costs:
United States $ - $ - $ -
Foreign 84 - -
----------- ----------- -----------
$ 84 $ - $ -
=========== =========== ===========
Development costs:
United States $ 978 $ 348 $ 1,821
Foreign - - 276
----------- ----------- -----------
$ 978 $ 348 $ 2,571
=========== =========== ===========
Purchase of minerals in place:
United States $ 2,800 $ - $ 9,041
Foreign - - -
----------- ----------- -----------
$ 2,800 $ - $ 9,041
=========== =========== ===========
</TABLE>
F-26
<PAGE>
ALLIANCE RESOURCES PLC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES
The estimates of proved oil and gas reserves were prepared by independent
petroleum engineers. The Group emphasizes that reserve estimates are
inherently imprecise. Accordingly, the estimates are expected to change as
more current information becomes available. In addition, a portion of the
Group's proved reserves are undeveloped, which increases the imprecision
inherent in estimating reserves which may ultimately be produced.
Proved reserves are estimated quantities of crude oil, natural gas, and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions. Proved
developed reserves are those which are expected to be recovered through
existing wells with existing equipment and operating methods.
The following is an analysis of the Group's proved oil and gas reserves.
Oil (Mbbls) Gas (MMcf)
----------- ----------
Proved resources at July 31, 1995 5,431.8 28,113
Revisions of previous estimates 1,077.5 1,350
Production (405.0) (3,481)
Purchases of reserves-in-place 248.7 2,190
----------- ----------
Proved reserves at July 31, 1996 6,353.0 28,172
Revisions of previous estimates 417.7 (577)
Production (190.0) (1,640)
----------- ----------
Proved reserves at April 30, 1997 6,580.7 25,955
Revisions of previous estimates (735.5) 2,149
Production (396.2) (1,689)
Purchases of reserves-in-place 1,335.7 4,173
Sales of reserves-in-place (290.4) (4,266)
----------- ----------
Proved reserves at April 30, 1998 6,494.3 26,322
=========== ==========
Proved developed reserves at:
July 31, 1996 4,952.9 27,757
=========== ==========
April 30, 1997 5,166.9 25,461
=========== ==========
April 30, 1998 3,773.7 22,632
=========== ==========
During the nine months ended April 30, 1997, the Group sold oil and gas
properties for approximately $1,500,000. The Group chose not to include
those properties in its reserve appraisal at July 31, 1996.
DISCOUNTED FUTURE NET CASH FLOWS
In accordance with Statement of Financial Accounting Standards No. 69,
estimates of the standardized measure of discounted future cash flows were
determined by applying period-end prices, adjusted for fixed and
determinable escalations, to the estimated future production of year-end
proved reserves. Future cash inflows were reduced by the estimated future
production and development costs based on period-end costs to determine
pre-tax cash inflows over the Group's tax basis in the associated proved
oil and gas properties. Net operating losses, credits and permanent
differences were also considered in the future
F-27
<PAGE>
ALLIANCE RESOURCES PLC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
income tax calculation. Future net cash inflows after income taxes were
discounted using a 10% annual discount rate to arrive at the Standardized
Measure.
