<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 1996
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from July 31, 1996 to April 30, 1997
Commission file number 333-19013
ALLIANCE RESOURCES PLC
(Exact name of registrant as specified in its charter)
ENGLAND AND WALES [NONE]
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4200 EAST SKELLY DRIVE
SUITE 1000
TULSA, OKLAHOMA 74135
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (918) 491-1100
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of the Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the Registrant's voting stock held by non-
affiliates as of May 31, 1998 was approximately $15,549,782 (based upon the
average of the high bid and closing asked prices on such date).
On May 31, 1998 there were 31,209,408 shares of the Registrant's common
stock issued and outstanding.
Documents Incorporated by Reference
NONE
<PAGE>
ALLIANCE RESOURCES PLC
FORM 10-K
TRANSITION PERIOD ENDED APRIL 30, 1997
--------------------------------------
TABLE OF CONTENTS
Page
----
PART I..................................................................
ITEM 1. BUSINESS.................................................. 1
ITEM 2. PROPERTIES................................................ 3
ITEM 3. LEGAL PROCEEDINGS......................................... 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....... 9
PART II.................................................................
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTER........................................ 9
ITEM 6. SELECTED FINANCIAL DATA................................... 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............... 21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE....................... 22
PART III................................................................
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........ 22
ITEM 11. EXECUTIVE COMPENSATION.................................... 24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 25
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............ 27
PART IV.................................................................
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.................................................. 27
SIGNATURES.............................................................. 29
Certain statements in this Report under the captions "Item 1. Business,"
"Item 2. Properties" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations," and elsewhere in this Report
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Reform Act"). Such forward-
looking statements involve known and unknown risks, uncertainties and other
factors that may cause the actual result, performance or achievements of the
Company, or industry trends and results, to be materially different from any
future results, trends, performance or achievements expressed or implied by such
forward-looking statements. Such risks, uncertainties and other factors
include, among others, the following: general economic and business conditions;
oil and gas and other industry conditions and trends, including supply and
demand; fluctuations in the prices for oil, gas and refined products;
competition; changes in business strategy or development plans; quality of
management; availability, terms and deployment of debt and equity capital;
business abilities and judgment of personnel; availability of qualified
personnel; changes in or the failure to comply with government regulations and
other factors referenced in this Report.
<PAGE>
PART I
ITEM 1. BUSINESS.
Alliance Resources PLC (the "Company" or "Alliance") is organized as a
public limited company under the laws of England and Wales. Alliance is a
London-based holding company of a group whose principal activities are the
acquisition, exploration, development and production of oil and gas properties.
All financial data (and, consequently, all oil and gas reserve information,
descriptions of properties and business and all information associated with
financial or reserve information) prior to the Company's Merger with LaTex
Resources, Inc. ("LaTex") on May 1, 1997, described below, has been restated to
reflect LaTex as the predecessor company to the Company. For financial, reserve
and associated information concerning Alliance prior to its May 1, 1997 Merger
with LaTex, reference should be made to the Company's Registration Statement on
Form F-4 (which was filed in its final form with the Securities Exchange
Commission on April 9, 1997 and which contains information regarding Alliance
through January 31, 1997) and to the Company's filing on Form 20-F (which is
being filed contemporaneously with this document).
Because for corporate law purposes (but not financial accounting purposes)
Alliance is the surviving corporation of the May 1, 1997 Merger, all references
to the "Company" both prior and subsequent to May 1, 1997 refer to Alliance
Resources PLC and its subsidiaries unless otherwise indicated. Unless the
context requires otherwise, all references to "LaTex " include LaTex Resources,
Inc., and its consolidated subsidiaries.
Alliance was incorporated and registered under the laws of England and
Wales on August 20, 1990. Alliance's corporate headquarters are at Kingsbury
House, 15-17 King Street, London SW1Y 6QU, England, but its U.S. operations
office is located at 4200 East Skelly Drive, Suite 1000, Tulsa, Oklahoma 74135.
RECENT DEVELOPMENTS
Alliance was incorporated in 1990. Its current business strategy was
adopted in connection with a change of management in 1996. Implementation of
its strategy required that Alliance have sufficient assets and cash flow to fund
the acquisition and development of suitable international opportunities.
Therefore, effective May 1, 1997, Alliance completed a merger with LaTex (the
"LaTex Merger"), which substantially increased the Company=s oil and gas
reserves and cash flow.
In the LaTex Merger and related transactions, Alliance issued 23,048,787
Shares and convertible loan notes and warrants convertible into or exercisable
for 4,332,427 Shares (56,805 of which have been issued through the exercise of
certain warrants). Therefore, as a result of the LaTex Merger, the acquisition
of an overriding royalty interest in LaTex's share of all hydrocarbons produced
from substantially all of LaTex's oil and gas properties from the Bank of
America (the "BOA ORI") and subsequent transactions, Alliance had outstanding
at May 31, 1998, 31,209,408 Shares, warrants to purchase up to 2,916,527 Shares,
options to issue up to 887,500 Shares and convertible loan notes convertible
into 1,193,581 Shares.
1
<PAGE>
COMPETITION
The oil and natural gas industry is highly competitive in all its phases.
Alliance encounters strong competition from many other energy companies in
acquiring economically desirable producing properties and drilling prospects and
in obtaining equipment and labor to operate and maintain its properties. In
addition, many energy companies possess greater resources than Alliance.
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.
Environmental laws and regulations may affect the Company's operations and
costs. In particular, production and salt water disposal operations and use of
facilities from 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.
2
<PAGE>
OPERATIONAL HAZARDS AND INSURANCE
The operations of the Company are subject to all risks inherent in the
exploration for and production of oil and gas, including such natural hazards as
blowouts, cratering and fires, which could result in damage or injury to, or
destruction of, drilling rigs and equipment, formations, producing facilities or
other property, or could result in personal injury, loss of life or pollution of
the environment. Any such event could result in substantial expense to the
Company which could have a material adverse effect upon the financial condition
of the Company to the extent it is not fully insured against such risk. The
Company carries insurance against certain of these risks but, in accordance with
standard industry practice, the Company is not fully insured for all risks,
either because such insurance is unavailable or because the Company elects not
to obtain insurance coverage because of cost. Although such operational risks
and hazards may to some extent be minimized, no combination of experience,
knowledge and scientific evaluation can eliminate the risk of investment or
assure a profit to any company engaged in oil and gas operations.
EMPLOYEES
At April 30, 1997, Alliance had six management and administrative employees
and six technical and operating employees none of whom belonged to a union. In
addition, at that date, LaTex employed a total of 30 people, including 20 people
in its Tulsa, Oklahoma office and one person in its Evansville, Indiana office
whose functions are associated with management, operations, accounting and oil
and gas marketing, seven people in the Tensaw, Alabama office who are lease
operators in the Company's South Carlton field, and one field person in each
state of Louisiana and Tennessee. The Company's other field activities are
accomplished through independent contractors. The Company believes its relations
with its employees and contractors are excellent.
MARKETING
Alliance's production is primarily from developed fields close to major
pipelines or refineries and established infrastructure. As a result, Alliance
has not experienced any difficulty in finding a market for all of its product as
it becomes available or in transporting its product to these markets.
Oil Marketing. Alliance markets its oil to a variety of purchasers, most
of which are large, established companies. The oil is generally sold under
short-term contracts with the sales price based on an applicable posted price,
plus a negotiated premium. This price is determined on a well-by-well basis and
the purchaser generally takes delivery at the wellhead.
Gas Marketing. Virtually all of Alliance's gas production is close to
existing pipelines and, consequently, Alliance 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.
ITEM 2. PROPERTIES
All information contained in "Item 2. Properties" refers to the properties
and businesses of LaTex Resources, Inc., at April 30, 1997, unless clearly
stated otherwise. Any information after May 1, 1997 refers to the entity
resulting from the Merger of Alliance and LaTex. Information concerning the
properties of Alliance can be found in the Company's Registration Statement on
Form F-4 filed with the Securities and Exchange Commission in its final form on
April 9, 1997 and in the Company's filing on Form 20-F which is being filed
contemporaneously with this document).
PRODUCTION
LaTex owns and operates producing properties located in 12 states in the US,
with proved reserves located primarily in the states of Mississippi, Louisiana,
Oklahoma, Texas, and Alabama. LaTex continuously evaluates the profitability of
its oil, gas and related activities and has a policy of divesting itself of
unprofitable oil and gas properties or areas of operation that are not
consistent with its operating philosophy.
3
<PAGE>
LaTex operates 172 producing wells in these areas and also owns non-
operated interests in 288 producing wells and units. Oil and gas sales from
LaTex's producing oil and gas properties accounted for substantially all of
LaTex's revenues for the year ended April 30, 1997.
The following summarizes LaTex's principal areas of oil and gas production
activity as of April 30, 1997.
South Carlton Field, Alabama. The South Carlton Field is located in Clarke
and Baldwin Counties in southwest Alabama. LaTex operates 56 active producing
oil wells and three salt water disposal wells. Production is from the Massive
and Pilot sands of Tuscaloosa Formation with daily gross production being
approximately 220 Bbls of Oil through the year ended April 30, 1997. Net proved
reserves to LaTex as of April 30, 1997 were 5,723.4 MBbls of oil.
Black Warrior Basin, Mississippi and Alabama. LaTex owns operated and non-
operated working interests in 131 wells (41 operated and 90 non-operated) in
Lamar, Fayette and Pickens Counties, Alabama and Lee and Chickasaw Counties,
Mississippi. Production from these wells are from multiple sandstones of
Mississippian age and range in depth from approximately 1,900 feet to 4,600
feet. Significant proved behind pipe reserves have been identified on the LaTex
held leases and the majority are schdeuled for recompletion over the next two
years with the potential to add significantly to net cash flow. Net proved
reserves to LaTex as of April 30, 1997 were 25.4 MBbls of oil and 14,403.6 MMcf
of gas.
Wolf Mountain Field, Colorado. LaTex operates one well in the Wolf
Mountain Field in Routt County, Colorado. The well produces oil at an average
daily rate of 23 Bbls from the Niobrara Shale reservoir at a depth of
approximately 5,500 feet. Additional potential exists behind the pipe to
recomplete the well to other undrained sections of the reservoir. LaTex has
significant undeveloped acreage in this field. Net proved reserves to LaTex as
of April 30, 1997 were 647 MBbls of oil.
War-Wink South/East Quito Fields, Texas. LaTex owns non-operated working
interests in 45 active wells operated by Texaco, Chevron, Enron and BC
Operating in the War-Wink South and East Quito Fields in Ward County, Texas.
These fields produced from the Fusselman, Atoka, Wolfcamp and Cherry Canyon
formations at depths ranging from 6,200 feet to 17,500 feet. Geological and
engineering data suggest that additional behind pipe and infill drilling
potential exists on these properties. Net proved reserves to LaTex as of April
30, 1997 were 82.5 MBbls of oil and 1,534 MMcf of gas.
Tinsley Field, Mississippi. The Tinsley Field is located in Yazoo County in
north central Mississippi and produces from a series of Selma-Eutaw sands of
Upper Cretaceous age. LaTex operates five active wells and two water
injection wells in the field having an average daily gross production of
approximately 20 BBls of oil. Extensive mapping and engineering work suggest
that significant additional oil reserves may remain in various Eutaw sand and in
the underlying Tuscaloosa sand which has not been extensively tested in the
field. Net proved reserves to LaTex as of April 30, 1997 were 553.9 MBbls of
oil.
Perkins Field, Louisiana. LaTex operates seven active wells and two
saltwater disposal wells in the Perkins Field which produce primarily crude oil
on a gas lift from various Miocene sands at depths ranging from approximately
6,000 to 7,500 feet. The average gross daily production from this field is 70
Bbls. The Perkins Field is a multiple reservoir structural feature which is
nearing the later stages of depletion. Net proved reserves to LaTex as of April
30, 1997 were 200.9 MBbls of oil.
Bolton Field, Mississippi. The Bolton Field is located in Hinds County in
west central Mississippi. LaTex operates one well in the field and has non-
operated interests in four additional wells. Production is from the Cotton
Valley, Sligo, Rodessa and Mooringsport formations. Average daily gross
production from the operated well is 334 Mcf of gas and 12 Bbls of oil. A review
of the geological and engineering data suggests that significant behind pipe
potential exists in several of the wells. Net proved reserves to LaTex as of
April 30, 1997 were 46.5 MBbls of oil and 1,315 MMcf of gas.
4
<PAGE>
RESERVES
Lee Keeling and Associates, Inc. ("LKA"), LaTex's independent petroleum
engineering consulting firm, has made estimates of LaTex's oil and gas reserves
at April 30, 1997. LKA's report covers the estimated present value of future
net cash flows before income taxes (discounted at 10%) attributable to LaTex's
proved developed reserves, as well as its proved undeveloped reserves and
estimated future net cash flows therefrom.
The quantities of LaTex's proved reserves of oil and natural gas presented
below include only those amounts which LaTex reasonably expects to recover in
the future from known oil and gas reservoirs under existing economic and
operating conditions. Proved developed reserves are limited to those quantities
which are recoverable commercially at current prices and costs, under existing
regulatory practices and with existing technology. Accordingly, any changes in
prices, operating and development costs, regulations, technology or other
factors could significantly increase or decrease estimates of LaTex's proved
developed reserves. LaTex's proved undeveloped reserves include only those
quantities which LaTex reasonably expects to recover from the drilling of new
wells based on geological evidence from offsetting wells. The risks of
recovering these reserves are higher from both geological and mechanical
perspectives than the risks of recovering proved developed reserves.
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 the date of the report. The estimated
future production is priced at current prices at the date of the report. The
resulting estimated future cash inflows are then reduced by estimated future
costs to develop and produce reserves based on cost levels at the date of the
report. No deduction has been made for depletion, depreciation or 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.
5
<PAGE>
The following table sets forth estimates of the proved oil and natural gas
reserves of LaTex at April 30, 1997, as evaluated by LKA.
