<PAGE>
AMENDMENT NO. 3
to
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the 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))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Materials Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Alliance Resources PLC
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
Alliance Resources PLC
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required
[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
July 13, 1998
To the Shareholders of Alliance Resources PLC:
You are cordially invited to attend an Extraordinary General Meeting of the
Shareholders (the "Extraordinary General Meeting") of Alliance Resources PLC
(the "Company") to be held on July 29, 1998, at 2:00 p.m., United Kingdom time,
at the Royal Automobile Club, 89 Pall Mall, London SW1Y 5HS.
At the Extraordinary General Meeting, you will be asked to consider and vote
upon proposals to approve the acquisition by the Company of all of the issued
and outstanding shares of the capital stock of Difco Limited ("Difco"), in
exchange for at least 7,020,825 and as many as 28,083,300 ordinary shares of
the Company, the acquisition by Difco of certain oil and gas interests in the
East Irish Sea (the "U.K. Interests") from Burlington Resources (Irish Sea)
Limited for a cash consideration of approximately $34.0 million (collectively,
the "Acquisitions"), the latter of which will be funded from the proceeds of a
proposed issue of senior notes, and related matters. The Board of Directors of
the Company has determined that the Acquisitions are fair to the shareholders
of the Company.
The Difco shareholders will initially be entitled to receive approximately
18.3% of the outstanding shares of the Company and could receive up to 45.0% of
the outstanding shares of the Company based upon the production from, or
reserves attributable to, the U.K. Interests. 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, these shares would have a value of approximately $2,977,000
(7,020,825 ordinary shares) to $11,907,000 (28,083,300 ordinary shares). Based
upon these values, and the cash consideration to be paid to acquire the U.K.
Interests, the total consideration to be paid to consummate the Acquisitions
ranges from approximately $36,977,000 to $45,907,000. Please see "The
Acquisitions and Related Matters" in the attached Proxy Statement for a more
detailed discussion of the Acquisitions.
Enclosed are a Notice of Extraordinary General Meeting of Shareholders, Proxy
Statement which describes the Acquisitions and a form of proxy card. You are
urged to read all of these materials carefully. In order to satisfy the
requirements of the City Code on Takeovers, the Chairman of the Extraordinary
General Meeting will, in accordance with the Company's Articles of Association,
demand a poll be held at the meeting for the purpose of deciding the
resolutions.
THE BOARD OF DIRECTORS OF THE COMPANY HAS UNANIMOUSLY APPROVED THE
ACQUISITIONS AND UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" APPROVAL
OF THE PROPOSALS TO BE CONSIDERED AT THE EXTRAORDINARY GENERAL MEETING.
PLEASE SIGN, DATE AND MAIL THE ENCLOSED PROXY CARD PROMPTLY IN THE POSTAGE-
PAID ENVELOPE THAT HAS BEEN PROVIDED TO YOU FOR YOUR CONVENIENCE. TO BE VALID,
THE ENCLOSED PROXY CARD MUST BE COMPLETED, SIGNED AND RETURNED SO THAT IT
ARRIVES AT THE COMPANY'S REGISTRARS NOT LATER THAN 2:00 P.M. ON JULY 27, 1998.
IF YOU ATTEND THE EXTRAORDINARY GENERAL MEETING, YOU MAY VOTE IN PERSON IF YOU
WISH, EVEN IF YOU HAVE PREVIOUSLY RETURNED YOUR PROXY CARD.
The Board and I urge you to vote "FOR" the Acquisitions and the related
matters 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
Tulsa, Oklahoma
July 13, 1998
<PAGE>
NOTICE OF AN 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 Royal Automobile Club, 89 Pall Mall, London SW1Y 5HS at
2:00 p.m., United Kingdom time on 29 July, 1998, for the purpose of
considering and, if thought fit, passing the following resolutions each of
which will be proposed as ordinary resolutions:
1. That:
(a) the acquisition:
(i) by Alliance Resources PLC of the whole of the issued share
capital of Difco Limited; and
(ii) by Difco Limited of an undivided 20 per cent of the right, title
and interest of Burlington Resources (Irish Sea) Limited in and 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 acquisition agreements dated 29 June, 1998, be
and are hereby approved (or upon such terms and subject to such conditions
as are approved by the Directors or any duly authorized 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;
(b) approval be and is hereby granted to a dispensation in favour of the
existing shareholders of Difco Limited from any obligation to make a
general offer to the shareholders of the Company to acquire their shares
(which obligations would otherwise arise under Rule 9 of the U.K. City Code
on Takeovers and Mergers) which arises from the acquisition by any of them
of new Ordinary Shares in the Company:
(i) as consideration for the sale by them of any shares in Difco
Limited pursuant to the agreement referred to at sub-paragraph (a)(i)
above; and/or
(ii) on the conversion of the convertible restricted voting shares of
40p each in the capital of the Company
as a result of which they would hold up to 28,083,300 Ordinary Shares in
the capital of the Company in aggregate (representing 45 per cent of the
issued ordinary share capital of the Company).
2. That, conditional upon the Acquisitions (as defined in Resolution 1
above) becoming unconditional (save insofar, in each case, as conditional on
this Resolution):
(a) the authorized share capital of the Company be increased from
(Pounds)18,400,000 to (Pounds)30,616,660 by the creation of 14,041,650 new
convertible restricted voting shares of 40p each and 16,500,000 new
ordinary shares of 40p each in the capital of the Company; and
(b) the Directors be generally and unconditionally authorized in
accordance with section 80 of the Companies Act 1985 (as amended) (the
"Act"), to exercise all the powers of the Company to allot relevant
securities (as defined in section 80(2) of the Act) up to an aggregate
nominal amount of (Pounds)15,456,918 PROVIDED THAT:
(i) in the case of any allotment (other than an allotment of relevant
securities in pursuance of the Acquisitions or as a consequence of the
exercise of existing warrants or the conversion of existing loan
<PAGE>
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
40p 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 29 July, 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 fifteen (15) times such an amount.
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.
<PAGE>
PROXY STATEMENT
FOR
ALLIANCE RESOURCES PLC
EXTRAORDINARY GENERAL MEETING OF SHAREHOLDERS
JULY 29, 1998
This Proxy Statement of Alliance Resources PLC, a public limited company
organized under the laws of England and Wales ("Alliance" or the "Company"),
is being furnished to holders of the Company's ordinary shares, par value
(Pounds)0.4 per share ("Shares"), in the United States in accordance with the
rules of the Securities and Exchange Commission, in Canada in accordance with
the provisions of the Securities Act (Ontario), and in connection with the
solicitation of proxies by the Company's Board of Directors (the "Board") for
use at an Extraordinary General Meeting of Shareholders of the Company (the
"Extraordinary General Meeting") to be held on July 29, 1998, at 2:00 p.m.,
United Kingdom time, at the Royal Automobile Club, 89 Pall Mall, London SW1Y
5HS, and any adjournment thereof.
At the Extraordinary General Meeting, you will be asked to consider and vote
upon a proposal to approve the acquisition by the Company of all of the issued
and outstanding shares of the capital stock of Difco Limited, a private
limited company organized under the laws of England and Wales ("Difco"), in
exchange for at least 7,020,825 and as many as 28,083,300 Shares, the
acquisition by Difco of certain oil and gas interests in the East Irish Sea
from Burlington Resources (Irish Sea) Limited for a cash consideration of
approximately $34.0 million (collectively, the "Acquisitions"), the latter of
which will be funded from the proceeds of a proposed issue of senior notes,
and related matters. Company shareholders should particularly note that no
right of dissent or appraisal is available to holders of Shares.
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS PROXY STATEMENT. THE
PROPOSED ACQUISITIONS ARE COMPLEX TRANSACTIONS. SHAREHOLDERS ARE STRONGLY
URGED TO READ AND CONSIDER CAREFULLY THIS PROXY STATEMENT IN ITS ENTIRETY.
This Proxy Statement and the accompanying proxy card are first being mailed
to the shareholders of the Company on or about July 13, 1998.
THE DATE OF THIS PROXY STATEMENT IS JULY 13, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY.................................................................. 1
General................................................................ 1
The Acquisitions....................................................... 2
The Meeting; Votes Required............................................ 5
Market Price Data...................................................... 5
SUMMARY SELECTED HISTORICAL AND UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL AND RESERVE INFORMATION....................................... 7
Summary Oil and Gas Reserve Information................................ 8
RISK FACTORS............................................................. 9
Significant Leverage and Debt Service.................................. 9
Consummation of the Offering; Approvals................................ 9
Substantial Capital Requirements....................................... 10
Potential Inability to Purchase Notes upon a Change of Control Offer... 10
Uncertainty of Reserve Information and Future Net Revenue Estimates.... 10
Volatility of Oil and Gas Prices....................................... 11
Need to Replace Reserves............................................... 11
Drilling and Operating Risks........................................... 11
Acquisition Risks and Risks of International Operations................ 12
Foreign Currency Exchange Rates........................................ 12
Dependence on Third-Party Operators.................................... 12
Transporting, Processing and Marketing of Oil and Gas From U.K.
Interests............................................................. 13
Competition............................................................ 13
Governmental and Environmental Regulation.............................. 13
Issues Related to the Year 2000........................................ 14
Possible Changes in U.K. Taxation...................................... 14
Cautionary Statement Regarding Forward-looking Statements.............. 14
THE EXTRAORDINARY GENERAL MEETING........................................ 15
General................................................................ 15
Purpose of the Meeting................................................. 15
Voting Rights; Solicitation of Proxies................................. 15
Recommendation......................................................... 16
THE ACQUISITIONS AND RELATED MATTERS..................................... 17
General................................................................ 17
Effective Time......................................................... 17
Background of the Acquisitions......................................... 17
Reasons for the Acquisitions; Recommendation of the Board of
Directors............................................................. 18
Terms of the Difco Acquisition......................................... 19
Other Provisions of the Difco Acquisition Agreement.................... 21
Terms of the Interests Acquisition Agreement........................... 22
Other Provisions of the Interests Acquisition Agreement................ 22
Interests of Certain Persons in the Acquisitions....................... 23
Governmental and Regulatory Approvals.................................. 23
Material Income Tax Consequences....................................... 23
Accounting Treatment................................................... 24
Shares Eligible for Future Sale; Registration Rights................... 24
Appraisal Rights....................................................... 24
Related Matters........................................................ 24
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PRICE RANGE OF ORDINARY SHARES........................................... 26
Exchange Rates......................................................... 26
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION....................... 27
SELECTED FINANCIAL DATA OF ALLIANCE...................................... 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................... 34
General................................................................ 34
Results of Operations.................................................. 34
Capital Resources and Liquidity........................................ 37
Seasonality............................................................ 40
Inflation and Prices; Hedging.......................................... 40
Currency Exchange Rates................................................ 41
Issues Related to the Year 2000........................................ 41
INFORMATION WITH RESPECT TO ALLIANCE..................................... 42
Business Strategy...................................................... 42
The Company's United States Properties................................. 43
Employees.............................................................. 48
Competition............................................................ 48
Legal Proceedings...................................................... 48
INFORMATION WITH RESPECT TO DIFCO AND THE U.K. PROPERTIES................ 50
General................................................................ 50
U.K. Properties........................................................ 50
U.K. Tax Regime........................................................ 58
PRINCIPAL SHAREHOLDERS OF ALLIANCE....................................... 60
DESCRIPTION OF ALLIANCE CAPITAL STOCK.................................... 62
Dividends.............................................................. 62
Liquidation Rights..................................................... 62
Voting Rights.......................................................... 62
Pre-emptive Rights..................................................... 63
Variation of Rights.................................................... 63
Conversion of Acquisition Shares....................................... 63
Disclosure of Interests................................................ 63
Exchange Controls and Other Limitations Affecting Security Holders..... 63
OTHER MATTERS............................................................ 64
SHAREHOLDER PROPOSALS FOR ALLIANCE 1999 ANNUAL MEETING................... 64
INDEX TO FINANCIAL STATEMENTS............................................ F-1
</TABLE>
APPENDIX AGLOSSARY
APPENDIX BRESERVE REPORT OF GAFFNEY, CLINE & ASSOCIATES, INC.
iii
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial information appearing elsewhere in this
Proxy Statement. Unless the context clearly suggests otherwise, references to
the "Company" or "Alliance" include Alliance Resources PLC and its
subsidiaries, collectively, and references to the "Acquisitions" relate to the
acquisition of the U.K. Interests (as defined herein) and the acquisition of
all of the capital stock of Difco Limited, collectively. Certain terms relating
to the oil and gas business are defined in the "Glossary" included as Appendix
A in this Proxy Statement. Shareholders should carefully consider the matters
discussed under the caption "Risk Factors."
GENERAL
Alliance is a United Kingdom public limited company whose principal
activities are the acquisition, exploration, development and production of oil
and gas properties. The Company currently owns producing oil and gas properties
in the United States, with a majority of its proved reserves located in the
states of Alabama, Louisiana, Mississippi, Oklahoma and Texas. Since 1996, the
Company has focused its efforts on maximizing the value of its properties in
the U.S. and on acquiring and developing suitable international opportunities.
Upon receiving shareholder approval, Alliance will acquire, for approximately
$34.0 million, a 20% working interest (the "U.K. Interests") in 13 offshore
blocks located in the East Irish Sea off the west coast of the U.K. (the "U.K.
Properties") from Burlington Resources (Irish Sea) Limited ("Burlington"), an
indirect wholly owned subsidiary of Burlington Resources, Inc. ("Burlington
Resources"). After giving effect to the acquisition of the U.K. Interests, the
Company's proved oil and gas reserves on a pro forma basis as of January 1,
1998, will consist of approximately 223 Bcfe of gas with a Pre-tax PV10 value
of approximately $146.5 million and a Standardized Measure of approximately
$114.8 million. Of the Company's pro forma proved reserves, 69% will be located
in the East Irish Sea and 81% will be gas. See "Information With Respect to
Difco and the U.K. Properties--U.K. Properties--The U.K. Interests," and
"Information With Respect to Alliance--The Company's United States Properties."
The U.K. Interests consist of certain undivided, non-operated working
interests in the U.K. Properties. Burlington is the operator of ten of the
blocks and holds non-operated interests in three of the blocks. The 13 offshore
blocks included in the U.K. Properties include five proved gas accumulations in
seven fields, traditionally split into the Rivers sour gas complex (comprising
the Hodder, Calder, Crossans, Darwen and Asland fields), and the Millom and
Dalton sweet gas fields. The U.K. Properties are located approximately 28 miles
offshore in water depths of less than 200 feet. The nearest developments are
the Morecambe fields located approximately six to ten miles to the east, which
are operated by Centrica Plc ("Centrica"), and the Liverpool Bay development
located approximately five to 15 miles to the south, which is operated by a
subsidiary of Broken Hill Proprietary Pty ("BHP").
The Company's independent petroleum engineers have estimated that the U.K.
Properties have gross proved reserves at January 1, 1998 of approximately 764
Bcf (153 Bcf net), with a gross Pre-tax PV10 value of approximately $433.3
million ( $86.7 million net) and a Standardized Measure of approximately $312.5
million ( $62.5 million net). Burlington acquired substantially all of its
interests in these blocks from British Gas Exploration and Production PLC
("BG") in December 1997 for approximately $157.6 million. The U.K. Properties
include five proven gas accumulations in seven fields discovered by a
predecessor of BG, from 1982 to 1993. Through 1997, BG had spent approximately
$140 million to drill 13 exploratory and appraisal wells and acquire and
interpret three dimensional ("3D") seismic data on six of the seven fields and
nine of the 11 undrilled exploratory prospects included in the U.K. Properties.
The U.K. Properties are not currently producing and were not developed because
they were satellite fields to the South and North Morecambe Fields, which are
owned by Centrica. The U.K. Properties had reduced strategic value to BG
because it no longer held an interest in the South and North Morecambe Fields.
See "Information With Respect to Difco and the U.K. Properties--U.K.
Properties."
1
<PAGE>
The U.K. Properties will be developed pursuant to a joint operating agreement
with Burlington. The Company anticipates that development of the U.K.
Properties will begin in the fourth quarter of 1998, with first production
anticipated in the fourth quarter of 1999. Due to the location of the U.K.
Interests and the existence of the considerable infrastructure in both the
Morecambe and Liverpool Bay areas of the East Irish Sea, the Company has
several options for the transportation and processing of gas produced from the
U.K. Interests. The Company believes that development of the fields and
commercial sales of oil and gas from the U.K. Interests can occur by utilizing
existing facilities and infrastructure, construction of new facilities and
infrastructure, or a combination of the foregoing. The available development
alternatives present multiple opportunities to market the production from the
U.K. Interests to the U.K. gas market, including sales to individual companies,
power generation plants, or industrial end-users. The Company's net share of
expected capital expenditures to implement development of the proved reserves
attributable to the U.K. Interests is estimated by the Company's independent
petroleum engineers to be approximately $73.0 million. See "Information With
Respect to Difco and the U.K. Properties--U.K. Properties."
THE ACQUISITIONS
General
Alliance will acquire all of the issued and outstanding capital stock of
Difco Limited ("Difco"), and then acquire the U.K. Interests pursuant to
Difco's agreement with Burlington. Mr. F. Fox Benton, Jr., until recently the
non-Executive Chairman of Burlington Resources International, Inc. (a
subsidiary of Burlington Resources) and an advisor to Burlington Resources, and
members of his immediate family own, directly or indirectly, all of the issued
and outstanding capital stock of Difco. Difco's sole asset is a contract to
acquire the U.K. Interests for a purchase price of approximately $33.0 million
in cash, effective January 1, 1998, from Burlington plus its pro rata share of
expenditures incurred by Burlington and interest from January 1, 1998, which
are anticipated to be approximately $1.0 million. This agreement terminates on
July 31, 1998, unless extended by Difco and Burlington.
On June 29, 1998, Alliance and the shareholders of Difco entered into a Sale
and Purchase Agreement (the "Difco Acquisition Agreement"), under which
Alliance will acquire all of the issued and outstanding capital stock of Difco,
and indirectly a contract to acquire the U.K. Interests, in exchange for
14,041,650 newly created convertible restricted voting shares (the "Acquisition
Shares"), convertible into between 7,020,825 and 14,041,650 Shares, and a
contingent right to receive up to 14,041,650 additional Shares, based upon the
sales production actually achieved from, or reserves value attributable to, the
U.K. Interests. The Difco shareholders will receive only 7,020,825 Shares if
none of the production targets are achieved, will receive 28,083,300 Shares if
all the production targets or reserve values are achieved and all of the loan
notes and warrants are converted and will receive a number of Shares within
this range if only some of the production targets or reserve valuations are
achieved and/or some of the loan notes or warrants are converted. See "The
Acquisitions and Related Matters--Terms of the Difco Acquisition." Until
converted, each Acquisition Share will be entitled to one-half vote on all
matters on which the Shares are entitled to vote and otherwise will have rights
identical to the Shares, except for certain restrictions on transfer. The
shareholders of Difco will receive a minimum of 18.3% of the issued and
outstanding Shares of the Company and a maximum of 45.0% of the issued and
outstanding Shares of the Company, pursuant to the terms of the Difco
Acquisition Agreement. The Acquisition Shares will not be listed on any
exchange for trading and the holders of such shares will have certain limited
rights to participate in registered offerings of Shares by the Company, if any.
The Company has, however, agreed to list the Shares resulting from the
conversion of the Acquisition Shares on the London Stock Exchange. See "The
Acquisitions and Related Matters--Terms of the Difco Acquisition" and "--Shares
Eligible for Future Sale; Registration Rights."
In determining how many Acquisition Shares the Company should issue to
acquire Difco (and indirectly, the U.K. Interests), and the number of Shares
into which the Acquisition Shares would be convertible, the Board of Directors
considered a variety of factors, including the risks associated with the
undeveloped proved oil and gas reserves in the U.K. Interests and the
discounted future net cash flows of the U.K. Interests. In determining
2
<PAGE>
the consideration payable to the Difco shareholders, the Board also considered
the Pre-tax PV10 value of the Company's 20% interest in the U.K. Properties
prepared by Gaffney Cline ( $86.7 million) compared with the Pre-tax PV10 value
of the Company's existing U.S. properties prepared by Lee Keeling ( $59.787
million). Based on the information it reviewed, the Board of Directors
determined that it was appropriate to issue securities of the Company that
would entitle the Difco shareholders to receive Shares entitling them to a
minimum percentage of the Company prior to any production from the U.K.
Interests and an increasing percentage of the Company based upon a combination
of sales production levels and reserves value ultimately attributable to the
U.K. Interests. The Difco shareholders will initially be entitled to receive
approximately 18.3% of the outstanding Shares and will receive up to 45.0% of
the outstanding Shares, based upon the production from, or reserves
attributable to, the U.K. Interests. See "The Acquisitions and Related
Matters--Reasons for the Acquisitions; Recommendation of the Board of
Directors" and "--Terms of the Difco Acquisition" for a more detailed
description of the circumstances under which the Difco shareholders will
receive varying amounts of Shares. Based upon the average closing prices for
the Shares, as quoted on the London Stock Exchange for the five trading days
preceding April 29, 1998, the day trading in the Shares on the London Stock
Exchange was suspended at the request of the Company, these Shares would have a
value of approximately $2,977,000 to $11,907,000. Based upon these values, and
the cash consideration to be paid to acquire the U.K. Interests, the total
consideration to be paid to consummate the Acquisitions ranges from
approximately $36,977,000 to $45,907,000.
The purpose of the Acquisitions is to acquire the U.K. Interests. Alliance
intends to finance the acquisition of the U.K. Interests, and a portion of the
development costs of the U.K. Interests, through the proposed issuance of at
least $100.0 million of Senior Notes (the "Notes"). In addition, the Company
has renegotiated its credit facility with its current lender, which will become
effective simultaneously with the completion of the Acquisitions and the
issuance of the Notes (the "Amended Credit Facility"). There is no assurance,
however, that the Company will be able to issue the Notes on terms that the
Company believes are satisfactory. The Company has the right not to acquire
Difco if it is unable to issue the Notes on satisfactory terms.
The Difco Acquisition Agreement and the Sale and Purchase Agreement between
Difco and Burlington (the "Interests Acquisition Agreement" and, with the Difco
Acquisition Agreement, the "Acquisition Agreements") set forth the principal
terms by which the Acquisitions will be consummated. The Acquisition Agreements
contain representations, warranties and agreements of the parties, and provide
specific conditions to the consummation of the Acquisitions and terms under
which each Acquisition Agreement may be terminated or abandoned. See "The
Acquisitions and Related Matters--Other Provisions of the Difco Acquisition
Agreement" and "--Other Provisions of the Interests Acquisition Agreement."
Effective Time
Following the satisfaction or waiver of all conditions contained in the
Acquisition Agreements, the Acquisitions will be consummated on the date and
time of the execution and delivery of all documents required to effect the
Acquisitions (the "Effective Time"). See "The Acquisitions and Related
Matters--Effective Time."
Conditions to the Completion of the Acquisitions
Completion of the Acquisitions is subject to certain conditions, including
the approval of the Acquisitions and the other matters to be considered at an
Extraordinary General Meeting by the requisite holders of Shares; the
completion of debt financing by the Company; approval of the acquisition of the
U.K. Interests on behalf of the U.K. Department of Trade and Industry (the
"U.K. DTI") by the Secretary of State for Trade and Industry; and certain other
customary closing conditions. There can be no assurance as to when or if the
conditions will be satisfied (or, where permissible, waived) or that the
Acquisitions will be consummated. See "The Acquisitions and Related Matters--
Other Provisions of the Difco Acquisition Agreement--Conditions to Difco
Acquisition,"
3
<PAGE>
"--Other Provisions of the Interests Acquisition Agreement--Conditions to U.K.
Interests Acquisition" and "--Governmental and Regulatory Approvals."
Termination of the Acquisition Agreements
The Acquisition Agreements may each be terminated at any time before the
Effective Time, notwithstanding the vote of the Company's shareholders, under
certain circumstances. See "The Acquisitions and Related Matters--Other
Provisions of the Difco Acquisition Agreement--Amendments; Waiver; Termination"
and "--Other Provisions of the Interests Acquisition Agreement--Amendments;
Waiver; Termination."
Waiver and Amendment
The parties to the Acquisition Agreements generally may waive or amend the
terms of their respective Acquisition Agreements. Upon a waiver or amendment by
the Company of a material term of either of the Acquisition Agreements the
Company will circulate an amended proxy statement and re-solicit the
shareholders of the Company to approve the Acquisitions and related matters.
See "The Acquisitions and Related Matters--Other Provisions of the Difco
Acquisition Agreement--Amendments; Waiver; Termination" and "--Other Provisions
of the Interests Acquisition Agreement--Amendments; Waiver; Termination."
Interests of Certain Persons in the Acquisitions
Certain members of the Company's management and the Board of Directors may
have interests in the Acquisitions that are in addition to their interests
generally as management or shareholders of the Company. In particular, Michael
E. Humphries, a director of the Company, is a Senior Vice President of
Rothschild Natural Resources, LLC, an affiliate of N M Rothschild & Sons
Limited which is acting as "sponsor" of the Company in connection with the
listing particulars of the Company being published in the U.K. as a consequence
of the Acquisitions and for purposes of U.K. regulatory requirements. Mr.
Humphries is not a shareholder of NM Rothschild & Sons Limited or of the
Company.
The Board was aware of these interests and considered them, among other
matters, in approving the Acquisitions and the related transactions. See "The
Acquisitions and Related Matters--Interests of Certain Persons in the
Acquisitions."
Expenses
The Company expects to incur expenses of approximately $6.5 million in
connection with the Extraordinary General Meeting, the debt financing, the
consummation of the Acquisitions and related matters.
Regulatory Matters
The Company is not aware of any U.S. governmental or regulatory approvals
required for completion of the Acquisitions in the U.S., other than compliance
with U.S. federal and applicable state securities laws. To the extent that any
governmental or regulatory requirements arise in the U.S., the Company does not
expect them to materially affect the completion of the Acquisitions or the
benefits to be obtained therefrom. See "The Acquisitions and Related Matters--
Governmental and Regulatory Approvals."
Pursuant to the listing rules of the London Stock Exchange, the Acquisitions
may not be completed until and unless the Company's shareholders have approved
the Acquisitions. The U.K. DTI must also approve the acquisition of the U.K.
Interests from Burlington. The Company has met with the U.K. DTI to discuss the
acquisition of the U.K. Interests. The necessary U.K. DTI approval will be
subject, among other things, to completion of the Acquisitions. See "The
Acquisitions and Related Matters--Governmental and Regulatory Approvals." In
addition, development of the U.K. Properties will be subject to subsequent U.K.
DTI approval.
