<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
XX SECURITIES EXCHANGE OF 1934
--
For the quarterly period ended October 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
--
For the transition period from _____________ to ________________
Commission file number : 333-19013
Alliance Resources PLC
England and Wales 73-1405081
(State or other jurisdiction of (IRS Employer Identification No.)
Incorporation or organization)
4200 East Skelly Drive, Suite 1000, Tulsa, Oklahoma 74135
(Address of principal executive offices) (Zip Code)
918-491-1100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the
preceding 12 months (or for such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
As of February 28, 1999, there were 47,487,142 shares of the Registrant's
ordinary shares of common stock and 10,000,000 convertible restricted voting
shares of the Registrant.
<PAGE>
ALLIANCE RESOURCES Plc AND SUBSIDIARIES
Index to Form 10-Q for the Quarterly Period
Ended October 31, 1998
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements. Page
Consolidated Condensed Balance Sheets -
October 31, 1998 and April 30, 1998 2
Consolidated Condensed Statements of Operations -
Three months and Six months ended
October 31, 1998 and 1997 4
Consolidated Condensed Statement of Stockholders' Equity -
Six months ended October 31, 1998 5
Consolidated Condensed Statements of Cash Flows -
Six months ended October 31, 1998 and 1997 6
Notes to Consolidated Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 9
PART II - OTHER INFORMATION 16
Item 1. Legal Proceedings
The information called for by Item 3. Default Upon Senior
Securities, Item 5. Other information has been omitted as either
inapplicable or because the answer thereto is negative.
Item 2. Changes in Securities
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibit and Reports on Form 8-K
SIGNATURES 18
Cautionary Statement Regarding Forward Looking Statements
In the interest of providing the Company's stockholders and
potential investors with certain information regarding the Company's
future plans and operations, certain statements set forth in this
Form-10Q relate to management's future plans and objectives. Such
statements are "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Although any
forward-looking statements contained in this Form 10-Q or otherwise
expressed by or on behalf of the Company are, to the knowledge and
in the judgement of the officers and directors of the Company,
expected to prove true and to come to pass, management is not able
to predict the future with absolute certainty. Forward-looking
statements involve known and unknown risks and uncertainties which
may cause the Company's actual performance and financial results in
future periods to differ materially from any projection, estimate or
forecasted result. These risks and uncertainties include, among
other things, volatility of oil and gas prices, competition, risks
inherent in the Company's oil and gas operations, the inexact nature
of interpretation of seismic and other geological and geophysical
data, imprecision of reserve estimates, the Company's ability to
replace and expand oil and gas reserves, and such other risks and
uncertainties described from time to time in the Company's periodic
reports and filings with the Securities and Exchange Commission.
Accordingly, stockholders and potential investors are cautioned that
certain events or circumstances could cause actual results to differ
materially from those projected, estimated, or predicted.
1
<PAGE>
ITEM 1. Financial Statements
ALLIANCE RESOURCES Plc AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
<TABLE>
<CAPTION>
October 31, 1998 April 30, 1998
(unaudited) (audited)
---------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 2,602,379 $ 408,439
Accounts receivable - trade 1,881,403 2,132,654
Other current assets 28,743 73,977
---------------- ---------------
Total current assets 4,512,525 2,615,070
---------------- ---------------
Property, plant, and equipment, at cost:
Oil and gas properties (using full cost method)
US Properties 42,954,409 43,200,388
UK Properties 28,153,272 -
Other depreciable assets 1,041,188 1,029,118
---------------- ---------------
72,148,869 44,229,506
Less accumulated depreciation and depletion (15,563,453) (14,421,400)
---------------- ---------------
Net property, plant and equipment 56,585,416 29,808,106
---------------- ---------------
Other assets:
Other assets 54,910 144,989
Deferred acquisition costs - 970,305
Deferred loan costs, less accumulated amortization 3,406,439 1,221,650
---------------- ---------------
Total other assets 3,461,349 2,336,944
---------------- ---------------
TOTAL ASSETS $ 64,559,290 $ 34,760,120
================ ===============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
2
<PAGE>
ALLIANCE RESOURCES Plc AND SUBSIDIARIES
Consolidated Condensed Balance Sheets, Continued
<TABLE>
<CAPTION>