<TABLE>
<CAPTION>
Oil (MBbls) Gas (Mmcf)
-------------------------------------------------------------------------------------------
Developed Undeveloped Total Developed Undeveloped Total
------------- -------------- ------------ -------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Alabama 2,701 1,244 3,945 8,432 - 8,432
Louisiana 429 11 440 1,622 196 1,818
Mississippi 344 146 490 4,728 - 4,728
Oklahoma 231 - 231 4,863 - 4,863
Texas 540 12 552 4,318 298 4,616
Other 922 - 922 1,498 - 1,498
---------- ----------- ---------- ---------- ---------- ----------
Total 5,167 1,413 6,580 25,461 494 25,955
========== =========== ========== ========== ========== ==========
</TABLE>
The following table sets forth amounts as of April 30, 1997 determined in
accordance with the requirements of the applicable accounting standards
pertaining to the estimated future net cash flows from production and sale of
the proved reserves attributable to LaTex's oil and gas properties before income
taxes and the present value thereof. Nymex benchmark prices used in determining
the future net cash flow estimates at April 30, 1997 were $19.70 per barrel for
oil and $1.81 per MMBtu for gas.
<TABLE>
<CAPTION>
At April 30, 1997
------------------
(in thousands)
------------------
Proved Proved Total
Developed Undeveloped Proved
Reserves Reserves Reserves
--------- ----------- --------
<S> <C> <C> <C>
Estimated future net cash
flows from proved reserves
before income taxes $ 68,653 $ 6,848 $ 75,501
Present value of estimated
future net cash flows from
proved reserves before
income taxes (discounted
at 10%) $ 38,438 $ 1,193 $ 39,631
Standardized Measure $ 34,303 $ 1,065 $ 35,368
</TABLE>
The estimation of oil and gas reserves is a complex and subjective process
which is subject to continued revisions as additional information becomes
available. Reserve estimates prepared by different engineers from the same data
can vary widely. Assumptions have to be made regarding the timing of future
production and the timing and amount of future development and production costs.
The calculations assume that economic conditions existing at the end of the
reporting period will continue. Other, but equally valid, assumptions might lead
to a significantly different final result. 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 judgement.
Subsequent reservoir performance may justify upward or downward revision of such
estimate. The information provided, therefore, does not represent management's
estimate of LaTex's expected future cash flows or value of proved reserves.
Estimates of LaTex's proved reserves have never been filed or included in
reports to any United States federal authority or agency, other than the
Securities and Exchange Commission.
For further information on reserves, costs relating to oil and gas activities,
and results of operations from producing activities, see Note 19 to the
Consolidated Financial Statements--Supplementary Financial Information for Oil
and Gas Producing Activities incorporated by reference herein.
6
<PAGE>
PRODUCTIVE WELLS AND ACREAGE
The following table sets forth LaTex's producing wells and developed acreage
assignable thereto at April 30, 1997
<TABLE>
<CAPTION>
Developed Acreage Productive Wells
------------------------
Oil Gas Total
- ---------------------- ------------------------ ------------------------ ------------------------
Gross Net Gross Net Gross Net Gross Net
----- --- ----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C> <C>
129,089 39,109 239 101 221 45 460 146
</TABLE>
Productive wells consist of producing wells and wells capable of
production, including gas wells awaiting pipeline connections to commence
deliveries and oil wells awaiting connection to production facilities. Wells
which are completed in more than one producing horizon are counted as one well.
Of the gross wells reported above, 12 had multiple completions.
At April 30, 1997, LaTex held by lease a total of 25,612 gross (10,936 net)
undeveloped acres consisting of (i) 4,080 gross (510 net) undeveloped acres in
the State of Colorado, (ii) 4,997 gross (2,166 net) undeveloped acres in the
State of Louisiana, (iii) 1,960 gross (245 net) undeveloped acres in the State
of Oklahoma, (iv) 2,719 gross (1,058 net) undeveloped acres in the State of
Texas, and (v) 11,856 gross (6,957 net) undeveloped acres located in the State
of Alabama.
PRODUCTION, UNIT PRICES AND COSTS
The following table sets forth information with respect to sales of production
and average unit prices and costs for the periods indicated.
<TABLE>
<CAPTION>
Year ended July 31 9 months ended
April 30
1995 1996 1997
<S> <C> <C> <C>
Production
Gas (Mmcf) 2,612 3,481 1,640
Oil (MBbls) 359 405 190
Average sales prices
Gas (per Mcf)) (1) $ 1.48 (2) $ 1.67 $ 1.70(2)
Oil (per Bbl) (1) $ 12.86 (2) $ 15.24 $ 15.34(2)
Average cash production
costs per BOE $ 6.78 $ 9.19 $ 6.77
</TABLE>
(1) LaTex's price hedging arrangements did not have a material effect on
average sales prices for the year ended July 31, 1995.
(2) After giving effect to the impact of LaTex's price hedging arrangements
with LaTex's principal bank. Without such hedging arrangements, the
average sales prices for the year ended July 31, 1996 would have been
$15.73 for oil and $2.03 for gas and for the nine months ended April 30,
1997 would have been $19.15 for oil and $2.40 for gas
7
<PAGE>
DRILLING ACTIVITY
During the periods indicated, LaTex drilled or participated in the drilling
of the following exploratory and development wells.
<TABLE>
<CAPTION>
Year ended July 31 9 months ended
April 30
1995 1996 1997
Gross Net Gross Net Gross Net
<S> <C> <C> <C> <C> <C> <C>
Exploratory:
Productive - - - - - -
Non-Productive 1 0.25 2 1.16 - -
---- ----- ---- ---- ---- ----
Total 1 0.25 2 1.16 - -
==== ===== ==== ==== ==== ====
Development:
Productive 6 1.20 6 0.46 2 0.20
Non-Productive - - 1 0.08 - -
---- ----- ---- ---- ---- ----
Total 6 1.20 7 0.54 2 0.20
==== ===== ==== ==== ==== ====
Total:
Productive 6 1.20 6 0.46 2 0.20
Non-Productive 1 0.25 3 1.24 - -
---- ----- ---- ---- ---- ----
Total 7 1.45 9 1.70 2 0.20
==== ===== ==== ==== ==== ====
</TABLE>
The well information above excludes wells in which LaTex has only an overriding
royalty interest.
At April 30, 1997, LaTex was participating in the drilling of two oil and gas
wells.
All of LaTex's drilling activities are conducted with independent contractors.
LaTex owns no drilling equipment.
TITLE TO PROPERTIES
As is customary in the oil and gas industry, Alliance conducts only a
perfunctory title examination at the time properties believed to be suitable for
drilling operations are first acquired. Prior to commencement of drilling
operations, a thorough drill site title examination is normally conducted and
curative work is performed with respect to significant defects. During
acquisitions, title reviews are performed on all material properties being
acquired.
ITEM 3. LEGAL PROCEEDINGS As at 30 April 1997, the Company was a party to the
following litigation:
(a) The Group was seeking to recover US$1,300,000 of unpaid drilling costs
from Drexco Inc., with Drexco Inc. and H Huizenga claiming unspecified
damages in respect of conduct, and removal of Alliance Resources (USA),
Inc. as operator of the Valentine field. This action was settled in
December 1997 from an escrow account and the Group incurred no out-of-
pocket expenses.
(b) Best Royalties Plc are claiming a sum of US$186,368 and a declaration
that they are entitled to a sum equal to 40% of Alliance Resources
(USA), Inc.'s net cash proceeds received from the Arrowhead well (and
payment of the said sum), alternatively damages, plus interest thereon.
The Group denies the claim and are vigorously defending the matter.
8
<PAGE>
(c) In 1994 Associated Storage Corporation ("Associated") filed a lawsuit
alleging that LaTex has breached a July 21, 1993 agreement between
Associated and LaTex. On May 15, 1997 Associated and LaTex entered into a
settlement agreement pursuant to which LaTex agreed to pay $100,000 in
twelve monthly installments. The final monthly installment of $8,691 was
paid on April 15, 1998.
(d) Germany Oil Company, a subsidiary of Alliance, was a named defendant in
three wrongful death actions involving an accident which occurred at a
heater-treatment unit on the Blowhorn Creek Millerella Oil Unit lease in
Lamar County, Alabama. Each plaintiff originally sought damages in the
amount of $25 million each. The cases were referred to Germany Oil
Company's insurance carrier. A settlement agreement has been reached and
Alliance has incurred no out-of-pocket expenses.
(e) In 1996, Northern Natural Gas Company ("Northern") filed a lawsuit against
Torch Energy Advisors, Inc. ("Torch") for alleged breach of an agreement
between Torch, Northern and Panda Resources, Inc. ("Panda") relating to the
transportation of gas through a facility located in Dewey County, Oklahoma.
LaTex assumed the defense of this matter pursuant to an indemnification
agreement entered into in connection with its sale of certain assets. In
March 1998, LaTex and Alliance entered into a settlement agreement pursuant
to which Alliance agreed to pay $150,000 in five monthly instalments.
In addition to the foregoing litigation, the Company is a named defendant
in lawsuits, is a party in governmental proceedings and is subject to claims of
third parties from time to time arising in the ordinary course of business.
While the outcome of lawsuits or other proceedings and claims against LaTex
cannot be predicted with certainty, management does not expect these additional
matters to have a material adverse effect on the financial position, results of
operations or liquidity of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 30, 1997, Alliance held an Extraordinary General Meeting in which
it adopted resolutions approving the Merger and certain other related
transactions including the acquisition of an overriding royalty interest in
LaTex (the "ORRI Acquisition"), a reverse stock split, an increase the share
capital of the Company and the adoption of new Articles of Association.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MARKET INFORMATION AND DIVIDENDS
The Company's Ordinary Shares are traded on the London Stock Exchange under
the symbol "ARS." At the request of Alliance, the trading of the Company's
Ordinary Shares on the London Stock Exchange was suspended from the announcement
of the Merger Agreement on August 13, 1996 until the completion of the LaTex
Merger on May 1, 1997. Also at the request of Alliance, the trading of the
Company's Ordinary Shares was suspended from September 6, 1995 to November 2,
1995 in connection with the investigation of the matters relating to Mr.
O'Brien, Alliance's former chief executive.
9
<PAGE>
The following table sets forth, for the calendar quarters indicated, the
high and low sales prices for the Alliance Shares on the London Stock Exchange
(in pounds) for the periods indicated derived from the official list of the
London Stock Exchange. Bid quotations represent quotations between dealers
without adjustment for retail mark-ups, mark-downs or commissions and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
Prices
Alliance Ordinary Shares
-----------------------------
High (Pounds) Low (Pounds)
------------- ------------
<S> <C> <C>
Year ended December 31, 1996:
First Quarter .0500 .0300
Second Quarter .0325 .0276
Third Quarter (through August 11) .0276 .0176
Fourth Quarter N/A N/A
Year ended December 31, 1997:
First Quarter N/A N/A
Second Quarter (through April 30, 1997) N/A N/A
</TABLE>
As of April 30, 1997, the approximate number of record holders of the
Alliance Ordinary Shares was 2,300.
Quotations for shares listed on the London Stock Exchange are not generally
readily available in newspapers or other publications in the United States, but
are available in the daily U.S. edition of the Financial Times. However,
investors may place orders for the purchase or sale of shares traded on the
London Stock Exchange through most licensed broker dealers in the United States.
Under current U.K law, the transfer of Alliance Shares will generally give rise
to a liability to U.K stamp duty, normally at the rate of 50p for every
(Pounds)100 (or part thereof) of the actual consideration paid.
Alliance has not paid any cash dividends on the Alliance Shares for at
least the last two complete fiscal years. In addition, Alliance is now
restricted from paying dividends under the Company's credit agreement with the
Bank of America.
EXCHANGE RATES
The table below sets forth, for the periods and dates indicated, certain
information regarding the US dollar/pound sterling exchange rate, based on the
Noon Buying Rate, expressed in US dollars per (Pounds)1.00. Such rates were not
used by Alliance in the preparation of its consolidated financial statements
included in this Proxy Statement.
Calendar Year Period End Average High Low
-------------------------- ---------- Rate (1) ----- ---
--------
1992 1.51 1.81 2.00 1.51
1993 1.48 1.50 1.59 1.42
1994 1.56 1.53 1.64 1.45
1995 1.56 1.58 1.66 1.52
1996 1.71 1.56 1.72 1.49
1997 1.64 1.64 1.70 1.58
10
<PAGE>
(1) The average daily closing values on the London Stock Exchange for each year
in question as quoted by Datastream (1992-1993) and Bloomberg (1994-1996).
ITEM 6. SELECTED FINANCIAL DATA
On May 1, 1997, Alliance completed its acquisition of LaTex. The
acquisition resulted in the issuance of 21,448,747 Shares to the former
shareholders of LaTex compared to the 8,103,816 Shares then outstanding. As a
result, the former 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"). 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.
Alliance 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. During the period under review, Alliance
operated three cost pools: the U.S., Kazakhstan and Tunisia. The capitalized
costs relating to each pool (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 filing and all financial data prior to the LaTex
Merger set out in this filing has been restated from the "successful efforts"
method to the "full cost" method.