4
<PAGE>
Under Rule 9 of the U.K. City Code on Takeovers and Mergers, any person who
acquires shares which (taken together with any shares already held or acquired
by persons acting in concert with them) carry 30% or more of the voting rights
of a company to which the Code applies (which includes Alliance) is required by
the Panel on Take-overs and Mergers (the "Panel") to make a general offer to
the shareholders of that company. The Panel has agreed, subject to the approval
of the Difco Acquisition by Alliance's shareholders, to waive any requirements
under Rule 9 of the Code for such a general offer to be made by Difco
shareholders as a consequence of the conversion of the Acquisition Shares and
the issuance of additional shares pursuant to the Difco Acquisition Agreement.
See "The Acquisitions and Related Matters--Governmental and Regulatory
Approvals."
Material Income Tax Consequences
Neither the Company nor any of its existing shareholders will recognize any
gain or loss under U.S. or U.K. tax laws as a result of the completion of the
Acquisitions. See "The Acquisitions and Related Matters--Material Income Tax
Consequences."
Accounting Treatment
The Acquisitions are intended to be accounted for as a "purchase" under U.S.
GAAP. See "The Acquisitions and Related Matters--Accounting Treatment."
Dissenters' Rights
No right of dissent or appraisal is available to holders of Shares. See "The
Acquisitions and Related Matters--Appraisal Rights."
Recommendation of the Board of Directors
The Directors consider that the Difco Acquisition and the U.K. Interests
Acquisition (collectively, the "Acquisitions") are in the best interests of
Alliance and its shareholders as a whole and are fair to the shareholders of
Alliance. 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% of the
present issued share capital of the Company. See "The Acquisitions and Related
Matters--Background of the Acquisitions" and "The Acquisitions and Related
Matters--Reasons for the Acquisitions; Recommendation of the Board of
Directors."
THE MEETING; VOTES REQUIRED
The Extraordinary General Meeting will be held on July 29, 1998, at 2:00
p.m., United Kingdom time, at the Royal Automobile Club, 89 Pall Mall, London
SW1Y 5HS. 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. In order to satisfy the requirements of the U.K. City Code
on Takeovers and Mergers, the Chairman of the Extraordinary General Meeting
will, in accordance with the Company's Articles of Association, demand a poll
be held at the meeting for the purpose of deciding the resolutions. 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.
MARKET PRICE DATA
The Shares are traded on the London Stock Exchange under the symbol "ARS."
Since completion of the Company's acquisition (the "LaTex Merger") of LaTex
Resources, Inc. ("LaTex") on May 1, 1997, the Shares
5
<PAGE>
have also traded from time to time in the U.S. in the over-the-counter market
under the trading symbol "ACREF." The table below sets forth the high and low
prices for Shares as reported on the London Stock Exchange and the high and low
closing bid prices for the Shares of the Company in the over-the-counter market
as reported by the National Association of Securities Dealers' ("NASD") for the
calendar periods indicated, after giving effect to a 40-to-1 reverse stock
split of the Shares that occurred on May 1, 1997. The quotations for the over-
the-counter market reflect inter-dealer prices, without retail mark-up, mark-
down or commission and may not represent actual transactions. At the date of
this Proxy Statement the Company has not declared or paid any cash dividends
and the terms of the Company's current credit facility prohibit the payment of
any dividends. At the request of Alliance, the trading of the Shares on the
London Stock Exchange was suspended upon the announcement of the LaTex Merger
agreement on August 10, 1996 and remained suspended until completion of the
LaTex Merger on May 1, 1997. In addition, at the request of Alliance, the
trading of the Shares on the London Stock Exchange was suspended upon the
announcement by Alliance of discussions regarding the Acquisitions on April 29,
1998 and will remain suspended until the Acquisitions are completed or
terminated.
<TABLE>
<CAPTION>
LONDON STOCK OTC BULLETIN
EXCHANGE BOARD
--------------------------- -------------
HIGH LOW HIGH LOW
------------- ------------- ------ ------
<S> <C> <C> <C> <C>
1996.............................. (Pounds).0500 (Pounds).0176 $ N/A $ N/A
1997.............................. .6000 .2300 0.5500 0.2500
1998 (through April 28, 1998 for
the London Stock Exchange and
June 24, 1998 for the OTC
Bulletin Board).................. .3250 .2100 0.5000 0.2300
</TABLE>
6
<PAGE>
SUMMARY SELECTED HISTORICAL AND UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL AND RESERVE INFORMATION
The summary historical financial information and the unaudited pro forma
condensed combined financial information presented below is qualified in its
entirety and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the "Pro Forma
Condensed Combined Financial Information," and the "Consolidated Financial
Statements" on page F-1. 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 the Company
would actually have been if the Acquisitions and the debt financing, the
effects of which they illustrate, had in fact occurred on the dates indicated
or to project the financial position or results of operations for any future
date or period.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
JULY 31, APRIL 30, APRIL 30, 1998
--------------------- ----------- -----------------
PRO
1995(1)(5) 1996(1)(5) 1997(1)(5) ACTUAL FORMA(2)
---------- ---------- ----------- ------- --------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total revenues........... $ 9,809 $ 12,520 $ 5,845 $10,210 $10,210
Lease operating
expenses................ 4,643 5,472 3,117 5,506 5,506
General and
administrative
expenses................ 2,736 2,893 3,481 3,364 3,364
Depreciation, depletion
and amortization........ 3,364 3,511 1,542 2,598 2,598
Loss from operations..... (1,678) (2,936) (2,311) (2,386) (2,386)
Net loss................. (3,306) (11,330) (4,389) (4,729) (9,214)
OTHER FINANCIAL DATA:
Capital expenditures(3).. 27,185 3,877 350 11,414 57,671
Ratio of earnings to
fixed charges(4)........ -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
APRIL 30, 1998
-----------------
PRO
ACTUAL FORMA(2)
------- --------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA (END OF PERIOD):
Cash and cash equivalents.................................. $ 408 $ 19,329
Working capital (deficit).................................. (9,480) 22,528
Oil and gas properties and other fixed assets, net......... 29,808 76,065
Total assets............................................... 34,760 121,728
Total debt................................................. 21,067 100,000
Convertible subordinated unsecured loan notes.............. 1,551 1,551
Total stockholders' equity................................. 2,183 10,218
</TABLE>
- --------
(1) On May 1, 1997, Alliance completed its acquisition of LaTex pursuant to the
LaTex Merger. For accounting and financial reporting purposes LaTex is
treated as having acquired Alliance as the LaTex shareholders had a
controlling interest in the combined companies. Accordingly, the assets and
liabilities of Alliance have been recorded at their fair value for the
period beginning May 1, 1997 while the assets and liabilities of LaTex have
been recorded at their historical cost as shown in LaTex's existing
financial statements. The historical financial information for all
financial periods to April 30, 1997 reflect the results of operations and
assets and liabilities of LaTex. 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.
(2) The unaudited pro forma condensed combined financial information
illustrates the acquisition of the U.K. Interests for the period ended and
as of April 30, 1998.
(3) Capital expenditures include expenditures on fixed assets acquired in
connection with the acquisition of subsidiaries as well as expenditures on
other additions to fixed assets.
7
<PAGE>
(4) For purposes of calculating the ratio of earnings to fixed charges, fixed
charges consist of interest expense including amortization of deferred debt
issuance costs. The Company's earnings were inadequate to cover fixed
charges for the years ended July 31, 1995 and 1996, for the nine months
ended April 30, 1997, for the year ended April 30, 1998 and pro forma for
the year ended April 30, 1998 by $3.306 million, $11.330 million, $4.389
million, $4.729 million and $9.214 million, respectively.
(5) Results reported for the nine months ended April 30, 1997 and all prior
periods have been restated to reflect the change in accounting policy for
oil and gas assets to full cost accounting in that period from LaTex's
previous policy of successful efforts accounting. The effects of the
accounting change on the years ended July 31, 1995 and 1996 and for the
nine months ended April 30, 1997 were to increase (decrease) the net loss
by $0.814 million, $1.100 million and $(2.373) million, respectively.
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
Gaffney, Cline & Associates, Inc. ("Gaffney Cline"), independent petroleum
engineers. The information with respect to oil and gas production represents
production from LaTex properties for the nine months ended April 30, 1997, and
production from the Company's properties for the year ended April 30, 1998.
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," and Note 17 to the Consolidated Financial Statements of the
Company.
<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)................... 26,576 179,376 26,322
MMcfe (6 Mcf/Bbl)............ 69,890 222,690 65,286
Percent proved developed
reserves.................... 71% 22% 78%
Pre-tax PV10 value (in
thousands).................. $59,787 $146,487 $48,600
Standardized Measure (in
thousands).................. $52,277 $114,777 $45,106
</TABLE>
- --------
(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.
<TABLE>
<CAPTION>
NINE
MONTHS
YEAR ENDED JULY 31, ENDED YEAR ENDED
------------------- APRIL 30, APRIL 30,
1995 1996 1997 1998
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Production Data:
Oil (MBls).......................... 359 405 190 396
Gas (MMcf).......................... 2,612 3,481 1,640 1,689
MMcfe (6 Mcf/Bbl)................... 4,766 5,911 2,780 4,065
</TABLE>
8
<PAGE>
RISK FACTORS
Completion of the Acquisitions involves certain risks that are different
from or greater than those involved in the Company's existing operations.
Shareholders should particularly note the following factors.
SIGNIFICANT LEVERAGE AND DEBT SERVICE
The Company has been and, following the Acquisitions and the issuance of the
Notes, will continue to be, highly leveraged. As of April 30, 1998, after
giving effect to the Acquisitions and the issuance of the Notes, on a pro
forma basis, the Company's total debt and shareholders' equity would have been
approximately $101.6 million and $10.2 million, respectively. In addition, the
Amended Credit Facility will initially afford the Company $20.0 million of
available borrowing capacity. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Capital Resources and
Liquidity."
The Company's level of indebtedness will have several important effects on
its future operations, including (i) a substantial portion of the Company's
cash flow from operations must be dedicated to the payment of interest on its
indebtedness and will not be available for other purposes, (ii) covenants
contained in the Amended Credit Facility and the indenture pursuant to which
the Notes will be issued (the "Indenture") will require the Company to meet
certain financial tests, and other restrictions may limit its ability to
borrow additional funds or to dispose of assets and may affect the Company's
flexibility in planning for, and reacting to, changes in its business,
including possible acquisition activities, and (iii) the Company's ability to
obtain additional financing in the future for working capital, capital
expenditures, acquisitions, general corporate purposes or other purposes may
be impaired. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Capital Resources and Liquidity."
The Company's ability to meet its debt service obligations and to reduce its
total indebtedness will be dependent upon the Company's future performance,
including the development of and receipt of cash flow from the U.K. Interests,
which will be subject to general economic conditions and to operational,
financial, business and other factors affecting the U.K. Interests and the
operations of the Company, many of which are beyond its control. There can be
no assurance that the Company will generate cash flow sufficient for these
purposes. If the Company is unable to generate cash flow in the future
sufficient to cover its fixed charges (including interest on the Notes) and is
unable to borrow sufficient funds from other sources, it may be required to
refinance all or a portion of its existing debt (including the Notes) or to
sell all or a portion of its assets. There can be no assurance that a
refinancing would be possible, nor can there by any assurance as to the timing
of any asset sales or the proceeds that the Company could realize therefrom.
In addition, the terms of the Indenture and the Amended Credit Facility will
restrict the Company's ability to sell assets and the use of the proceeds
therefrom. Additionally, in the event of a bankruptcy, liquidation,
dissolution, reorganization or similar proceeding with respect to the Company,
assets of the Company will be available to pay shareholders only after all
indebtedness of the Company has been paid in full. There can be no assurance
that there will be sufficient assets to pay amounts to shareholders.
The Company's cash flow from operations is currently not sufficient to make
interest payments on the Notes. If the Company does not develop the U.K.
Interests and receive cash flow from the operation of the U.K. Interests
subsequent to the payment of the first four semi-annual interest payments,
there can be no assurance that the Company will be able to make required
interest payments on the Notes.
CONSUMMATION OF THE OFFERING; APPROVALS
The consummation of the offering of the Notes is dependent upon the
consummation of the Acquisitions. The consummation of the Acquisitions is
dependent upon, among other things, the fulfillment or waiver of various
closing conditions, including that the Acquisitions be approved by a majority
of the outstanding Shares, and approved on behalf of the U.K. DTI by the
Secretary of State for Trade and Industry.
9
<PAGE>
The Company has met with the U.K. DTI to discuss the acquisition of the U.K.
Interests. The Company has been advised that the U.K. DTI approval will be
subject, among other things, to completion of the Acquisitions. In addition,
development of the U.K. Interests will be subject to subsequent U.K. DTI
approval. The Company has not, and understands that Burlington has not
submitted a development plan to the U.K. DTI. There can be no assurance that
the U.K. DTI will approve the Acquisitions or development of the U.K.
Interests.
SUBSTANTIAL CAPITAL REQUIREMENTS
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 $33.0 million
in cash plus its pro rata share of expenditures incurred by Burlington and
interest from January 1, 1998, which are anticipated to be approximately $1.0
million. In addition, it is currently anticipated by the Company that
approximately $73.0 million (net to the Company's interest in the U.K.
Properties) will be required in the period commencing upon the closing of the
Acquisitions to the end of the year 2005 in connection with the development
plans for the U.K. Properties under the assumptions described in "Information
With Respect to Difco and the U.K. Properties--U.K. Properties--The U.K.
Interests," of which amount approximately $21.5 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 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 herein 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.
POTENTIAL INABILITY TO PURCHASE NOTES UPON A CHANGE OF CONTROL OFFER
Upon a change of control of the Company, the Company will be required to
offer to repurchase all outstanding Notes at 101% of the principal amount
thereof plus accrued and unpaid interest to the date of repurchase. However,
there can be no assurance that sufficient funds will be available at the time
of any change of control to make any required repurchases of Notes tendered,
or that restrictions in the Amended Credit Facility will allow the Company to
make such required repurchases.
UNCERTAINTY OF RESERVE INFORMATION AND FUTURE NET REVENUE ESTIMATES
The accuracy of the reserve information and the future cash flows from those
reserves set forth in this Proxy Statement depend on a number of factors,
including the accuracy of the engineering data and its interpretation, future
rates of production, future oil and gas prices, the amount and timing of
future development and operating costs, hydrocarbon drainage, severance and
excise taxes, and the effects of government regulation, all of which may in
fact vary considerably from those assumed in making the estimates. Any
significant variance in these matters could materially affect the estimated
quantity and value of the reserves. Actual production, revenues and
expenditures with respect to the Company's reserves will likely vary from
estimates, and these variances may be material. See "Information With Respect
to Alliance" and "Information With Respect to Difco and the U.K. Properties."
The present value of future net revenues (Pre-tax PV10 value and
Standardized Measure) referred to in this Proxy Statement should not be
construed as the current market value of the estimated oil and gas reserves
attributable to the U.K. Interests or the Company's U.S. properties. In
accordance with applicable requirements of the Securities and Exchange
Commission (the "Commission"), the estimated discounted future net cash flows
from proved reserves are generally based on prices and costs as of the date of
the estimate, whereas actual future prices and costs may be materially higher
or lower. Actual future net cash flows also will be affected by increases in
consumption by gas and oil purchasers and changes in governmental regulations
or taxation. The timing of actual future net cash flows from proved reserves,
and thus their actual present value, will be affected by the timing of both
the production and the incurrence of expenses in connection with development
and production of
10
<PAGE>
oil and gas properties. In addition, the 10% discount factor, which is
required to be used to calculate discounted future net cash flows for
reporting purposes, is not necessarily the most appropriate discount factor
based on interest rates in effect from time to time and risks associated with
the Company or the oil and gas industry in general.
VOLATILITY OF OIL AND GAS PRICES
The Company's financial results and, therefore, its ability to service its
debt, including the Notes, are significantly affected by the price received
for the Company's oil and gas production. Historically, the markets for oil
and gas have been volatile and may continue to be volatile in the future.
Prices of oil and gas are subject to wide fluctuations in response to market
uncertainty, changes in supply and demand and a variety of additional factors,
all of which are beyond the control of the Company. These factors include
domestic and foreign political conditions, the overall level of supply of and
demand for oil and gas, the price of imported oil and gas, weather conditions,
the price and availability of alternative fuels and overall economic
conditions. The Company's future financial condition and the results of
operations will be dependent, in part, upon the prices received for the
Company's oil and gas production, as well as the costs of acquiring, finding,
developing and producing reserves. To reduce its exposure to price risks in
the sale of its oil and gas, the Company enters into hedging arrangements from
time to time. Although the Company currently hedges a significant portion of
its production, any substantial or extended decline in the price of oil and
gas would have a material adverse effect on the Company's financial condition
and results of operations, as well as reduce the amount of the Company's oil
and gas that could be produced economically. Moreover, if oil and gas prices
fall materially below their current levels, the availability of funds and the
Company's ability to repay outstanding debt, including the Notes, could be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
NEED TO REPLACE RESERVES
In general, the volume of production from oil and gas properties declines as
reserves are depleted, with the rate of decline depending on reservoir
characteristics. Except to the extent the Company conducts successful
exploration and development activities or acquires additional properties
containing proved reserves, or both, the proved reserves of the Company will
decline as reserves are produced. The Company's future oil and gas production
is, therefore, highly dependent upon its level of success in finding or
acquiring additional reserves. The business of exploring for, developing or
acquiring reserves is capital intensive. To the extent cash flow from
operations is reduced and external sources of capital become limited or
unavailable, the Company's ability to make the necessary capital investment to
maintain or expand its asset base of oil and gas reserves would be impaired.
In addition, there can be no assurance that the Company's future exploration,
development and acquisition activities will result in additional proved
reserves or that the Company will be able to drill productive wells at
acceptable costs.
DRILLING AND OPERATING RISKS
Drilling activities are subject to many risks, including the risk that no
commercially productive reservoirs will be encountered or that operations may
be affected by matters beyond the Company's control. The cost of drilling,
completing and operating wells is often uncertain, and drilling operations may
be curtailed, delayed or canceled as a result of a variety of factors,
including unexpected drilling conditions, pressure or irregularities in
formations, equipment failures or accidents, adverse weather conditions and
shortages or delays in the delivery of equipment. The Company's future
drilling activities may not be successful and, if unsuccessful, such failure
may have a material adverse effect on the Company's future results of
operations and financial condition. Additionally, the Company is not fully
insured against drilling risks, nor are all such risks insurable. The Company
considers current levels of liability insurance adequate, although the nature
of these risks is such that liabilities could exceed policy limits or, as in
the case of environmental fines, be uninsurable, in which event the Company
could incur significant costs.
11
<PAGE>
ACQUISITION RISKS AND RISKS OF INTERNATIONAL OPERATIONS
The Company intends to continue to grow via the acquisition of oil and gas
properties. The Company expects to continue to evaluate and pursue acquisition
opportunities available on terms management considers favorable to the
Company. The successful acquisition of oil and gas properties requires an
assessment of recoverable reserves, future oil and gas prices, operating
costs, potential environmental and other liabilities and other factors beyond
the Company's control. Such an assessment is necessarily inexact and its
accuracy is inherently uncertain. In connection with such an assessment, the
Company performs a review of the subject properties it believes to be
generally consistent with industry practices. Such a review, however, will not
reveal all existing or potential problems, nor will it permit a buyer to
become sufficiently familiar with the properties to fully assess their
deficiencies and capabilities. Inspections may not be performed on every well,
and structural and environmental problems are not necessarily observable even
when an inspection is undertaken. The Company is generally not entitled to
contractual indemnification for preclosing liabilities, including
environmental liabilities, and generally acquires interests in the properties
on an "as is" basis.
The Company intends to explore and develop projects in the U.S., Europe and
other countries, some of which may have less developed regulatory schemes.
Such international projects would be subject to political, economic and other
uncertainties, including, inter alia, risk of war, revolution, import and
export regulations and by U.S. legislation affecting foreign trade, taxation
and investment. Furthermore, disputes may subject the Company to the exclusive
jurisdiction of foreign courts or the Company may not be successful in
subjecting foreign persons to the jurisdictions of courts in the U.K. or in
the U.S.
FOREIGN 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 pounds sterling. This will subject
the Company to currency exchange risk which may adversely affect the financial
condition of the Company. Any change in the currency exchange rates that
reduces the pounds sterling available to the Company upon the conversion of
the U.S. dollars could have a material adverse effect on the Company and its
ability to make the planned capital expenditures. Future revenues from the
U.K. Interests will be largely denominated in pounds sterling (or other
European currencies), but principal and interest on the Notes will be payable
in U.S. dollars. Therefore the ability of the Company to pay interest and
principal on the Notes when due is dependent, in part, on the then current
exchange rate between pounds sterling, on the one hand, and U.S. dollars, on
the other hand, which rates are and will be subject to fluctuation. The
Company does not currently use financial hedging instruments to manage
exchange rate exposure, although in the future the Company may elect to manage
exchange rate exposure by entering into certain hedging transactions. There
can be no assurance however, that exchange rate fluctuations will not have a
material adverse effect on the Company's ability to make principal and
interest payments when due.
Stage III of the European Economic and Monetary Union ("Stage III") is due
to commence on January 1, 1999, in certain Member States (Austria, Belgium,
Finland, France, Germany, Ireland, Italy, Luxemburg, the Netherlands, Portugal
and Spain ("Participating States")) of the European Union ("EU"). Part of
Stage III is the locking of exchange rates and the introduction of a single
currency ("Euro"), which is intended to replace the national currencies of the
Participating States and the transfer of authority for conducting monetary
policy for such EU Member States to the European Central Bank. The Company
cannot predict what effect, if any, conversion to the Euro will have on
currency exchange rates, the Notes or the business of the Company.
DEPENDENCE ON THIRD-PARTY OPERATORS
Burlington will be the operator for a majority of the U.K. Interests.
Although the U.K. Interests operated by Burlington will be governed by a Joint
Operating Agreement between Burlington and the Company (the "Operating
Agreement") that will generally require concurrence of the Company, the
Company will not be able to compel Burlington to undertake any specific
development activities.
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The Operating Agreement also will provide for operations in the covered area
by less than all parties under certain circumstances ("Sole Risk Operations").
The parties conducting such operations ("Sole Risk Participants") will be
responsible for all liabilities, costs and expenses associated with such
operations, and also will be entitled to receive all benefits and revenues
generated by the operations. If a discovery results from Sole Risk Operations,
any party that was not a Sole Risk Participant in the operations may
participate in appraisal drilling or a development program relating to the
discovery by making a payment to the then existing Sole Risk Participants of
its proportionate share of the cost previously incurred with respect to the
Sole Risk Operations, plus interest. In addition, the party must make a
payment to the then existing Sole Risk Participants of a significant premium
calculated by reference to a formula in the Operating Agreement.
Additionally, the Company owns (and may in the future acquire) working
interests in additional properties in which it is not the operator of such
properties. In such cases, the Company's ability to explore and develop such
interests may be dependent upon the decision of the operator or others. If the
Company's partners do not elect to explore, develop and to finance such
ventures, the Company may not be able to develop such properties.
TRANSPORTING, PROCESSING AND MARKETING OF OIL AND GAS FROM U.K. INTERESTS
The Company currently does not have any contracts for the transportation,
processing or sale of oil and gas produced from the U.K. Interests. Moreover,
completion of the Acquisitions is not contingent on any contracts being
executed. The Company believes that it will be able to transport, have
processed and sell its production on satisfactory terms at the time the U.K.
Interests are developed and ready to begin production. See "Information With
Respect to Difco and the U.K. Properties--U.K. Properties--The U.K.
Interests." However, if the Company is unable to, or does not, enter into
satisfactory arrangements, it will not be able to begin production from the
U.K. Interests and any cash flow from the U.K. Interests will be delayed until
adequate arrangements are made.
COMPETITION
The oil and gas industry is highly competitive in all of its phases.
Alliance competes with other integrated and independent energy companies in
all areas of its business (including acquiring properties), as well as in
securing employees. Many of these competitors have financial, personnel and
other resources substantially greater than those of Alliance. The Company's
ability to acquire additional properties to discover reserves and to
participate in drilling opportunities in the future will be dependent upon its
ability to select and evaluate suitable properties and to consummate
transactions in a highly competitive environment.
GOVERNMENTAL AND ENVIRONMENTAL REGULATION
Oil and gas production is subject to regulation under many international and
U.S. federal and state statutes, rules, orders and regulations. Permits for
drilling, reworking and recompletion operations, drilling bonds and reports
concerning operations are required. Most jurisdictions have regulations
governing conservation matters, establishing maximum rates of production and
the regulation of the spacing, plugging and abandonment of wells. See "--
Consummation of the Offering; Approvals" and "The Acquisitions and Related
Matters--Governmental and Regulatory Approvals."
Environmental laws and regulations may affect the Company's operations and
costs. In particular, production and salt water disposal operations and use of
facilities for treating, processing or otherwise handling hydrocarbons and
wastes therefrom are subject to stringent environmental regulations.
Environmental regulations are subject to frequent change and the Company
cannot predict ongoing costs of compliance or the future impact of such
regulations on operations.
Development of new power stations requires U.K. government consent. On June
25, 1998, the U.K. government announced the preliminary conclusions of its
review of energy sources for power generation. The U.K. government has
proposed a stricter policy on power station consents which is likely to curb
the
13
<PAGE>
development of new gas fired power stations. The application and duration of
this policy is currently uncertain and consequently it is difficult to assess
the impact this will have on U.K. gas demand and prices at this time.
ISSUES RELATED TO THE YEAR 2000
Please see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Issues Related to the Year 2000" for a discussion of
risks to the Company associated with the Year 2000 problem.
POSSIBLE CHANGES IN U.K. TAXATION
The U.K. government has announced that it will formally consult the oil
industry on specific proposals to change the fiscal regime for companies
involved in the extraction of U.K. oil and gas. A consultative document is
expected to be published during 1998, with the aim of introducing legislation
in the next U.K. Finance Bill to ensure that an appropriate share of oil and
gas profits are being taxed. An outline of the proposals to be included in the
consultative document has been published by the U.K. government. These
proposals include the abolition of royalties, the removal of the petroleum
revenue tax ("PRT") tariff receipt allowance and either the introduction of a
supplementary corporation tax charge on the profits from U.K. oil and gas
extraction activities or the extension of the PRT to all fields combined with
the introduction of the PRT relief on abortive exploration costs and a
reduction in the PRT oil allowance. There can be no assurance that the
adoption of any of these proposals (or any other proposals which may
ultimately be adopted) will not have a materially adverse effect on the
Alliance's future tax burden.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Proxy Statement includes certain statements that may be deemed to be
"forward-looking statements." All statements included in this Proxy Statement
that address activities, events or developments that the Company expects,
projects, believes or anticipates will or may occur in the future, including
such matters as future drilling and operations, future production of oil and
gas, future net cash flows, future capital expenditures and other such
matters, are forward-looking statements. These statements are based on certain
assumptions and analyses made by management of the Company in light of its
experience and its perception of historical trends, current conditions,
expected future developments and other factors it believes are appropriate in
the circumstances. These statements are subject to a number of assumptions,
risks and uncertainties, including the risk factors discussed in this Proxy
Statement, general economic and business conditions, prices of oil and gas,
the ability of the Company to sell the oil and gas produced, changes in laws
or regulations and other factors, many of which are beyond the control of the
Company. The Company cautions that any such statements are not guarantees of
future performance and that actual results or developments may differ
materially from those projected in the forward-looking statements.