October 31, 1998 April 30, 1998
(unaudited) (audited)
---------------- --------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 10,135,131 $ 8,972,704
Accrued expenses payable 506,076 847,190
Current portion long-term debt - 2,275,000
---------------- --------------
Total current liabilities 10,641,207 12,094,894
Long-term Liabilities:
Long-term debt-less current portion (net of
discount of $7,445,000) 36,806,876 18,791,762
Other liabilities 3,568 139,626
Convertible subordinated unsecured loan notes 1,550,700 1,550,700
---------------- --------------
Total long-term liabilities 38,361,144 20,482,088
---------------- --------------
Total liabilities 49,002,351 32,576,982
---------------- --------------
Stockholders' equity:
Ordinary Shares-par value 40 pence;
46,000,000 shares authorized, 31,209,408
issued and outstanding
at April 30, 1998 - 20,114,634
---------------- --------------
Ordinary Shares - par value 1 pence;
415,001,376 authorized, 47,487,142
issued and outstanding
at October 31, 1998 768,823 -
---------------- --------------
Deferred Shares - par value 1 pence;
1,414,998,624 authorized,
1,217,166,912 issued and outstanding
at October 31, 1998 19,611,767 -
---------------- --------------
Convertible Shares - par value 1 pence;
10,000,000 authorized, 10,000,000
issued and outstanding
at October 31, 1998 278,000 -
---------------- --------------
Additional paid-in capital 21,042,094 5,911,050
Accumulated deficit (26,143,745) (23,842,546)
---------------- --------------
Total stockholders' equity 15,556,939 2,183,138
---------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 64,559,290 $ 34,760,120
================ ==============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE>
ALLIANCE RESOURCES Plc AND SUBSIDIARIES
Consolidated Condensed Statement of Operations
<TABLE>
<CAPTION>
Three Three Six Six
Months Ended Months Ended Months Ended Months Ended
October 31, 1998 October 31, 1997 October 31, 1998 October 31, 1997
(Unaudited) ( Unaudited) (Unaudited) ( Unaudited)
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Oil and gas revenue $ 2,031,805 $ 3,248,700 $ 3,949,771 $ 5,976,036
Lease operations and management fees - - - -
-------------------------------------------------------------------------
Total operating income 2,031,805 3,248,700 3,949,771 5,976,036
-------------------------------------------------------------------------
Operating expenses:
Lease operating expense 493,204 1,491,276 1,462,559 2,664,920
Depreciation, depletion, and amortization 632,697 777,907 1,142,052 1,430,396
Loss on commodity deriviatives - 859,429 - 1,128,000
General and administrative expense 828,410 909,860 1,578,672 2,175,709
-------------------------------------------------------------------------
Total operating expenses 1,954,311 4,038,472 4,183,283 7,399,025
-------------------------------------------------------------------------
Net operating gain/(loss) 77,494 (789,772) (233,512) (1,422,989)
Other income (expense):
Gain on sale of assets - 165 (9,184) 18,496
Interest expense (550,790) (609,127) (1,219,240) (1,291,200)
Write-off of deferred loan costs (869,906) - (869,906) -
Interest income 6,857 15,110 12,116 35,719
Miscellaneous income (expense) (82,653) 79,051 49,741 404,204
-------------------------------------------------------------------------
Net loss from continuing operations before
income taxes (1,418,998) (1,304,573) (2,269,985) (2,255,770)
Income tax expense - - - -
-------------------------------------------------------------------------
Net loss (1,418,998) (1,304,573) (2,269,985) (2,255,770)
-------------------------------------------------------------------------
Net loss for common shareholders $(1,418,998) $(1,304,573) $(2,269,985) $(2,255,770)
=========================================================================
Loss per share for common shareholders $(0.05) $(0.04) $(0.07) $(0.07)
=========================================================================
Weighted average number of shares
outstanding 31,390,272 31,137,386 31,299,840 31,094,994
=========================================================================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
ALLIANCE RESOURCES Plc AND SUBSIDIARIES
Consolidated Condensed Statements of Stockholders' Equity
Six Months Ended October 31, 1998
<TABLE>
<CAPTION>
Ordinary Shares Deferred Shares Convertible Shares
--------------- --------------- ------------------
Shares Par Shares Par Shares Par
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1998 31,209,408 $ 20,114,634 - $ - - $ -
Subdivide stock - $(19,611,767) 1,217,166,912 19,611,767 - -
Issued for Difco acquisition - - - - 10,000,000 278,000
Issued for financial advisory services 615,385 10,000 - - - -
Issued to lender 15,545,454 254,000 - - - -
Warrants issued to lender - - - - - -
Additional shares issued in connection 116,895 1,956 - - - -
with LaTex acquisition
Foreign Exchange - - - - - -
Net loss current period - - - - - -