11
<PAGE>
The selected financial information presented below should be read in conjunction
with the Company's audited financial statements and the notes thereto included
under Item 8 and Management'sDiscussion and Analysis of financial Condition and
Results of Operations at Item 7
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(in thousands, except per share amounts and average sales data)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEARS ENDED
APRIL 30 JULY 31
------------ --------------------------------------------------------
1997 1996 1995 1994 1993
------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues:
Oil and gas sales $ 5,699 11,980 8,586 8,703 8,489
Crude oil and gas marketing 146 540 1,223 2,781 2,128
------------ ----------- ------------ ------------ ------------
Total revenues 5,845 12,520 9,809 11,484 10,617
------------ ----------- ------------ ------------ ------------
Operating expenses:
Lease operating expense 3,117 5,472 4,643 4,206 3,701
Cost of crude oil and gas marketing 16 133 744 2,216 1,740
Cessation of overseas exploration - 3,447 - - -
General and administrative 3,481 2,893 2,736 2,497 2,566
Depreciation, depletion and amortization 1,542 3,511 3,364 1,486 2,179
------------ ----------- ------------ ------------ ------------
Total operating expenses 8,156 15,456 11,487 10,405 10,186
------------ ----------- ------------ ------------ ------------
Other Income/(expense):
Equity in losses and write-offs of investments
in affiliates (20) (4,034) (235) (440) (16)
Interest income 52 280 58 17 9
Interest expense (2,102) (2,830) (1,416) (598) (728)
Miscellaneous income/(expense) (8) (1,810) - - 1,097
--------------------------- ------------ ------------ ------------
Net loss/(income) from continuing operations
before income taxes (4,389) (11,330) (3,271) 58 793
Provision for income taxes:
Current - - (35) - 145
------------ ----------- ------------ ------------ ------------
Net loss/(income) (4,389) (11,330) (3,306) 58 938
Preferred stock dividends 518 571 133 - -
------------ ----------- ------------ ------------ ------------
Net income/(loss) for common shareholders $ (4,907) (11,901) (3,439) 58 938
============ =========== ============ ============ ============
Income/loss per common share (0.25) (0.66) (0.19) 0.00 (0.06)
============ =========== ============ ============ ============
Weighted average shares outstanding 19,289,275 18,011,826 17,661,428 17,539,159 15,116,096
============ =========== ============ ============ ============
Balance Sheet Data (end of period)
Total assets $ 30,858 36,493 46,549 20,701 21,710
Net property, plant and equipment $ 26,708 29,473 36,336 12,686 12,903
Working capital/(deficit) $ (9,620) (27,970) (7,264) (2,127) (2,117)
Long term debt $ 18,095 - 20,635 4,467 4,868
Stockholders equity $ 85 3,846 14,628 9,721 7,176
Reserve and Production Data
Production:
Oil (Mbbls) 190 405 359 335 280
Gas (Mmcf) 1,640 3,481 2,612 2,107 1,941
Average sales prices:
Oil (per Bbl) $ 15.34 15.24 12.86 14.56 17.88
Gas ( per Mcf) $ 1.70 1.67 1.48 1.81 1.79
Proved reserves (end of period)
Oil (Mbbls) 6,580.7 6,353.0 5,431.8 4,519.9 2,455.3
Gas (Mmcf) 25,955 28,172 28,113 10,933 9,391
Present value of estimated future oil and gas net
revenues before income taxes (discounted 10%) $ 39,631 53,499 32,912 23,418 15,658
Standardized Measure $ 35,368 43,889 28,802 14,277 9,993
</TABLE>
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company's acquisition of LaTex on May 1, 1997 has been accounted for as
a "reverse acquisition" of the Company by LaTex. As such, the historical
financial statements and financial information as of and for each of the years
in the two-year period ended July 31, 1996 and for the nine-month period ended
April 30, 1997 are for the business of LaTex alone and include no information
for the Company.
RESULTS OF OPERATIONS
Alliance 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. During the period under review, Alliance
operated three cost pools: the U.S., Kazakhstan and Tunisia. The capitalized
costs relating to each pool (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 filing and all financial data prior to the LaTex
Merger set out in this filing has been restated from the "successful efforts"
method to the "full cost" method.
The factors which most significantly affect results of operations are (i)
the sale 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 in efforts to acquire oil and
gas properties and in the ability to maintain or increase production from
existing oil and gas properties through development activities.
The following table reflects certain historical operating data for the
periods presented.
<TABLE>
<CAPTION>
YEAR ENDED JULY 31 9 MONTHS TO
APRIL 30
-------------------------- -------------
1995 1996 1997
<S> <C> <C> <C>
Net sales volumes
Oil (MBbls) 359 405 190
Natural gas (Mmcf) 2,612 3,481 1,640
Oil equivalent (MBOE) 794 985 463
Average sales prices $ $ $
Oil (per Bbl) 12.86(1) 15.24(2) 15.34(2)
Natural gas (per Mcf) 1.48(1) 1.67(2) 1.70(2)
Operating expenses per BOE of net sales (3)
Lease operating 6.06 8.31 5.55
Severance tax 0.72 0.88 1.22
Depreciation, depletion and amortization 4.24 3.56 3.33
General and administrative 3.45 2.94 7.52
</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 commodity price hedging arrangements
with the Bank of America. Without such hedging arrangements, the average
sales prices for the year ended July 31, 1996 would have been $15.73/bbl
for oil and $2.03/mcf for gas and for the nine months ended April 30, 1997
would have been $19.15/bbl for oil and $2.40/mcf for gas
13
<PAGE>
(3) Operating expenses also include the cost of crude oil and gas marketing and
cessation of overseas exploration.
Nine month period ended April 30, 1997 compared to the 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 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 $5,472,130 for the year ended July 31, 1996. The
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 $1,541,415 for the nine months ended April
30, 1997 primarily due to a lower production.
General and administrative expenses for the nine month period ended April
30, 1997 were $3,481,003 up from $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 after preference dividends for the nine months ended April
30, 1997 of $4,906,946 (($0.25) per common share) compared to a net loss after
preference dividends of $11,900,997 (($0.66) 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 a
cessation of overseas exploration), 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.
Year ended July 31, 1996 compared to year ended July 31, 1995.
Total revenues from operations for the year ended July 31, 1996 were
$12,520,138 which includes $1,475,653 of losses incurred from oil and gas price
hedging arrangements. This compares to total revenues of $9,808,641 for the
year ended July 31, 1995, which includes hedging gains of $157,301. The increase
is attributable to a 15% increase in oil and gas prices and the inclusion of the
oil and gas operations of a wholly-owned subsidiary, Germany Oil Company, for
the full year ended July 31, 1996. Germany Oil company was acquired on April 1,
1995. The increased revenues were partially offset by lower revenues from crude
oil marketing activities.
Lease operating expenses for the year ended July 31, 1996 were $5,472,130
compared to $4,643,030 for the same period a year earlier, primarily as a result
of including the full year of operations of Germany Oil Company, while expenses
associated with marketing operations decreased $610,155 due to reduced oil and
gas marketing activity.
Depreciation, depletion and amortization expense increased to $3,510,814 in
fiscal 1996 from $3,364,031 in fiscal 1995 primarily as a result of the
acquisition of Germany Oil Company.
General and administrative expenses for the year ended July 31, 1996 were
$2,893,146 compared to $2,736,267 for the prior year due to routine increases in
administrative expenses.
Costs of $2,491,299 were incurred during the year ended July 31, 1996, from
the write-off of the investment in the Tunisian prospect following cessation of
activities. The investment in the Kazakhstan Prospect was also written off in
the amount of $955,496 for the same reason.
The equity in the net losses of the unconsolidated affiliates, Wexford
Technology Inc. and Imperial Petroleum, Inc. was $234,608 during the fiscal year
ended July 31, 1995. In the year ended July 31, 1996 the equity in the losses or
earnings from these unconsolidated affiliates was not subject to determination
by LaTex and,
14
<PAGE>
therefore, is included in the write off of the investment in and advances to
these affiliates in the total amount of $4,034,414. During the year ended July
31, 1996, it was determined that those affiliates would no longer be funded and
in view of this, and the inability of the affiliates to find alternative sources
of finance, it was determined that the investments were unlikely to be of any
value. The investments were therefore written off.
The net loss after preference dividends for the year ended July 31, 1996
was $11,900,997 ($0.66 per common share), compared to a net loss after
preference dividends of $3,438,556 ($0.19 per common share) for the year ended
July 31, 1995. The increase in the net is primarily a result of the write off
resulting from the cessation of activities in Tunisia and Kazakhstan (reflected
as cessation of overseas exploration), hedging contract losses, and equity in
losses and write-offs of investments in affiliates.
CAPITAL RESOURCES AND LIQUIDITY
The Company's capital requirements relate primarily to the acquisition of
developed oil and gas properties and undeveloped leasehold acreage and
exploration and development activities, 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, 1997, LaTex reported current assets of $2.247 million and
current liabilities of $11.866 million, which resulted in a net current deficit
of $9.619 million. The Merger was completed, in part, to reduce LaTex's working
capital deficit.
For the transition period ended April 30, 1997 and the year ended July 31,
1996, LaTex's operating activities resulted in positive cash flow of $2.099
million and $3.485 million respectively, compared to a positive
15
<PAGE>
cash flow of $1.730 million for the year ended July 31, 1995. The improvement in
cash flow is partly due to additional cash provided by operating activities
through delaying payments to creditors resulting in increased accounts payable
balances.
Investing activities of LaTex provided $2.497 million and used $1.508
million in net cash flow for the transition period ended April 30, 1997 and the
year ended July 31, 1996, respectively, to fund LaTex's oil and gas activities.
The change between the two periods was primarily due to the reduction in
purchases of property and equipment (capital expenditures).
Financing activities used $4.541 million and $2.271 million in net cash
flow for the transition period ended April 30, 1997 and the year ended July 31,
1996, respectively. The increase during the transition period was principally as
a result of the monthly amortization of LaTex's indebtedness to its principal
bank and of additional debt reduction upon the sale of oil and gas properties.
The domestic spot prices of oil and gas have traded, in a volatile manner
over various periods in recent years. To the extent that oil and gas prices are
volatile, material fluctuations in revenues from quarter to quarter can be
expected which, in turn, could adversely affect the Company's ability to service
its debt with its principal bank in a timely manner and to fund its ongoing
operations and could, under certain circumstances, require a write-down of the
book value of the Company's oil and gas reserves.
After making enquiries, the Directors have concluded that they have a
reasonable expectation that the Company has adequate resources to continue in
operational existence for the forseeable future. Accordingly, the going concern
basis for preparing the financial statements continues to be used.
In reaching this conclusion the Directors have considered the satisfactory
progress made in integrating and rationalising the operations of LaTex since the
Merger on 1 May 1997. In addition, the Directors have considered the financing
arrangements with the Company's main lender, Bank of America, and other factors
such as the property disposal programme, the remedial work programme and the
proposed recompletion programme expected to have a beneficial impact on the
volumes from the properties, the collateral
16
<PAGE>
value of the Company's oil and gas reserves and the liquidity of the Company.
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 shares were suspended at a price of 32.5P. 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.
Capital Expenditures.
A 37 well recompletion program is currently underway and has the potential
to significantly increase daily production over the next 12 months although
there can be no guarantee of a successful outcome of this program given the
relevant technical and pricing risks. 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 timing of most of the capital
expenditures in relation to the Company's existing US properties is
discretionary. Currently, there are no material long-term commitments associated
with the Company's capital expenditure plans. Consequently, the Company has a
significant degree of flexibility to adjust the level of such expenditures as
circumstances warrant. The Company primarily uses internally generated cash flow
and proceeds from the sale of oil and gas properties to fund capital
expenditures, other than significant acquisitions, and to fund its working
capital deficit. If the Company's internally generated cash flows should be
insufficient to meet its banking or other obligations, the Company may reduce
the level of discretionary capital expenditures or increase the sale of non-
strategic oil and gas properties in order to meet such obligations. The level of
the Company's capital expenditures will vary in future periods depending on
energy market conditions and other related economic factors. As a result, the
Company will continue its current policy of funding capital expenditures with
internally generated cash flow and the proceeds from oil and gas property
divestitures.
It was anticipated that LaTex's cash flow would not be sufficient to fund
its domestic operations and debt service at their previous levels beyond April
30, 1997. It was believed that the Merger would improve the financial condition
of LaTex by the restructuring of its obligations through the Alliance Credit
Agreement and to allow LaTex to become active again in the acquisition and
exploitation of oil and gas properties (see "Item 1. Business--Recent
Developments"). In addition, it was believed that the amended financing
arrangements contained in the Alliance Credit Agreement (described below) would
contribute to the funding of capital expenditures post completion of the Merger.
Financing Arrangements
(1) LaTex Credit Agreement: At April 30, 1997, the outstanding balance
under the LaTex's credit facility pursuant to a Credit Agreement dated as of
March 31, 1995 (the "Credit Agreement") between Bank of America, NT and SA
("Bank") and LaTex's wholly-owned subsidiaries, LaTex Petroleum, Germany Oil and
LaTex/GOC Acquisition ("Borrowers") was $22,206,707. Advances under the Credit
Agreement maintained from time to time as a "Base Rate Loan" bear interest,
payable monthly, at a fluctuating rate equal to the higher of (i) the rate of
interest announced from time to time by the Bank as its "reference rate", plus
1%, or (ii) the "Federal Funds Rate" (as defined in the Credit Agreement) plus 1
1/2%. Advances under the Credit Agreement maintained from time to time as a
"LIBO Rate Loan" bear interest, payable on the last day of each applicable
interest period (as defined in the Credit Agreement), at a fluctuating rate
equal to the LIBO Rate (Reserve Adjusted) (as defined in the Credit Agreement)
plus 2%. As of April 30, 1997, all advances to LaTex under the Credit Agreement
were maintained as LIBO Rate Loans that beared interest at the annual rate of
7.5%. Under the Alliance Credit Agreement, the borrowing base will be equal to
the outstanding indebtedness under the LaTex Credit Agreement as of the date of
the Merger. The borrowing base is to be redetermined semiannually as of December
31 and June 30 of each year.
At April 30, 1997, the principal on any loans under the Credit Agreement
was repayable in monthly installments of $365,000 (including Oakland Petroleum's
monthly principal payment of $42,500) plus an additional payment equal to the
positive difference, if any, between the net proceeds from Borrower's oil and
gas production (as defined in the Credit Agreement) times a variable dedicated
percentage (as defined in the Credit Agreement) and the minimum monthly payment.