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<PAGE>
THE EXTRAORDINARY GENERAL MEETING
GENERAL
This Proxy Statement is being furnished to holders of Shares in connection
with the solicitation of proxies by the Board of Directors of Alliance for use
at the Extraordinary General Meeting to be held on July 29, 1998, at 2:00
p.m., United Kingdom time, at the Royal Automobile Club, 89 Pall Mall, London
SW1Y 5HS.
This Proxy Statement, the Notice of Meeting and the accompanying form of
proxy are first being mailed to shareholders of the Company on or about July
13, 1998.
PURPOSE OF THE MEETING
At the Extraordinary General Meeting, you will be asked to consider and vote
upon a proposal to approve the Acquisitions and related matters.
VOTING RIGHTS; SOLICITATION OF PROXIES
Each Share entitles its holder to one vote on all matters to be acted upon
at the Extraordinary General Meeting. The presence, in person or by proxy, of
two shareholders entitled to vote at the meeting is necessary to constitute a
quorum to transact business. All shareholders of record at the time of the
Extraordinary General Meeting are entitled to vote at the meeting.
In order to satisfy the requirements of the U.K. City Code on Takeovers and
Mergers, the Chairman of the Extraordinary General Meeting will, in accordance
with the Company's Articles of Association, demand a poll be held at the
meeting for the purpose of deciding the resolutions. The directors and
executive officers of the Company beneficially own and have the right to vote
approximately 1.3% of the outstanding Shares and have indicated their
intention to vote in favor of the approval and adoption of the Acquisitions
and the other matters to be considered at the Extraordinary General Meeting.
When proxies in the accompanying form are properly executed and received,
the Shares represented will be voted at the Extraordinary General Meeting in
accordance with the directions noted. If no direction is indicated, Shares
will be voted in favor of the Acquisitions and the other matters to be
considered at the Extraordinary General Meeting, and in the discretion of the
proxies with respect to any other matter that is properly brought before the
meeting. The deposit of an instrument of proxy shall not preclude a
shareholder from attending and voting in person at the Extraordinary General
Meeting.
A form of proxy for use at the Extraordinary General Meeting is enclosed
with this Proxy Statement. Whether or not you intend to be present at the
meeting, you are requested to complete and return the form of proxy in
accordance with the instructions thereon so as to arrive as soon as possible
at IRG plc, Balfour House, 390/398 High Road, Ilford, Essex IG1 1NQ, but in
any event no later than 48 hours before the time appointed for the holding of
the meeting. The completion and return of a form of proxy will not preclude
you from attending and voting in person at the meeting, if you so wish.
Any shareholder of the Company giving a proxy may revoke his proxy at any
time prior to the voting thereof either in person at the Extraordinary General
Meeting or by delivering written notice to the registrar, IRG plc, at Balfour
House, 390/398 High Road, Ilford, Essex IG1 1NQ, no later than 48 hours before
the time appointed for the holding of the meeting. No notice of revocation
will be effective, however, until it has been received by the registrar, and
the notice of revocation must be received at or before the Extraordinary
General Meeting.
In addition to the solicitation of proxies by use of the mail and through
this Proxy Statement, directors, officers and regular employees of the Company
may solicit the return of proxies, either by mail, personal contact,
telephone, telecopy or other electronic means. Officers and employees of the
Company will not be additionally
15
<PAGE>
compensated for their solicitation efforts but will be reimbursed for any out-
of-pocket expenses incurred. Brokerage houses and other custodians, nominees
and fiduciaries will be requested, in connection with shares registered in
their names, to forward solicitation materials to the beneficial owners of the
Shares.
Each shareholder can vote personally or on a poll by proxy; a person acting
as a proxy need not be a shareholder.
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.
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<PAGE>
THE ACQUISITIONS AND RELATED MATTERS
GENERAL
The following is a brief summary of certain aspects of the Acquisition
Agreements and the Acquisitions.
EFFECTIVE TIME
The parties to the Acquisition Agreements anticipate executing and
delivering all documents required to complete the Acquisitions as promptly as
possible after the adoption of the matters to be considered at the
Extraordinary General Meeting and the satisfaction or waiver of the conditions
contained in the Acquisition Agreements. See "--Other Provisions of the Difco
Acquisition Agreement--Conditions to Difco Acquisition" and "--Other
Provisions of the Interests Acquisition Agreement--Conditions to the U.K.
Interests Acquisition." The Acquisitions will be completed on the date and
time of such execution and delivery (the "Effective Time").
BACKGROUND OF THE ACQUISITIONS
Since the completion of the LaTex Merger in May 1997, the management of
Alliance has internally reviewed and evaluated a number of domestic and
international acquisition opportunities in the oil and gas business. In
November 1997, Rothschild Natural Resources LLC ("RNR"), financial advisors to
Alliance, approached management with the potential acquisition of the U.K.
Interests, located in the U.K. sector of the North Sea. On December 22, 1997,
Messrs. John A. Keenan, Chairman, Managing Director and Chief Executive
Officer of the Company, and Paul R. Fenemore, an executive director and
Operations and Business Development Director of the Company, were introduced
by Mr. Michael E. Humphries, a Senior Vice President of RNR and a director of
the Company to Mr. F. Fox Benton, Jr., who together with members of his
immediate family own all of the issued and outstanding capital stock of Difco.
During the course of this meeting, Mr. Benton stated that he had discussed the
potential acquisition of the U.K. Interests with Burlington Resources and had
considered pursuing such potential acquisition through a U.K. public company
such as Alliance. There followed further discussion of the U.K. Properties and
Alliance, with both parties agreeing to exchange confidentiality agreements
followed by information on each others' assets.
During late December 1997 and early January 1998, a series of telephone
conversations took place and both parties exchanged information. On January 9,
Mr. Benton, Mr. Keenan and Mr. Humphries met to discuss potential acquisition
structures and financing. The parties discussed the relative net asset
valuation of both Alliance and the U.K. Interests. Mr. Keenan also met with
Bank of America National Trust & Savings Association ("BoA"), Alliance's
principal creditor, to discuss the proposed transaction and likely financing
sources. BoA suggested that Alliance consider issuing debt securities in
connection with any financing.
In addition, during this period, several phone conversations took place
between Mr. Keenan, his fellow directors, Mr. Benton, RNR, BoA, and other
potential financial sources, which resulted in presentations being made by
several financial institutions regarding possible financing for the proposed
Acquisitions. On January 14, Messrs. Keenan and Humphries met with BoA to
discuss restructuring the existing BoA credit facility and the likely terms
and timing of new debt securities, and continued the discussion by conference
call on January 16.
During the week commencing January 19, 1998, a series of meetings took place
in London with N M Rothschild & Sons Limited and Williams de Broe, the
Company's stockbrokers, regarding the timing and U.K. regulatory issues
involved in a possible transaction.
During the next thirty day period, Messrs. Keenan and Fenemore and H. Brian
K. Williams, an executive director, the Finance Director and Chief Financial
Officer of the Company, participated in presentations with various financial
institutions regarding potential sources of financing for the Acquisitions.
Mr. Keenan, Mr. Benton and the financial and legal advisers of Alliance and
Difco, N.M. Rothschild & Sons Limited, Jenkens & Gilchrist, P.C., and Ashurst
Morris Crisp for Alliance, and Vinson & Elkins, LLP for
17
<PAGE>
Difco, continued to discuss the possible terms of a transaction and on June
29, 1998, Alliance and Difco entered into the Difco Acquisition Agreement.
During the same period, representatives of Difco and Burlington Resources and
their financial and legal advisers continued to meet and on June 29, 1998,
Difco and Burlington Resources entered into the Interests Acquisition
Agreement.
REASONS FOR THE ACQUISITIONS; RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors recommends that the shareholders vote "FOR" the
approval of the Acquisitions and the other proposals to be considered at the
Extraordinary General Meeting, because the Directors believe that:
. the Acquisitions enable the Company to significantly increase its proved
gas reserves;
. the U.K. Interests comprise a large block of proved reserves in a well-
recognized area of oil and gas production that is located close to a
developed gas market infrastructure;
. owning an interest in the U.K. Properties will provide the Company an
association with Mr. Benton and Burlington Resources, whose corporate
family constitutes a major independent exploration and production
company with an extensive portfolio of international assets, which may
have strategic value in connection with the Company's continuing
strategy of pursuing international opportunities; and
. in addition to the proved reserves, the U.K. Interests include a number
of potentially attractive exploration blocks in the East Irish Sea.
In addition, the Board of Directors has reviewed the impact that the debt
financing arrangements associated with making the Acquisitions will have on
the Company's overall financial condition and consider that those arrangements
are favorable because they:
. permit the Company to pay the cash consideration required to fund the
U.K. Interests Acquisition and the related costs;
. provide for the repayment of the amounts outstanding on the Company's
current credit facility (the "Previous Credit Facility"), which amounts
will then be available for future use under the Amended Credit Facility;
and
. enable the Company to fund a significant portion of the development
costs associated with the U.K. Interests.
The Board of Directors considered the risks associated with undeveloped
proved oil and gas reserves in the East Irish Sea, described in greater detail
under "Risk Factors," but believes that the potential benefits justify
completing the Acquisitions on the terms described in this Proxy Statement. In
particular, the Board of Directors believed that the mature nature of the U.K.
gas market, coupled with the projected growth and development of the U.K. gas
market, especially the demand for gas for power generation, and the existing
proximity of the U.K. Properties to gas processing and distribution
facilities, enhance the long-term attractiveness of the Acquisitions.
In determining the consideration payable to the Difco shareholders, the
Board also considered the Pre-tax PV10 value of the Company's 20% interest in
the U.K. Properties prepared by Gaffney Cline ( $86.7 million) compared with
the Pre-tax PV10 value of the Company's existing U.S. properties prepared by
Lee Keeling ($59.787 million) discussed under "Information with Respect to
Alliance--The Company's United States Properties--Reserves," and "Information
With Respect to Difco and the U.K. Properties--U.K. Properties--The U.K.
Interests--Overview." Based on the information it reviewed, the Board of
Directors determined that it was appropriate to issue securities of the
Company that would entitle the Difco shareholders to as much as 45.0% of the
outstanding Shares of the Company. The Difco shareholders will initially be
entitled to receive only approximately 18.3% of the Company's outstanding
Shares and will receive 45.0% of the outstanding Shares only if the U.K.
Interests achieve a combination of sales production performance levels and
reserves value that indicate they are at least as valuable as the Board of
Directors anticipate. See "--Terms of the Difco Acquisition." The Difco
shareholders will initially be entitled to receive approximately 18.3% of the
outstanding
18
<PAGE>
shares of the Company and will receive up to 45.0% of the outstanding shares
of the Company based upon the production from, or reserves attributable to,
the U.K. Interests. Based upon the average closing prices for the 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 Shares traded on the London
Stock Exchange was suspended at the request of the Company, these Shares would
have a value of approximately $2,977,000 to $11,907,000. Based upon these
values, and the cash consideration to be paid to acquire the U.K. Interests,
the total consideration to be paid to consummate the Acquisitions ranges from
approximately $36,977,000 to $45,907,000.
In view of the wide variety of factors, both positive and negative,
considered by the Board of Directors, the Board of Directors did not find it
practical to, and did not, quantify or otherwise assign relative weights to
the specific factors considered.
TERMS OF THE DIFCO ACQUISITION
On June 29, 1998, Alliance and the shareholders of Difco entered into the
Difco Acquisition Agreement under which Alliance will acquire all of the
capital stock of Difco, and, indirectly a contract to acquire the U.K.
Interests, in exchange for 14,041,650 newly created Acquisition Shares and a
contingent right to receive additional Shares, subject to certain increases
based upon the conversion or exercise of Alliance's currently outstanding
convertible loan notes or warrants, as described below, and upon 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 14,041,650 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 shareholders of Difco will
receive a minimum of 18.3% of the issued and outstanding Shares and a maximum
of 45.0% of the issued and outstanding Shares, pursuant to the terms of the
Difco Acquisition Agreement.
The Difco shareholders will initially be entitled to receive approximately
18.3% of the outstanding Shares and will receive up to 45.0% of the
outstanding Shares based upon the production from, or reserves attributable
to, the U.K. Interests. The Difco shareholders will receive only 7,020,825
Shares if none of the production targets are achieved, will receive 28,083,300
Shares if all the production targets or reserve values are achieved and all of
the loan notes and warrants are converted and will receive a number of Shares
within this range if only some of the production targets or reserve valuations
are achieved and/or some of the loan notes or warrants are converted, as set
out in the table below. Based upon the average closing prices for the 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 Shares on the London
Stock Exchange was suspended at the request of the Company, these Shares would
have a value of approximately $2,977,000 (for 7,020,825 Shares) to $11,907,000
(for 28,083,300 Shares). Based upon these values, and the cash consideration
to be paid to acquire the U.K. Interests, the total consideration to be paid
to consummate the Acquisitions ranges from approximately $36,977,000 to
$45,907,000.
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, but in any event into no
more Shares than would result in such Difco holders owning a greater
percentage of the Shares of the Company than as is set out under the heading
"Maximum Applicable Percentage" 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, but in any event no more additional Shares than would result
in such Difco holders owning a greater percentage of the Shares of the Company
than as is set out under the heading "Maximum Applicable Percentage"
corresponding to such Sustained Production Level. "Sustained Production Level"
shall mean 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.
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<PAGE>
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, but 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" shall mean 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 from the production and sale of 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.
<TABLE>
<CAPTION>
BASE NUMBER OF MAXIMUM
SUSTAINED PRODUCTION ALLIANCE SHARES TO BE APPLICABLE RESERVES ESTIMATED ISSUANCE
LEVEL ISSUED PERCENTAGE (1) VALUE (2) DATE (3)
- --------------------- --------------------- -------------- ------------- --------------------
<S> <C> <C> <C> <C>
16
MMcf/day 10,442,101 23.0% N/A First Quarter, 2000
24
MMcf/day 3,797,128 28.5% N/A First Quarter, 2001
32
MMcf/day 3,797,128 34.0% N/A Second Quarter, 2001
40
MMcf/day 3,797,128 39.5% $68.3 million Third Quarter, 2001
48
MMcf/day 3,797,127 45.0% $75.0 million Not Applicable
</TABLE>
- --------
(1) Percentage is to be calculated by dividing the cumulative number of Shares
issued (and to be issued at the relevant Sustained Production Level) to
the Difco shareholders by the total number of Shares then in issue.
(2) 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 this Proxy Statement
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.
(3) 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."
If, by the date which is five years from the completion of the Difco
Acquisition, none of the Sustained Production Levels set out above have been
achieved, the Acquisition Shares will automatically convert on that date into
7,020,825 Shares and 7,020,825 deferred shares having nominal value and no
voting rights. If by such date more than 7,020,825, 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 (Pounds).01. In addition, the Difco Acquisition Agreement provides that the
number of Shares into which the Acquisition Shares are convertible and the
number of additional Shares issuable upon achievement of the Sustained
Production Levels and/or Reserves Value may be increased on a pro rata basis
by as many as 2,452,688 Shares to a total of 28,083,300 Shares upon the
issuance by Alliance of Shares as a result of the conversion or exercise of
Alliance's currently outstanding convertible loan notes or warrants. These
convertible loan notes and warrants were issued by Alliance in connection with
the LaTex Merger, and may be converted into or exercised for up to 2,997,730
Shares.
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<PAGE>
In connection with the Acquisitions, the Company intends to issue at least
$100.0 million of Notes. From the proceeds of the Notes, it is anticipated
that a portion of the proceeds will be used to purchase a portfolio of U.S.
government securities that, together with the earnings thereon, should be
sufficient to pay when due the first four interest payments on the Notes;
approximately $34.0 million will be used to pay the purchase price for the
U.K. Interests Acquisition and interest and expenditures incurred by
Burlington since January 1, 1998; approximately $22.6 million will be used to
repay amounts outstanding under the Company's Previous Credit Facility;
approximately $6.5 million will be used to pay costs and expenses incurred in
connection with the Acquisitions and the issuance of the Notes and the
remainder will be used to fund the development of the U.K. Interests and the
Company's working capital requirements.
The Difco Acquisition Agreement sets forth the principal terms by which the
Difco Acquisition will be consummated. The 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."
OTHER PROVISIONS OF THE DIFCO ACQUISITION AGREEMENT
Certain Covenants
In the Difco Acquisition Agreement Alliance has agreed that, prior to the
Difco Acquisition, it will attempt to secure the financing necessary to
acquire the U.K. Interests and pay the development costs attributable to the
U.K. Interests.
Board of Directors
The Difco Acquisition Agreement also provides that the Difco shareholders
will be entitled to appoint one director to the Board of Directors of
Alliance. Any such appointment will be in accordance with the Company's
Articles of Association. Once an appointment has been made, the Difco
shareholders will have no further right to appoint any directors of Alliance.
The Difco shareholders have informed the Company that they do not currently
have any intention of making any such appointment.
Conditions to the Difco Acquisition
Completion of the Difco Acquisition is subject to certain conditions,
including the approval of the Acquisitions and the other matters to be
considered at the Extraordinary General Meeting by the affirmative vote of the
holders of at least 50% of the votes cast at the Extraordinary General
Meeting, in person or by proxy; approval of the Acquisitions by the U.K. DTI;
the completion of an offering of at least $100.0 million of debt securities by
the Company; and certain other customary closing conditions. There can be no
assurance as to when or if the conditions will be satisfied (or, where
permissible, waived) or that the Difco Acquisition will be consummated. See
"--Governmental and Regulatory Approvals."
Amendments; Waiver; Termination
Prior to the Effective Time, Alliance and the shareholders of Difco may, to
the extent legally allowed, (i) extend the time for the performance of any of
the obligations or other acts required of them in the Difco Acquisition
Agreement; (ii) waive any inaccuracies in the representations and warranties
of the other party contained in Difco Acquisition Agreement or in any document
delivered pursuant to the Difco Acquisition Agreement; or (iii) waive
compliance by the other party of any of its agreements or conditions contained
in the Difco Acquisition Agreement.
The Difco Acquisition Agreement may be terminated at any time prior to the
Effective Time by the mutual written consent of the parties thereto and by
Alliance upon the breach by the Difco shareholders of the terms of the Difco
Acquisition Agreement.
21
<PAGE>
Fees; Expenses
All fees and expenses incurred by the parties to the Difco Acquisition
Agreement shall be borne by the party that incurred such fee or expense.
Relationship Agreement
In compliance with the listing rules of the London Stock Exchange, the Difco
shareholders are required to enter into a relationship agreement pursuant to
which they will agree that for so long as, individually or collectively, they
control the exercise of 30% or more of the rights to vote at general meetings
of the Company, the Company and its subsidiaries will operate independently of
the Difco shareholders and their associates.
TERMS OF THE INTERESTS ACQUISITION AGREEMENT
On June 29, 1998, Difco and Burlington entered into the Interests
Acquisition Agreement under which Difco will acquire the U.K. Interests for
cash consideration of approximately $33.0 million, plus a pro rata share of
expenditures incurred by Burlington and interest from January 1, 1998, which
are anticipated to be approximately $1.0 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."
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. See "--Other Provisions of the Interests Acquisition
Agreement."
OTHER PROVISIONS OF THE INTERESTS ACQUISITION AGREEMENT
Certain Covenants
Burlington has agreed that, prior to completion of the U.K. Interests
Acquisition, (i) it will not agree, without Difco's prior written consent (not
to be unreasonably withheld), to amend any agreements related to the U.K.
Interests nor execute any new agreements with respect to the U.K. Interests to
the extent that any such amendment or new agreement would have a material
adverse impact upon the U.K. Interests and (ii) it will carry on its
activities in relation to the U.K. Interests in the ordinary and usual course.
Conditions to the U.K. Interests Acquisition
Completion of the U.K. Interests Acquisition is subject to certain
conditions, including the approval of the Acquisitions and the other matters
to be considered at the Extraordinary General Meeting; approval of the
acquisition of the U.K. Interests by the U.K. DTI; approval of the U.K.
Interests Acquisition by the Boards of Directors of Difco, Burlington and
Burlington Resources; and certain other customary closing conditions. There
can be no assurance as to when or if the conditions will be satisfied (or,
where permissible, waived) or that the U.K. Interests Acquisition will be
consummated. See "--Governmental and Regulatory Approvals."
Amendments; Waiver; Termination
Prior to the Effective Time, Burlington and Difco, may, to the extent
legally allowed, (i) extend the time for the performance of any of the
obligations or other acts required of the other party contained in the
Interests Acquisition Agreement; (ii) waive any inaccuracies in the
representations and warranties of the other party contained in the Interests
Acquisition Agreement or in any document delivered pursuant to the Interests
Acquisition Agreement; or (iii) waive compliance by the other party of any of
its agreements or conditions contained in the Interests Acquisition Agreement.
22
<PAGE>
The Interests Acquisition Agreement may be terminated at any time prior to
the Effective Time by the mutual written consent of the parties thereto.
Fees; Expenses
All fees and expenses incurred by the parties to the Interests Acquisition
Agreement shall be borne by the party that incurred such fee or expense.
INTERESTS OF CERTAIN PERSONS IN THE ACQUISITIONS
Certain members of the Company's management and the Board of Directors, may
have certain interests in the Acquisitions that are in addition to their
interests generally as management or shareholders of the Company. In
particular, Michael E. Humphries, a director of the Company, is Senior Vice
President of Rothschild Natural Resources, LLC, an affiliate of which is
acting as "sponsor" of the Company in connection with the listing particulars
of the Company being published in the U.K. as a consequence of the
Acquisitions and for purposes of U.K. regulatory requirements. Upon completion
of the Acquisitions, N M Rothschild & Sons Limited will be paid a fee of at
least (Pounds)600,000. Mr. Humphries is not a shareholder of NM Rothschild &
Sons Limited or of the Company.
The Board was aware of these interests and considered them, among other
matters, in approving the Acquisitions and the related transactions.
GOVERNMENTAL AND REGULATORY APPROVALS
Alliance is not aware of any U.S. governmental or regulatory approvals
required for the completion of the Acquisitions, other than compliance with
U.S. federal and applicable state securities law. To the extent that any
governmental or regulatory requirements arise in the U.S., the Company does
not expect them to materially affect the completion of the Acquisitions or the
benefits to be obtained therefrom.
Pursuant to the listing rules of the London Stock Exchange, the Acquisitions
may not be completed until and unless the Company's shareholders have approved
the Acquisitions. In addition, the U.K. DTI must also approve the acquisition
of the U.K. Interests from Burlington. The Company has met with the U.K. DTI
to discuss the acquisition of the U.K. Interests. The necessary U.K. DTI
approval will be subject, among other things, to completion of the
Acquisitions. In addition, development of the U.K. Properties will be subject
to subsequent U.K. DTI approval.
Shareholders should note that, under Rule 9 of the U.K. City Code on
Takeovers and Mergers (the "Code"), any person who acquires shares which
(taken together with any shares already held or acquired by persons acting in
concert with them) carry 30% or more of the voting rights of a company to
which the Code applies (which includes Alliance) is required by the Panel on
Take-overs and Mergers (the "Panel") to make a general offer to the
shareholders of that company.
The Panel has agreed, subject to the approval of the Difco Acquisition by
Alliance's shareholders, to waive any requirements under Rule 9 of the Code
for such a general offer to be made by Difco shareholders as a consequence of
the conversion of the Acquisition Shares and the issuance of additional shares
pursuant to the Difco Acquisition Agreement. In voting for approval of the
Difco Acquisition, shareholders should note in particular that the existing
Difco shareholders would, after the acquisition, control approximately 18.3%
of the votes at a general meeting of Alliance. However, assuming that the
Acquisition Shares are converted into the maximum number of Shares and the
maximum number of additional Shares are issued, this would give existing Difco
shareholders up to 45.0% of the issued share capital of Alliance.
MATERIAL INCOME TAX CONSEQUENCES
Neither the Company nor any of its shareholders will recognize any gain or
loss under U.S. or U.K. tax laws as a result of the completion of the
Acquisitions.
23
<PAGE>
ACCOUNTING TREATMENT
The Difco Acquisition will be accounted for by the Company as a "purchase"
for financial accounting purposes in accordance with U.S. GAAP. The purchase
price (i.e., the consideration) will be allocated based on the fair value of
Difco's assets acquired and liabilities assumed. These allocations will be
made based upon valuations and other studies that have not been finalized as
of the date hereof. It is not expected that there will be an excess of the
purchase price of the Difco Acquisition over the amounts so allocated.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Upon completion of the Acquisitions, the Company will have outstanding
31,326,303 Shares and will be required to issue between 7,020,825 and
28,083,300 additional Shares to the shareholders of Difco. The 14,041,650
Acquisition Shares issued to the Difco shareholders, the Shares issued to the
Difco shareholders upon conversion of the Acquisition Shares and the further
contingent issuances of Shares to the Difco Shareholders will be "restricted
securities" as that term is defined under Rule 144 of the Securities Act of
1933, as amended (the "Securities Act"). These restricted securities generally
may be resold in a public distribution only if registered under the Securities
Act or pursuant to an exemption therefrom, including Rule 144.
In general, under Rule 144 a person (or persons whose shares are
aggregated), including an affiliate of the Company, who has beneficially owned
restricted securities for at least one year is entitled to sell within any
three-month period a number of shares that does not exceed the greater of the
average weekly trading volume during the four calendar weeks preceding such
sale or 1% of the then outstanding Shares, provided certain manner of sale and
notice requirements and requirements as to the availability of current public
information about the Company are satisfied. In addition, affiliates of the
Company must comply with the restrictions and requirements of Rule 144, other
than the one-year holding period, to sell Shares. A person who is deemed not
to have been an "affiliate" of the Company at any time during the 90 days
preceding a sale by such person, and who has beneficially owned such shares
for at least two years, would be entitled to sell such shares without regard
to the volume limitations described above.
Pursuant to the terms of the Difco Acquisition Agreement, Alliance has
granted the Difco shareholders certain "piggyback" registration rights with
respect to the Shares to be issued in the Difco Acquisition. These
registration rights will have a term of five years and contain standard
provisions regarding indemnification and cooperation with respect to any
offering. Therefore, if the Company registers Shares for sale, the Difco
shareholders will have the right to include their Shares in any such
registration statement, subject to customary restrictions. In addition, the
shareholders of Difco have agreed that, for a period of three (3) years
following the completion of the Difco Acquisition, they will not sell any of
their Shares in the open market without first providing written notice of
their intent to sell such shares to Alliance and thereafter providing Alliance
with a reasonable opportunity to place for sale such Shares to third parties
upon terms and conditions which are acceptable to the Difco shareholders and
such third parties.