-------------------------------------------------------------------------------------------
Balance October 31, 1998 47,487,142 $ 768,823 1,217,166,912 $ 19,611,767 10,000,000 $ 278,000
===========================================================================================
<CAPTION>
Additional Retained Earnings Total
Paid-In (Accumulated Stockholders'
Capital Deficit) Equity
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at April 30, 1998 5,911,050 $ (23,842,546) $ 2,183,138
Subdivide stock - - -
Issued for Difco acquisition $ 6,930,000 $ - 7,208,000
Issued for financial advisory services 320,000 - 330,000
Issued to lender 6,398,000 - 6,652,000
Warrants issued to lender 1,335,000 - 1,335,000
Additional shares issued in connection 148,044 - 150,000
with LaTex acquisition
Foreign Exchange - (31,214) (31,214)
Net loss current period - (2,269,985) (2,269,985)
-----------------------------------------------------------------------------
Balance October 31, 1998 $ 21,042,094 $ (26,143,745) $ 15,556,939
=============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
ALLIANCE RESOURCES Plc AND SUBSIDIARIES
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Six Six
Months Ended Months Ended
October 31, 1998 October 31, 1997
(Unaudited) (Unaudited)
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,269,985) $(2,255,770)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation, amortization, and depletion 1,142,052 1,430,396
Gain on sale of assets 9,184 (18,496)
Write-off of deferred loan costs 869,906 -
Amortization of deferred loan costs 351,744 281,694
Changes in assets and liabilities, net of effects
from acquisition:
Accounts receivable 220,037 (26,237)
Accounts payable (822,183) (1,613,144)
Accrued expenses payable (341,114) 8,752
Other current assets 135,313 (246,563)
Deposits and other assets - 1,264,129
Other liabilities (136,058) (1,349,972)
--------------- -------------
Net cash used in operating activities (841,104) (2,525,211)
--------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Difco (19,680,356) -
Purchases of property and equipment (85,084) (2,289,926)
Proceeds from sale of property and equipment 379,809 4,998,501
Effect of LaTex Acquisition - 192,819
--------------- -------------
Net cash provided by (used in) investing activities (19,385,631) 2,901,394
--------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 38,141,876 -
Payment of long term debt (22,566,762) -
Proceeds from notes payable 1,500,000 2,355,340
Deferred loan costs (1,014,439) (428,391)
Proceeds from issuance of common stock 6,360,000 -
--------------- -------------
Net cash provided by financing activities 22,420,675 1,926,949
--------------- -------------
Net increase in cash and cash equivalents 2,193,940 2,303,132
Cash and cash equivalents at beginning of period 408,439 72,948
--------------- -------------
Cash and cash equivalents at end of period $ 2,602,379 $ 2,376,080
--------------- -------------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
6
<PAGE>
ALLIANCE RESOURCES Plc AND SUBSIDIARIES
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Six Six
Months Ended Months Ended
October 31, 1998 October 31, 1997
(Unaudited) (Unaudited)
---------------- ----------------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period of:
Interest $ 1,170,060 $ 730,850
================ ================
Supplemental schedules of noncash investing and financing activities:
Ordinary shares issued on acquisition of LaTex $ - $ 4,039,339
Convertible shares issued to Difco shareholders 7,208,000 -
Ordinary shares issued for acquisition of overriding
royalty interest - 2,371,300
Ordinary shares issued for settlement of various advisory and
banking fees 772,000 203,000
Ordinary shares due in settlement of advisory fees - 150,000
Convertible loan notes issued for acquisition of overriding
royalty interest - 1,400,700
Convertible loan notes due in settlement of financing fees - 150,000
Foreign exchange adjustment 31,214 15,162
Overriding royalty interest conveyed to bank 2,100,000 -
</TABLE>
See accompanying notes to consolidated condensed financial statements.
7
<PAGE>
Alliance Resources PLC
Notes to Consolidated Condensed Financial Statements
A. Summary of Significant Accounting Policies
Basis of Presentation
- ---------------------
Alliance Resources PLC (the "Company" or "Alliance") is organized as a
public limited company under the laws of England and Wales. Alliance is a
London-based holding company of a group whose principal activities are the
exploration, development, and production of oil and gas and the acquisition of
producing oil and gas properties. Alliance was incorporated and registered
under the laws of England and Wales on August 20, 1990. Alliance's corporate
headquarters are at Kingsbury House, 15-17 King Street, London SW1Y 6QU,
England, but its operations office is located at 4200 East Skelly Drive, Suite
1000, Tulsa, Oklahoma 74135.