(2) Alliance Credit Agreement: In connection with the Merger, a subsidiary
of Alliance entered into a Credit Agreement (the "Alliance Credit Agreement")
with Bank of America NT & SA (the "Bank") effective as of
17
<PAGE>
March 19, 1997, amending and restating the Credit Agreement in order to
restructure LaTex's existing indebtedness to the Bank. As a restructuring fee,
in connection with entering into the Alliance Credit Agreement, Alliance issued
to the Bank the 156,250 Ordinary Shares and zero coupon convertible loan notes
convertible into an additional 115,456 Ordinary Shares.
Under the Alliance Credit Agreement principal payments are suspended until
October 31, 1998 following completion of the Merger. However, cash flows
generated by Alliance and its subsidiaries in excess of amounts shown in the
business plan that formed the basis of negotiation with the Bank will be used to
reduce outstanding principal indebtedness. The maturity date of the existing
line of credit remains at March 31, 2000.
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 Bank of America. Under the terms of
the Previous Credit Agreement, the contractual maturities of long term debt as
at April 30, 1998 are $2.275 million, and $18.792 million due in 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 herein.
Substantially all of the existing security for the outstanding indebtedness
under the LaTex Credit Agreement, being the mortgages of all of LaTex's
producing oil and gas properties and pledges of stock of the Existing Borrowers
and ENPRO, remains in place. As additional security, the Bank received mortgages
on substantially all of Alliance's producing oil and gas properties and pledges
of the stock of Alliance's subsidiaries.
In connection with the LaTex Merger and the Alliance Credit Agreement, the
Company, effective May 1, 1997, acquired the overriding royalty interest 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 New Alliance Shares, convertible loan notes and warrants.
Borrowings under the Alliance Credit Agreement maintained from time to time
as a "Base Rate Loan" bear interest, payable monthly, at a fluctuating rate
equal to the higher of (i) the rate of interest announced from time to time by
BoA as its "reference rate" plus 1% or (ii) the "Federal Funds Rate" (as defined
in the Alliance Credit Agreement) plus 1 1/4%. Borrowings under the Alliance
Credit Agreement maintained from time to time as a "LIBO Rate Loan" bear
interest, payable on the last day of each applicable interest period (as defined
in the Alliance Credit Agreement), at a fluctuating rate equal to the LIBO Rate
(Reserve Adjusted) (as defined in the Alliance Credit Agreement) plus 2%. As at
April 30, 1998, the majority of advances to the Company under the Alliance
Credit Agreement were maintained as Libo Rate Loans that bore interest at the
annual rate of 7.875%.
As a condition to the Bank making the loans under the Credit Agreement
previously in place with LaTex, LaTex's subsidiary, LaTex Petroleum, entered
into hedging agreements with the BoA designed to enable LaTex to (a) obtain
agreed upon net realized prices for LaTex's oil and gas production (the "LaTex
Oil and Gas Hedging Agreements") and (b) protect LaTex against fluctuations in
interest rates with respect to the principal amounts of all loans under the
LaTex credit agreement. Under the Alliance Credit Agreement, BoA agreed to make
available, at its sole discretion, to the Company the amount of $2,500,000
("Tranche B Facility") to reduce or terminate the LaTex Oil and Gas Hedging
Agreements. As at April 30, 1998 $2.472 million had been drawn under the Tranche
B Facility by the Company.
18
<PAGE>
(3) Hedging Arrangements: As a condition to the Bank making the loans under
the Credit Agreement, LaTex's subsidiary, LaTex Petroleum, entered into hedging
agreements designed to enable LaTex to obtain agreed upon net realized prices
for LaTex's oil and gas production and designed to protect LaTex against
fluctuations in interest rates with respect to the principal amounts of all
loans under the Credit Agreement. Under the LaTex Oil and Gas Hedging
Agreements, LaTex pre-sold certain volumes of its gas production for a three
year period beginning April 1, 1995 at a fixed price of $1.806 per MMBTU. The
dedicated annual volumes for gas average 2,605,384 MMcf in fiscal 1996,
1,948,592 MMcf in fiscal 1997 and 1,115,296 MMcf in fiscal 1998. In addition,
LaTex placed a price "collar" on certain volumes of its oil production between
$16.50 per barrel and $19.82 per barrel. The dedicated annual volumes for oil
average 324,288 Bbls in fiscal 1996, 279,828 Bbls in fiscal 1997 and 170,344
Bbls in fiscal 1998. Interest rate protection was provided based on an interest
rate swap at 7.49%. The effect of the LaTex Oil and Gas Hedging Agreements in
the three fiscal periods ended April 30, 1997 is described under "Inflation and
Prices" below.
- Termination of LaTex Oil and Gas Hedging Agreements: As a result of the
substantial uncertainties regarding the Group's ability to perform in accordance
with the commodity price hedging program, and as allowed under the Alliance
Credit Agreement, the LaTex Oil and Gas Hedging Agreements were terminated on
May 15, 1997 at a cost of $1.128 million. The loss related to the buyout was
recognised in its entirety during the period ended October 27, 1997, the date
the Company entered into new commodity price hedges. This accounting treatment
is in accordance with Statement of Financial Accounting Standards No. 80
"Accounting for Futures Contracts".
- New Oil and Gas Hedging Agreements: On October 23, 1997 the Company
entered into new commodity price hedge agreements to protect against price
declines and the volatility in oil and natural gas spot prices. Unlike the LaTex
Oil and Gas Hedging Agreements, 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 effected through the purchase of put options (floors) by the Company, and
the associated premia cost was funded by additional drawdowns under the Alliance
Credit Agreement. The commodity price hedges cover the year to October 31, 1998
and cover in excess of 90% of Alliance's current monthly sales volumes. The
floors currently equate to approximately $18.50/bbl Nymex WTI contract and
$2.20/mmbtu Nymex Natural Gas contract.
SEASONALITY
The results of operations are somewhat seasonal due to seasonal
fluctuations in the price for crude oil and natural gas. Recently, crude oil
prices have been generally higher in the third calendar quarter and natural gas
prices have been generally higher in the first calendar quarter. Due to these
seasonal fluctuations, results of operations for individual quarterly periods
may not be indicative of results which may be realized on an annual basis In
addition, production at the South Carlton Field in Alabama is affected during
the spring rain season, when flooding can require the shutting in of the wells.
INFLATION AND PRICES; HEDGING
In recent years, inflation has not had a significant impact on operations
or financial condition. The generally downward pressure on oil and gas prices
during most of such periods has been accompanied by a corresponding downward
pressure on costs incurred to acquire, develop and operate oil and gas
properties as well as the costs of drilling and completing wells on properties.
Prices obtained for oil and gas production depend upon numerous factors
that are beyond the control of LaTex including the extent of domestic and
foreign production, imports of foreign oil, market demand, domestic and world-
wide economic and political conditions and government regulations and tax laws.
Prices for oil and gas have fluctuated significantly. The following table sets
forth the average price received for the transition period ended April 30, 1997
and for each of the last two years and the effects of the hedging arrangement
described below.
19
<PAGE>
<TABLE>
<CAPTION>
OIL OIL GAS GAS
(EXCLUDING THE (INCLUDING THE (EXCLUDING THE (INCLUDING THE
EFFECT OF EFFECTS OF EFFECTS OF EFFECTS OF
HEDGING HEDGING HEDGING HEDGING
TRANSACTIONS) TRANSACTIONS) TRANSACTIONS) TRANSACTIONS)
--------------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Nine Months ended April $19.15 $15.34 $2.40 $1.70
30, 1997
Year ended July 31, 1996 $15.73 $15.24 $2.03 $1.67
Year ended July 31, 1995 $12.86 $12.86 $1.48 $1.48
</TABLE>
A master agreement was entered into to hedge the price of its oil and
natural gas. The purpose of the hedging arrangement was to provide protection
against price drops and to produce a measure of stability in the volatile
environment of oil and natural gas spot pricing. With respect to the losses
incurred as a result of this hedging arrangement, see "Capital Resources and
Liquidity -- Financing Arrangements." The following table provides a summary of
financial contracts.
<TABLE>
<CAPTION>
OIL
- -----------------
PERCENT OF ESTIMATED CONTRACT
PERIOD DIRECT FLOOR PRICE
- ----------------- PRODUCTION HEDGED (PER BBL)
----------------- ------------------------
<S> <C> <C>
08/01/96-07/31/97 79% $16.50
08/01/97-03/27/98 75% $16.50
</TABLE>
<TABLE>
<CAPTION>
GAS
- -----------------
PERCENT OF ESTIMATED CONTRACT
PERIOD DIRECT SWAP PRICE
- ----------------- PRODUCTION HEDGED (PER MMBTU)
----------------- ------------------------
<S> <C> <C>
08/01/96-07/31/97 71% $ 1.81(1)
08/01/97-03/27/98 68% $ 1.81(1)
</TABLE>
In addition, interest rate hedging agreements were entered into designed to
protect against fluctuations in interest rates with respect to its indebtedness
to the Bank under the Credit Agreement.
20
<PAGE>
FASB ACCOUNTING STANDARDS
Financial Accounting Standard Board (FASB) has issued Statement of
Financial Accounting Standard No. 123 ("SFAS 123"), Accounting for Stock-Based
Compensation. This statement establishes financial accounting and reporting
standards for stock-based employee compensation plans. This statement defines a
fair value based method of accounting for an employee stock option or similar
equity instrument plan. Under the fair value based method, compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period, which is usually the vesting period. This statement is
effective for transactions entered into in fiscal years that begin after
December 15, 1995.
In March 1997, FASB issued Statement of Financial Accounting Standards No.
128 ("SFAS 128"), Earnings per Share, which establishes new standards for
computing and presenting earnings per share. SFAS 128 will be effective for
interim and annual financial statements after December 15, 1997. The Company
believes that the adoption of SFAS 128 will not have a material impact on the
Company's reported earnings per share.
ISSUES RELATED TO THE YEAR 2000
As the year 2000 approaches, there are uncertainties concerning whether
computer systems will properly recognize data-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 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
Audited Financial Statements of Alliance Resources PLC
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors Report............................................ F-1
Consolidated Balance Sheets as of April 30, 1997 and July 31, 1996..... F-2
Consolidated Statements of Operations for the nine months ended April
30, 1997 and the years ended July 31, 1996 and 1995;.................. F-4
Consolidated Statements of Stockholders' Equity for the nine months
ended April 30, 1997 and the years ended July 31, 1996 and 1995;..... F-5
Consolidated Statements of Cash Flows for the nine months ended April
30, 1997 and the years ended July 31, 1996 and 1995;................... F-6
Notes to Consolidated Financial Statements............................. F-8
</TABLE>
21
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the directors,
executive officers and key employees of the Company as at May 31, 1998 [latest
practicable date before filing].
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
John A. ("Jak") Keenan 43 Chairman and Managing Director, Chief
Executive Officer
H. Brian K. Williams 43 Finance Director, Chief Financial Officer
Paul R. Fenemore 42 Director, Operations and Business Development
M. Philip Douglas 59 Director (Chairman of the Remuneration
Committee)
William J. A. Kennedy 58 Director (Chairman of the Audit Committee)
Christopher R. L. Samuelson 51 Director
John R. Martinson 61 Director
Michael Humphries 41 Director
</TABLE>
John A. ("Jak") Keenan is an experienced executive in the U.S. and
international oil industry. From 1986 until 1992, Mr. Keenan was First Vice
President of Corporate Development for Great Western Resources Inc., an
independent oil and gas exploration and production company listed on the London
Stock Exchange. In that role he oversaw corporate acquisitions and divestitures
and also was the senior legal officer for the company. In 1990, Mr. Keenan
assumed the additional role of Chief Operating Officer for Great Western and in
that role was responsible for day to day administration of the company's
affairs. In 1992, Mr. Keenan was elected a director of Great Western and
appointed President of is Oil & Gas Division. In that capacity he oversaw the
day to day operations of the division that included both domestic operations as
well as international operations in Peru. He resigned his position at Great
Western in August, 1995 and accepted a position with the law firm of Jenkens &
Gilchrist in Houston, Texas, where he specialized in oil and gas transactions.
He left Jenkens & Gilchrist in February, 1996 to assume a role overseeing
Alliance's U.S. operations. He was elected a director of Alliance in April,
1996 and appointed Managing Director in May, 1996. Mr. Keenan is a U.S.
citizen.
H. Brian K. Williams joined the Board as Finance Director in June 1996. He
is a chartered accountant and formerly the Finance Director of Pict Petroleum
PLC and previously with Hamilton Brothers and British National Oil Corporation.
Mr. Williams is a citizen of the United Kingdom.
Paul R. Fenemore was appointed to the Board of Alliance in May 1996 as
Operations and Business Development Director. He has previously served in a
variety of technical and management positions in Amoco, Gulf Oil, Hamilton
Brothers, Cairn Energy and Amerada Hess. Mr. Fenemore is a citizen of the
United Kingdom.
22
<PAGE>
M. Philip Douglas is Chairman of the Remuneration Committee and is a former
director of and head of international investment at Morgan Grenfell, where he
spent 16 years. He is also a director of GT Management. Mr. Douglas is a
citizen of he United Kingdom.
William J. A. Kennedy is Chairman of the Audit Committee. After 25 years
in the investment industry, he served as a vice president of a major
conglomerate, Crownx Inc. For the past five yeas he has operated a management
consulting service and sits on the boards of three public Canadian companies.
Mr. Kennedy is a citizen of Canada.
Christopher R. L. Samuelson joined the Board as a non-executive director in
April 1996. He has an extensive background in investment management and banking
and currently holds the position of Group Chief Executive of Valmet, a large
international trust company with whom he has been associated for the last twelve
years. He also holds a wide number of directorships around the world. Mr.
Samuelson is a citizen of the United Kingdom.