APPRAISAL RIGHTS
Under the laws of the U.K., holders of Shares will have no appraisal rights
in connection with the Acquisitions and the completion of the transactions
contemplated thereby.
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.
Waiver of Obligation to Make General Offer. Under Rule 9 of the U.K. City
Code on Takeovers and Mergers, any person who acquires shares which (taken
together with any shares already held or acquired by persons acting in concert
with them) carry 30% or more of the voting rights of a company to which the
Code
24
<PAGE>
applies (which includes Alliance) is required by the Panel on Take-overs and
Mergers to make a general offer to the shareholders of that company.
Shareholders are being asked to waive any requirement under Rule 9 of the Code
for such a general offer to be made by Difco shareholders as a consequence of
the conversion of the Acquisition Shares and the issuance of additional shares
pursuant to the Difco Acquisition Agreement.
Increase in Share Capital and Creation of Acquisition Shares. In order to be
able to issue the Acquisition Shares and to continue to be able to meet its
obligations should any of the existing warrants be exercised or the
convertible loan notes be converted into Shares, the Company will need to
increase its authorized share capital. As the initial consideration for the
Difco Acquisition is to be paid in the form of 14,041,650 Acquisition Shares
of 40p 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 are subject to limited rights of transfer, and are more fully described
under "Description of Alliance Capital Stock."
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 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 this Proxy Statement, 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 fifteen (15) times adjusted capital and reserves, which based
on the Pro Forma Condensed Combined Balance Sheet as of April 30, 1998, set
out elsewhere in this Proxy Statement would be approximately $153.3 million.
25
<PAGE>
PRICE RANGE OF ORDINARY SHARES
Shares are traded on the London Stock Exchange under the symbol "ARS." Since
completion of the LaTex Merger on May 1, 1997, the Shares have also traded
from time to time in the U.S. in the over-the-counter market under the trading
symbol "ACREF". The table below sets forth the high and low prices for Shares
as reported on the London Stock Exchange and the high and low closing bid
prices for the Shares of the Company in the over-the-counter market as
reported by the NASD for the calendar periods indicated, after giving effect
to a 40-to-1 reverse stock split of the Shares that occurred on May 1, 1997.
The quotations for the over-the-counter market reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not represent actual
transactions. As of the date of this Proxy Statement the Company has not
declared or paid any cash dividends and the terms of the Company's current
credit facility prohibit the payment of any dividends. At the request of
Alliance, the trading of the Shares on the London Stock Exchange was suspended
upon the announcement of the LaTex Merger agreement on August 10, 1996 and
remained suspended until completion of the LaTex Merger on May 1, 1997. In
addition, at the request of Alliance, the trading of the Shares on the London
Stock Exchange was suspended upon the announcement by Alliance of discussions
regarding the Acquisitions on April 29, 1998 and will remain suspended until
the Acquisitions are completed or terminated.
<TABLE>
<CAPTION>
LONDON STOCK EXCHANGE OTC BULLETIN BOARD
--------------------------------------------------------------------------------- ---------------------------
1996 1997 1998 1997 1998
--------------------------- ------------------------- --------------------------- ------------- -------------
HIGH LOW HIGH LOW HIGH LOW HIGH LOW HIGH LOW
------------- ------------- ------------ ------------ ------------- ------------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1st Quarter..... (Pounds).0500 (Pounds).0300 (Pounds) N/A (Pounds) N/A (Pounds).3200 (Pounds).2150 $ N/A $ N/A $.5000 $.2300
2nd Quarter..... .0325 .0276 .6000 .2400 .3250 .2100 .5175 .2500 .4800 .2800
3rd Quarter..... .0276 .0176 .3550 .2450 N/A N/A .5500 .2500 N/A N/A
4th Quarter..... N/A N/A .3350 .2300 N/A N/A .4863 .2500 N/A N/A
</TABLE>
On April 28, 1998, the last full trading day prior to the public
announcement by Alliance of discussions regarding the Acquisitions, the
closing price of the Shares, as reported on the London Stock Exchange was
(Pounds).3250. On June 24, 1998, the most recent date for which it was
practicable to obtain market price information prior to the printing of this
Proxy Statement, the closing price of the Shares, as reported by the NASD was
$.3750. On such date, there were approximately 2,700 record holders of Shares.
EXCHANGE RATES
The table below sets forth for the periods and dates indicated, certain
information regarding the U.S. dollar/pound sterling exchange rate, based on
the Noon Buying Rate, expressed in U.S. dollars per (Pounds)1.00. Such rates
were not used by Alliance in the preparation of its consolidated financial
statements included in this Proxy Statement.
<TABLE>
<CAPTION>
CALENDAR
YEAR PERIOD END AVERAGE RATE (1) HIGH LOW
-------- ---------- ---------------- ----- -----
<S> <C> <C> <C> <C>
1995................................. $1.56 $1.58 $1.66 $1.52
1996................................. 1.71 1.56 1.72 1.49
1997................................. 1.64 1.64 1.70 1.58
1998(2).............................. 1.67 1.65 1.69 1.61
</TABLE>
- --------
(1) The average daily closing values for each period in question are as quoted
by Bloomberg L.P.
(2) 1998 exchange rates are for the period from January 1, 1998 to June 30,
1998 only.
26
<PAGE>
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 elsewhere in this Proxy Statement. It is
prepared in 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 actually
have been if the Acquisitions and the debt 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
April 30, 1998 gives effect to the purchase of the U.K. Interests as if this
was consummated on that date. The proposed issuance of $100.0 million of Notes
to finance the purchase of the U.K. Interests and their further development
costs and to repay existing indebtedness is also reflected as if completed at
that date.
Pro Forma Condensed Combined Statement of Operations
The pro forma condensed combined statement of operations has been prepared
to illustrate the effect of the Acquisitions and the issuance of the Notes
mentioned above.
The pro forma condensed combined statement of operations for the year ended
April 30, 1998 reflects the Acquisitions and the debt issuance as though
completed on the first day of that period.
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.
27
<PAGE>
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF APRIL 30, 1998
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
ALLIANCE PRO FORMA PRO FORMA
(HISTORICAL) ADJUSTMENTS COMBINED
------------ ----------- ----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.................................. $ 408 $ 54,951 (b) $ 19,329
(34,000)(c)
Receivables: (2,030)(a)
Trade................................. 2,133 -- 2,133
Other current assets.................... 74 10,812 (b) 10,886
-------- --------- --------
Total current assets.................... 2,615 29,733 32,348
-------- --------- --------
Net property, plant and equipment....... 29,808 9,257 (a) 76,065
3,000 (a)
Other assets: 34,000 (c)
Deposits and other assets due after
one year............................. 145 9,670 (b) 9,815
Deferred acquisition costs............ 970 (970)(a) --
Deferred loan costs, less accumulated 1,222 (1,222)(d) 3,500
amortization......................... 3,500 (b)
-------- --------- --------
Total assets............................ $ 34,760 $ 86,968 $121,728
======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable................ $ 8,973 $ -- $ 8,973
Accrued expenses payable.............. 847 -- 847
Current portion of long term debt..... 2,275 (2,275)(b) --
-------- --------- --------
Total current liabilities............... 12,095 (2,275) 9,820
Other liabilities....................... 139 -- 139
Long-term debt, excluding current in-
stallments............................. 18,792 (18,792)(b) --
Senior notes............................ -- 100,000 (b) 100,000
Convertible subordinated unsecured loan
notes.................................. 1,551 -- 1,551
-------- --------- --------
Total liabilities....................... 32,577 78,933 111,510
-------- --------- --------
Stockholders' equity
Ordinary shares, par value
(Pounds)0.40; 46,000,000 shares
authorized; 31,209,408 issued and
outstanding and Acquisition Shares,
par value (Pounds)0.40; 14,061,650
shares authorized; 14,061,650 issued
and outstanding at April 30, 1998.... 20,115 9,392 (a) 29,507
Additional paid in capital............ 5,911 (135)(a) 5,776
Accumulated deficit................... (23,843) (1,222)(d) (25,065)
-------- --------- --------
Total stockholders' equity............ 2,183 8,035 10,218
-------- --------- --------
Total liabilities and stockholders' eq-
uity................................... $ 34,760 $ 86,968 $121,728
======== ========= ========
</TABLE>
28
<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 14,041,650 Acquisition Shares
(convertible into between 7,020,825 and 14,041,650 Shares) with an
aggregate par value of $9.392 million and the commitment to issue up to a
further 14,041,650 Shares depending upon performance of the U.K. Interests.
The value of $9.257 million attributed to the acquisition of the U.K.
Interests is based upon the expected minimum number of Shares to be issued
pursuant to the Difco Acquisition Agreement estimated by the Board of
Directors to be 21,833,485 (before any anti-dilution adjustments as
explained more fully in "The Acquisitions and Related Matters--Terms of the
Difco Acquisition") 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, amounting to
$3.0 million (of which $0.970 million had been paid at April 30, 1998,
leaving $2.030 million to be paid), have been added to give a total
carrying amount.
(b) The proposed issuance of $100.0 million of Notes to raise funding for the
acquisition of the U.K. Interests and their subsequent development. The
proceeds will be utilized as follows:
<TABLE>
<CAPTION>
($000) ($000)
------- --------
<S> <C> <C>
Gross proceeds............................................ 100,000
To settle the issuance costs of the Notes................. (3,500)
Placed in escrow to meet two year's interest payments:
--due within one year................................... (10,812)
--due after one year.................................... (9,670)
-------
(20,482)
To settle BoA debt:
--due within one year................................... (2,275)
--due after one year.................................... (18,792)
-------
(21,067)
--------
Net cash proceeds......................................... $ 54,951
========
</TABLE>
(c) The acquisition of the U.K. Interests by the payment of $34.0 million of
cash to Burlington Resources from the net cash proceeds. The purchase price
comprises a fixed amount of $33.0 million together with Alliance's pro rata
share of expenditures incurred by Burlington and interest since January 1,
1998.
(d) The write-off of $1.222 million being the unamortized costs relating to the
repaid BoA debt.
29
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED APRIL 30, 1998
(UNAUDITED, IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
ALLIANCE PRO FORMA PRO FORMA
(HISTORICAL) ADJUSTMENTS COMBINED
------------ ------------ ----------
<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) (3,263)(a) (5,774)
Cost of redemption of loan............ -- (1,222)(b) (1,222)
Miscellaneous income.................. 133 133
------- ------- ----------
Net loss................................ $(4,729) $(4,485) $ (9,214)
======= ======= ==========
Basic loss per share(c)................. $ (0.17)
==========
Weighted average number of shares
outstanding(c)......................... 52,959,174
==========
</TABLE>
30
<PAGE>
Notes to the Pro Forma Condensed Combined Statement of Operations
The unaudited pro forma condensed combined statement of operations includes
adjustments to reflect:
(a) The impact on net interest expense of the Acquisitions and the issuance of
$100.0 million of Notes to finance the purchase of the U.K. Interests and
to repay existing indebtedness as if these had taken place at the
beginning of the period. Net interest comprises the interest payable on
the Notes, the amortization of the issue costs and interest earned on the
net cash proceeds and escrowed amounts less amounts capitalized. Interest
payable on the portion of the Notes which finances the acquisition of the
U.K. Interests has been capitalized to the cost of the assets. Such
interest capitalized amounted to $3.8 million. 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 expected minimum number of Shares to be issued
pursuant to the Difco Acquisition Agreement, estimated by the Board of
Directors to be 21,833,485 (before any anti-dilution adjustments as
explained more fully in "The Acquisitions and Related Matters--Terms of
the Difco Acquisition").
31
<PAGE>
SELECTED FINANCIAL DATA OF ALLIANCE
The following table sets forth consolidated financial data for Alliance as
of the dates and for the periods indicated.
Alliance's May 1, 1997 acquisition of LaTex is treated as the acquisition of
Alliance by LaTex for accounting and financial reporting purposes as the LaTex
shareholders had a controlling interest in the combined companies.
Accordingly, the assets and liabilities of Alliance have been recorded at
their fair value for the period beginning May 1, 1997, while the assets and
liabilities of LaTex have been recorded at their historical cost. The
historical financial information for all financial periods to April 30, 1997
reflects the results of operations and assets and liabilities of LaTex.
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. The consolidated financial data as of and for each of the
years in the two year period ended July 31, 1995 have been derived from the
audited consolidated financial statements of LaTex. The consolidated financial
data as of and for the year ended July 31, 1996, the nine months ended April
30, 1997 and the year ended April 30, 1998 have been derived from the audited
consolidated financial statements of Alliance included elsewhere in this Proxy
Statement. The selected financial data should be read in conjunction with the
consolidated financial statements of Alliance and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Additional
financial data of Alliance prior to the acquisition of LaTex, including its
financial statements and Management's Discussion and Analysis of Financial
Condition, is included in its Annual Report on Form 20-F for the year ended
April 30, 1997.
<TABLE>
<CAPTION>
NINE
MONTHS YEAR
YEAR ENDED JULY 31, ENDED ENDED
---------------------------------- APRIL 30, APRIL 30,
1994(1) 1995(1) 1996(1) 1997(1) 1998
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DA-
TA:
Revenues:
Oil and gas revenue...... $ 8,703 $ 8,586 $ 11,980 $ 5,699 $ 10,210
Crude oil and gas market-
ing..................... 2,781 1,223 540 146 --
---------- ---------- ---------- ---------- ----------
Total revenues......... 11,484 9,809 12,520 5,845 10,210
---------- ---------- ---------- ---------- ----------
Operating expenses:
Lease operating ex-
penses.................. 4,206 4,643 5,472 3,117 5,506
Cost of crude oil and gas
marketing............... 2,216 744 133 16 --
Cessation of overseas
exploration(2).......... -- -- 3,447 -- --
General and
administrative
expenses................ 2,497 2,736 2,893 3,481 3,364
Depreciation, depletion
and amortization........ 1,486 3,364 3,511 1,542 2,598
Loss on commodity
derivatives(3).......... -- -- -- -- 1,128
---------- ---------- ---------- ---------- ----------
Total operating ex-
penses................ 10,405 11,487 15,456 8,156 12,596
---------- ---------- ---------- ---------- ----------
Income (loss) from opera-
tions................... 1,079 (1,678) (2,936) (2,311) (2,386)
Other income (expense):
Equity in net losses and
write-offs of
investments in
affiliates.............. (440) (235) (4,034) (20) --
Gain on sale of assets... -- -- -- -- 35
Interest expense......... (598) (1,416) (2,830) (2,102) (2,573)
Interest income.......... 17 58 280 52 62
Miscellaneous income
(expenses)(4)........... -- -- (1,810) (8) 133
---------- ---------- ---------- ---------- ----------
Net income (loss) before
income taxes.............. 58 (3,271) (11,330) (4,389) (4,729)
Income tax expense......... -- 35 -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss).......... 58 (3,306) (11,330) (4,389) (4,729)
Preferred stock dividends.. -- 133 571 518 --
---------- ---------- ---------- ---------- ----------
Net income (loss) for
common shareholders(5).... $ 58 $ (3,439) $ (11,901) $ (4,907) $ (4,729)
========== ========== ========== ========== ==========
Basic income (loss) per
common share.............. $ 0.00 $ (0.22) $ (0.77) $ (0.30) $ (0.15)
========== ========== ========== ========== ==========
Weighted average number of
shares outstanding(5).......14,990,064. 15,317,157 15,507,551 16,585,113 31,125,689
========== ========== ========== ========== ==========
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
NINE
MONTHS YEAR
YEAR ENDED JULY 31, ENDED ENDED
-------------------------- APRIL 30, APRIL 30,
1994(1) 1995(1) 1996(1) 1997(1) 1998
------- ------- -------- --------- ---------
(IN THOUSANDS, EXCEPT RESERVE, AVERAGE SALES
PRICE AND PRODUCTION DATA)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (END
OF PERIOD):
Total assets........... $20,701 $46,549 $ 36,493 $30,858 $34,760
Net property, plant and
equipment............. 12,686 36,336 29,473 26,708 29,808
Working capital (defi-
cit).................. (2,127) (7,264) (27,970) (9,620) (9,480)
Long term debt......... 4,467 20,635 -- 18,095 18,792
Convertible subordi-
nated unsecured loan
notes................. -- -- -- -- 1,551
Stockholders' equity... 9,721 14,628 3,846 85 2,183
RESERVE AND PRODUCTION
DATA:
Production:
Oil (MBbls)............ 335 359 405 190 396
Gas (MMcf)............. 2,107 2,612 3,481 1,640 1,689
Average sales prices:
Oil (per Bbl).......... $ 14.56 $ 12.86 $ 15.24(6) $ 15.34(6) $ 15.75(3)
Gas (per Mcf).......... $ 1.81 $ 1.48 $ 1.67(6) $ 1.70(6) $ 2.36(3)
Proved reserves (end of
period):
Oil (MBbls)............ 4,520 5,432 6,353 6,581 6,494
Gas (MMcf)............. 10,933 28,113 28,172 25,955 26,321
Pre-tax PV10 value..... $23,418 $32,912 $ 53,499 $39,631 $48,600
Standardized Measure... $14,277 $28,802 $ 43,889 $35,368 $45,106
</TABLE>
- --------
(1) Results reported for the nine months ended April 30, 1997 and all prior
periods have been restated to reflect the change in accounting policy for
oil and gas assets to full cost accounting in that period from LaTex's
previous policy of successful efforts accounting. The effects of the
accounting change on the years ended July 31, 1994, 1995 and 1996, and the
nine months ended April 30, 1997 were to increase (decrease) the net loss
by $(0.481) million, $0.814 million, $1.100 million and $(2.373) million,
respectively.
(2) During the year ended July 31, 1996, the Company ceased its overseas
exploration activities in both Tunisia and Kazakhstan and wrote off its
costs relating to these activities of $3,446,795.
(3) On May 15, 1997, the existing commodity price hedging agreements put in
place by prior management were terminated through a buyout, the cost of
which was financed by a drawdown under the terms of the Previous Credit
Facility. On October 23, 1997 new commodity price hedging agreements were
initiated. Without such hedging arrangements, the average sales prices for
the year ended April 30, 1998 would have been $15.12 per Bbl for oil and
$2.40 per Mcf for gas. The loss relating to the buy-out ( $1,128,000) has
been recognized in its entirety in the year ended April 30, 1998
consequent upon the Company entering into the new commodity price
protection agreement.
(4) The miscellaneous expenses in the year ended July 31, 1996 arose from
litigation in connection with the sale in July 1993 of the Company's
subsidiary, Panda Resources, Inc.
(5) For periods ending on or before April 30, 1997, the weighted average
number of shares outstanding has been based on the number of Alliance
shares issued on May 1, 1997, which represent the number of LaTex shares
outstanding in each of the relevant periods based on the exchange ratio in
the acquisition of LaTex. The loss for each period is stated after
deducting dividends on the LaTex preferred stock.
(6) After giving effect to the impact of commodity price hedging arrangements.
Without such hedging arrangements, the average sales prices for the year
ended July 31, 1996 would have been $15.73 per Bbl for oil and $2.03 per
Mcf for gas, and for the nine months ended April 30, 1997 would have been
$19.15 per Bbl for oil and $2.40 per Mcf for gas.
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 Proxy Statement 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.
The approval of the shareholders of the Company, and the subsequent
completion of the Acquisitions and issuance of the Notes, will significantly
change the financial condition and prospects of the Company. Historical
results, therefore, are not necessarily indicative of the future performance
of the Company.
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.
34
<PAGE>
The following table reflects certain historical operating data for the
periods presented.
<TABLE>
<CAPTION>
YEAR ENDED NINE
JULY 31, MONTHS ENDED
---------------- APRIL 30, YEAR ENDED
1995 1996 1997 APRIL 30, 1998
------ ------ ------------ --------------
<S> <C> <C> <C> <C>
Net Sales Volumes:
Oil (MBbls).................. 359 405 190 396
Gas (MMcf)................... 2,612 3,481 1,640 1,689
MMcfe (6 Mcf/Bbl)............ 4,766 5,911 2,780 4,063
Average Sales Prices:
Oil (per Bbl)................ $12.86(1) $15.24(2) $15.34(2) $15.75(3)
Gas (per Mcf)................ $ 1.48(1) $ 1.67(2) $ 1.70(2) $ 2.36(3)
Operating Expenses per Boe of
Net Sales (4):
Lease operating.............. $ 6.06 $ 8.31 $ 5.55 $ 7.16
Severance tax................ 0.72 0.88 1.22 0.97
Depreciation, depletion, and
amortization................ 4.24 3.56 3.33 3.84
General and administrative... 3.45 2.94 7.52 4.97
Loss on commodity deriva-
tives....................... -- -- -- 1.67
</TABLE>
- --------
(1) Commodity price hedging arrangements did not have a material effect on
average prices for the year ended July 31, 1995.
(2) After giving effect to the impact of commodity price hedging arrangements
with BoA. Without such hedging arrangements, the average sales prices for
the year ended July 31, 1996 would have been $15.73 per Bbl for oil and
$2.03 per Mcf for gas, and for the nine months ended April 30, 1997 would
have been $19.15 per Bbl for oil and $2.40 per Mcf for gas.
(3) The commodity price hedging arrangements were bought out on May 15, 1997.
On October 23, 1997 new commodity price hedging agreements were initiated.
Without such hedging arrangements, the average sales prices for the year
ended April 30, 1998 would have been $15.12 per Bbl for oil and $2.40 per
Mcf for gas. The loss relating to the buy-out of the original arrangements
of $1,128,000 has been recognized in its entirety in the year ended April
30, 1998 as a result of the new agreements being initiated.
(4) Operating expenses also include the cost of crude oil and gas marketing
and cessation of overseas exploration.
Year Ended April 30, 1998 compared to the Nine Months Ended April 30, 1997
Total revenues from the Company's operations for the year ended April 30,
1998 were $10,209,881 compared to $5,844,871 for the nine months ended April
30, 1997. Revenues increased proportionately over the comparable period a year
earlier due principally to the beneficial effect of higher realized gas prices
(net of the impact of the commodity price hedge) and higher oil volumes,
offset partially by the absence of marketing margins in the revenue category.
The higher oil volumes were partially attributable to the inclusion of
Alliances' sales volumes and additional volumes attributable to the
acquisition of the BoA ORI in the 1998 period following the LaTex Merger. The
revenues in the 1998 period benefited from the termination of the commodity
price hedges which allowed the Company full exposure to higher market prices.
Revenues in the 1997 period were adversely affected by the LaTex hedge program
which effectively capped pricing at below market levels by restricting prices
received for the Company's production to $15.34 per Bbl of oil and $1.70 per
Mcf of gas. Although sales volumes for the year ended April 30, 1998, were
adversely affected by a continuing decline in volumes from the LaTex
properties during the initial three months of the period, the remedial work
program had a beneficial impact on volumes from the LaTex properties
(discussed below). The recompletion program discussed below under "Capital
Expenditures--Existing United States Properties" is also expected to have a
beneficial impact on volumes from the LaTex properties. In addition, the
inclusion of Alliance's sales volumes from the start of the current reporting
period more than compensated for the initial decline in the LaTex properties.
35
<PAGE>
The Company concentrated its efforts immediately after the LaTex Merger on
increasing production from eleven existing producing fields operated by LaTex
in the states of Alabama, Mississippi, Oklahoma, Texas and Louisiana. Workover
operations on these fields commenced in early May 1997 and comprised mainly
returning shut-in wells to production. Gross production from these eleven
fields was increased from an average of 244 Boe per day in April 1997 to an
average of 980 Boe per day by October 1997. Most of the production increase
came from remedial workover operations in the South Carlton field in Alabama.
Gross production from this field alone increased from an average of 89 Boe per
day in April 1997 to an average of 575 Boe per day in September 1997.
Total operating expenses increased proportionately to $12,595,777 for the
year ended April 30, 1998 compared to $8,155,557 for the nine months ended
April 30, 1997. On May 15, 1997, the existing commodity price hedging
arrangements were bought out with a loss of $1,128,000 recognized in its
entirety in the year ended April 30, 1998 as a result of new agreements being
initiated on October 23, 1997. Lease operating expenses increased to
$5,505,826 for the year ended April 30, 1998 compared to $3,117,341 for the
nine months ended April 30, 1997. The year ended April 30, 1998 was impacted
by the remedial work program mentioned above and the inclusion of the Alliance
properties partially offset by lower operating costs due to the sale of non-
operated, non-strategic wells. Depreciation, depletion and amortization
increased to $2,598,066 for the 1998 period compared to $1,541,415 due to
higher volumes resulting from the inclusion of Alliance. General and
administrative expenses decreased marginally from $3,481,003 during the nine
months ended April 30, 1997 to $3,363,885 for the year ended April 30, 1998
primarily due to an employee stock award of $528,125 in the 1997 period.
In addition to the marginal increase in the net operating loss to $2,385,896
for the year ended April 30, 1998 from $2,310,686 for the nine months ended
April 30, 1997, there was also a proportionate decrease in other
income/expense. This was the result of higher interest expense taking into
account the additional quarterly payment.
In summary, due to the above factors, the net loss for the ordinary
shareholders for the year ended April 30, 1998 decreased to $4,728,923 ($0.15
per share) compared to a net loss of $4,906,946 ($0.30 per share) for the nine
months ended April 30, 1997.
Nine Months Ended April 30, 1997 compared to Year Ended July 31, 1996
Total revenues from operations for the nine month period ended April 30,
1997 were $5,844,871 compared to $12,520,138 for the year ended July 31, 1996.
Revenues were proportionately lower in the current period due to the sale of
non-operated, non-strategic properties, lower oil sales, primarily at the
South Carlton, Alabama field and lower marketing revenues.
Lease operating expenses for the nine month period ended April 30, 1997 were
$3,117,341 compared to $5,492,130 for the year ended July 31, 1996. The
proportionate reduction in operating expenses is a result of a reduced
property base, lower expenses at the Alabama operations and the shutting-in of
marginal operated wells.
Depreciation, depletion and amortization expense decreased from $3,510,814
for the year ended July 31, 1996 to $1,541,915 for the nine months ended April
30, 1997 primarily due to lower production.
General and administrative expenses for the nine month period ended April
30, 1997 were $3,481,003 up from the $2,893,146 for the prior fiscal year
primarily due to an employee stock award of $528,125 in the nine months ended
April 30, 1997.
The net loss for the nine months ended April 30, 1997 of $4,906,946 ($0.30
per common share) compared to a net loss of $11,900,997 ($0.77 per common
share) for the year ended July 31, 1996. The decrease in the net loss from
continuing operations is a result of the prior year write-off of Tunisia and
Kazakhstan (reflected as abandonments), write-offs of investments in
affiliates and the loss of $1,810,382 arising from litigation in connection
with the sale in July 1993 of Panda Resources, Inc., a former subsidiary of
the Company.