Interim Reporting
- -----------------
The interim consolidated condensed financial statements reflect all
adjustments, which, in the opinion of management, are necessary for a fair
presentation of the results for the interim periods presented. All such
adjustments are of a normal recurring nature. The results of operations for the
six months ended October 31, 1998, are not necessarily indicative of the results
that may be expected for the year ended April 30, 1999. For further
information, refer to the Company's Annual Report on Form 10-K for the year
ended April 30, 1998.
B. Significant Events
On October 30, 1998, Alliance completed its acquisition (the "Acquisition")
of Difco Limited ("Difco"). Alliance acquired all of the capital stock of Difco
and, indirectly a contract to acquire 10% of Burlington Resources, Inc.'s
("Burlington") interest in the East Irish Sea Properties ("U.K. Interests").
The Difco shareholders received approximately 8.7% of the outstanding shares of
the Company and could receive up to 29.6% of the outstanding shares of the
Company based upon the production from, or reserves attributable to the U.K
Interests.
The Company then acquired, through Difco, 10% of Burlington's interest in
the East Irish Sea Properties for cash consideration of approximately
$17,000,000. In addition, the Company issued to one of its lenders 15,000,000
ordinary shares and loan notes with a face value of $9,750,000 for a total
consideration of $10,000,000 and 545,454 ordinary shares in payment of a fee of
$292,000. The Company paid another lender a cash fee of $700,000 and granted
the lender warrants to purchase 3,275,000 ordinary shares at a price of 1p per
share and an overriding royalty interest in the U.K. Interests of 0.3% beginning
January 1, 2001. The overriding royalty interest will entitle the lender to
receive a payment equal to the specified percentage of the net revenues
8
<PAGE>
Alliance Resources PLC
Notes to Consolidated Condensed Financial Statements
generated by the U.K. Interests. The overriding royalty interest would the have
the effect of reducing the Company's revenues from the U.K. Interests. The
Company also issued to its financial advisor 615,385 ordinary shares in payment
of a fee of $330,000.
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
Results of Operations
- ---------------------
The following is a discussion of the results of operations of the Company
for the three and six months ended October 31, 1998. This discussion should be
read in conjunction with the Company's unaudited Consolidated Condensed
Financial Statements above.
The factors which most significantly affect the Company's results of
operations are (i) the sales prices of crude oil and natural gas, (ii) the level
of total sales volumes, (iii) the level of lease operating expenses, and (iv)
the level of and interest rates on borrowings. Total sales volumes and the
level of borrowings are significantly impacted by the degree of success the
Company experiences in its efforts to acquire oil and gas properties and its
ability to maintain or increase production from its existing oil and gas
properties through its development activities. The following table reflects
certain historical operating data for the periods presented:
Six Months Ended October 31
----------------------------
1998 1997
---- ----
Net Sales Volumes:
Oil (Mbbls) 154 218
Natural Gas (MMcf) 828 998
Oil Equivalent (MBOE) 292 382
Average Sales Prices:
Oil (per Bbl) $15.70 (1) $16.63 (2)
Natural Gas (per Mcf) $ 1.88 (1) $ 2.38 (2)
Operating Expenses per
Equivalent barrel of Net Sales:
Lease operating $ 4.36 $ 7.11
Severance tax $ 0.64 $ 1.00
Depreciation, depletion, and amortization $ 3.91 $ 4.48
General and administrative $ 5.41 $ 5.69
9
<PAGE>
Alliance Resources PLC
Notes to Consolidated Condensed Financial Statements
(1) After giving effect to the impact of the Company's commodity price hedging
arrangements with its principal lender. Without such hedging arrangements,
the average sales prices for the six months ended October 31, 1998 would
have been $10.66/bbl for oil and $1.84/mcf for gas.
(2) On May 15, 1997, the commodity price hedging agreements with the principal
lender were terminated through a buyout, the cost of which was financed by
a drawdown under the terms of the Alliance Credit Agreement. Hence, the
table reflects actual realized prices for the six months ended October 31,
1997.
Average sales prices received by the Company for oil and gas have
historically fluctuated significantly from period to period. Fluctuations in
oil prices during these periods reflect market uncertainties as well as concerns
related to the global supply and demand for crude oil. Average gas prices
received by the Company fluctuate generally with changes in the spot market for
gas. Relatively modest changes in either oil or gas significantly impact the
Company's results of operations and cash flow and could significantly impact the
Company's borrowing capacity.