John R. Martinson joined the Board as a non-executive director upon the
completion of the Merger. Mr. Martinson was a Director of LaTex since May 4,
1995. Mr. Martinson is the principal and founder of Wood Roberts, Inc., an
investment banking firm. Since April 1988 Wood Roberts has been involved
primarily in the petroleum industry, with a particular focus on initiating and
advising on Merger transactions and arranging financing. In January 1996, Wood
Roberts, Inc. and J L Ogden & Co., LLC. formed Wood Roberts, LLC., which also
pursues investment banking and financial advisory activities. In 1995, Mr.
Martinson was also a principal in the merchant banking firm Martinson, O'Dell &
Ogden, L.L.C., specializing in corporate and project finance. From 1973 to
1988, Mr. Martinson was an independent oil operator and investor, including the
founding and management of companies involved in oil and gas exploration and
development, crude oil and products trading, refining and marketing, natural gas
gathering and processing and electric utility loan management. Mr. Martinson is
a U.S. citizen.
Michael E Humphries, aged 41, joined the Board of Alliance in December
1997. Having begun his career at Britoil plc., he has spent 16 years working in
the international oil and gas arena and is currently Senior Vice President of
Rothschild Natural Resources, LLC, based in Washington DC, USA, where he has
responsibility for Rothschild's oil and gas activities in North America. Mr
Humphries is a citizen of the United Kingdom.
Directors are elected by the shareholders of the Company and hold office
until their earlier death, resignation, retirement, disqualification or removal.
The directors may at any time appoint additional directors who will hold office
until the next annual general meeting of the Company, when they will be eligible
for re-election. One third of the directors retire from office at each annual
general meting of the Company but are eligible for re-election. The Board may
appoint any director to the office of Chief Executive or Managing Director or
other executive office upon such terms and for such period as they think fit.
No family relationships exist among the directors or executive officers of
the Company or its subsidiaries.
Except as indicated above, none of the directors of the Company is a
director of any other company that has a class of securities registered pursuant
to Section 12 of the Securities Exchange Act of 1934, or that is subject to the
requirements of Section 15(d) of that Act or any company registered as an
investment company under the Investment Company Act of 1940.
Committees. The Board has established standing committees. The
Remuneration Committee is composed of Mr. M. P. Douglas (chair), Mr. C.R.L.
Samuelson and Mr. J R Martinson. Its responsibilities include advising the
Board on remuneration of the executive directors. During the nine months to
April 30, 1997, the committee met once. The Audit Committee is composed of Mr.
W.J.A. Kennedy (chair), Mr. M.P. Douglas and Mr. J R Martinson. Its
responsibilities include recommending to the shareholders the firm to be
employed as Alliance's independent auditors and consulting with, and reviewing
the reports of, Alliance's independent auditors and financial staff. During the
nine months to April 30, 1997, the committee met once.
23
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
The total compensation paid for each of the three fiscal years of Alliance
ended April 30, 1997, to the persons who served as Managing Director and chief
executive, and to each other executive officer who earned at least $100,000 in
salary and bonus in fiscal 1997 (collectively, the "Named Executive Officers"),
is set forth below in the following Summary Compensation Table:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
Awards
------------
ANNUAL COMPENSATION SECURITIES ALL OTHER
------------------- UNDERLYING COMPEN-
FISCAL OPTIONS/ SATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) SARS (#) ($)
- --------------------------- ---- --------- --------- -------- ---
<S> <C> <C> <C> <C> <C>
D. Patrick Maley, Acting 1997 13,386 --- --- 109,525
Executive Chairman (1) 1996 57,311 125 --- ---
John A. Keenan, 1997 150,333 --- 150,000 5,061
Managing Director (2)
H. Brian K. Williams 1997 144,751 --- 62,500 ---
Finance Director (3)
Paul R. Fenemore 1997 142,789 --- 25,000 ---
Operations and Business
Development Director (4)
</TABLE>
(1) Mr. Maley acted as Executive Chairman from November 29, 1995 to May 22,
1996.
(2) Mr. Keenan assumed his position with Alliance on May 22, 1996.
(3) Mr. Williams assumed his position with Alliance on June 5, 1996.
(4) Mr. Fenemore assumed his position with Alliance on May 21,1996.
STOCK OPTIONS
The table below sets forth, in summary form, with respect to the Named
Officers, (i) the name of such officer receiving grants of stock options from
the Company during the fiscal year ended April 30, 1997; (ii) the number of
securities underlying the options; (iii) the percent such grant represents of
the total options granted to employees during the fiscal year ended April 30,
1997; (iv) the per-share exercise price of the options granted; (v) the
expiration date of the options; and(vi) the potential realizable value at
assumed annual rates of stock price appreciation.
<TABLE>
<CAPTION>
OPTIONS/SAR GRANTS IN 9 MONTH PERIOD TO APRIL 30, 1997
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
----------------------------------------------------------- -----------------
% OF TOTAL
SECURITIES OPTIONS/SHARES
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN OR BASE EXPIRATION
NAME GRANTED (#) FISCAL YEAR(2) PRICE($) DATE 5% 10%
- ---- ----------- -------------- -------- ---------- -- ---
<S> <C> <C> <C> <C> <C> <C>
John A. Keenan 150,000 63% 1.32 12.16.2006 125,419 317,837
H. Brian K. Williams 62,500 26% 1.32 12.16.2006 52,258 132.432
Paul R. Fenemore 25,000 11% 1.32 12.16.2006 20,903 52,973
</TABLE>
24
<PAGE>
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS
OPTIONS AT AT APRIL 30,
APRIL 30, 1997 1997
--------------- --------------
NAME UNEXERCISABLE EXERCISABLE UNEXERCISABLE EXERCISABLE
- ----------------------- --------------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
John A. Keenan 150,000 0 0 0
H. Brian K. Williams 62,500 0 0 0
Paul R. Fenemore 25,000 0 0 0
</TABLE>
EMPLOYMENT AGREEMENTS
Each of Messrs. Keenan, Williams and Fenemore have entered into Executive
Service Agreements with Alliance providing for his employment in his current
capacity for an initial fixed term of two years beginning October 15, 1996,
December 16, 1996, and September 20, 1996, respectively, and automatic
extensions of the initial term for additional one year periods (two year periods
in the case of Mr Keenan) unless written notice of either party's intention not
to extend has been given to the other party at least three months prior to the
expiration of the then effective one year period of employment (two year period
in the case of Mr Keenan), provided that the executive may at any time terminate
his employment by giving a minimum of three months notice. If the executive's
employment terminates for any reason other than the executive's breach of the
agreement, disability or malfeasance, Alliance must pay the executive an amount
equal to the executive's salary for the then remaining term of the executive's
employment. Upon the involuntary termination of the executive's employment
without cause or voluntary termination by the executive after a change in his
office location, his responsibilities or reduction in compensation following a
change in control of Alliance, the executive is entitled to the payment in
one lump sum of cash in an amount equal to two times the average annual salary,
bonus and benefits paid to the executive for the previous two years.
The annual salary under the agreements is $180,000 for Mr. Keenan,
(Pounds)85,000 for Mr. Williams, and (Pounds)96,000 for Mr. Fenemore, plus any
bonuses or other compensation determined by Alliance's Board of Directors in its
discretion.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of May 31, 1998, the Company had 31,209,408 issued and outstanding
Ordinary Shares. The following table sets forth, as of May 31, 1998 latest
practicable date before filing , the number and percentage of Ordinary Shares of
the Company owned beneficially by (i) each director of the Company, (ii) each
officer of the Company named in the Summary Compensation Table in Item 11 above,
(iii) all directors and executive officers of the Company as a group, and (iv)
each person known to the Company to own of record or beneficially more than 5%
of the Company's Ordinary Shares. Except as otherwise indicated, the persons
named in the table have sole voting and investment power with respect to the
shares indicated.
25
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS OF SHARES OWNED PERCENT
BENEFICIAL OWNER(1) BENEFICIALLY OWNED
------------------- ------------ 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.............. 0 -
Michael E. Humphries..................... 0 -
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%
Bank of America(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 Alliance'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 Alliance's
executive share option plans.
(3) Includes options to purchase 112,500 Shares granted pursuant to Alliance's
executive share option plans.
(4) Consists of options to purchase 225,000 Shares granted pursuant to
Alliance's 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 (the "Bank 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.
26
<PAGE>
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 and 102,500 Shares
held in the name of Havensworth Limited by virtue of having proxy over the
voting rights attaching 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Since January 1993 LaTex has leased a condominium located in Tulsa,
Oklahoma owned by Jeffrey T. Wilson, who was Chairman and Chief Executive
Officer of LaTex. Under the terms of the oral lease arrangement, LaTex pays Mr.
Wilson approximately $1,100 per month. The condominium is used by LaTex to house
its out of town employees and guests. At April 30, 1997, LaTex owed Mr. Wilson
approximately $8,000 for unpaid rent.
In connection with the Merger, LaTex sold to Imperial Petroleum, Inc.
("Imperial") its interests in Imperial, Wexford Technology, Inc., LaTex
Resources International, Inc. and Phoenix Metals, Inc. for 100,000 shares of
LaTex's common stock. Imperial is controlled by Jeffrey T. Wilson who was
Chairman, President and Chief Executive Officer of LaTex. Mr. Wilson
contributed to Imperial the 100,000 shares of LaTex's common stock to be used by
Imperial in acquiring LaTex's interest in these companies.
LaTex was previously a party to an agreement with Wood Roberts, Inc.
("WRI"), a company controlled by John R. Martinson, a Director of LaTex,
pursuant to which WRI acted as a financial advisor to LaTex. Under the
agreement, LaTex paid WRI a monthly fee of $4,000 and agreed to pay WRI a
success fee in connection with any Merger or acquisition involving a party
introduced to LaTex by WRI, and any financing facility arranged by WRI. WRI
assisted LaTex in obtaining its credit facility with Bank of America. Through
July 31, 1996, LaTex paid WRI cash retainer and success fees of $55,000. In
addition, LaTex issued to WRI six year common stock purchase warrants to
purchase 536,000 shares at $0.75 per share, of which WRI has exercised and
purchased 100,000 shares. As of March 4, 1996, the financial advisor agreement
between LaTex and WRI was terminated by agreement of the parties. By separate
agreement LaTex paid Wood Roberts a fee of $240,000 upon completion of the
Merger and a fee equal to 0.5% of the amount of any credit facility obtained by
LaTex from a bank or other financial institution introduced to LaTex by Wood
Roberts in order to refinance its indebtedness to Bank of America, settled by
the issue to Wood Roberts of 100,000 shares of LaTex common stock.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8.
(a) Financial Statements (included at Item 8. Financial Statements and
Supplemental Data):
Audited Financial Statements of LaTex Resources, Inc.
Independent Auditor's Report;
Consolidated Balance Sheets as of April 30, 1997 and July 31, 1996 ;
Consolidated Statements of Operations for the nine-month period ended April 30,
1997, and years ended July 31, 1996 and 1995;
Consolidated Statements of Stockholders' Equity for the nine-month period ended
April 30, 1997, and years ended July 31, 1996 and 1995;
Consolidated Statements of Cash Flows for the nine-month period ended April 30,
1997, and the years ended July 31, 1996 and 1995; and
Notes to Consolidated Financial Statements.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company with the Securities and
Exchange Commission during the transition period ending April 30, 1997.
27
<PAGE>
(c) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
3.1* Memorandum of Association of Alliance Resources Plc (3.1)
3.2* Articles of Association of Alliance Resources Plc (3.7)
3.3* Form of Warrant Agreement relating to Warrants issued to Society National
Bank as Warrant Agent for holders of certain LaTex Warrants (3.3)
3.4* Warrant Agreement and form of Warrant issued to all other holders of
LaTex Warrants (3.4)
3.5* Form of Convertible Loan Note Instrument entered into between Alliance
Resources Plc and Bank of America NT & SA (3.5)
3.6* Registration Rights Agreement between Alliance Resources Plc and
affiliate of Bank of America NT & SA (3.6)
10.1* Executive Service Agreement between Alliance Resources Plc and John A.
Keenan dated October 15, 1996 (10.1)
10.2* Executive Service Agreement between Alliance Resources Plc and Paul R.
Fenemore dated September 20, 1996 (10.2)
10.3* Executive Service Agreement between Alliance Resources Plc and H.
Brian K. Williams dated December 16, 1996 (10.3)
10.4* Second Amended and Restated Credit Agreement among LaTex Petroleum
Corporation, LaTex/GOC Acquisitions, Inc., Germany Oil Company, Alliance
Resources (USA) Inc. and Source Petroleum Inc. as Borrowers and Bank of
America NT & SA as the Lender (10.4)
22.1 Subsidiaries
* Incorporated by reference from the indicated exhibit filed with Alliance's
Registration Statement on Form F-4 (No. 333-19013).
Subsidiaries
Latex Resources Inc.
Alliance Resources Group, Inc.
LaTex/GOC Acquisition Inc.
LaTex Petroleum Corporation
Germany Oil Company
Germany Operating Company
ENPRO
Alliance Resources (USA)
ARNO
ARCOL
Source Petroleum
</TABLE>
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Alliance Resources PLC
Date: 1998 /s/ JOHN A. KEENAN
-------------------- ---------------------------------------
John A. Keenan,
Chairman and Managing Director
Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ JOHN A. KEENAN Chairman and Managing Director 1998
- -------------------------------------- (Chief Executive Officer)
John A. Keenan
/s/ H. BRIAN K. WILLIAMS Finance Director (Principal 1998
- -------------------------------------- Financial and Accounting Officer)
H. Brian K. Williams
/s/ PAUL R. FENEMORE Director of Operations and 1998
- -------------------------------------- Business Development
Paul R. Fenemore
/s/ PHILIP DOUGLAS Director 1998
- --------------------------------------
Philip Douglas
/s/ JOHN R. MARTINSON Director 1998
- -------------------------------------
John R. Martinson
</TABLE>
29
<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 JULY 31, 1996 AND THE
RELATED CONSOLIDATED STATEMENTS OF OPERATIONS, STOCKHOLDERS' EQUITY, AND CASH
FLOWS FOR THE NINE MONTHS ENDED APRIL 30, 1997 AND THE YEARS ENDED JULY 31, 1996
AND 1995. THESE CONSOLIDATED FINANCIAL STATEMENTS ARE THE RESPONSIBILITY OF THE
COMPANY'S MANAGEMENT. OUR RESPONSIBILITY IS TO EXPRESS AN OPINION ON THESE
FINANCIAL STATEMENTS BASED ON OUR AUDITS.