36
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
The Company's capital requirements relate primarily to the acquisition of
developed oil and gas properties and undeveloped leasehold acreage and
exploration and development activities, 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 acquisition and exploration and development program and the
acquisition of additional reserves.
Cash Flows and Liquidity
At April 30, 1998, the Company reported current assets of $2.6 million and
current liabilities of $12.1 million, which resulted in a net current deficit
of $9.5 million. Since the LaTex Merger, the net current deficit has been
reduced from $9.6 million at year ended April 30, 1997 to its current position
of $9.5 million. The $0.1 million improvement was despite the addition of
Alliance's cash and other current assets totaling $1.9 million and its
liabilities of $2.7 million and the inclusion of $2.3 million of current
portion of long term debt. The reduction in accounts payable in the nine
months ended April 30, 1998 to $9.0 million from $11.4 million previously
masks a much larger improvement as this reduction occurred despite the
addition of $2.5 million of current liabilities which were absorbed from
Alliance in the LaTex Merger. The current portion of long-term debt, which is
included in total current liabilities, amounted to $2.3 million at April 30,
compared to $0 at April 30, 1997.
For the year ended April 30, 1998, net cash used in the Company's operating
activities was $5.2 million compared to cash provided of $2.1 million for the
nine months ended April 30, 1997. The most significant items affecting cash
flow from operations were total revenues, lease operating expenses and general
and administrative expenses which are discussed above under the heading "Year
Ended April 30, 1998 compared to the Nine Months Ended April 30, 1997." In
addition, the deterioration in cash from operating activities is substantially
due to the allocation of funds to reduce the Company's accounts payable
balances in order to improve the working capital deficit of the Company in the
1998 period.
Investing activities of the Company generated $3.1 million in net cash flow
for the year ended April 30, 1998 compared to $2.5 million for the nine months
ended April 30, 1997. This was principally due to property sales of $5.7
million and the acquisition of cash balances of $1.5 million from Alliance
arising from the LaTex Merger, less payment of acquisition expenses of $1.5
million. Financing activities provided $2.4 million for the year ended April
30, 1998 compared to a use of $4.5 million for the nine months ended April 30,
1997. The improvement was due to the drawdown of additional funds under the
Previous Credit Facility with BoA and the abatement of scheduled principal
payments until October 31, 1998. The arrangements related to the abatement of
principal cover the 12 months ended October 31, 1998 for monthly amounts of
$0.325 million. During the current period no principal repayments were made to
BoA. Under the terms of the Previous Credit Facility, the contractual
maturities of long term debt as at April 30, 1998 are $2.275 and $18.792
million for the years ending April 30, 1999 and 2000, respectively. However,
cash flows generated by the Company in excess of amounts shown in the business
plan that formed the basis of negotiation with BoA will be used to reduce
outstanding principal indebtedness. See Note 7 "Long-Term Debt" in the Notes
to the Consolidated Financial Statements attached hereto.
Overall cash and cash equivalents improved by $0.3 million in the year ended
April 30, 1998 compared to $0 in the 1997 period.
Capital Expenditures
Existing United States Properties. The timing of most of the capital
expenditures for the Company's existing U.S. properties is discretionary.
Currently, there are no material long-term commitments associated with the
Company's existing U.S. properties. However, approximately 50 recompletion
opportunities are expected to be carried out within 12 months of the
completion of the Offering, although there can be no guarantee of a
37
<PAGE>
successful outcome of this program given the relevant risks outlined under
"Risk Factors" above. If the Acquisitions are not completed, together with the
associated issuance of the Notes and the Amended Credit Agreement, the program
will be reassessed in the light of the existing cash flows of the Company and
the present commodity pricing environment, and the potential alternative
sources of financing available to the Company. See "Organization and Summary
of Significant Accounting Policies" under the heading "Financial Condition"
contained in the Consolidated Financial Statements attached hereto.
Consequently, the Company has a significant degree of flexibility to adjust
the level of such expenditures as circumstances warrant. In the event that the
recompletion program is continued according to plan and is successful, the
Company anticipates that it will provide significant net revenues beyond the
capital expenditures necessary to complete the program. The Company primarily
uses internally generated cash flows and proceeds from the sale of oil and gas
properties to fund capital expenditures, other than significant acquisitions,
and to fund its working capital deficit. If the Company's internally generated
cash flows should be insufficient to meet its debt service or other
obligations, the Company may reduce the level of discretionary capital
expenditures or increase the sale of non-strategic oil and gas properties in
order to meet such obligations. The level of the Company's capital
expenditures will vary in future periods depending on energy market conditions
and other related economic factors. As a result, the Company will continue its
current policy of funding capital expenditures with internally generated cash
flows 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
$34.0 million in cash. In addition, it is currently anticipated by the Company
that approximately $73.0 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," of which amount approximately $21.5 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 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
below 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. See
"Risk Factors--Substantial Capital Requirements." 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 issuance of the Notes, from the
Amended Credit Facility (see below "Proposed Financing Arrangements in
Connection with the Acquisitions") and from cash flows from the Company's
existing U.S. properties.
Proposed Financing Arrangements in Connection with the Acquisitions
As described above, the completion of the Acquisitions and the forecast
capital expenditures in connection with the development of the U.K. Interests
will be partially funded from the issuance of the Notes and from the Amended
Credit Facility.
Proposed Issuance of the Notes. It is proposed that the Company will offer
at least $100.0 million aggregate principal amount of Notes. The aggregate
offering of the Notes may be increased, however, to $110.0 million. It is
anticipated that the Notes offering will close contemporaneously with the
closing of the Acquisitions
38
<PAGE>
and is conditional upon the closing of the Acquisitions. From the proceeds of
the Notes, it is anticipated that a portion of the proceeds will be used to
purchase a portfolio of U.S. government securities that, together with the
earnings thereon, should be sufficient to pay when due the first four interest
payments on the Notes; approximately $34.0 million will be used to pay the
purchase price for the U.K. Interests Acquisition and expenditures incurred by
Burlington and interest since January 1, 1998; approximately $22.6 million
will be used to repay amounts outstanding under the Company's Previous Credit
Facility; approximately $6.5 million will be used to pay costs and expenses
incurred in connection with the Acquisitions and the remainder will be used to
fund the development of the U.K. Interests and the Company's working capital
requirements. In the event that the Acquisitions are not completed and the
Notes are not offered, the Directors will seek other transactions of a similar
nature, restructure the Previous Credit Facility or seek alternative forms of
financing and will seek to take such steps as are necessary to allow the
Company to meet its obligations as they become due. Such steps might include
the continuing rationalization of the Company's overhead, deferral of elements
of the recompletion program and the disposition of oil and gas properties. See
the Notes to the Consolidated Financial Statements attached hereto.
Amended Credit Facility. The Company has received a commitment to enter into
the Amended Credit Facility to revise the Previous Credit Facility. It is
anticipated that the Amended Credit Facility will close contemporaneously with
the closing of the Acquisitions and is conditional upon the closing of the
Acquisitions and the negotiation and execution of final loan documents. Under
the Amended Credit Facility, the Company would have a $25.0 million senior
secured line of credit with $20.0 million of available borrowing capacity
initially. The anticipated maturity date of the Amended Credit Facility will
be the date which is five years after closing of the Acquisitions. There can
be no assurances, however, that the Amended Credit Facility will be closed.
Substantially all of the security for the indebtedness under the Previous
Credit Facility, being the mortgages of all of Alliance's U.S. producing oil
and gas properties and pledges of stock of Alliance's material subsidiaries,
will remain in place under the Amended Credit Facility. As additional
security, Alliance will pledge the stock of Difco that it is acquiring as well
as the U.K. Interests.
The borrowing base under the Amended Credit Facility will initially be
established at $20.0 million. The borrowing base will be redetermined semi-
annually as of January 1 and July 1 of each year. The borrowing base will be
calculated based upon the reserves and economic parameters (including but not
limited to hydrocarbon prices, escalation rates, discount rate assumptions,
and other general economic parameters) acceptable to the lender. The reserves
and economics reports will consist of independent engineering evaluations on
all of the Company's, and its subsidiaries, oil and gas properties. The
Amended Credit Facility will also contain financial and other covenants which
under certain circumstances, may further limit the amount available under the
facility and may limit future borrowings under other facilities.
The interest margin under the Amended Credit Facility will vary according to
the percentage utilization of the facility. The interest rate will be either
fixed in relation to the Eurodollar rate or fixed in relation to the Alternate
Base rate, defined as the higher of the lender's Prime Rate or the Federal
Funds Effective Rate plus 1/2 of 1% per annum.
See "Risk Factors" for a discussion of certain factors that should be
considered in relation to the Company's proposed financing arrangements.
Previous Credit Facility. Under the Company's Previous Credit Facility, the
borrowing base was equal to $21.6 million as of April 30, 1998. Borrowings
under the Previous Credit Facility maintained from time to time as a "Base
Rate Loan" bore interest, payable monthly, at a fluctuating rate equal to the
higher of (i) the rate of interest announced from time to time by BoA as its
"reference rate" plus 1% or (ii) the "Federal Funds Rate" (as defined in the
Previous Credit Facility) plus 1 1/4%. Borrowings under the Previous Credit
Facility maintained from time to time as a "LIBO Rate Loan" bore interest,
payable on the last day of each applicable interest period (as defined in the
Previous Credit Facility), at a fluctuating rate equal to the LIBO Rate
(Reserve Adjusted) (as defined in the Previous Credit Facility) plus 2%.
39
<PAGE>
As a condition to BoA making the loans under the credit agreement previously
in place at LaTex, LaTex's subsidiary, LaTex Petroleum, entered into hedging
agreements with BoA designed to enable LaTex to (a) obtain agreed upon net
realized prices for LaTex's oil and gas production (the "Oil and Gas Hedging
Agreements") and (b) protect LaTex against fluctuations in interest rates with
respect to the principal amounts of all loans under the LaTex credit
agreement. Under the Previous Credit Facility, BoA agreed to make available,
at its sole discretion, to Alliance the amount of $2,500,000 ("Tranche B
Facility") to reduce or terminate the Oil and Gas Hedging Agreements. As at
April 30, 1998, $2.472 million had been drawn under the Tranche B Facility by
Alliance. In addition, under the Previous Credit Facility, BoA agreed to make
available to Alliance the amount of $2,000,000 ("Tranche C Facility") to cover
costs and expenses incurred in connection with the Acquisitions and the
proposed issuance of the Notes. As at April 30, 1998, $1.0 million had been
drawn under the Tranche C Facility by Alliance.
At April 30, 1998, the outstanding balance under the Previous Credit
Facility was $21.6 million, of which $2.3 million is included as the current
portion on the balance sheet. The outstanding loan balance has increased $3.5
million since the Company's April 30, 1997 year-end as a result of the
following items which have been added to the outstanding loan balance: $0.1
million of loan interest, $0.7 million related to unpaid product hedge
payments as of April 30, 1997 (the hedge liability was provided for in the
April 30, 1997 financial statements and has subsequently been reclassified to
the bank debt). Other additions to the outstanding loan balance covered
drawdowns in respect of the cost of the buyout of the commodity price hedges
(noted above) of $1.1 million on May 15, 1997, merger-related legal costs of
BoA's attorneys of $0.1 million and the $0.4 million cost of new commodity
price hedges purchased on October 23, 1997 for the twelve months ended October
31, 1998 and $0.5 million for general working capital purposes in March 1998.
In connection with the LaTex Merger and the Previous Credit Facility, the
Company, effective May 1, 1997, acquired the BoA ORI in all LaTex's existing
producing oil and gas properties, other than those located in the State of
Oklahoma, the Perkins field in Louisiana, and certain other minor value
properties located in other states from an affiliate of BoA in exchange for
1,343,750 Shares, convertible loan notes and warrants.
SEASONALITY
The results of operations of the Company are somewhat seasonal due to
fluctuations in the price for crude oil and gas. Recently, crude oil prices
have been generally higher in the third calendar quarter, and 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. In
addition, production at the Company's South Carlton Field in Alabama is
affected during the spring rain season, when flooding can require the shutting
in of wells.
INFLATION AND PRICES; HEDGING
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
worldwide economic and political conditions, and government regulations and
tax laws. Prices for oil and gas have fluctuated significantly from 1995
through 1997. The following table sets forth the average price received by the
Company for each of the last three years and the effects of the various
hedging arrangements noted above.
40
<PAGE>
<TABLE>
<CAPTION>
OIL OIL GAS GAS
(EXCLUDING THE (INCLUDING THE (EXCLUDING THE (INCLUDING THE
EFFECTS OF HEDGING EFFECTS OF HEDGING EFFECTS OF HEDGING EFFECTS OF HEDGING
TRANSACTIONS) TRANSACTIONS) TRANSACTIONS) TRANSACTIONS)
------------------ ------------------ ------------------ ------------------
$/BBL $/BBL $/MCF $/MCF
<S> <C> <C> <C> <C>
12 Months ended April
30, 1998............... $15.12 $15.75 $2.40 $2.36
Nine months ended April
30, 1997............... $19.15 $15.34 $2.40 $1.70
12 months ended July 31,
1996................... $15.73 $15.24 $2.03 $1.67
12 months ended July 31,
1995................... $12.86 $12.86 $1.48 $1.48
</TABLE>
On October 23, 1997, the Company entered into new commodity price hedge
agreements to protect against price declines which may be associated with the
volatility in oil and gas spot prices. Unlike the previous hedging agreements
entered into by LaTex, the new commodity price hedge agreements, while
protecting the downside, also provide the Company with exposure to price
increases beyond certain agreed price levels. The commodity price hedges have
been achieved through the purchase of put options (floors) by the Company, and
the associated premium cost was funded by additional drawdowns under the
current credit agreement. The commodity price hedges cover the year to October
31, 1998 and cover in excess of 90% of Alliance's current monthly sales
volumes. The floors currently equate to approximately $18.50 per Bbl Nymex WTI
contract and $2.20 per MMBtu Nymex Natural Gas contract.
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."
At the present time the U.K. has not joined in the first wave of those
European Union states which will participate in State 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 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.
41
<PAGE>
INFORMATION WITH RESPECT TO ALLIANCE
Alliance is a United Kingdom public limited company whose principal
activities are the acquisition, exploration, development and production of oil
and gas properties. The Company currently owns producing oil and gas
properties in the United States, with a majority of its proved reserves
located in the states of Alabama, Louisiana, Mississippi, Oklahoma and Texas.
Since 1996, the Company has focused its efforts on maximizing the value of its
properties in the U.S. and on acquiring and developing suitable international
opportunities. Upon receiving shareholder approval Alliance will acquire the
U.K. Interests from Burlington for approximately $34.0 million. After giving
effect to the acquisition of the U.K. Interests, the Company's proved oil and
gas reserves on a pro forma basis as of January 1, 1998, will consist of
approximately 223 Bcfe of gas with a Pre-tax PV10 value of approximately
$146.5 million and a Standardized Measure of approximately $114.8 million. Of
the Company's pro forma proved reserves, 69% will be located in the East Irish
Sea and 81% will be gas. See "Information With Respect to Difco and the U.K.
Properties--U.K. Properties--The U.K. Interests," and "Information With
Respect to Alliance--The Company's United States Properties."
Alliance was incorporated and registered under the laws of England and Wales
on August 20, 1990. Alliance's corporate headquarters are at Kingsbury House,
15-17 King Street, London SW1Y 6QU, England. However, Alliance maintains its
principal operating offices at 4200 East Skelly Drive, Suite 1000, Tulsa,
Oklahoma 74135.
BUSINESS STRATEGY
The Company's strategy is to significantly increase its oil and gas
reserves, production, cash flow and earnings through a program focused on the
rapid development of the U.K. Interests, strategic acquisitions, continued
exploitation and development of its portfolio of U.S. assets and a selective
low risk exploration program.
Development of the U.K. Interests. The Company intends to actively pursue
development of the U.K. Interests. The U.K. Interests include five proved gas
accumulations in seven fields. A 3D seismic survey covering six of the seven
fields has been acquired and interpreted and 13 exploratory and appraisal
wells have been drilled to date on the U.K. Interests. Because of the
proximity of the U.K. Interests to significant existing facilities and
infrastructure and a growing U.K. gas market, the Company believes the
development of the U.K. Interests will be achieved quickly. Development of the
U.K. Interests will be expedited as a result of several factors, in
particular, the extensive drilling and geophysical appraisal work already
conducted, the close proximity of the U.K. Interests to existing facilities
and infrastructure, and a growing U.K. gas market. The U.K. Interests will
provide strategic value to the Company as it pursues further international
opportunities due to their location, profile and the critical mass they
provide for the Company.
Strategic Acquisitions. The Company has an acquisition strategy which
focuses on properties that are candidates for significant exploitation and
development. The strategy has both U.S. and non-U.S. components, as
exemplified by the Company's acquisition of the U.K. Interests which followed
the LaTex Merger. Outside of the U.S., the Company seeks to acquire material
interests in development opportunities in known hydrocarbon producing basins
by aligning itself with larger companies such as Burlington Resources. Its
current acquisition criteria include a high percentage of proved reserves,
developed infrastructure (e.g., access to pipelines, markets, etc.),
reasonable development costs, the prospect of near-term production and low to
moderate political risk. In the U.S., the Company focuses on long-lived
reserves that combine established production history, significant exploitation
potential, operating control and the opportunity for cost reduction.
Continued Enhancement of U.S. Properties. The Company has a substantial
inventory of exploitation projects in the U.S., including workovers,
recompletions, development drilling and cost reduction programs. The Company's
current management has identified over 20 development drilling locations and
over 90 recompletion and workover opportunities on the Company's U.S. assets
that the Company will seek to exploit in order to increase its U.S.
production. Approximately 50 of the recompletion opportunities are expected to
be carried out
42
<PAGE>
within 12 months of the completion of the Offering. The Company believes that
these exploitation projects have the potential to significantly increase daily
production from these wells. To illustrate, within six months following the
Company's acquisition of LaTex Resources, Inc. in April 1997, gross production
from 11 key fields was increased over 300%, from an average of 240 Boe per day
to an average of 980 Boe per day, through workovers and other remedial
operations. In addition, the Company will continue to sell or otherwise
dispose of non-core properties.
Low-Risk Exploration Program. The Company plans to participate in selective,
low-risk exploration projects to balance its development drilling and workover
programs and give the Company exposure to potential additional reserves. The
Company's focus is primarily on prospects delineated with the benefit of 3D
seismic technology. Thus far, the Company has identified 11 exploration
prospects in the U.K. Interests which could add significant incremental
reserves, the majority of which were developed from 3D seismic data. The
Company expects the geology and reservoir quality of the majority of these
prospects to be similar to those found in the nearby producing blocks in the
East Irish Sea. Domestically, the Company has farmed out its Jefferson Island
salt dome leasehold located in Iberia Parish, Louisiana to Continental
Resources Ltd. in exchange for a new 3D seismic survey over the leasehold and
a one-third carried working interest in two wells to be drilled in the farmed
out acreage.
THE COMPANY'S UNITED STATES PROPERTIES
The Company currently owns producing oil and gas properties located in 12
states in the U.S., with proved reserves located primarily in the states of
Alabama, Louisiana, Mississippi, Oklahoma and Texas. The Company operates 248
producing wells in these areas and also owns non-operated interests in 311
producing wells and units. Lee Keeling, independent petroleum engineering
consultants, has estimated that the proved reserves attributable to the
Company's U.S. properties at January 1, 1998 and April 30, 1998, included
7,219 and 6,494 MBbls of oil, respectively, and 26,576 and 26,322 MMcf of gas,
respectively (69,890 and 65,286 MMcfe, respectively), with a Pre-tax PV10
value of approximately $59.8 million and $48.6 million, respectively, and a
Standardized Measure of approximately $52.3 million and $45.1 million,
respectively.
The Company's principal areas of activity in the U.S. are:
South Carlton Field, Alabama. The South Carlton Field is located in Clarke
and Baldwin Counties in southwest Alabama along the banks of the Alabama
River. The Company operates 56 active producing oil wells and three water
injection wells. Production is from the Massive and Pilot sands of the
Tuscaloosa Formation. Daily production in this field has increased
significantly following the commencement of remedial workover operations. As
part of its remedial operations, the Company has recently made significant
improvements to its main gathering and loading facilities on both sides of the
Alabama River. Due to the remediation effort, production increased from an
average of 89 Boe per day in April 1997 to an average of 575 Boe per day in
September 1997. Gross daily production for February 1998 was lower, at
approximately 295 Bbls of oil per day, due to heavy seasonal flooding which
required the shutting in of a number of wells. These have begun to return to
production. Based on the production history of certain infill wells previously
drilled in this field and an extensive geological and engineering review, the
Company believes that additional infill drilling potential using horizontal
drilling techniques exists for the Tuscaloosa reservoirs. The application of
horizontal drilling techniques has the potential to significantly improve
recovery per well in view of the heavy gravity of the oil (12-14 API). The
Company's average working interest in this field is 100%.
Black Warrior Basin, Mississippi and Alabama. The Company owns operated and
non-operated working interests in 90 wells (41 operated and 49 non-operated)
in Lamar, Fayette and Pickens Counties, Alabama and Lee and Chickasaw
Counties, Mississippi. Production from these wells are from multiple
sandstones of Mississippian age and range in depth from approximately 1,900
feet to 4,600 feet. Over 5,000 MMcf of proved behind pipe reserves have been
identified on the Alliance-held leases and the majority of these are scheduled
for recompletion over the next two years with the potential to add
significantly to net cash flow. The Company's working interest in these
properties varies from 1.8% to 100%.
43
<PAGE>
War-Wink South/East Quito Fields, Texas. The Company owns non-operated
working interests in 71 active wells principally operated by Texaco, Inc. and
Chevron USA Inc. in the War-Wink South and East Quito Fields in Ward County,
Texas. These fields produce from the Fusselman, Atoka, Wolfcamp and Cherry
Canyon Formations at depths ranging from approximately 6,200 feet to 17,500
feet. Based upon review of geological and engineering data, the Company
believes that additional behind pipe and infill drilling potential exists on
these properties. The Company's average working interest in these fields is
approximately 10%.
Jefferson Island Field, Louisiana. The Jefferson Island field is located
near the city of New Iberia in Iberia Parish, Louisiana. Alliance is operator
for a 525 acre leasehold which currently is being maintained by production
from the Will Drill Resources (Texaco) JISMC #4 well. The Alliance lease has
five shut-in wells located on it. Production has been established in Siphoni
Divisi and Discorbis B age sandstone reservoirs. The reservoir traps are
combination structural-stratigraphic traps in a salt dome piercement setting.
A number of potential drilling locations have been identified on the lease for
future exploration activity. The Company's average working interest in this
field is currently 100%.
Following extensive negotiations, the Company signed a farm-out agreement
with Continental Resources Ltd ("Continental") on this lease, whereby
Continental, at its sole expense, will conduct a 3D seismic survey and drill
and complete two wells on the lease to earn a two-thirds working interest. The
3D seismic survey was permitted, procured and shot in May 1998. It is expected
that the processing of the survey will be completed in July 1998. In the event
that Continental earns an interest in the lease, the Company's average working
interest in this field will be 33%.
In addition to these fields, the Company has additional activities in
Arkansas, Colorado, Louisiana, Mississippi and Texas. Net proved reserves to
the Company, as of January 1, 1998 and April 30, 1998, from these other
properties are 2,393 and 2,087 MBbls of oil, respectively and 11,218 and
10,602 MMcf of gas, respectively.
Product Marketing
Alliance's U.S. production is primarily from developed fields close to major
pipelines or refineries and established infrastructure. As a result, the
Company has not experienced any difficulty in finding a market for all of its
product as it becomes available or in transporting its product to these
markets.
Oil Marketing. Alliance markets its oil to a variety of purchasers, most of
which are large, established companies. The oil generally is sold under short-
term contracts with the sales price based on an applicable posted price, plus
a negotiated premium or discount. This price is determined on a well-by-well
basis and the purchaser generally takes delivery at the wellhead.
Gas Marketing. Virtually all of the Company's gas production is close to
existing pipelines and, consequently, the Company generally has a variety of
options to market its gas. Alliance sells the majority of its gas on the spot
market, with prices fluctuating month-to-month based on published pipeline
indices with slight premiums or discounts to the applicable index.
Significant Oil and Gas Purchasers
Oil and gas sales from properties operated by the Company are made under
short-term contracts at the current area market price as adjusted for the
relevant premium or discount. The Company believes that if any customer ceased
purchases of oil or gas at any time, numerous other parties are available to
purchase its production at the market price. As a result, the loss of any
purchaser would not be expected to have a material adverse effect upon
operations. For the period ended April 30, 1998, the Company sold
approximately 39% of its net production of oil to Texaco Trading and
Transportation, Inc. ("Texaco"), pursuant to a contract terminable upon 30
days advance written notice by either party. The price under which the Company
sells its production under this contract is based upon Texaco's posted price
for the type of crude oil produced in the particular field where the crude oil
is produced.
44
<PAGE>
Title to Properties
As is customary in the oil and gas industry, the Company conducts only a
perfunctory title examination at the time properties believed to be suitable
for drilling operations are first acquired. Prior to commencement of drilling
operations, a thorough drillsite title examination is normally conducted and
curative work is performed with respect to significant defects. During
acquisitions, title reviews are performed on all material properties being
acquired.
Reserves
Lee Keeling, independent petroleum engineering consultants, has prepared a
reserve report with respect to Alliance's proved reserves at January 1 and
April 30, 1998. The information presented below and elsewhere in this Proxy
Statement with respect to Alliance's properties is based on the Lee Keeling
reserve report. Alliance believes that the description contained in this Proxy
Statement of the report and these estimates is fair and accurate.
The quantities of Alliance's proved reserves of oil and gas presented below
include only those amounts that Alliance reasonably expects to recover in the
future from known oil and gas reservoirs under existing economic and operating
conditions. Proved developed reserves are limited to those quantities that are
recoverable commercially at current prices and costs, under existing
regulatory practices and with existing technology. Accordingly, any changes in
prices, operating and development costs, regulations, technology or other
factors could significantly increase or decrease estimates of Alliance's
proved developed reserves. Alliance's proved undeveloped reserves include only
those quantities that Alliance reasonably expects to recover from the drilling
of new wells based on geological evidence from offsetting wells. The risks of
recovering these reserves are higher from both geological and mechanical
perspectives than the risk of recovering proved developed reserves.
As required by the Securities and Exchange Commission, the estimates of net
proved reserves and proved developed reserves and the estimated future net
revenues from such reserves set forth below, have been made in accordance with
the provisions of Statement of Financial Accounting Standards No. 69,
"Disclosures about Oil and Gas Producing Activities." Estimated future net
cash flows from proved reserves are determined by using estimated quantities
of proved reserves and the periods in which they are expected to be developed
and produced based on economic conditions at April 30, 1998. The estimated
future production is priced at current prices at April 30, 1998. The resulting
estimated future cash inflows are then reduced by estimated future costs to
develop and produce reserves based on cost levels at the date of the report.