The estimated standardized measure of discounted future cash flows follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------- -------------- --------------
<S> <C> <C> <C>
Future cash inflows $ 181,566,000 $ 139,587,000 $ 131,858,000
Future production and
development costs (79,763,000) (64,086,000) (48,683,000)
------------- -------------- --------------
Future net cash inflows before
income tax expense 101,803,000 75,501,000 83,175,000
Future income tax expense (21,193,000) (11,477,000) (10,444,000)
------------- -------------- --------------
Future net cash flows 80,610,000 64,024,000 72,731,000
10% annual discount for estimated
timing of cash flows (36,721,000) (28,656,000) (27,625,000)
------------- -------------- --------------
Standardized measure of discounted
future net cash flows $ 43,889,000 $ 35,368,000 $ 45,106,000
============= ============== ==============
</TABLE>
The changes in standardized measure of
discounted future net cash flows follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
JULY 31, 1996 APRIL 30, 1997 APRIL 30, 1998
------------- -------------- --------------
<S> <C> <C> <C>
Beginning of period
Increases (decreases) $ 28,802,000 $ 43,889,000 $ 35,368,000
Sales, net of production costs (6,973,000) (4,074,000) (4,338,000)
Net change in sales prices, net of
production costs 21,444,000 (12,690,000) 7,671,000
Changes in estimated future
development costs (3,419,000) (280,000) (1,161,000)
Revisions of previous quantity estimates 6,601,000 1,282,000 (1,778,000)
Accretion of discount 2,691,000 5,350,000 3,963,000
Net change income taxes (8,725,000) 5,345,000 813,000
Purchases of reserves-in-place 2,093,000 - 12,720,000
Sales of reserves-in-place - - (4,975,000)
Changes of production rates
(timing) and other 1,375,000 (3,454,000) (3,177,000)
------------- -------------- --------------
End of period $ 43,889,000 $ 35,368,000 $ 45,106,000
============ ============ ============
</TABLE>
F-28
<PAGE>
PROXY ALLIANCE RESOURCES PLC
KINGSBURY HOUSE
15-17 KING STREET
LONDON SW1Y 6QU
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints John A. Keenan and Paul R. Fenemore, and each
of them, as Proxies, each with the power to appoint his substitute, and hereby
authorizes them to represent and vote, as designated on the reverse side
hereof, all of the ordinary shares of Alliance Resources PLC (the "Company"),
held of record by the undersigned at the close of business on October 28, 1998,
at the Extraordinary General Meeting of the Company (the "Meeting") to be held
on October 30, 1998, and any adjournment thereof.
This proxy, when properly executed and dated, will be voted in the manner
directed herein by the undersigned shareholder(s). If no direction is given,
this proxy will be voted FOR Proposal 1, Proposal 2, Proposal 3, Proposal 4,
and Proposal 5 and at the discretion of the Proxies with respect to any other
matter that is properly brought before the meeting in accordance with proposal
6.
[X] Please mark votes as in this example.
1. Proposal to approve the subdivision and redesignation of the Company's
ordinary shares of 40p each into ordinary shares of 1p each and deferred
shares of 1p each, with the deferred shares having the rights and being
subject to the restrictions set forth in Article 3.2 of the Articles of
Association, as approved pursuant to Proposal 5, below.
[_] For[_] Against[_] Abstain
2. Proposal to approve the acquisition of Difco Limited ("Difco") and the
simultaneous acquisition by Difco of the East Irish Sea Interests.
[_] For[_] Against[_] Abstain
(Continued and to be signed on reverse side)
<PAGE>
3. Proposal to approve the conversion and redesignation of the Company's
ordinary shares of 1p each into convertible restricted voting shares of 1p
each, approve the Directors' power of allotment and approve the increase in
the Directors' borrowing powers.
[_] For[_] Against[_] Abstain
4. Proposal to approve the Directors allotment of equity securities to EnCap,
Bank of America, current holders of ordinary shares, or otherwise for up to
an aggregate amount equal to five percent (5%) of the aggregate amount of
all ordinary shares issued and fully paid immediately following the approval
of this Proposal.
[_] For[_] Against[_] Abstain
5. Proposal to approve the alteration and amendment of the Company's Articles
of Association.
[_] For[_] Against[_] Abstain
6. In their discretion, the Proxies are authorized to vote upon such other
business as properly may come before the Meeting or any adjournments
thereof.
Please execute the Proxy as your name
appears hereon. When shares are held by
joint tenants, both should sign, or if one
signs he should attach evidence of his
authority. When signing as attorney,
executor, administrator, agent, trustee or
guardian, please give full title as such.
If a corporation, please sign full
corporate name by the president or other
authorized officer. If a partnership,
please sign in partnership name by
authorized person.
DATED: October ___, 1998
--------------------------------------------
Signature
--------------------------------------------
Signature
(if held jointly)
PLEASE MARK, COMPLETE, SIGN AND DATE THIS PROXY AND RETURN PROMPTLY USING THE
ENCLOSED ENVELOPE. TO BE VALID, THIS FORM MUST BE COMPLETED, SIGNED AND
RETURNED SO THAT IT ARRIVES AT THE COMPANY'S REGISTRARS NOT LATER THAN 10:00
A.M. ON OCTOBER 28, 1998.