WE CONDUCTED OUR AUDITS IN ACCORDANCE WITH GENERALLY ACCEPTED AUDITING
STANDARDS. THOSE STANDARDS REQUIRE THAT WE PLAN AND PERFORM THE AUDIT TO OBTAIN
REASONABLE ASSURANCE ABOUT WHETHER THE FINANCIAL STATEMENTS ARE FREE OF MATERIAL
MISSTATEMENT. AN AUDIT INCLUDES EXAMINING, ON A TEST BASIS, EVIDENCE SUPPORTING
THE AMOUNTS AND DISCLOSURES IN THE FINANCIAL STATEMENTS. AN AUDIT ALSO INCLUDES
ASSESSING THE ACCOUNTING PRINCIPLES USED AND SIGNIFICANT ESTIMATES MADE BY
MANAGEMENT, AS WELL AS EVALUATING THE OVERALL FINANCIAL STATEMENT PRESENTATION.
WE BELIEVE THAT OUR AUDITS PROVIDE A REASONABLE BASIS FOR OUR OPINION.
IN OUR OPINION, THE CONSOLIDATED FINANCIAL STATEMENTS REFERRED TO ABOVE PRESENT
FAIRLY, IN ALL MATERIAL RESPECTS, THE CONSOLIDATED FINANCIAL POSITION OF
ALLIANCE RESOURCES PLC AND SUBSIDIARIES AS OF APRIL 30, 1997 AND JULY 31, 1996
AND THE RESULTS OF THEIR OPERATIONS AND THEIR CASH FLOWS FOR THE NINE MONTHS
ENDED APRIL 30, 1997 AND THE YEARS ENDED JULY 31, 1996 AND 1995 IN CONFORMITY
WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.
AS DISCUSSED IN NOTE 3 TO THE CONSOLIDATED FINANCIAL STATEMENTS, THE COMPANY
CHANGED ITS METHOD OF ACCOUNTING FOR OIL AND GAS EXPLORATION AND DEVELOPMENT
ACTIVITIES DURING 1997.
KPMG Audit Plc.
Chartered Accountants
Registered Auditor
London, England
April 29, 1998 except for Note 8
which is as of June 17, 1998.
F-1
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, 1997 AND JULY 31, 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
------- ---- ----
(AS RESTATED)
<S> <C> <C>
CURRENT ASSETS:
CASH $ 72,948 19,337
ACCOUNTS RECEIVABLE - TRADE 2,119,406 3,324,309
NOTES RECEIVABLE - 515,820
OTHER CURRENT ASSETS 54,176 203,080
------------ -----------
TOTAL CURRENT ASSETS 2,246,530 4,062,546
------------ -----------
PROPERTY, PLANT AND EQUIPMENT, AT COST
OIL AND GAS PROPERTIES, AT COST, FULL COST METHOD 36,107,310 41,379,540
OTHER DEPRECIABLE ASSETS 855,512 854,259
------------ -----------
36,962,822 42,233,799
LESS ACCUMULATED DEPRECIATION AND DEPLETION (10,254,970) (12,761,131)
NET PROPERTY, PLANT AND EQUIPMENT 26,707,852 29,472,668
------------ -----------
OTHER ASSETS:
NOTES RECEIVABLE - 757,500
DEPOSITS AND OTHER ASSETS 282,920 295,526
DUE FROM RELATED PARTIES - 392,297
DEFERRED LOAN COSTS, LESS ACCUMULATED AMORTIZATION 1,620,185 1,512,899
------------ -----------
$ 30,857,487 36,493,436
============ ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-2
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
------------------------------------ ---- ----
(AS RESTATED)
<S> <C> <C>
CURRENT LIABILITIES:
ACCOUNTS PAYABLE -TRADE $ 11,428,872 9,057,707
ACCOUNTS PAYABLE - OTHER - 132,000
ACCRUED EXPENSES PAYABLE 437,736 607,055
CURRENT PORTION OF LONG-TERM DEBT - 22,235,867
------------ -----------
TOTAL CURRENT LIABILITIES 11,866,608 32,032,629
OTHER LIABILITIES 810,783 615,000
LONG-TERM DEBT, EXCLUDING CURRENT INSTALLMENTS 18,095,497 -
------------ -----------
TOTAL LIABILITIES 30,772,888 32,647,629
------------ -----------
STOCKHOLDERS' EQUITY:
PREFERRED STOCK - PAR VALUE $.01; 5,000,000 SHARES
AUTHORIZED:
SERIES A CONVERTIBLE PREFERRED STOCK WITH LIQUIDATION
PREFERENCES OF $4,570,510 AND $4,498,280 ISSUED AND
OUTSTANDING AT APRIL 30, 1997 AND JULY 31, 1996,
RESPECTIVELY 4,571 4,498
SERIES B CONVERTIBLE PREFERRED STOCK WITH LIQUIDATION
PREFERENCES OF $5,245,370 AND $4,800,250 ISSUED AND
OUTSTANDING AT APRIL 30, 1997 AND JULY 31, 1996,
RESPECTIVELY 5,246 4,800
COMMON STOCK - PAR VALUE $.01; 50,000,000 AUTHORIZED;
ISSUED AND OUTSTANDING 20,913,995 AND 19,123,995 AT
APRIL 30, 1997 AND JULY 31, 1996, RESPECTIVELY 209,140 191,240
ADDITIONAL PAID-IN CAPITAL 19,482,453 18,355,134
ACCUMULATED DEFICIT (19,127,446) (14,220,500)
TREASURY STOCK (1,108,500 AND 1,008,500 AT APRIL 30, 1997 AND
JULY 31, 1996, RESPECTIVELY) (489,365) (489,365)
------------ -----------
TOTAL STOCKHOLDERS' EQUITY 84,599 3,845,807
------------ -----------
COMMITMENTS AND CONTINGENCIES (NOTE 14)
$ 30,857,487 36,493,436
============ ===========
</TABLE>
F-3
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED APRIL 30, 1997
AND
YEARS ENDED JULY 31, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(AS RESTATED) (AS RESTATED)
<S> <C> <C> <C>
REVENUES:
OIL AND GAS REVENUE $ 5,698,490 11,979,982 8,585,453
CRUDE OIL AND GAS MARKETING 146,381 540,156 1,223,188
------------ ----------- ----------
TOTAL REVENUES 5,844,871 12,520,138 9,808,641
------------ ----------- ----------
OPERATING EXPENSES:
LEASE OPERATING EXPENSE 3,117,341 5,472,130 4,643,030
COST OF CRUDE OIL AND GAS MARKETING 15,798 133,455 743,610
CESSATION OF OVERSEAS EXPLORATION - 3,446,795 -
GENERAL AND ADMINISTRATIVE EXPENSES 3,481,003 2,893,146 2,736,267
DEPRECIATION, DEPLETION, AND AMORTIZATION 1,541,415 3,510,814 3,364,031
------------ ----------- ----------
TOTAL OPERATING EXPENSES 8,155,557 15,456,340 11,486,938
------------ ----------- ----------
LOSS FROM OPERATIONS (2,310,686) (2,936,202) (1,678,297)
------------ ----------- ----------
OTHER INCOME (EXPENSE):
EQUITY IN NET LOSSES AND WRITE-OFFS OF
INVESTMENTS IN AFFILIATES (19,823) (4,034,414) (234,608)
INTEREST EXPENSE (2,102,933) (2,829,700) (1,416,064)
INTEREST INCOME 52,038 280,322 58,309
MISCELLANEOUS EXPENSE (7,929) (1,810,382) -
------------ ----------- ----------
TOTAL OTHER EXPENSE (2,078,647) (8,394,174) (1,592,363)
------------ ----------- ----------
LOSS BEFORE INCOME TAXES (4,389,333) (11,330,376) (3,270,660)
INCOME TAX EXPENSE - - 35,096
------------ ----------- ----------
NET LOSS (4,389,333) (11,330,376) (3,305,756)
PREFERRED STOCK DIVIDENDS (517,613) (570,621) (132,800)
------------ ----------- ----------
NET LOSS FOR COMMON SHAREHOLDERS $ (4,906,946) (11,900,997) (3,438,556)
============ =========== ==========
LOSS PER SHARE FOR COMMON SHAREHOLDERS $ (.25) (.66) (.19)
============ =========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 19,289,275 18,011,826 17,661,428
============ =========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED APRIL 30, 1997
AND
YEARS ENDED JULY 31, 1996 AND 1995
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS 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, 1994,
AS PREVIOUSLY REPORTED $ - 18,480,195 $184,802 8,692,456 1,677,686 (275,000) 10,279,944
ADJUSTMENT FOR THE CUMU-
LATIVE EFFECT OF RETRO-
ACTIVELY APPLYING FULL
COST METHOD OF ACCOUNT-
ING FOR OIL AND GAS
EXPLORATION AND DEVELOP-
MENT ACTIVITIES - - - - (558,633) - (558,633)
--------- ---------- -------- ---------- ----------- -------- -----------
BALANCES AT AUGUST 1, 1994,
AS RESTATED - 18,480,195 184,802 8,692,456 1,119,053 (275,000) 9,721,311
ISSUED FOR DEBT - 150,000 1,500 96,938 - - 98,438
ISSUED FOR ACQUISITION OF
GERMANY OIL COMPANY 8,088 250,000 2,500 8,227,322 - - 8,237,910
ISSUED FOR DIVIDENDS 133 - - 132,667 (132,800) - -
PURCHASE OF TREASURY
STOCK - - - - - (124,106) (124,106)
NET LOSS, AS RESTATED - - - - (3,305,756) - (3,305,756)
--------- ---------- -------- ---------- ----------- -------- -----------
BALANCES AT JULY 31, 1995,
AS RESTATED 8,221 18,880,195 188,802 17,149,383 (2,319,503) (399,106) 14,627,797
ISSUED FOR SERVICES - 100,000 1,000 77,125 - - 78,125
ISSUED FOR DEBT OF AFFILIATE - 143,800 1,438 59,082 - - 60,520
ISSUED FOR LITIGATION
SETTLEMENT 500 - - 499,500 - - 500,000
ISSUED FOR DIVIDENDS 577 - - 570,044 (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 9,298 19,123,995 191,240 18,355,134 (14,220,500) (489,365) 3,845,807
ISSUED FOR SERVICES - 100,000 1,000 99,000 - - 100,000
ISSUED FOR EMPLOYEE BONUS - 1,690,000 16,900 511,225 - - 528,125
ISSUED FOR DIVIDENDS 519 - - 517,094 (517,613) - -
NET LOSS - - - - (4,389,333) - (4,389,333)
--------- ---------- -------- ---------- ----------- -------- -----------
BALANCES AT APRIL 30,1997 $9,817 20,913,995 $209,140 19,482,453 (19,127,446) (489,365) 84,599
========= ========== ======== ========== =========== ======== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED APRIL 30, 1997
AND
YEARS ENDED JULY 31, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(AS RESTATED) (AS RESTATED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $(4,389,333) (11,330,376) (3,305,756)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
DEPRECIATION, DEPLETION AND AMORTIZATION 1,541,415 3,510,814 3,364,031
AMORTIZATION OF DEFERRED LOAN COSTS 394,000 193,000 125,000
EMPLOYEE BONUS 528,125 - -
LITIGATION SETTLEMENT - 500,000 -
WRITE-OFFS OF INVESTMENTS IN AFFILIATES - 4,034,414 234,608
CESSATION OF OVERSEAS EXPLORATION - 3,446,795 -
CHANGES IN ASSETS AND LIABILITIES, NET OF EFFECTS
OF ACQUISITION:
ACCOUNTS RECEIVABLE 1,204,903 203,155 1,073,004
DUE FROM RELATED PARTIES 392,297 198,288 (76,591)
ACCRUED EXPENSES PAYABLE (169,319) 467,942 (34,017)
ACCOUNTS PAYABLE 2,239,165 1,686,017 390,146
OTHER ASSETS 161,530 (40,290) (40,012)
OTHER LIABILITIES 195,783 615,000 -
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,098,566 3,484,759 1,730,413
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
PROCEEDS FROM SALE OF PROPERTY AND EQUIPMENT 1,573,625 3,984,491 357,445
PURCHASES OF PROPERTY AND EQUIPMENT (350,322) (3,899,198) (4,803,199)
INCREASE IN ACCOUNTS AND NOTES RECEIVABLE-OTHER - (2,300,000) -
DECREASE IN ACCOUNTS AND NOTES RECEIVABLE-OTHER 1,273,320 1,032,500 -
ACQUISITION OF GERMANY OIL COMPANY, NET OF
CASH ACQUIRED - - (10,592,292)
ADVANCES TO UNCONSOLIDATED AFFILIATES - (326,334) (1,575,820)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 2,496,623 (1,508,541) (16,613,866)
----------- ----------- -----------
</TABLE>
CONTINUED
F-6
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
NINE MONTHS ENDED APRIL 30, 1997
AND
YEARS ENDED JULY 31, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(AS RESTATED) (AS RESTATED)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
DEFERRED LOAN AND REORGANIZATION COSTS $ (401,208) (137,186) (1,483,143)
PROCEEDS FROM NOTES PAYABLE - 6,233,192 26,837,059
PAYMENTS ON NOTES PAYABLE (4,140,370) (8,276,857) (10,100,527)
PAYMENTS ON NOTES PAYABLE - SHAREHOLDER - - (140,000)
PURCHASES OF TREASURY STOCK - (90,259) (124,106)
----------- ---------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES (4,541,578) (2,271,110) 14,989,283
----------- ---------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 53,611 (294,892) 105,830
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD 19,337 314,229 208,399
----------- ---------- -----------
CASH AND CASH EQUIVALENTS END OF PERIOD $ 72,948 19,337 314,229
=========== ========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
- ----------------------------------------------------
CASH PAID DURING THE YEAR FOR INTEREST $ 1,623,985 2,403,156 1,307,264
=========== ========== ===========
CASH PAID FOR INCOME TAXES $ - 5,275 7,739
=========== ========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
- ------------------------------------------------
FINANCING ACTIVITIES
- --------------------
COMMON STOCK ISSUED FOR SERVICES AND BONUS $ 562,500 78,125 98,438
STOCK ISSUED TO ACQUIRE GERMANY OIL COMPANY:
COMMON - - 144,530
PREFERRED - - 8,093,380
PREFERRED STOCK ISSUED FOR LITIGATION SETTLEMENT - 500,000 -
COMMON STOCK ISSUED TO PAY DEBT OF
UNCONSOLIDATED AFFILIATE - 60,520 -
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-7
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997
AND
JULY 31, 1996 AND 1995
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Alliance Resources PLC (Alliance) and its subsidiaries are engaged in the
exploration, development and production of oil and gas and oil and gas
marketing. The Group's principal oil and gas production operations are
conducted in Oklahoma, Texas, Louisiana, Mississippi and Alabama. Until
the year ended July 31, 1996, it was also involved in exploration and
development of oil and gas properties 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.