No deduction has been made for depletion, depreciation or for indirect costs,
such as general corporate overhead. The Pre-tax PV10 value was computed by
discounting future net revenues at 10% per annum, without deduction for income
taxes. The Standardized Measure was computed by discounting future net
revenues, after deduction of federal income taxes, at 10% per annum.
Additional information concerning Alliance's reserves is included in
"Supplemental Oil and Gas Data" in the Notes to Alliance's Consolidated
Financial Statements included in this Proxy Statement.
The following table sets forth estimates of the proved oil and gas reserves
of Alliance at April 30, 1998.
<TABLE>
<CAPTION>
OIL (MBBLS) GAS (MMCF)
----------------------------- ------------------------------
DEVELOPED UNDEVELOPED TOTAL DEVELOPED UNDEVELOPED TOTAL
--------- ----------- ------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Alabama........... 1,855.1 2,029.8 3,884.9 9,927.6 -- 9,927.6
Louisiana......... 612.4 532.5 1,144.9 718.3 2,791.1 3,509.4
Mississippi....... 193.7 145.6 339.3 5,054.7 -- 5,054.7
Oklahoma.......... 195.5 -- 195.5 3,758.5 557.8 4,316.3
Texas............. 430.3 12.7 443.0 2,623.3 340.3 2,963.6
Other............. 486.7 -- 486.7 550.1 -- 550.1
------- ------- ------- -------- ------- --------
Total............. 3,773.7 2,720.6 6,494.3 22,632.5 3,689.2 26,321.7
======= ======= ======= ======== ======= ========
</TABLE>
The following table sets forth amounts, as of April 30, 1998, of the
estimated future net cash flows from production and sale of the proved
reserves attributable to Alliance's oil and gas properties before income taxes
45
<PAGE>
and the present value thereof. NYMEX benchmark prices used in determining the
future net cash flow estimates at April 30, 1998 were $15.39 per Bbl for oil
and $2.22 per MMBtu for gas.
<TABLE>
<CAPTION>
AT APRIL 30, 1998
-------------------------------
PROVED PROVED TOTAL
DEVELOPED UNDEVELOPED PROVED
RESERVES RESERVES RESERVES
--------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Estimated future net cash flows from proved
reserves before income taxes................. $63,086.4 $20,088.6 $83,175.0
Pre-tax PV10 value............................ $37,863.5 $10,692.9 $48,556.4
Standardized Measure.......................... $35,173.0 $ 9,933.0 $45,106.0
</TABLE>
The estimation of oil and gas reserves is a complex and subjective process
that is subject to continued revisions as additional information becomes
available. Reserve estimates prepared by different engineers from the same
data can vary widely. Assumptions have to be made regarding the timing of
future production and timing and amount of future development and production
costs. The calculations assume that economic conditions existing at the end of
this reporting period will continue. Other, but equally valid, assumptions
might lead to a significantly different final results. Therefore, the reserve
data presented herein should not be construed as being exact. Any reserve
estimate depends in part on the quality of available data, engineering and
geologic interpretation, and thus represents only an informed professional
judgment. Subsequent reservoir performance may justify upward or downward
revision of such estimate. The information provided, therefore, does not
represent management's estimate of Alliance's expected future cash flows or
value of proved resources. See "Risk Factors--Uncertainty of Reserve
Information and Future Net Revenue Estimates."
Estimates of Alliance's proved reserves have not been filed or included in
reports to any United States' authority or agency other than the Securities
and Exchange Commission. Alliance has filed estimates of proved reserves with
the London Stock Exchange. These estimates do not differ materially from those
contained in this Proxy Statement, but these filings with the London Stock
Exchange also include estimates of probable and possible reserves, as required
by the rules of the London Stock Exchange.
For further information on reserves, costs relating to oil and gas
activities, and results of operations from producing activities, see
Alliance's Consolidated Financial Statements--Supplemental Oil and Gas Data.
Productive Wells and Acreage
The following table sets forth Alliance's producing wells at April 30, 1998.
<TABLE>
<CAPTION>
PRODUCTIVE WELLS
-----------------------------------------------------------------------------------------
OIL GAS TOTAL
-------------------------- ------------------------- --------------------------
GROSS NET GROSS NET GROSS NET
----- ----- ----- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C>
462 101.2 97 27.9 559 129.1
</TABLE>
Productive wells consist of producing wells and wells capable of production,
including gas wells awaiting pipeline connections to commence deliveries and
oil wells awaiting connection to production facilities. Wells that are
completed in more than one producing horizon are counted as one well. Of the
gross wells reported above, 12 had multiple completions.
Developed and Undeveloped Acreage
The following table sets forth the developed and undeveloped leasehold
acreage held by Alliance at April 30, 1998. Developed acres are acres that are
spaced or assignable to productive wells. Undeveloped acres are acres on which
wells have not been drilled or completed to a point that would permit the
production of commercial quantities of oil and gas, regardless of whether or
not such acreage contains proved reserves. Gross
46
<PAGE>
acres are the total number of acres in which Alliance has a working interest.
Net acres are the sum of Alliance's fractional interests owned in the gross
acres.
<TABLE>
<CAPTION>
GROSS NET
-------- --------
<S> <C> <C>
Developed acreage............................................. 30,841.5 22,683.9
Undeveloped acreage........................................... 11,319.6 8,703.5
-------- --------
Total......................................................... 42,161.1 31,387.4
======== ========
</TABLE>
States in which Alliance held developed and undeveloped acreage at April 30,
1998, include Alabama, Arkansas, Colorado, Kansas, Louisiana, Mississippi,
Montana, New Mexico, North Dakota, Oklahoma, Texas and Wyoming.
Production, Unit Prices and Costs
The following table sets forth information with respect to production and
average unit prices and costs for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
JULY 31, ENDED YEAR ENDED
---------------- APRIL 30, APRIL 30,
1995 1996 1997 1998
------ ------ ----------- ----------
<S> <C> <C> <C> <C>
Production:
Gas (MMcf)..................... 2,612 3,481 1,640 1,689
Oil (MBbls).................... 359 405 190 396
Average Sales Prices:
Gas (per Mcf).................. $ 1.48(1) $ 1.67(2) $ 1.70(2) $ 2.36(3)
Oil (per Bbl).................. $12.86(1) $15.24(2) $15.34(2) $15.75(3)
Average Production costs per
Boe(4).......................... $ 6.78 $ 9.19 $ 6.77 $ 8.13
</TABLE>
- --------
(1) Commodity price hedging arrangements did not have a material effect on
average prices for the year ending July 31, 1995.
(2) After giving effect to the impact of the Company's commodity price hedging
arrangements with BoA. Without such hedging arrangements, the average
sales prices for the year ended July 31, 1996 would have been $15.73 per
Bbl for oil and $2.03 per Mcf for gas and for the nine months ended April
30, 1997 would have been $19.15 per Bbl for oil and $2.40 per Mcf for gas.
(3) On May 15, 1997, the commodity price hedging agreements were terminated
with BoA through a buyout, the cost of which was financed by a drawdown
under the terms of its current credit facility with BoA. Hence, the table
reflects actual realized prices for the nine months ended January 31,
1998. On October 23, 1997, new commodity price hedging agreements were
initiated. Without such new hedging arrangements, the average sales prices
for the year ended April 30, 1998 would have been $15.12 per Bbl for oil
and $2.40 per Mcf for gas.
(4) The components of production costs may vary substantially among wells
depending on the methods of recovery employed and other factors, but
generally include production taxes, lease overhead, maintenance and
repair, labor and utilities. Average production costs per Boe for the year
ended April 30, 1998 does not include $1.67 per Boe in respect of the loss
recorded in that period relating to commodity derivatives.
47
<PAGE>
Drilling Activity
During the periods indicated, Alliance drilled or participated in the
drilling of the following exploratory and development wells:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED JULY 31, ENDED YEAR ENDED
--------------------- APRIL 30, APRIL 30,
1995 1996 1997 1998
---------- ---------- ------------ ----------
GROSS NET GROSS NET GROSS NET GROSS NET
----- ---- ----- ---- ------ ----- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exploratory:
Productive...................... -- -- -- -- -- -- -- --
Non-Productive.................. 1 0.25 2 1.16 -- -- 1 0.1
--- ---- --- ---- ----- ----- --- ----
Total......................... 1 0.25 2 1.16 -- -- 1 0.1
=== ==== === ==== ===== ===== === ====
Development:
Productive...................... 6 1.2 6 0.46 2 0.2 7 0.53
Non-Productive.................. -- -- 1 0.08 -- -- -- --
--- ---- --- ---- ----- ----- --- ----
Total......................... 6 1.2 7 0.54 2 0.2 7 0.53
=== ==== === ==== ===== ===== === ====
</TABLE>
At April 30, 1998, Alliance was not participating in the drilling or
completion of any oil and gas wells.
EMPLOYEES
At April 30, 1998, Alliance had a total of 31 employees, none of whom
belonged to a union.
COMPETITION
The oil and gas industry is highly competitive in all its phases. Alliance
encounters strong competition from many other energy companies in acquiring
economically desirable producing properties and drilling prospects and in
obtaining equipment and labor to operate and maintain its properties. In
addition, many energy companies possess greater resources than Alliance.
LEGAL PROCEEDINGS
Except as set forth below, the Company is not involved in any legal or
arbitration proceedings that may have or have had, during the 12 months
preceding the date of this Proxy Statement, a significant effect on the
Company's financial position nor (so far as the Company is aware and save as
referred to below) are any such proceedings pending or threatened against the
Company.
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% of Alliance Resources (USA), Inc.'s net cash proceeds
received from the Arrowhead No. 1 well (and payment of such sum). The claim
was filed in the London, U.K. High Court of Justice. The Company denies the
claim and is vigorously defending this matter.
On February 9, 1998, Alliance filed a lawsuit in Orleans Parish, Louisiana
state court, alleging malpractice against the law firm of Baldwin & Haspel,
LLC, for acts and omissions in certain property and securities transactions
during the period June 1994 to October 1996. The total amount of the Company's
claim has not yet been ascertained.
On April 8, 1998, Union Pacific Resources Company filed a lawsuit in the
State District Court of Denver, Colorado against Germany Oil Company, a
subsidiary of the 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.
48
<PAGE>
On April 17, 1998, UPRC filed a lawsuit in the State 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.
On February 7, 1996, Northern Natural Gas Company ("Northern") filed a
lawsuit against Torch Energy Advisors, Inc. ("Torch") in the 269th Judicial
District Court of Harris County, Texas alleging a breach of an agreement
between Torch, Panda Resources, Inc., a former subsidiary of the Company, and
Northern relating to the transportation of natural gas. LaTex assumed the
defense of the matter pursuant to an indemnification agreement. On February
26, 1998, LaTex and Alliance executed and entered into a settlement agreement,
pursuant to which the Company has agreement to pay five monthly installments
of $150,000.
On October 27, 1992, under prior management and after an unsuccessful
development program, Alliance Resources (USA) Inc. filed a voluntary petition
for reorganization under Chapter 11 of the Bankruptcy Code. There are no
pending adversary proceedings in the case. None of Alliance or its other
subsidiaries are affected in any way by the bankruptcy. The Company has filed
an application for a final decree and a hearing is currently scheduled for
July 31, 1998.
49
<PAGE>
INFORMATION WITH RESPECT TO DIFCO AND THE U.K. PROPERTIES
GENERAL
Difco is a private limited company formed in June 1997 under the laws of
England and Wales. Mr. F. Fox Benton, Jr. and members of his immediate family
own, directly or indirectly, all of the issued and outstanding capital stock
of Difco. Difco's sole asset is a contract to acquire the U.K. Interests, for
a purchase price of approximately $34.0 million in cash, effective January 1,
1998. The U.K. Interests consist of an undivided 20% of Burlington's interest
in 13 offshore blocks or parts of blocks located in the East Irish Sea and
Liverpool Bay areas off the west coast of the U.K. Burlington acquired
substantially all of its interests in the U.K. Properties from BG in December
1997 for approximately $157.6 million, and subsequently acquired the remaining
minority interest in three of the blocks for an additional $3.1 million. Upon
receiving shareholder approval and completion of the Difco Acquisition,
Alliance intends to acquire the U.K. Interests.
U.K. PROPERTIES
Geology of the East Irish Sea Basin
The U.K. Interests lie in the East Irish Sea basin. The East Irish Sea basin
is a Permo-Triassic extensional basin. The basin is complexly faulted with
intersecting north-south, northeast-southwest and northwest-southeast fault
trends, some of which have undergone repeated periods of movement. The
reservoirs in the basin are sandstones of the Middle Triassic Sherwood
Sandstone Group with trapped oil and gas being sealed by overlying shales and
halites of the Upper Triassic Mercia Mudstone Group. Hydrocarbons are sourced
from Upper and Middle Carboniferous Westphalian and Namurian shales. The
Sherwood Sandstone Group is the reservoir in all producing fields and proved
gas accumulations in the basin and comprises sandstone with fluvial, sabkha,
playa lake, channel abandonment and aeolian dune and sheet sand environments
of deposition. The quality of the Sherwood Sandstone is generally high with
good flow rates achieved for both oil and gas. The Sherwood Sandstone has
porosites in the range of 10 to 20 percent with net-to-gross ratios of 60 to
100 percent. Average field permeabilities range from six to 2500 millidarcies
with the exception of the Millom Field, which is typically less than one
millidarcy, as a result of reservoir illitization. The fields are faulted
anticlinal and four-way dip closed structures sealed by the shales and halites
of overlaying Mercia Mudstone Group.
Exploration and Field Development of the East Irish Sea Basin
In the 33 years since the award of the first exploration blocks, the East
Irish Sea basin has emerged as a significant hydrocarbon province which has
resulted in significant oil and gas infrastructure being put in place in the
area. The East Irish Sea basin contains two hydrocarbon producing areas--the
Morecambe Bay area and the Liverpool Bay area. To date, four gas fields, one
oil field and one oil/gas field have been discovered, developed and brought on
stream. Hydrocarbon exploration commenced in the East Irish Sea basin in 1965
with the award of the first production license to Gulf Oil. Gulf Oil completed
the first two East Irish Sea wells in 1969. British Gas Exploration &
Production ("British Gas") discovered oil and gas in other blocks in this area
beginning in 1973 and has been a major operator in the East Irish Sea since
that time. This activity culminated in the discovery of the South Morecambe
and North Morecambe gas fields, which were brought on stream in 1985 and 1994,
respectively. The Liverpool Bay area is the other area of development and
production in the East Irish Sea basin. The complex is operated by an
affiliate of Broken Hill Proprietary Pty. ("BHP") and comprises the Hamilton
and Hamilton North gas fields, the Douglas oil field and the Lennox oil and
gas field.
Morecambe Bay
British Gas became active in the East Irish Sea in 1970 with the award of
Blocks 110/6, 7, 12 and 14. In 1974 British Gas applied for and obtained
Blocks 110/3 and 8, which secured for it 100% ownership of the area covering
the future South and North Morecambe Fields. Thereafter, Block 110/2 was
acquired by British Gas. British Gas drilled the discovery well for the
Morecambe Field in September 1974. Between 1975 and 1978 seven appraisal wells
were drilled, three of which were on the North Morecambe Field. U.K. DTI
approval for a
50
<PAGE>
staged development of South Morecambe Field was obtained in February 1982 and
the first gas was produced in January 1985. The field was developed on the
concept of it being a peak season supply facility and was initially designed
to produce at a rate of 1,200 MMcf per day of wellhead gas, with even higher
production rates possible over short periods.
A total of 33 production wells were drilled during both stages of the
development, of which 31 were capable of producing as of October 1, 1996. All
but one well was completed with seven inch tubing and as a result of the
development policy of perforating all reservoir layers with permeabilities
exceeding 10 millidarcies, initial well deliverabilities have been in the
order of 88 to 100 MMcf per day on 112/64 inch chokes. The restriction on flow
rates has historically been mechanical rather than reservoir related. In
October 1992, an enhanced development project was completed. This essentially
consisted of the installation offshore of compression facilities and the
addition onshore of a fourth processing train. This increased the field's
production and onshore processing capacity of sales gas to 1,800 MMcf per day.
A 36 inch diameter pipeline exports the gas from the central processing
platform 23 miles to a dedicated onshore gas processing terminal at Westfield
Point near Barrow-in-Furness.
Separation and processing of the gas begins on the drilling platforms where
the primary separation of water and condensate from the gas occurs, the
condensate being spiked back into the gas pipeline for transport to the
central processing platform where the condensate is again separated from the
gas, the gas dried and compressed for export to the onshore terminal. The
separation of gas and liquids is repeated at the onshore terminal located at
Westfield Point near Barrow-in-Furness where the gas is processed and treated
in order to meet the U.K. National Transmission System ("NTS") gas sales
specifications. The onshore and offshore facilities' design capacity of 1,860
MMcf per day of well head gas equates to 1,800 MMcf per day of sales gas. The
onshore processing terminals are connected to NTS at Lupton via a 32 mile long
42 inch diameter pipeline There is onsite storage for condensate at the
terminals with a four mile long eight inch diameter pipeline connecting this
storage with further storage facilities (20,000 tons) at Barrow Docks.
The North Morecambe Field received U.K. DTI approval in 1992 and has been
developed in a single stage with the installation of one unmanned 16 slot
drilling and production platform. A total of ten production wells have been
drilled. As the North Morecambe Field gas contains around six percent by
volume carbon dioxide, a new pipeline was required to transport the gas to
shore. The pipeline is 20 miles long and 36 inches in diameter and connects to
the dedicated North Morecambe Field onshore terminal, which is alongside but
separate from the South Morecambe Field terminal.
Offshore processing of the gas is kept to a minimum on the North Morecambe
Field with wellhead gas flowing directly to shore. The onshore processing of
the North Morecambe Field gas is more complex than that for the South
Morecambe Field as it requires the removal of some nitrogen and carbon dioxide
in order to meet the NTS sales specifications. The gas sold meets all
specifications required by the NTS. The onshore and offshore facilities'
design capacity of 588 MMcf of wellhead gas equates to approximately 518 MMcf
per day of sales gas.
The Company has no ownership interest in the North and South Morecambe
Fields.
Liverpool Bay
The Liverpool Bay complex is the other area of production within the East
Irish Sea basin. It is operated by BHP and comprises the Hamilton and Hamilton
North gas fields, the Douglas oil field and the Lennox oil and gas field. They
lie within Blocks 110/13a and b and 110/15. The licences were originally
awarded to Hamilton Brothers Oil and Gas. Operatorship subsequently
transferred to BHP following the drilling of exploration and appraisal wells.
Partners within the Liverpool Bay complex include Lasmo Plc, Monument Oil and
Gas plc, and PowerGen Plc.
In July 1990, the first well to be drilled on the block produced gas at an
unrestricted rate of some 70 MMcf per day from Triassic sandstones. This
initial gas structure (named Hamilton) was appraised successfully in early
51
<PAGE>
1991 by the third and fourth wells on the block. After this initial gas
discovery well, the Douglas oil discovery was made in the south west corner of
the block with the drilling of the 110/13-8 well in November 1990. That
original oil discovery well has been followed by four oil appraisal wells
(110/13-9, 110/13-10, 110/13-11 and 110/13-12) which have successfully
appraised the three separate fault segments making up the field.
U.K. DTI approval for the Hamilton, Hamilton North and Douglas Fields was
granted in October 1993 and for the Lennox Field in January 1994. Development
consists of a central processing platform, a fixed jack-up accommodation
platform and a wellhead platform over the Douglas Field. Three satellite
platforms on the Hamilton, Hamilton North and Lennox Fields are tied back to
the central processing platform at the Douglas Field. The platforms on the
Hamilton, Hamilton North and Lennox Fields are each connected to the Douglas
central processing platform by 14-18 inch diameter pipelines through which oil
and gas from these areas is transported. The main gas evacuation line is a 20
inch diameter pipeline laid from the Douglas Field central processing platform
33.5 kilometers to Point of Ayr. It has been oversized to take a peak
throughout of 740 MMcf per day. From Point of Ayr, the gas is transported via
a 24 inch diameter pipeline, 26 kilometers to the 1,400 megawatt power station
at Conyer's Quay. Two 3 inch diameter pipelines take condensate back from the
terminal to the Douglas Field for mixing and exporting the crude. After
processing on the Douglas Field platform, oil is piped via a 14 inch diameter,
18 kilometer pipeline to a permanently moored 870,000 barrel capacity catenary
anchor leg rigid arm mooring (CALRAM) with onward export via shuttle tankers.
The Company has no ownership interest in the Hamilton, Hamilton North and
Douglas Fields.
The U.K. Interests
Overview
Coinciding with the appraisal and development of the Morecambe Fields,
British Gas drilled further exploration and appraisal wells resulting in the
discoveries of the Millom and Calder Fields in 1982, the Dalton Field in 1989,
the Crossans and Darwen Fields in 1991 and the Hodder and Asland Fields in
1993. Thereafter, a 640 square kilometer 3D survey was acquired during October
1994 to May 1995 covering the Morecambe Fields and the Millom, Dalton, Calder,
Crossans, Darwen and Hodder Fields.
In 1997, British Gas was separated into two separate companies, Centrica and
BG. Centrica acquired the gas trading and sales side of the former British Gas
plus the South and North Morecambe Fields. BG acquired all of the exploration
and production interests of the former British Gas, with the exception of the
South and North Morecambe Fields, which are adjacent to several of the blocks
purchased by Burlington. Management believes that, because the BG East Irish
Sea blocks effectively became isolated assets from the rest of BG's U.K.
portfolio they had a reduced strategic value to BG and, thus, became available
to Burlington.
The U.K. Interests consist of certain undivided, nonoperated working
interests in 13 offshore blocks. The blocks include five proved gas
accumulations in seven fields, traditionally split into the Millom and Dalton
sweet gas fields and the Rivers sour gas complex (comprising the Hodder,
Calder, Crossans, Darwen and Asland Fields). The U.K. Interests are located
approximately 28 miles offshore in water depths of less than 200 feet. The
U.K. Properties are located in close proximity to the North and South
Morecambe Fields, operated by Centrica, which are approximately six to ten
miles to the east and south. The Liverpool Bay development located
approximately five to fifteen miles to the south of the blocks, is operated by
a subsidiary of BHP.
52
<PAGE>
Set forth below is certain information with respect to the U.K. Properties.
<TABLE>
<CAPTION>
NET PROVED RESERVES
DISCOVERY -------------------- ALLIANCE
BLOCKS FIELD OPERATOR DATE GAS (BCF) OIL (BBLS) WORKING INTEREST
- ------ ----- -------- --------- --------- ---------- -----------------
<S> <C> <C> <C> <C> <C> <C>
113/26a Millom Burlington 1982 46.4 0 20.0%
113/27a
110/2c
110/2b Dalton Burlington 1989 22.8 0 20.0%
110/2b Rivers Complex Burlington 1982 83.6 0 20.0%
110/7c-F1 Fields (Calder, through
110/7a Crossans, 1993
110/8a Darwen, Hodder
110/9a and Asland)
110/14
110/12a Burlington -- -- -- 20.0%
110/3b Kerr McGee -- -- -- 5.2%
110/3c
110/7b Perenco UK Ltd. -- -- -- 8.45%
----- ---
Total 152.8 0
===== ===
</TABLE>
Three of the 13 blocks are not wholly-owned by Burlington. Before these
blocks can be transferred to Difco the consent of the other joint owners is
required (such consent not to be unreasonably withheld). None of the three
blocks requiring such consents contains any proved oil or gas reserves.
Sweet Gas Fields
Millom Field. The Millom Field is a medium sized gas field located
approximately six miles northwest of the North Morecambe Field in water depth
of approximately 110 feet. The field extends into blocks 110/2c, 113/26a and
113/27a, which are operated by Burlington. The discovery well 113/26-1 was
drilled in March 1982 and encountered a 480 foot gas column in a Triassic
Sherwood Sandstone reservoir with lower porosities and permeabilities than
those occurring in the producing Morecambe Fields to the south, principally
due to reservoir illitization. The discovery was followed by three additional
appraisal wells to further delineate the field. One of these appraisal wells
was drilled as a horizontal well (in order to mitigate the effects of
reservoir illitization) through the Triassic Sherwood Sandstone Group and
drill stem tested at a rate of 15 MMcf of gas per day, on a 128/64" choke.
This well is currently suspended. The top of the Sherwood Sandstone occurs at
a depth of 4,146 feet below mean sea level.
Dalton Field. The Dalton Field is located approximately three miles west of
the South Morecambe Field and four miles north of the Calder Field in a water
depth of approximately 120 feet. The field lies in block 110/2b, which is
operated by Burlington Resources. The discovery well 110/2b-9 was drilled in
December 1989 and encountered gas bearing sands in the Triassic Sherwood
Sandstone Group at a depth of 3,359 ft. below mean sea level. The well was
drill stem tested at a rate of 90 MMcf of gas per day, on a 128/64" choke,
from a perforated interval of 300 feet in the upper section of the Sherwood
Sandstone. The 110/2b-9 well is currently suspended.
Rivers Complex Sour Gas Field
Calder Field. The Calder Field is located approximately three miles
southwest of the South Morecambe Field central processing platform in water
depth of approximately 115 feet. The field lies mainly in block 110/7a and
extends into block 110/2b, both of which are operated by Burlington. The
Calder Field is the largest of the seven gas fields discovered by British Gas
and acquired by Burlington in the Liverpool Bay and Morecambe Bay areas of the
East Irish Sea. The discovery well 110/7a-3 was drilled in February 1982 and
was followed by
53
<PAGE>
two appraisal wells, 110/7a-4, drilled in May 1983 and 110/7a-8, drilled in
January 1994. All three wells tested gas on drill stem test and were
subsequently plugged and abandoned. In addition all three wells penetrated a
thin (16 ft.) oil column. The 110/7a-8 well flowed at a maximum rate of 20.99
MMcf of gas per day and 106 Bbls of condensate per day, on a 72/64" choke,
from a perforated interval of 100 feet in the upper section of the Triassic
Sherwood Sandstone Group at a depth of 2,671 feet below mean sea level.
Crossans Field. The Crossans Field is located approximately 2.5 miles
northwest of the Calder Field in water depth of approximately 140 feet. The
field extends into blocks 110/2b, 110/7c and 110/7a, which are operated by
Burlington. The discovery well 110/2b-10 was drilled in October 1991 and
encountered a 156 foot gas saturated sand section in the Triassic Sherwood
Sandstone Group at a depth of 2,088 feet below mean sea level. The well was
drill stem tested at a maximum rate of 14.5 MMcf of gas per day, on a 64/64"
choke. The 110/2b-10 well is currently suspended.