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 former 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 periods beginning
on or after May 1, 1997, the assets and liabilities of Alliance will be
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.
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. Working capital deficits and operating losses have
been much reduced.
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 similar nature, restructure the current credit facility or seek
alternative
F-8
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, CONTINUED
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.
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 antidilutive. 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 translation net assets are taken directly to stockholder's
equity.
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.
REVENUES
Revenues represents income from production and delivery of oil and gas,
recorded net of royalties in kind. The Group follows the sales method of
accounting for gas imbalances. A liability is recorded only if the Group's
excess takes of gas volumes exceed its estimated recoverable reserves from
the relevant well and no receivable is recorded where the Group has taken
less than its entitlement to gas production.
OIL AND GAS INTERESTS
The Group follows the full cost method of accounting for oil and gas
operations whereby all costs of exploring for and developing oil and gas
reserves are capitalized as tangible fixed assets. Such costs include
lease acquisition costs, geological costs, the costs of drilling both
productive and non-productive wells, production equipment and related
overhead costs. Capitalized costs, plus
F-9
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, CONTINUED
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:
Fixtures and equipment - 3 to 7 years
Buildings - 30 years
DEFERRED TAXATION
Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in the consolidated statement of operations in the period that includes the
enactment date.
JOINT VENTURES
The Group's exploration, development and production activities are
generally conducted in joint ventures with other companies. The
consolidated financial statements reflect the relevant proportions of
turnover, production, capital expenditure and operating costs applicable to
the Group's interests.
F-10
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, CONTINUED
The effects of redeterminations of equity interests in joint ventures are
accounted for when the outcome of the redetermination is known.
LEASES
Rentals under operating leases are charged to the consolidated statement of
operations on a straight line basis over the lease term.
DEBT ISSUANCE COSTS
Debt issuance costs are initially capitalized as intangible assets and are
amortized over the term of the debt to which they relate.
DERIVATIVES
Changes in value of financial instruments, utilized to hedge commodity
price and interest rate risk are recognized in the consolidated statement
of operations when the underlying transactions are recognized. Changes in
value of financial instruments which do not meet the criteria to be treated
as a hedge of an underlying risk are recognized in the consolidated
statement of operations as they occur.
The Group's criteria for a derivative instrument to qualify for hedge
accounting treatment are as follows:
- the timing or duration, quantum and characteristics of the
underlying exposure must have been identified with reasonable
certainty;
- 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 or 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 redesignate the remaining derivative instruments to other underlying
exposures provided the normal criteria are all met.
F-11
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, CONTINUED
CASH FLOW STATEMENT
For the purposes of the consolidated statement of cash flows, the Group
treats all debt instruments 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.
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 Resources Plc ("Alliance"), completed its
acquisition of LaTex, whereby a newly formed wholly owned subsidiary of
Alliance merged with and into LaTex with LaTex being the surviving
corporation for accounting purposes. In consideration the shareholders and
warrant holders of LaTex received an aggregate of 21,448,787 shares of
Alliance, par value (pounds) 0.40 per share (the "New Alliance Shares") and
warrants to purchase an additional 1,927,908 New Alliance Shares.
As a result, after giving effect to a 40-to-1 reverse stock split of the
Alliance ordinary shares, each shareholder of LaTex on May 1, 1997,
received 0.85981 of a New Alliance Share for each share of the LaTex's
common stock, 2.58201 new Alliance shares for each share of the LaTex's
Series A preferred stock then held, 6.17632 New Alliance Shares for each
share of LaTex's Series B preferred stock then held, and a warrant to
purchase 0.85981 of a New Alliance Share for each share of LaTex's Common
Stock subject to warrants.
The purchase price has been arrived at as follows:
Value of 8,103,816 Alliance shares outstanding $4,039,339
Acquisition costs 871,000
----------
$4,910,339
==========
F-12
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, CONTINUED
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 of the
acquired business at the effective date of acquisition is as follows:
Cash $ 1,460,555
Other current assets 480,045
Other assets 202,253
Oil and gas assets 5,268,929
Other fixed assets 253,386
Debt (85,420)
Other liabilities and provisions (2,669,409)
-----------
$ 4,910,339
===========
In connection with the acquisition, Alliance issued to Bank of America
156,250 Alliance Shares and zero coupon 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 6 and
15).
Subsequent to April 30, 1997, Alliance also issued 1,343,750 Alliance
Shares, zero coupon convertible subordinated unsecured loan notes of
(Pounds) 873,281 convertible into 1,078,125 Alliance Shares and 1,210,938
warrants to Bank of America in exchange for an overriding royalty interest
in most of LaTex's properties held by Bank of America.
The purchase price was allocated to oil and gas properties and has been
arrived at as follows:
Value of 1,343,750 ordinary shares and
warrants issued $2,371,300
Value of convertible subordinated
unsecured loan note issued 1,400,700
----------
$3,772,000
==========
(3) ACCOUNTING CHANGE
Effective August 1, 1996, the Group changed its method of accounting for
oil and gas exploration and development activities from the "successful
efforts" method to the "full cost" method. The Group believes the full
cost method more properly reflects the economic facts
F-13
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, CONTINUED
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 nine months ended April 30, 1997 and the years ended July 31, 1996
and 1995 are as follows:
1997 1996 1995
----- ---- ----
Increase (decrease) in:
Oil and gas properties (cost) $ 648,723 114,967 852,107
=========== ========= =======
Net loss $(2,373,358) 1,099,593 814,414
=========== ========= =======
Loss per common share $ (.12) .06 .05
=========== ========= =======
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) Notes Receivable
The Group had a non-interest bearing note receivable which represented the
balance due to the Group for a loan entered into with its primary lender
for a joint purchase of property. The original amount was approximately
$2,300,000. Imputed interest income was $46,154 and $79,784 for the nine
months ended April 30, 1997 and the year ended July 31, 1996, respectively.
The note receivable was paid off during the nine months ended April 30,
1997.
(5) FINANCIAL INSTRUMENTS
The carrying value of cash equivalents, receivables and payables
approximates 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
$469,834 at April 30, 1997 and $1,291,680 at July 31, 1996. The estimated
fair value of the commodity derivative instruments approximates a net
payable of $1,017,816 and $2,357,607 at April 30, 1997 and July 31, 1996,
respectively. The carrying value of long term debt approximates the
estimated fair value. Fair value is defined as the amount at which the
instrument could be exchanged in a current transaction between willing
parties.
(6) 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.
F-14
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, CONTINUED
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 15)
(7) INCOME TAXES
Income taxes differed from the amounts computed by applying the U.S.
federal tax rate of 34% as a result of the following:
1997 1996 1995
---- ---- ----
Computed expected tax benefit $(1,492,000) (3,852,000) (1,120,000)
Increase in valuation allowance
for deferred tax assets 1,301,000 4,218,000 579,000
Other 191,000 (366,000) 576,096
----------- ---------- ----------
Actual income tax expense $ - - 35,096
=========== ========== ==========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below:
1997 1996
---- ----
Total deferred tax liabilities -
Property, plant and equipment $ 498,000 916,000
----------- ----------
Deferred tax assets:
Net operating losses 7,266,000 6,574,000
Investment write-downs 917,000 917,000
Percentage depletion carryforward 390,000 392,000
Accrued expenses not deductible until paid 378,000 180,000
Other - 5,000
----------- ----------
Total deferred tax assets 8,951,000 8,068,000
Valuation allowance (8,453,000) (7,152,000)
----------- ----------
Net deferred tax assets 498,000 916,000
----------- ----------
Net deferred tax asset (liability) $ - -
=========== ==========
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.
F-15
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, CONTINUED
The Group has net operating loss (NOL) carryforwards to offset future
taxable earnings of approximately $14,000,000 of which, approximately
$10,000,000 is available to offset the future separate company earnings of
a wholly owned subsidiary, Germany Oil Company. If not previously
utilized, the net operating losses will expire in varying amounts from 2006
to 2012.
(8) LONG-TERM DEBT
Long-term debt at April 30, 1997 and 1996 was as follows:
1997 1996
---- ----
Bank Note $18,095,497 22,206,707
Other - 29,160
----------- -----------
Total 18,095,497 22,235,867
Less current maturities - (22,235,867)
----------- -----------
$18,095,497 -
=========== ===========
The bank note payable bears interest at the higher of a Base Rate (the
higher of the Bank of America Reference Rate and the Federal Fund Rate plus
.5% per annum) plus 1% per annum and the London Interbank Offered Rate plus
2%. The current rate at April 30, 1997 was 7.69%. The note matures on
March 31, 2000. Amounts outstanding are secured by mortgages which cover
certain of the Group's oil and gas properties.
The Group's existing 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 the current ratio, cash or cash
equivalent balance, 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 (the Bank) 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 the Bank 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 received mortgages on
substantially all of Alliance's producing oil and gas properties and
pledges of the stock of Alliance's subsidiaries.
F-16
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, CONTINUED
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 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. In
addition, 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 which is in breach of a
covenant in its loan. The Bank of America has agreed to waive compliance
with the covenant for these outstanding filings.
The contractual maturities of long term debt for the years ended April 30
are as follows:
1998 $ -
1999 2,257,500
2000 15,837,997
(9) 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. Participation 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
nine months ended April 30, 1997 and the years ended July 31, 1996 and
1995. The Group is under no obligation to make contributions to the Plan
in the future.
(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 Common Stock. The terms of
the Restricted Common Stock provide that a holder may not sell, transfer,
or otherwise dispose of any Restricted Common Stock as long as the Group
has the right to a forfeiture of the shares. The Group recognized
compensation expense of $528,125 (based on the estimated value of the
restricted stock) related to this transaction.
F-17
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, CONTINUED
Stock option activity during the periods indicated is as follows:
Number Weighted Average
of Shares Exercise Price
--------- ----------------
Balance at July 31, 1994 619,000 $0.875
Forfeited (12,000) 0.875
--------- ------
Balance at July 31, 1995 607,000 0.875
Granted 1,448,000 0.448
Forfeited (365,000) 0.764
--------- ------
Balance at July 31, 1996 1,690,000 0.533
Canceled (See Note 2) (1,690,000) -
--------- ------
Balance at April 30, 1997 - $ -
========= ======
(11) WARRANTS
Warrants to purchase 2,242,250 shares of Common Stock were outstanding at
April 30, 1997 and July 31, 1996. The warrants expire at various dates
ranging from November 1997 to October 2001, at prices ranging from $.75 to
$4.44. Following the acquisition of LaTex, all outstanding warrants were
converted to Alliance warrants with like terms and conditions.
(12) PREFERRED STOCK
The Series A Convertible Preferred Stock (i) pays annual dividends at the
rate of $0.20 per share payable quarterly in cash (or, if payment of cash
dividends was prohibited by the senior lender, payable in additional shares
of Series A Convertible Preferred Stock), (ii) has no voting rights except
as otherwise required under Delaware law, (iii) has a liquidation
preference over shares of Common Stock of $10.00 per share plus accrued and
unpaid dividends, (v) is convertible by the holder into shares of Common
Stock at a conversion price of $3.33 per share, and (vi) has 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 and July 31, 1996 is $4,570,510 and
$4,498,280, respectively.
The Series B Convertible Preferred Stock (i) pays annual dividends at the
rate of $1.20 per share payable quarterly in cash (or, if payment of cash
dividends was prohibited by the senior lender, payable in additional shares
of Series B Convertible Preferred Stock), (ii) has no voting rights except
as otherwise required under Delaware law, (iii) has a liquidation
preference over shares of Series A Convertible Preferred Stock and Common
Stock of $10.00 per share plus accrued and unpaid dividends, and (iv) is
convertible by the holder into shares of Common Stock at an initial
conversion price of $1.50 per share, subject to adjustment from time to
time to prevent dilution. By separate agreement, the Group has 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
and July 31, 1996 is $5,245,370 and $4,800,250, respectively.
F-18
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, CONTINUED
As a result of the merger with Alliance, (see note 2) all preferred stock
was converted to Alliance shares subsequent to April 30, 1997.