Darwen Field. The Darwen Field is located approximately eight miles
southwest of the Calder Field in water depth of approximately 130 feet. The
field lies in block 110/8a, which is operated by Burlington. The discovery
well 110/8a-4 was drilled in September 1991 and was drill stem tested and
flowed at a maximum rate of 27.1 MMcf of gas per day and 281.8 Bbls of
condensate per day, on a 36/64" choke, from a perforated interval of 290 feet
in the upper section of the Triassic Sherwood Sandstone Group at a depth of
3,098 feet below mean sea level. The 110/8a-4 well is currently suspended.
Asland Field. The Asland Field is located approximately 16.5 miles southeast
of the Calder Field and six miles northeast of the Hamilton Field in water
depth of approximately 70 feet. The field extends to blocks 110/9a and 110/14,
which are operated by Burlington. The discovery well 110/14-2 was drilled in
October 1993 and tested gas at a maximum rate of 7.8 MMcf of gas per day, on a
96/64" choke. The 110/14-2 well was plugged and abandoned.
Hodder Field. The Hodder Field is located approximately two miles northwest
of the Calder Field in water depth of approximately 110 feet. The field lies
in block 110/2b, which is operated by Burlington. The discovery well 110/2b-11
was drilled in February 1993 and was suspended as a gas discovery without
being tested. Electric logs show a 72 foot gas zone in the Triassic Sherwood
Sandstone Group at a depth of 2,752 feet below mean sea level.
Exploratory Potential
The blocks also contain 11 identified exploration prospects that the Company
believes present drilling opportunities, the majority of which are well-
defined by high quality, comprehensive 3D seismic surveys. Nine of the 11
prospects have reservoirs in the Triassic Sherwood Sandstone, which is the
same reservoir for the South and North Morecambe Fields and the Lennox and
Douglas Fields at Liverpool Bay. Two of the prospects have reservoirs within
the deeper Permian Collyhurst Sandstone formation and reservoir quality is
uncertain. Ownership interests in the prospects varies, with the Company
acquiring a 20% interest in nine of the exploration prospects and an 8.45%
interest in the other two prospects. Three of the prospects identified lie
only partially within the blocks to be acquired. The prospects tend to be oil
prone with three classified as gas prospects and eight classified as oil
prospects.
The prospects are all tilted fault and horst block structures with partial
dip closure. Eight of the nine Triassic Sherwood Sandstone prospects lie in
close proximity to the major north-south graben in the center of the East
Irish Sea, which also forms the western boundary of the South and North
Morecambe Fields. The Company believes this deep graben is likely to contain
mature Carboniferous source rocks and the boundary faults are expected to
provide an easy migration path for any hydrocarbons generated within the
graben into prospects located in close proximity to the main graben boundary
faults. The Mercia mudstones and halites are expected to provide a good top
seal for the Triassic Sherwood Sandstone and the overall level of risk is
estimated to be low to moderate. The deeper Collyhurst Sandstone play is more
uncertain and the Company has allocated a higher risk profile for these
prospects.
54
<PAGE>
Development Plans
The statements below regarding when development of each field is anticipated
to be undertaken and production is anticipated to begin are based on the
assumptions made by Gaffney Cline in its reserve report on the U.K. Interests.
Gaffney Cline's assumptions are in turn based on information and data obtained
from public sources, the Company and Burlington. Burlington made available to
Gaffney Cline its comprehensive database of technical information acquired
from BG on the seven undeveloped gas fields and exploration licenses
including: all raw data, geological, petrophysical and geophysical
interpretations, engineering reports and calculations. Gaffney Cline also
reviewed the 3D seismic data and interpretations available on Burlington's
workstations.
There can be no assurance that the development and production from the
fields will occur as assumed and described below. The actual schedule for
development and production of these fields will be determined by Burlington
and the Company pursuant to the Operating Agreement and will depend upon a
number of factors, including (i) the results of other development activities
in the East Irish Sea area; (ii) the availability of sufficient capital
resources for drilling and installation of facilities; (iii) the approval of
the individual field development plans by the U.K. DTI and other regulatory
authorities; and (iv) economic and industry conditions at the time of
drilling, including prevailing and anticipated prices for oil and gas and the
availability of drilling rigs and crews. The actual outcome of none of these
factors has been determined. In particular, the Company has not entered into
any agreements for the development, transportation or marketing of any gas
from the U.K. Interests, has not applied for or received the necessary
regulatory approvals and has not arranged for the necessary drilling rigs or
crews. There is no assurance that either the Company or Burlington will be
able to enter into or obtain contractual or other arrangements on satisfactory
terms or at all. The full development of the fields will depend upon the
commercial success of the development plan. In the event that the results of
the initial development activities do not meet expectations, the developments
will be modified accordingly.
Development of the Millom and Dalton Fields. The Millom and Dalton Fields
are sweet gas fields. In its reserve report on the U.K. Interests, Gaffney
Cline assumed that the Dalton Field will be a two well development. The
drilling and related infrastructure was assumed to be completed and first gas
produced by the fourth quarter of 1999.
It was assumed that development of the Millom Field would commence in 1999.
In the following year, it was assumed the development would continue with the
drilling of three new production wells and the installation of an unmanned
minimum facilities production platform, together with related pipelines and
infrastructure. This would be followed by the drilling of an additional four
new production wells in 2001 whereupon production would commence.
The Company's net share of expected capital expenditures to implement
development of these fields is estimated to be approximately $30.0 million.
On June 18, 1998, Burlington Resources announced that it had executed a
statement of intent with Hydrocarbon Resources Limited, a subsidiary of
Centrica, to transport and process natural gas from the Millom and Dalton
Fields. Subject to approval by the U.K. DTI, Burlington Resources announced
that initial gas production from the Dalton Field is targeted for the fourth
quarter of 1999. Development of the Million Field is expected to follow, with
initial production planned by the end of 2000. The Company expects to utilize
this arrangement to sell its oil and gas from these fields.
Development of the Rivers Complex. The Rivers Complex of fields comprises
five separate sour gas accumulations, namely, Asland, Calder, Crossans, Darwen
and Hodder. In its reserve report on the U.K. Interests, Gaffney Cline assumed
initial development of the Rivers Complex through implementation of a
development program at the Calder, Crossans and Darwen Fields. Development of
the Asland and Hodder Fields will be deferred pending further evaluation by
the Company. U.K. DTI approval for the development of the Rivers Complex of
fields will include consideration of the environmental impact of the
production of sour gas from these fields. The Rivers Complex is in close
proximity to the Hamilton, Hamilton North and Lennox fields owned
55
<PAGE>
by BHP that are currently producing sour gas. Therefore, the Company does not
anticipate any difficulties with U.K. DTI approval relating to the existence
of sour gas in the Rivers Complex of fields.
The Calder Field was assumed to be the first of the sour gas fields
developed. First gas production was assumed to be achieved as early as by the
end of 2000. The current development assumptions include an unmanned
facilities platform for the Calder Field, with sub-sea tie-backs from the
Crossans and Darwen Fields. The Calder Field was assumed to be developed with
a total of three production wells drilled directionally from the unmanned
platform. The Crossans Field was assumed to be developed with one production
well and the Darwen Field with one production well, all of which will be tied
back to the platform at the Calder Field. The Company's share of expected
capital expenditures to implement the development of these fields is estimated
to be approximately $43.0 million.
Transportation, Processing and Marketing
Because the U.K. Interests are located in close proximity to the
considerable infrastructure at the South and North Morecambe Fields and
Liverpool Bay area, the Company has several options for the transportation,
processing and marketing of hydrocarbons produced from the U.K. Interests.
Although the Company has no ownership interest in the existing facilities, the
Company believes that development of the fields and commercial sales of oil
and gas from the U.K. Interests can occur by utilizing existing facilities and
infrastructure, construction of new facilities and infrastructure, or a
combination of both of the foregoing. All such alternatives are being
analyzed. In its reserve report on the U.K. Interests, Gaffney Cline assumed
that the gas would be transported and processed through a combination of both
newly constructed facilities and infrastructure and contractual arrangements
for the use of existing facilities and infrastructure. Since the Company has
not entered into any contractual arrangements relative to the use of existing
facilities and infrastructure, it was assumed for purposes of the reserve
report that contractual terms for the use of existing facilities and
infrastructure would be substantially similar to those reported for other
licensees in the U.K. for similar services and circumstances.
The Rivers Complex of fields comprises five sour gas accumulations.
Processing of the sour gas is necessary to remove the toxic hydrogen sulfide
gas. The existing facility at Point of Ayr currently processes the sour gas
produced by BHP from the Hamilton, Hamilton North and Lennox fields. The
Company has not entered into any contractual arrangements for the use of these
existing facilities. In the reserve report for these fields, it was assumed
that contractual terms for the use of these facilities would be substantially
similar to those reported for other licensees in the U.K. for similar services
and circumstances.
There are multiple opportunities to market the production from the U.K.
Interests in several directions to various markets. The available market
opportunities include sales to gas wholesalers, power generation plants or
industrial end-users under fixed price term contracts, contracts with price
adjustment clauses, spot price contracts or some combination of all of these.
The Company anticipates selling its production from the U.K. Interests through
a combination of contractual and spot price arrangements. The Company has not
entered into any contractual arrangements for the sale of the gas and no
assurance can be given that the Company will be able to do so on terms
satisfactory to it or at all.
The U.K. Gas Market
Overview. Until the early 1990's, the state-owned British Gas dominated all
aspects of pipeline transportation, marketing and distribution, while a number
of international oil and gas companies were involved in the exploration and
development of gas. In the period since the 1986 Gas Act was introduced, the
U.K. gas market has been transformed from a monopoly to a free market. The
liberalization of the market was caused by several factors--the privatization
of British Gas, the development of third party access through the British Gas
pipeline systems, the price collapse in 1995 caused by an oversupply of gas,
pressure from the British government to open markets, and the emergence of a
spot market for gas. In 1997 British Gas was restructured into two companies--
BG, which contains the pipeline operations and the domestic and international
exploration and production assets, and Centrica, which contains the supply,
service and retail businesses as well as the Morecambe Bay Fields, owned by
Centrica.
56
<PAGE>
Gas Demand. U.K. gas demand has grown significantly since 1991 driven in
part by growth in gas sales to electric power generators. According to "Energy
Trends," a publication issued by the U.K. DTI, from 1991 to 1996, total demand
for gas in the U.K. grew almost by a compounded annual rate of 7.7%. Of this
growth, gas sales to power generators grew almost thirty times from 60 to
1,700 MMcf per day. In addition, mature U.K. domestic, industrial and
commercial markets grew at a compounded annual rate of 3.1% from 1991 to 1996.
According to the Energy Contract Company, growth in the U.K. gas market over
the next several years will be driven in part by the development of gas fired
power generation plants and the commencement of operation in October 1998 of
the Interconnector between the U.K. (Bacton) and Europe (Zeebrugge in
Belgium). The Interconnector greatly enlarges the potential market for U.K.
gas by effectively linking U.K. producers to European customers via the
continental gas grids. Development of new power stations requires U.K.
government consent. On June 25, 1998, the U.K. government announced the
preliminary conclusions of its review of energy sources for power generation.
The U.K. government has proposed a stricter policy on power station consents
which is likely to curb the development of new gas fired power stations. The
application and duration of this policy is currently uncertain and
consequently it is difficult to assess the impact this will have on U.K. gas
demand and prices at this time. This policy is not expected to effect at least
17 new gas fired electric power plants currently under development.
Gas Supply. Gas is supplied to the U.K. mainland primarily from fields in
the Southern Gas Basin and the central North Sea off of the east coast of the
U.K., and from Morecambe Bay and Liverpool Bay, off of the west coast of the
U.K. A number of international oil and gas companies operate these gas fields
and a number of independent exploration and production companies have non-
operated interests in these fields. Gas from these offshore gas fields comes
ashore at one of seven terminals--St. Fergus, Easington, Theddlethorpe,
Bacton, Barrow, Teeside, and Point of Ayr, where it enters the U.K. NTS. The
U.K. currently imports gas from Norway via the Frigg pipeline. This pipeline
is emptying as the fields which supply it become depleted. Imports now account
for only about 2% of U.K. demand.
Long-term vs. Short-term Contracts. In general, sales of a significant
portion of gas within the U.K. are made under long-term contracts, driven in
part by the growth in electricity produced by gas fired independent power
projects, which require secure long-term supplies of gas. According to the
Energy Contract Company, by late-1997, the market rate on a 10-15 year
contract was approximately 15p per therm ($2.47 per Mcf). In comparison, the
spot market to date has been characterized by relatively thinly traded volumes
and significant price volatility. A study by BG TransCo, the U.K.'s primary
transporter of gas, suggests that only 15-20% of all gas sold in the U.K. is
being sold under short-term arrangements. With respect to spot market price
volatility, "British Spot Gas Markets" reported within day trades of
significant volumes at 30p per therm ($4.63 per Mcf) on December 17, 1997,
compared to 9.15-9.30p per therm ($1.41-$1.44 per Mcf) for July 1998
contracts, as quoted in the June 17, 1998 issue of the Financial Times.
Joint Operating Agreement with Burlington
With respect to Block Nos. 110/2b, 110/2c, 110/7a, 110/7c-F1, 110/8a,
110/9a, 110/12a, 110/14, 113/26a and 113/27a, which will be owned 80% by
Burlington and 20% by the Company, at the closing of the Difco Acquisition,
Burlington and the Company will execute the Operating Agreement covering such
blocks (the "License Area"). The Operating Agreement will be substantially
similar to other joint operating agreements covering oil and gas properties in
the North Sea and will contain detailed provisions governing the exploration,
development and operation of the License Area. Furthermore, the Operating
Agreement will include provisions allocating the costs, liabilities, revenues
and benefits which are attributable to oil and gas operations in the License
Area.
Burlington will be designated to act as operator under the Operating
Agreement ("Operator"). In that capacity, Burlington generally will be
responsible for the conduct of day-to-day operations on the License Area,
subject to the overall supervision and control of a joint operating committee
composed of one representative from each party owning an interest in the
License Area (the "Joint Operating Committee"). Decisions of the Joint
Operating Committee will be generally made by the affirmative vote of two or
more parties owning not less than
57
<PAGE>
a 65% interest in the License Area. Therefore, the Company will have no right
to compel any development activities in the License Area, but the Company's
consent will generally be required for all development activities in the
License Area while no more than two parties own interests in the License Area.
The Operator will prepare and submit exploration programs and budgets
annually to the Joint Operating Committee for approval. In the event of a
discovery of oil and gas reserves, the Operator will prepare and submit
appraisal and development programs and budgets for such discovery to the Joint
Operating Committee for approval. Except in emergency situations, prior to
entering into any commitment or incurring any expenditures under an approved
program and budget, the Operator will be required to submit an authorization
for expenditures for approval by the Joint Operating Committee.
The Operating Agreement also will provide for exploratory operations on the
License Area by less than all parties under certain circumstances ("Sole Risk
Operations"). The parties conducting such operations ("Sole Risk
Participants") will be responsible for all liabilities, costs and expenses
associated with such operations, and also will be entitled to receive all
benefits and revenues generated by such operations. If a discovery results
from Sole Risk Operations, any party which was not a Sole Risk Participant in
such operations may participate in appraisal drilling or a development program
relating to such discovery by making a payment to the then existing Sole Risk
Participants of its proportionate share of the cost previously incurred with
respect to such Sole Risk Operations, plus interest. In addition, the party
must make a payment to the then existing Sole Risk Participants of a
significant premium calculated by reference to a formula in the Operating
Agreement.
U.K. TAX REGIME
U.K. Corporation Tax
Alliance and Difco, as U.K. resident companies, will be subject to U.K.
corporation tax (currently at the rate of 31%, but to be reduced from April 1,
1999 to 30%) on all its profits (wherever arising and including both income
and capital gains), subject to any applicable relief under any relevant double
tax treaty. For U.K. tax purposes, the U.K. is extended to cover the
territorial sea of the U.K. and certain designated areas. Generally, oil
extraction activities and other activities involving oil rights, which are
carried on as part of a trade, are treated for U.K. tax purposes as a separate
trade. This is known as the ring fence. Special rules prevent profits from the
ring fence being reduced by losses from other activities outside the ring
fence. In particular, only to the extent that the proceeds of the Notes are
used for the acquisition and development of the U.K. Interests will the
interest expense on the Notes be eligible for tax relief.
U.K. Petroleum Revenue Tax
Petroleum Revenue Tax ("PRT") is charged on all fields in the U.K. and the
U.K. continental shelf which received their development consent before
February 16, 1993. The rate is currently 50%. Petroleum Revenue Tax is charged
on profits less certain losses and reliefs. The U.K. Properties have not yet
received development consent and therefore are not subject to PRT.
U.K. Capital Gains Tax for Shareholders
The disposal of Shares by a U.K. resident, or in certain circumstances by a
shareholder who is carrying on a business in the U.K. through a branch or
agency in connection with which the Shares are held, will generally give rise
to a chargeable gain or allowable loss for the purposes of U.K. taxation of
capital gains. If proposals included in the Finance (No. 2) Bill 1998 are
enacted, U.K. resident individuals who acquire Shares before becoming
temporarily non-U.K. resident, may remain chargeable to U.K. capital gains tax
on gains realized while non-resident.
The U.K. taxing jurisdiction is extended to ensure that capital gains
derived by persons not resident in the U.K. from disposals of unquoted shares
deriving the greater part of their value from oil exploration or
58
<PAGE>
exploitation assets situated in the U.K. or a designated area are brought
within the charge to U.K. tax. These provisions will not apply in the case of
shareholders of Alliance while Alliance remains quoted on the London Stock
Exchange.
Neither the Company nor any of its shareholders will be required to
recognize any gain or loss under U.K. tax law as a result only of the
completion of the Acquisitions.
Taxation of Dividends Paid by the Company
Under current U.K. tax legislation, Alliance will not be required to
withhold tax at source from dividends. However, when paying a dividend,
Alliance will have to account to the Inland Revenue for an amount of advance
corporation tax ("ACT"), the current rate of ACT being 25% of the cash
dividend paid. If legislation introduced in the Finance (No. 2) Bill 1998 is
enacted, ACT will be abolished with effect from April 6, 1999. Currently, non-
corporate shareholders resident in the U.K. (other than pension funds) should
generally be entitled to a tax credit equivalent to 25% of the amount of any
dividend received from Alliance. Any shareholders who pay income tax on the
dividend other than at the higher rate would have no further tax to pay on the
dividend. Higher rate taxpayers would have a further liability to U.K. income
tax. Currently, any such non-corporate shareholders (other than pension funds)
who are not liable to pay U.K. income tax would be able to claim repayment of
the tax credit from the Inland Revenue. However, with effect from April 6,
1999, the ability of such shareholders to make a claim for repayment of the
tax credit will be abolished. Notwithstanding the changes to the amount of the
tax credit, due to a corresponding reduction in the rate of income tax on
dividends, the net cash return to tax-paying U.K. non-corporate shareholders
should remain the same on or after April 6, 1999, as before.
Shareholders resident outside the U.K. may currently, depending upon the
provisions of any relevant double tax convention or agreement, be able to
claim a repayment from the Inland Revenue in respect of part of the tax credit
attaching to any dividends to which they are entitled. However, the changes to
the amount of the tax credit associated with dividends paid by Alliance on or
after April 6, 1999 will affect (and often eliminate) the amount of any
repayment claim which can be made. Non-resident shareholders of Alliance
should consult their own tax advisors as to their entitlement to utilize the
tax credit, the procedures for doing so and the tax treatment of dividends
received by them in the jurisdiction where they are resident.
59
<PAGE>
PRINCIPAL SHAREHOLDERS OF ALLIANCE
The following table and the notes thereto set forth certain information
regarding the beneficial ownership of Shares by (i) all executive officers and
directors of Alliance and (ii) each other person known to Alliance who will
own beneficially more than five percent of the Shares, based on their
ownership as of June 30, 1998.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF SHARES OWNED PERCENT OWNED
BENEFICIAL OWNER(1) BENEFICIALLY BENEFICIALLY
-------------------- ------------ -------------
<S> <C> <C>
John A. Keenan................................ 650,000(2) 1.8%
H. Brian K. Williams.......................... 132,500(3) *
Paul R. Fenemore.............................. 225,000(4) *
William J.A. Kennedy.......................... 4,125 *
M. Philip Douglas............................. 99,583 *
Christopher R. L. Samuelson................... -- --
Michael E. Humphries.......................... -- --
John R. Martinson(5).......................... 778,987 2.1%
Enron Reserve Acquisition Corp.(6)............ 3,239,708 8.9%
Trans Arabian Energy Ltd.(7).................. 1,575,875 4.3%
LaSalle Street Natural Resources Corpora-
tion(8)...................................... 3,904,519 10.7%
Framlington Investment Management Ltd. (9).... 1,850,000 5.1%
All Executive Officers and Directors of
Alliance as a group (8 persons)(2), (3), (4),
(5).......................................... 1,870,195 5.2%
</TABLE>
- --------
* Less than one percent.
(1) All of the Company's directors may be contacted at Kingsbury House, 15-17
King Street, London SW1Y 6QU.
(2) Includes options to purchase 550,000 Shares granted pursuant to the
Company's executive share option plans.
(3) Includes options to purchase 112,500 Shares granted pursuant to the
Company's executive share option plans.
(4) Consists of options to purchase 225,000 Shares granted pursuant to the
Company executive share option plans.
(5) Includes presently exercisable warrants to purchase 374,877 Shares held by
Wood Roberts, Inc., a corporation under the control of Mr. Martinson and
presently exercisable warrants to purchase 218,334 Shares held by Wood
Roberts, LLC, a Texas limited liability company 50% owned by Mr.
Martinson.
(6) The address of Enron Reserve Acquisition Corp. is 1400 Smith Street,
Houston, Texas 77002.
(7) The address of Trans Arabian Energy Ltd. is 50 Town Range, Gibraltar. It
is wholly owned by Sheikh Ahmed Mannai of Qatar.
(8) Consists of 1,500,000 Shares, convertible loan notes and immediately
exercisable warrants convertible into or exercisable for 2,404,519 Shares
issued to an affiliate of BoA. The address of BoA is 231 S. LaSalle
Street, Chicago, Illinois 60697.
(9) The address of Framlington Investment Management Ltd. is 15 Bishopsgate,
London, EC2M 3XJ.
In addition to the interests set out above, John A. Keenan is interested in
45,000 Shares held in the name of Diamond Securities Limited, 102,500 Shares
held in the name of Havensworth Limited by virtue of having proxy over the
voting rights attached to these Shares pending their sale, as required by a
settlement of legal proceedings with the former Managing Director of the
Company in August 1996.
60
<PAGE>
The following table and the notes thereto set forth the possible ranges of
share ownership by the shareholders of Difco after the completion of the Difco
Acquisition.
<TABLE>
<CAPTION>
MINIMUM(1) MAXIMUM(2)
-------------------- ---------------------
PERCENTAGE PERCENTAGE
DIFCO HOLDER SHARES OWNERSHIP SHARES OWNERSHIP
- ------------ --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
F. Fox Benton, Jr. and Lizinka M.
Benton............................ 3,650,829 9.6% 14,603,316 23.4%
F. Fox Benton III.................. 1,123,332 2.9 4,493,328 7.2
Lizinka C. Benton.................. 1,123,332 2.9 4,493,328 7.2
Lucia T. Benton.................... 1,123,332 2.9 4,493,328 7.2
--------- ---- ---------- ----
Total.............................. 7,020,825 18.3% 28,083,300 45.0%
========= ==== ========== ====
</TABLE>
- --------
(1) Assumes conversion of the minimum number of Acquisition Shares and that no
Shares are issued to holders of the Company's warrants or convertible loan
notes.
(2) Assumes conversion of the maximum number of Acquisition Shares and that
the maximum number of Shares are issued to the holders of the Company's
warrants and convertible loan notes.
61
<PAGE>
DESCRIPTION OF ALLIANCE CAPITAL STOCK
The authorized capital stock of Alliance consists of 46,000,000 Shares of
(Pounds)0.40 each, of which 31,209,408 shares were outstanding as of June 30,
1998. In addition, Alliance is authorized to issue instruments convertible
into Shares. Under this authority, and subject to receiving shareholder
approval at the Extraordinary General Meeting, the Board of Directors will
authorize the issuance of the Acquisition Shares in the Difco Acquisition. The
following sections include certain information concerning the Shares and the
Acquisition Shares, based on English law and a summary of certain provisions
of the Memorandum and Articles of Association of Alliance. This information
and summary do not purport to be complete and are qualified in their entirety
by reference to the full Memorandum and Articles of Association. All
statements regarding the rights of Shares apply equally to the Acquisition
Shares except where noted.
All of the 31,209,408 issued and outstanding Shares are fully paid or
credited as fully paid and not subject to calls for additional payments of any
kind. The Shares are issued in registered form.
DIVIDENDS
Holders of Shares are entitled to receive such dividends as may be declared
by the Board of Directors. To date there have been no dividends paid to
holders of Shares.
LIQUIDATION RIGHTS
On a liquidation, the court-appointed liquidator may (with the sanction of
an extraordinary resolution) divide among the holders of the Shares the whole
or any part of the assets of Alliance and may, for such purpose, set such
values as he deems fair upon any property to be divided and may determine how
such division shall be carried out as among the shareholders.
VOTING RIGHTS
Voting at any general meeting of shareholders is by a show of hands unless a
poll is duly demanded. A poll may be demanded by (i) the chairman of the
meeting, (ii) at least three shareholders entitled to vote at the meeting,
(iii) any shareholder or shareholders representing in the aggregate not less
than one-tenth of the total voting rights of all shareholders entitled to vote
at the meeting or (iv) any shareholder or shareholders holding shares
conferring a right to vote at the meeting on which there have been paid up
sums in the aggregate equal to not less than one-tenth of the total sum paid
up on all the shares conferring that right.
On a show of hands, every shareholder who (being an individual) is present
in person or (being a corporation) is present by a duly authorized
representative at a shareholders meeting of Alliance and entitled to vote will
have one vote, and on a poll, every shareholder who is present in person or by
proxy shall have one vote per Share. Holders of Acquisition Shares shall have
one-half of a vote per Share. The necessary quorum for a shareholders' meeting
shall be a minimum of two persons (each of whom is a shareholder or proxy).
If all the members entitled to vote at a general meeting sign written
resolutions in lieu of a vote at such meeting, such resolutions shall be valid
and effective as resolutions passed at a general meeting.