Preferred Stock activity during the periods indicated follows:
Class A Class B
------- -------
Balance at July 31, 1994 - -
Issued for acquisition of Germany
Oil Company 438,838 370,000
Issued for dividends 2,180 11,100
------- -------
Balance at July 31, 1995 441,018 381,100
Issued for litigation settlement - 50,000
Issued for dividends 8,810 48,925
------- -------
Balance at July 31, 1996 449,828 480,025
Issued for dividends 7,223 44,512
------- -------
Balance at April 30, 1997 457,051 524,537
======= =======
(13) ACQUISITION OF GERMANY OIL COMPANY
On March 31, 1995 through a series of transactions, the Group acquired all
of the issued and outstanding stock of Germany Oil Company (Germany) in
exchange for 250,000 and 11,800 Common and Series A Convertible Preferred
Stock, respectively. The ratio of the number of shares received by the
stockholders of Germany was determined through arms length negotiations
between the Chairman of the Board and President of LaTex and the President
of Germany. 370,000 shares of the Series B Convertible Preferred Stock
were issued and $8,900,000 in cash was paid to retire a volumetric
production payment and acquire all of the related contract rights,
mortgages, vendor liens and security interests. In addition, $1,742,294
was paid in cash and 438,838 shares of Series A Convertible Preferred Stock
and $87,998 in notes payable were issued to acquire and retire certain
indebtedness of Germany. The transaction was accounted for as a purchase
accordingly, operations from date of acquisition have been included in the
accompanying financial statements.
The fair value of assets and liabilities of Germany at date of acquisition
follows:
Current assets $ 773,088
Current liabilities (4,309,479)
Oil and gas properties 22,504,593
-----------
$18,968,202
===========
F-19
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(14) 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 the Group's Series B Senior Convertible Preferred Stock which are
convertible (subject to adjustment) into 333,333 shares of the Group's
Common Stock, 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 1996
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
F-20
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, CONTINUED
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 has been made in the consolidated financial statements for
the nine months ended April 30, 1997.
Germany Oil Company was named as a defendant in three wrongful death
actions which were settled subsequent to April 30, 1997. The Group's
liability insurance was adequate to cover the loss.
In addition to the foregoing 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, 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, 1997, future minimum lease
commitments were approximately as follows:
Year ending April 30
--------------------
1998 $171,000
1999 14,000
Rent expense under all operating leases was $160,780, $235,732, and
$233,066 during the nine months ended April 30, 1997, and the years ended
July 31, 1996, and 1995, 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.
(15) 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 was
required to dispose 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 100,000 shares of LaTex 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 controller by John R. Martinson, a Director, concluding that the
transaction was fair to the Group's stockholders.
F-21
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, CONTINUED
The Group was previously a party to an agreement with WRI, pursuant to
which WRI acted as a financial advisor to the Group. Under the agreement,
the Group agreed to pay WRI a success fee in connection with any merger or
acquisition involving a party introduced to the Group by WRI, and any
financing facility arranged by WRI. In addition, the Group has issued to
WRI six year common stock purchase warrants to purchase warrants to
purchase 460,858 shares at $.87 per share, of which 374,877 are outstanding
as of April 30, 1997. 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 100,000 shares of the Common Stock for
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.
(16) 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 2,293 BBLS per
month. Under the commodity swap transaction, the price of gas was fixed at
$1.806 MMBTU based on 139,412 MMBTU per month. These volumes cover
approximately 90% of the groups monthly volumes.
As a result of substantial uncertainties regarding the Group's ability to
perform in accordance with the price protection program, and as allowed by
the Alliance Credit Agreement, the oil and gas pricing agreements were
terminated subsequent to April 30, 1997 for $1,128,000. The loss related to
the buyout was recognized in its entirety during the period ended October
27, 1997, the date the group entered into a new price protection agreement.
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. Under the
agreement, variable interest rates are swapped to achieve a fixed rate of
7.49% based on a fixed amortization schedule determined at loan
origination. The notional principal outstanding at April 30, 1997 was
$22,179,000 and this will have reduced at termination to $9,769,000. The
hedging gains/losses are included in interest expense.
(17) 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. Subsequent to April 30,
1997, the Group sold additional properties for approximately $5,000,000.
Proceeds of such sales were credited to the full cost pool.
F-22
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(18) BUSINESS SEGMENTS
The Group's operations involve oil and gas exploration, production and
lease operations. Additionally, crude oil and crude oil by-products are
marketed through a wholly-owned subsidiary. Intersegment sales are made at
prices prevailing in the industry at the time of the sale.
The following table sets forth information with respect to the industry
segments of the Group as of and for the nine months ended April 30, 1997
and the years ended July 31, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(AS RESTATED) (AS RESTATED)
<S> <C> <C> <C>
Revenues:
Oil and gas production $ 5,698 11,980 8,586
Marketing 2,227 4,198 4,246
------- ------ ------
Total revenues 7,925 16,178 12,832
Intersegment (2,080) (3,658) (3,023)
------- ------ ------
$ 5,845 12,520 9,809
======= ====== ======
Operating income (loss):
Oil and gas production $(2,189) (3,119) (2,002)
Marketing (122) 179 231
Other - 4 93
------- ------ ------
Net loss from operations $(2,311) (2,936) (1,678)
======= ====== ======
</TABLE>
The Group sold 16% of its consolidated oil and gas revenue to one purchaser
during the year ended July 31, 1996. The Group had no other purchasers in
excess of 10% of consolidated oil and gas revenue in any of the other
periods presented.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(AS RESTATED) (AS RESTATED)
<S> <C> <C> <C>
Identifiable total assets:
Oil and gas production $28,454 29,357 35,997
Marketing 112 429 606
Other 2,291 6,707 9,946
------- ------ ------
$30,857 36,493 46,549
======= ====== ======
Depreciation, depletion, and amortization:
Oil and gas production $ 1,539 3,508 3,359
Marketing 2 3 5
------- ------ ------
$ 1,541 3,511 3,364
======= ====== ======
Capital expenditures:
Oil and gas production $ 348 3,862 4,604
Other 2 15 76
------- ------ ------
$ 350 3,877 4,680
======= ====== ======
</TABLE>
F-23
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(19) 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 nine
months ended April 30, 1997 and the years ended July 31, 1996 and 1995.
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>
1997 1996 1995
---- ---- ----
(AS RESTATED) (AS RESTATED)
<S> <C> <C> <C>
Revenues $ 5,698,000 11,980,000 8,585,000
Production costs (2,550,000) (4,601,000) (4,071,000)
Gross production taxes (567,000) (871,000) (572,000)
Cessation of overseas exploration - (3,447,000) -
Depreciation and depletion (1,457,000) (3,208,000) (3,181,000)
----------- ---------- ----------
Income (loss) from operations
before income taxes 1,124,000 (147,000) 761,000
Income tax expense - - -
----------- ---------- ----------
Results of operations (excluding corporate
overhead and interest costs) $ 1,124,000 (147,000) 761,000
=========== ========== ==========
</TABLE>
CAPITALIZED COSTS AND COSTS INCURRED RELATING TO OIL AND GAS ACTIVITIES
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(AS RESTATED) (AS RESTATED)
<S> <C> <C> <C>
United States $36,107,000 41,379,000 40,491,000
Foreign - - 3,363,000
----------- ----------- ----------
Total capitalized costs 36,107,000 41,379,000 43,854,000
Less accumulated depreciation and depletion (9,432,000) (12,022,000) (7,857,000)
----------- ----------- ----------
Net capitalized costs $26,675,000 29,357,000 35,997,000
=========== =========== ==========
Costs incurred during the year:
Exploration costs:
United States $ - - -
Foreign - 84,000 2,210,000
----------- ----------- ----------
$ - 84,000 2,210,000
=========== =========== ==========
Development costs:
United States $ 348,000 978,000 2,394,000
Foreign - - -
----------- ----------- ----------
$ 348,000 978,000 2,394,000
=========== =========== ==========
Purchase of minerals in place:
United States $ - 2,800,000 22,505,000
Foreign - - -
----------- ----------- ----------
$ - 2,800,000 22,505,000
=========== =========== ==========
</TABLE>
F-24
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, CONTINUED
ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES
The estimates of proved oil and gas reserves were prepared by independent
petroleum engineers. The Group emphasizes that reserve estimates are
inherently imprecise. Accordingly, the estimates are expected to change as
more current information becomes available. In addition, a portion of the
Group's proved reserves are undeveloped, which increases the imprecision
inherent in estimating reserves which may ultimately be produced.
Proved reserves are estimated quantities of crude oil, natural gas, and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions. Proved
developed reserves are those which are expected to be recovered through
existing wells with existing equipment and operating methods.
The following is an analysis of the Group's proved oil and gas reserves:
Oil (Mbbls) Gas (MMcf)
----------- ----------
Proved reserves at July 31, 1994 4,519.9 10,933
Revisions of previous estimates (195.0) (1,091)
Production (359.0) (2,612)
Purchases of reserves-in-place 1,562.3 21,202
Sales of reserves-in-place (96.4) (319)
------- ------
Proved reserves 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
======= ======
Proved developed reserves at:
July 31, 1995 4,036.4 27,730
======= ======
July 31, 1996 4,952.9 27,757
======= ======
April 30, 1997 5,166.9 25,461
======= ======
During the nine months ended April 30, 1997, the Group sold oil and gas
properties for approximately $1,500,000. Those properties were not
included in the reserve appraisal at July 31, 1996.
F-25
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
NOTES TO 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. Tax 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>
Nine Months Year Year
Ended Ended Ended
April 30, 1997 July 31, 1996 July 31, 1995
-------------- ------------- -------------
<S> <C> <C> <C>
Future cash inflows $139,587,000 181,566,000 99,585,000
Future production and
development costs (64,086,000) (79,763,000) (43,794,000)
------------ ----------- -----------
Future net cash inflows before
income tax expense 75,501,000 101,803,000 55,791,000
Future income tax expense (11,477,000) (21,193,000) (2,773,000)
------------ ----------- -----------
Future net cash flows 64,024,000 80,610,000 53,018,000
10% annual discount for estimated
timing of cash flows (28,656,000) (36,721,000) (24,216,000)
------------ ----------- -----------
Standardized measure of discounted
future net cash flows $ 35,368,000 43,889,000 28,802,000
============ =========== ===========
</TABLE>
F-26
<PAGE>
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, CONTINUED
The changes in standardized measure of discounted future net cash flows
follows:
<TABLE>
<CAPTION>
Nine Months Year Year
Ended Ended Ended
April 30, 1997 July 31, 1996 July 31, 1995
-------------- ------------- -------------
<S> <C> <C> <C>
Beginning of year $ 43,889,000 28,802,000 14,277,000
Increases (decreases)
Sales, net of production costs (4,074,000) (6,973,000) (3,308,000)
Net change in sales prices, net
of production costs (12,690,000) 21,444,000 (9,168,000)
Changes in estimated future
development costs (280,000) (3,419,000) 1,293,000
Revisions of previous quantity
estimates 1,282,000 6,601,000 (670,000)
Accretion of discount 5,350,000 2,691,000 2,342,000
Net change in income taxes 5,345,000 (8,725,000) 3,675,000
Purchases of reserves-in-place - 2,093,000 20,700,000
Sales of reserves-in-place - (704,000)
Changes of production rates
(timing) and other (3,454,000) 1,375,000 365,000
------------ ---------- ----------
End of period $ 35,368,000 43,889,000 28,802,000
============ ========== ==========
</TABLE>
F-27
<PAGE>
The Board of Directors:
We have audited the consolidated balance sheets of Alliance Resources Plc and
subsidiaries as of April 30, 1997 and July 31, 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the nine months ended April 30, 1997, and for each of the years in the two year
period ended July 31, 1996 and have reported thereon under date of April 29,
1998. The aforementioned consolidated financial statements and our auditor
report thereon are included in the Company's annual report on Form 10-K for the
nine months ended April 30, 1997. As stated in Note 3 to those financial
statements, the Company changed its method of accounting for oil and gas
properties and expenditures to the full cost method from the successful efforts
method of accounting. The newly adopted accounting principle is preferable in
the circumstances because management believes the full cost method better
reflects the economics of the Company due to its change in operating strategy
from primarily an acquisition and production company to an exploration,
development, and production company. Further, the full cost method of accounting
is the method used by many independent oil and gas companies of comparable size
and allows investors to better measure the performance of the Company. In
accordance with your request, we have reviewed and discussed with Company
officials the circumstances and business judgement and planning upon which the
decision to make this change in the method of accounting was based.
With regard to the aforementioned accounting method, authoritative criteria have
not been established for evaluating the preferability of one acceptable method
of accounting over another acceptable method. However, for purposes of Alliance
Resources Plc's compliance with the requirements of the Securities and Exchange
Commission, we are furnishing this letter.
Based on our review and discussion, with reliance on management's business
judgement and planning we concur that the adoption of the new method of
accounting is preferable in Alliance Resources Plc's circumstances.
KPMG Audit Plc
London England
April 29, 1998.
F-28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 12-MOS
<FISCAL-YEAR-END> APR-30-1997 JUL-31-1996
<PERIOD-START> JUL-31-1996 AUG-01-1995
<PERIOD-END> APR-30-1997 JUL-31-1996
<CASH> 72,948 19,337
<SECURITIES> 0 0
<RECEIVABLES> 2,119,406 3,840,129
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 2,246,530 4,062,546
<PP&E> 36,962,822 42,233,799
<DEPRECIATION> (10,254,970) (12,761,131)
<TOTAL-ASSETS> 30,857,487 36,493,436
<CURRENT-LIABILITIES> 11,866,608 32,032,629
<BONDS> 0 0
0 0
0 0
<COMMON> 209,140 191,240
<OTHER-SE> (124,541) 3,654,567
<TOTAL-LIABILITY-AND-EQUITY> 30,857,487 36,493,436
<SALES> 5,698,490 11,979,982
<TOTAL-REVENUES> 5,844,871 12,520,138
<CGS> 3,117,341 5,472,130
<TOTAL-COSTS> 8,155,557 15,456,340
<OTHER-EXPENSES> (24,286) 5,540,188
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,102,933 2,829,700
<INCOME-PRETAX> (4,389,333) (11,330,376)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,389,333) (11,330,376)
<EPS-PRIMARY> (0.25) (0.66)
<EPS-DILUTED> (0.25) (0.66)
</TABLE>