Unless otherwise required by law or the Alliance's Memorandum of Association
or Articles of Association, voting in a general meeting is by ordinary
resolution (e.g., resolutions for the election of directors, the approval of
financial statements, the declaration of final dividends, the appointment of
auditors, the increase of authorized share capital or the grant of authority
to allot shares). An ordinary resolution requires the affirmative vote of a
majority of the votes of those persons present at a meeting at which there is
a quorum. A special resolution (e.g., modifying the rights of any class of
shares at a meeting concerning an alteration of Alliance's Memorandum or
Articles of Association or a winding-up of Alliance) or an extraordinary
resolution requires the affirmative vote of not less than three-fourths of the
eligible votes. Meetings are generally convened upon advance notice of 21
62
<PAGE>
or 14 days (not including the days of delivery or receipt of the notice)
depending on the nature of the business to be transacted.
For as long as a Regulated Entity or its affiliate is a holder of Shares, it
will not be entitled to vote more than 5% of the total votes normally
exercisable by holders of Shares. Upon a transfer of any Shares to a Regulated
Entity, this restriction will cease to apply to those Shares.
PRE-EMPTIVE RIGHTS
The Companies Act of 1985, as amended (the "Companies Act"), confers upon
shareholders, to the extent not disapplied, rights of pre-emption in respect
of the allotment of equity securities that are or are to be paid up wholly in
cash. These provisions may be disapplied by a special resolution of the
shareholders, either generally or specifically, for a period not exceeding
five years. Additionally, the Articles of Association of Alliance provide the
shareholders with such a pre-emptive right unless Alliance shall by special
resolution otherwise direct.
VARIATION OF RIGHTS
If at any time the share capital of Alliance is divided into different
classes of shares, the rights attached to any class may be varied or
abrogated, subject to the provisions of the Companies Act, with the written
consent of the holders of not less than three-quarters of the issued shares of
the class, or with the sanction of any extraordinary resolution passed at a
separate meeting of the holders of the shares of that class. At every such
separate meeting, the quorum shall be members of the class present in person
or by proxy holding not less than one-third of the issued shares of the class,
or at an adjourned meeting of such holders as described above a quorum will be
established if any one person entitled to vote at the meeting (or his proxy)
is present. Each holder of shares of the class shall have one vote in respect
of every share of the class held by such person.
CONVERSION OF ACQUISITION SHARES
The Acquisition Shares will convert into Shares during the five year period
subsequent to the completion of the Difco Acquisition, based upon sales
production actually achieved from, or the estimated value attributable to the
U.K. Interests. See "The Acquisitions and Related Matters--Terms of the Difco
Acquisition."
DISCLOSURE OF INTERESTS
Under the Companies Act, any person who acquires (alone or, in certain
circumstances, with others) an interest in the relevant share capital of
Alliance in excess of the "notifiable percentage" (currently three percent)
comes under an obligation to disclose prescribed information to Alliance in
respect of those shares. After the "notifiable" level is exceeded, similar
notifications must be made, in respect of the whole percentage figure
increases or decreases, rounding down to the next whole number.
In addition, the Companies Act gives Alliance power to require persons who
it knows are, or has reasonable cause to believe to be, or to have been within
the previous three years, interested in its relevant share capital to disclose
prescribed particulars of those interests. Failure to supply the information
required may lead to disenfranchisement of the relevant shares and a
prohibition on their transfer and on dividend or other payments in respect of
them.
In this context, the term "interest" is broadly defined and will generally
include an interest of any kind in shares.
EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
There are currently no U.K. foreign exchange controls on the payment of
dividends on the Shares or the conduct of Alliance's operations. There are no
restrictions under Alliance's Memorandum and Articles of Association or under
English law that limit the right of non-resident or foreign owners to hold or
vote Shares.
63
<PAGE>
OTHER MATTERS
The Board of Directors is not aware of any matters not set forth herein that
may come before the Extraordinary General Meeting. If, however, further
business properly comes before the Extraordinary General Meeting, the persons
named in the proxies will vote the shares represented thereby in accordance
with their judgment.
SHAREHOLDER PROPOSALS FOR ALLIANCE 1999 ANNUAL MEETING
Subject to the provisions of the Company's Articles of Association,
shareholders of Alliance may submit proposals on matters appropriate for
shareholder action at annual meetings in accordance with regulations adopted
by the Securities and Exchange Commission. To be considered for inclusion in
the proxy statement and form of proxy relating to the 1999 Alliance annual
meeting, such proposals must be received by Alliance not later than March 31,
1999. Proposals should be directed to the attention of the Secretary of
Alliance.
By Order of the Board of Directors
Secretary
July 13, 1998
64
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report............................................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Stockholders' Equity............................ F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Alliance Resources PLC and Subsidiaries
We have audited the accompanying consolidated balance sheets of Alliance
Resources PLC and subsidiaries as of 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 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.
KPMG Audit Plc
London, England
June 17, 1998
F-2
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
ASSETS ------------ ------------
<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
============ ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<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-3
<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,
SEE NOTE 3)
<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 market-
ing............................. 133,455 15,798 --
Cessation of overseas explora-
tion............................ 3,446,795 -- --
General and administrative ex-
penses.......................... 2,893,146 3,481,003 3,363,885
Depreciation, depletion, and am-
ortization...................... 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-4
<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
(see note 3)........... 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
(see note 3)........... 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-5
<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,
SEE NOTE 3)
<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 activities................. 3,484,759 2,098,566 (5,184,139)
------------ ----------- -----------
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
------------ ----------- -----------
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) --
Exercise of warrants................... -- -- 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-6
<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 21,448,787 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
The Directors consider that satisfactory progress has been made in
integrating and rationalizing the operations of LaTex since the acquisition on
May 1, 1997 and that the financial condition of the Group is significantly
improved.
The Group's working capital deficit has been reduced from $9,620,078 at
April 30, 1997 to $9,479,824 at April 30, 1998. Operating losses are much
reduced.
In the year from April 30, 1998, loan repayments of $2,275,000 are scheduled
to be made.
Management plans to consummate a significant acquisition which will involve
the satisfactory restructuring of the Group's borrowings. If this transaction
is not consummated, the Directors will seek other transactions of a
F-7
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
similar nature, restructure the current credit facility or seek alternative
forms of financing and will take such steps as are necessary to allow the
Group to meet its obligations as they fall due. Such steps might include the
continuing rationalization of the Group's overheads, deferral of elements of
the recompletion program and the disposition of oil and gas properties.
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.
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
F-8
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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:
<TABLE>
<S> <C>
Fixtures and equipment -- 3 to 7 years
Buildings -- 30 years
</TABLE>
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.
F-9
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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;
--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.
F-10
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
(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:
<TABLE>
<S> <C>
Value of 8,103,816 Alliance shares outstanding................ $4,039,339
Acquisition costs............................................. 871,000
----------
$4,910,339
==========
</TABLE>
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:
<TABLE>
<S> <C>
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
===========
</TABLE>
F-11
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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 5 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:
<TABLE>
<S> <C>
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
==========
</TABLE>
(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 15.
F-12
<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):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
JULY 31, APRIL 30, APRIL 30,
1996 1997 1998
------------- ----------- ----------
(AS RESTATED)
<S> <C> <C> <C>
Computed expected tax benefit......... $(3,852) $(1,492) $(1,608)
Increase in valuation allowance for
deferred tax, assets................. 4,218 1,301 6,792
Net Operating losses acquired......... -- -- (5,513)
Other................................. (366) 191 329
------- ------- -------
Actual income tax expense (benefit)... $ -- $ -- $ --
======= ======= =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below in
thousands:
<TABLE>
<CAPTION>
1997 1998
------- --------
<S> <C> <C>
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)........................ $ -- $ --
======= ========
</TABLE>
F-13
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Borrowing under Credit Agreement.................... $18,095,497 $21,066,762
Less current maturities........................... -- (2,275,000)
----------- -----------
$18,095,497 $18,791,762
=========== ===========
</TABLE>
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.
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 and each of the
three subsequent quarters. 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.
F-14
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The contractual maturities of long term debt as at April 30, 1998 are as
follows:
<TABLE>
<S> <C>
Year ending April 30, 1999...................................... $ 2,275,000
2000................................................... 18,791,762
</TABLE>
(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.
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.
F-15
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<CAPTION>
ALLIANCE COMMON STOCK
REPRESENTING:
---------------------
SERIES A SERIES B
---------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>
(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
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:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES SERVICE PRICE
------- ----------------
<S> <C> <C>
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
=======
</TABLE>
F-16
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<S> <C>
Risk free interest rate............................................. 6%
Expected life....................................................... 10 years
Volatility.......................................................... 14%
</TABLE>
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.
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 3,082,041 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.
F-17
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(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.
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.
F-18
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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:
<TABLE>
<CAPTION>
YEAR ENDING APRIL 30
--------------------
<S> <C>
1999........................................................... $20,155
2000........................................................... 5,000
2001........................................................... 5,000
</TABLE>
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.
F-19
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(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.
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
F-20
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
Concentrations of Credit Risk
During the year ended April 30, 1998, the Group sold approximately 39% of
its oil and gas revenues to one purchaser (year ended July 31, 1996, 16%). The
Group had no other purchases in excess of 10% of its oil and gas revenues in
any of the periods presented.
(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 explora-
tion......................... (3,447) -- --
Depreciation and depletion.... (3,208) (1,457) (2,571)
Loss on commodity deriva-
tives........................ -- -- (1,128)
------- ------- -------
Income (loss) from operations
before income taxes.......... (147) 1,124 1,005
Income tax expense............ -- -- --
------- ------- -------
Results of operations
(excluding corporate overhead
and interest costs).......... $ (147) $ 1,124 $ 1,005
======= ======= =======
</TABLE>
F-21
<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 $ 2,097
======== ======= ========
Purchase of minerals in place:
United States................ $ 2,800 $ -- $ 9,041
Foreign...................... -- -- --
-------- ------- --------
$ 2,800 $ -- $ 9,041
======== ======= ========
</TABLE>
F-22
<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.
<TABLE>
<CAPTION>
OIL (MBBLS) GAS (MMCF)
----------- ----------
<S> <C> <C>
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
======= ======
</TABLE>
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.
F-23
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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............ $28,802,000 $ 43,889,000 $35,368,000
Increases (decreases)
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 quan-
tity 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-24
<PAGE>
APPENDIX A
GLOSSARY
The terms defined in this Appendix are used throughout this Proxy Statement.
Acquisition Share. Newly created restricted voting share of Alliance
convertible by the holder into one Share within five years after completion of
the Acquisition subject to and in accordance with the terms and conditions of
the Acquisition Agreement.
Alliance. Alliance Resources PLC, a public limited company organized and
registered under the laws of England and Wales.
BoA. Bank of America National Trust & Savings Association.
BoA ORI. The overriding royalty interest in LaTex's share of all
hydrocarbons produced from substantially all of LaTex's oil and gas
properties, previously owned by an affiliate of BoA.
Bbl. One stock tank barrel, of 42 U.S. gallons liquid volume, used herein in
reference to crude oil or other liquid hydrocarbons.
Bcf. One billion cubic feet of gas.
Bcfe. Means Bcf equivalent.
Boe. One barrel of oil equivalent using the ratio of one barrel of crude
oil, condensate or gas liquids to 6 Mcf of gas.
Btu. British thermal unit, which is the heat required to raise the
temperature of a one-pound mass of water from 58.5 to 59.5 degrees Fahrenheit.
Developed Acreage. The number of acres which are allocated or assignable to
producing wells or wells capable of production.
Development Well. A development well is a well drilled within the presently
proved productive area of an oil or gas reservoir, as indicated by reasonable
interpretation of available data, with the objective of completing in that
reservoir.
Difco. Difco Limited, a private limited company organized and registered
under the laws of England and Wales.
Difco Acquisition. Alliance's acquisition of all of the issued and
outstanding shares of capital stock of Difco, with Difco becoming a wholly-
owned subsidiary of Alliance.
Difco Acquisition Agreement. The Sale and Purchase Agreement, dated as of
June 29, 1998, by and between Alliance and the shareholders of Difco.
Dry Hole; Dry Well; Non-Productive Well. A well found to be incapable of
producing either oil or gas in sufficient quantities to justify completion as
an oil or gas well.
Exploratory Well. An exploratory well is a well drilled either in search of
a new, as-yet undiscovered oil or gas reservoir or to greatly extend the known
limits of a previously discovered reservoir.
A-1
<PAGE>
Gross Acres or Gross Wells. The total acres or wells, as the case may be, in
which a working interest is owned.
LaTex. LaTex Resources, Inc., a Delaware corporation and a wholly-owned
subsidiary of Alliance.
LaTex Merger. The merger of Alliance with LaTex, effective May 1, 1997.
MBbls. One thousand barrels of crude oil or other liquid hydrocarbons.
MBoe. One thousand BOEs.
MBtu. One thousand BTUs.
Mcf. One thousand cubic feet of gas.
MMbl. One million barrels of crude oil or other liquid hydrocarbons.
MMboe. One million BOEs.
MMbtu. One million BTUs.
MMcf. One million cubic feet of gas.
MMcfe. MMcf equivalent using the ratio of six MMcf of gas to one MBbl of
crude oil or condensate.
Net; Net Revenue Interest. Production or revenue that is owned by the
respective company and produced for its interest after deducting royalties and
other similar interests.
Net Acres or Net Wells. The sum of the fractional working interests owned in
gross acres or gross wells.
NTS. The U.K. National Transmission System.
Operating Agreement. Joint Operating Agreement between Alliance and
Burlington Resources covering Block Nos. 110/2b, 110/2c, 110/7c-F1, 110/7a,
110/8a, 110/9a, 110/12a, 110/14, 113/26a and 113/27a in the East Irish Sea.
P per therm. Pence per therm, which is equal to 1,000 great calories (a
"great calorie" being the heat required to raise a kilogram of water one
degree centigrade).
Pre-tax PV10 value. When used with respect to oil and gas reserves, Pre-tax
PV10 value means the estimated future gross revenue to be generated from the
production of proved reserves, net of estimated production and future
development costs, using prices and costs in effect at the determination date,
without giving effect to non-property related expenses such as general and
administrative expenses, debt service and future income tax expense or to
depreciation, depletion and amortization, discounted using an annual discount
rate of 10%.
Productive Well. A well that is producing oil or gas or that is capable of
production.
Proved Developed Reserves. Reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.
Proved Reserves. The estimated quantities of crude oil, gas and 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.
A-2
<PAGE>
Proved Undeveloped Reserves. Reserves that are expected to be recovered from
new wells on undrilled acreage or from existing wells where a relatively major
expenditure is required for recompletion.
Royalty Interest. An interest in an oil and gas property entitling the owner
to a share of oil or gas production free of costs of production.
Shares. The ordinary shares of Alliance, par value (Pounds)0.40 per share.
Sour Gas. Natural gas contaminated with chemical impurities, notably
hydrogen sulphide or other sulfur compounds, which impart to the gas a foul
odor. Such compounds must be removed before the gas can be used for commercial
and domestic purposes.
Standardized Measure. When used with respect to oil and gas reserves,
Standardized Measure is the standardized measure of discounted future net cash
flows to be generated from the production of proved reserves computed by
applying year-end prices of oil and gas (with consideration of price changes
only to the extent provided by contractual arrangements) to the estimated
future production of proved oil and gas reserves less estimated future
expenditures (based on year-end costs) to be incurred in developing and
producing the proved reserves, less estimated future income tax expenses
(based on year-end statutory tax rates, with consideration of future tax rates
already legislated) to be incurred on pretax net cash flows less tax basis of
the properties and available credits, and assuming continuation of existing
economic conditions. The estimated future net cash flows are then discounted
using a rate of 10% per year to reflect the estimated timing of the future
cash flows. Proved oil and gas reserves are the estimated quantities of crude
oil, natural gas, and natural gas liquids which geological and engineering
data demonstrate with reasonable certainty to be recoverable in future years
from known reservoirs under existing economic and operating conditions, i.e.,
prices and costs as of the date the estimate is made. Prices include
consideration of changes in existing prices provided only by contractual
arrangements, but not on escalations based upon future conditions. Reserves on
undrilled acreage are limited to those drilling units offsetting productive
units that are reasonably certain of production when drilled. Proved reserves
for other undrilled units can be claimed only where it can be demonstrated
with certainty that there is continuity of production from the existing
productive formation. Under no circumstances may estimates for proved
undeveloped reserves be attributable to any acreage for which an application
of fluid injection or other improved recovery technique is contemplated,
unless such techniques have been proved effective by actual tests in the area
and in the same reservoir.
Subsidiary Undertaking. An undertaking is the subsidiary undertaking of
another if any of the following apply.
a. It holds a majority of the voting rights in the undertaking.
b. It is a member of the undertaking and has the right to appoint or
remove directors holding a majority of the voting rights at meetings of the
board on all, or substantially all, matters.
c. It has the right to exercise a dominant influence over the
undertaking:
i. by virtue of provisions contained in the undertaking's memorandum
or articles; or
ii. by virtue of a control contract. The control contract must be in
writing and be of a kind authorized by the memorandum or articles of
the controlled undertaking. It must also be permitted by the law under
which that undertaking is established.
d. It is a member of the undertaking and controls alone, pursuant to an
agreement with other shareholders or members, a majority of the voting
rights in the undertaking.
e. It has a participating interest in the undertaking and:
i. it actually exercises a dominant influence over the undertaking;
or
ii. it and the undertaking are managed on a unified basis.
A parent undertaking is also treated as the parent undertaking of the
subsidiary undertakings of its subsidiary undertakings.
A-3
<PAGE>
Sweet Gas. Natural gas not contaminated with impurities, such as hydrogen
sulphide or other sulphur compounds, except for removal of any liquid
constituents that may be present, sweet gas is ready for commercial and
domestic use.
U.K. DTI. The United Kingdom Department of Trade and Industry.
Undeveloped Acreage. Lease acreage on which wells have not been participated
in or completed to a point that would permit the production of commercial
quantities of oil and gas regardless of whether such acreage contains proved
reserves.
U.S. GAAP. U.S. generally accepted accounting principles.
Working Interest. The operating interest which gives the owner the right to
drill, produce and conduct operating activities on the property as well as to
a share of production.
A-4
<PAGE>
APPENDIX B
July 7, 1998
Board of Directors
Alliance Resources PLC
Kingsbury House
15-17 King Street
London, SW1Y 6QU
United Kingdom
Gentlemen:
On March 3, 1998, Alliance Resources PLC ("Alliance") instructed Gaffney,
Cline & Associates, Inc. ("GCA") to proceed with an independent due diligence
examination and evaluation of certain undeveloped gas fields and exploration
licenses in Morecambe Bay of the United Kingdom's East Irish Sea. These
properties were acquired by a wholly-owned subsidiary of Burlington Resources
Inc. ("Burlington") in December 1997 from British Gas Exploration and
Production Plc ("BG"). Burlington will serve as the operator in most of the
licenses. Subsequent to the aforementioned transaction, Alliance has the
opportunity to acquire an undivided 20% interest in these properties, and it
is this secondary transaction that is the subject of this report.
GCA is an independent professional consultancy of 35 years standing whose
specialties include petroleum reservoir evaluation and economic analysis. In
the preparation of this report, GCA, its partners, directors and employees
have maintained and continue to maintain a strict, independent relationship
with Alliance and Burlington in the services provided, including the provision
of the opinions expressed in this report. Furthermore, GCA has no interest in
any assets or share capital of Alliance or Burlington.
GCA has conducted a review of seven undeveloped natural gas discoveries and
the exploration potential of 13 blocks or partial blocks located in the East
Irish Sea off the west coast of the United Kingdom and purchased by
Burlington. This review was conducted during March 1998 subsequent to a series
of technical and commercial information gathering visits to Burlington's
offices in Houston and London, and discussions were held with key project
personnel.
Burlington made available to GCA its comprehensive database of technical
information acquired from BG on this property package, including all raw data,
geological, petrophysical and geophysical interpretations, engineering reports
and calculations. GCA has received all the essential data requested and has
further reviewed the 3D seismic data and interpretations available on
Burlington's workstations.
The proved natural gas reserve volumes reported here have been prepared in
accordance with the reporting guidelines of the United States Securities and
Exchange Commission (SEC), and have been satisfactorily tested for economic
producing life using constant prices and costs as of January 1, 1998, the
effective date of this assessment. This economic test was conducted using a
December 31, 1997, quoted price of 16.05 pence/therm (US $2.65/million Btu @
US $1.65/(Pounds)) for spot deliveries of natural gas at Bacton in the United
Kingdom (published in the Financial Times) to calculate estimated future gross
revenues. Future net revenues were ascertained by deducting capital
expenditures, operating costs and other expenditures (including abandonment
costs, totaling an aggregate of $6MM, although these costs would not begin to
be incurred until after the year 2015) determined to be appropriate.
This reserve volume economic test also formed the general basis for the
supplementary economic information presented below. The Discounted Future Net
Revenue (DFNR) after-tax at 10% reflects a deduction of US $26.8 million for
accumulated past costs against Alliance's future income tax liability in the
United Kingdom. This deduction arises from Burlington's acquisition of the
British Gas properties and is assumed to pass proportionately to Alliance's
20% net interests. A sensitivity analysis of the effect of variations in
natural
B-1
<PAGE>
Board of Directors
ALLIANCE RESOURCES PLC
July 7, 1998
gas sales prices on the Discounted Future Net Revenue (DFNR) at 10%
illustrated below, indicates that each 1 pence/therm change in gas price would
cause a corresponding change of US $12.0 million (MM) pre-tax and US $8.5 MM
in the after-tax DFNR at 10%. The following table represents a summary of our
conclusions as of January 1, 1998:
NET TO ALLIANCE RESOURCES PLC
<TABLE>
<CAPTION>
PROVED PROVED TOTAL
DEVELOPED UNDEVELOPED PROVED
--------- ----------- ------
<S> <C> <C> <C>
Estimated Future Net Oil/Condensate--bbis........ 0 * *
Estimated Future Net Gas--Bscf................... 0 152.8 152.8
Total Future Gross Revenue--$MM.................. 0 379.1 379.1
Capital Expenditures--$MM........................ 0 78.9 78.9
Operating Expenditures--$MM...................... 0 102.8 102.8
Estimated Future Net Revenue (Pre-tax)--$MM...... 0 197.4 197.4
Discounted Future net Revenue @ 10% (Pre-tax)--
$MM............................................. 0 86.7 86.7
United Kingdom Income Taxes--$MM................. 0 53.1 53.1
Estimated Future Net Revenue (After-tax)--$MM.... 0 144.3 144.3
Discounted Future Net Revenue @ 10% (After-tax)--
$MM............................................. 0 62.5 62.5
Estimated Future Net Revenues (Pre-tax) by Year--
$MM
1998........................................... 0 (0.5) (0.5)
1999........................................... 0 (19.1) (19.1)
2000........................................... 0 (9.1) (9.1)
2001........................................... 0 23.4 23.4
--- ----- -----
Subtotal..................................... 0 (5.3) (5.3)
Thereafter..................................... 0 202.7 202.7
--- ----- -----
Total........................................ 0 197.4 197.4
=== ===== =====
</TABLE>
- --------
* The hydrocarbon liquid content of these sales gas reserve volumes are
reflected in the sales gas revenues through their heating value.
The estimated reserve volumes shown in this report are for Proved
Undeveloped reserve volumes and are expressed in billions of standard cubic
feet (Bscf). They contain inert gases with no heating value which, if removed,
would reduce the total proved net reserve volume shown above by 22 Bscf. In
accordance with SEC guidelines, our estimates do not contemplate unproved
(Probable or Possible) reserve volumes which may exist for these properties.
Indeed, while 11 undrilled exploration prospects have been identified in this
property package which do appear to present attractive drilling opportunities,
neither the cost of pursuing a program of this nature or the rewards, if any,
of a successful outcome of such activity have been taken into account in the
economic conclusions presented here.
THE ESTIMATED REVENUES AND PRESENT WORTH OF FUTURE NET REVENUES PRESENTED
HERE ARE NOT REPRESENTED TO BE MARKET VALUES FOR THE APPRAISED PROPERTIES.
This report has been prepared utilizing methods and procedures regularly
used by petroleum engineers to estimate oil and gas reserve volumes for
properties of this type and character. The recovery of natural gas reserve
volumes and projection of producing rates are dependent upon many variable
factors, including the development of the fields, prudent operations, and
market demand. Actual production results and future well data may yield
additional facts, not presently available to us, which will require
adjustments to our estimates.
B-2
<PAGE>
Board of Directors
ALLIANCE RESOURCES PLC
July 7, 1998
The reserve volumes included in this report are estimates only and should
not be construed as exact quantities. They may or may not be recovered; if
recovered, the revenues therefrom and the costs related thereto could be more
or less than the estimated amounts. The sales volumes, prices received for the
reserves, costs incurred in recovering such reserve volumes and future capital
costs may vary from assumptions included in this report due to governmental
policies, uncertainties of supply and demand and other factors. Also,
estimates of reserve volumes may increase or decrease as a result of future
operations. As in all aspects of oil and natural gas evaluation, there are
uncertainties inherent in the interpretation of engineering and geological
data. Therefore, our conclusions necessarily represent only informed,
professional judgements.
The data used in our estimates was obtained from Burlington and was accepted
as accurate. Basic geologic and field performance data, together with our
engineering worksheets, are maintained on file in our office.
As independent oil and gas consultants, Gaffney, Cline & Associates, Inc.
hereby consents to the inclusion of our report and the references to our firm
in the Proxy Statement of Alliance to be used in connection with the
solicitation of proxies to approve the acquisition of the subject properties
and in the Schedule 14A of Alliance filed with the Securities and Exchange
Commission.
Very truly yours,
GAFFNEY, CLINE & ASSOCIATES, INC.
William B. Cline
Senior Partner
B-3
<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 July 27, 1998, at
the Extraordinary General Meeting of the Company (the "Meeting") to be held on
July 29, 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 AND PROPOSAL 2 AND AT THE DISCRETION OF
THE PROXIES WITH RESPECT TO ANY OTHER MATTER THAT IS PROPERLY BROUGHT BEFORE
THE MEETING IN ACCORDANCE WITH PROPOSAL 3.
(Continued and to be signed on reverse side)
<PAGE>
[X] Please mark votes as in this example.
1. Proposal to approve the acquisition of Difco Limited ("Difco"), the
simultaneous acquisition by Difco of the East Irish Sea Interests and the
dispensation of the existing Difco shareholders from any obligations under
Rule 9 of the City Code on Takeovers and Mergers.
[_] FOR [_] AGAINST [_] ABSTAIN
2. Proposal to approve the increase in authorized share capital, the Directors'
power of allotment and the increase in the Directors' borrowing powers.
[_] FOR [_] AGAINST [_] ABSTAIN
3. In their discretion, the Proxies are authorized to vote upon such other
business as properly may come before the Meeting or any adjournments
thereof.
[_] FOR [_] AGAINST [_] ABSTAIN
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: July , 1998
--------------------------------------------
Signature of Shareholder
--------------------------------------------
Signature of Shareholder
(if held jointly)
PLEASE MARK BOXES IN BLUE OR BLACK INK. 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 2:00 PM ON JULY 27, 1998.