Three Months Ended October 31, 1998 compared to the Three Months Ended
-----------------------------------------------------------------------
October 31, 1997
----------------
Total revenue from the Company's operations for the quarter ended October
31, 1998, was $2,031,805 compared to $3,248,700 for the quarter ended October
31, 1997. Revenue decreased over the comparable period a year earlier due
principally to the effects of lower sales of oil equivalent volumes. The
primary reason for the decline in sales volumes was due to the sale of certain
marginal non-core properties during the latter portion of the previous fiscal
year.
Total operating expenses decreased to $1,954,311 for the quarter ended
October 31, 1998, compared to $4,038,472 for the same period in 1997. This
decrease was primarily due to a significant decrease in lease operating
expenses. Lease operating expenses decreased to $493,204 for the three-month
period ended October 31, 1998, compared to $1,491,276 for the same period in
1997 due to the completion of remedial workovers and the sale of non-operated,
non-strategic wells in fiscal year 1998. The other significant decrease in
operating expenses was due to the decrease in loss on commodity derivatives.
This decrease was primarily due to the buy-out in 1997 of a previous commodity
hedge ($1,128,000). Depreciation, depletion and amortization decreased to
$632,697 from $777,907 a year earlier primarily as a result of lower sales
volumes. General and administrative expenses decreased to $828,410 during the
quarter ended October 31, 1998, from $909,860 for the quarter ended October 31,
1997, primarily due to the continued efforts by management to reduce corporate
overhead expenses.
10
<PAGE>
Alliance Resources PLC
Notes to Consolidated Condensed Financial Statements
The net operating gain of $77,494 for the quarter ended October 31, 1998,
compares favorably with the net operating loss of $789,772 for the same period
in 1997. Additionally, miscellaneous expenses increased to $82,653 for the 1998
period compared to miscellaneous income of $79,051 for the three months ended
October 31, 1997. The write-off of deferred financing costs related to the
previous credit facility, which was revised for the Difco acquisition, was
$869,906 for the 1998 period and $0 for the 1997 period. As a result, net loss
increased to $1,418,998 in the three-month period ending October 31, 1998,
compared to a net loss of $1,304,573 in the comparable period during 1997.
Six Months Ended October 31, 1998 compared to the Six Months Ended
------------------------------------------------------------------
October 31, 1997
----------------
Total revenue from the Company's operations for the six months ended
October 31, 1998, was $3,949,771 compared to $5,976,036 for the six months ended
October 31, 1997. Revenue decreased significantly over the comparable period a
year earlier due principally to lower oil sales volumes and realized gas prices,
property disposals and the depletion of producing reserves. Revenues in the
1998 period were adversely affected by the Company's decision to curtail oil
sales in the South Carlton field in Alabama due to low posted oil prices and
property disposals in the last quarter of 1997 also contributed to the reduction
in current gas volumes.
Total operating expenses decreased to $4,183,283 for the six months ended
October 31, 1998, compared to $7,399,025 for the same period in 1997. This
decrease was primarily due to the buy-out in 1997 of a previous commodity hedge
($1,128,000) and a significant decrease in lease operating expenses. Lease
operating expenses decreased to $1,462,559 in the 1998 period compared to
$2,664,920 for the six-month period ended October 31, 1997. This decrease was
mainly due to the completion of remedial workovers and the sale of non-operated,
non-strategic properties in fiscal year 1998. Depreciation, depletion, and
amortization decreased to $1,142,052 from $1,430,396 a year earlier mainly due
to lower sales volumes. General and administrative expenses decreased from
$2,175,709 during the six months ended October 31, 1997, compared with
$1,578,672 during the 1998 period. The decrease was a result of continuing
efforts by management to reduce corporate overhead expenses.
In addition to the decrease in the net operating loss to $233,512 for the
six months ended October 31, 1998, from $1,422,989 for the same period in 1997,
there was also a significant decrease in miscellaneous income/expense from
$404,204 during the six months ended October 31, 1997, compared with $49,741
during the 1998 period. This decrease was mainly due to the settlement of
several trade payable balances during the 1997 period. The write-off of
deferred financing costs relating to the previous credit facility, which was
revised for the Difco acquisition, was $869,906 for the 1998 period and $0 for
the 1997 period. As a result, net loss increased to $2,269,985 in the six month
11
<PAGE>
Alliance Resources PLC
Notes to Consolidated Condensed Financial Statements
period ending October 31, 1998, compared to a net loss of $2,255,770 in the
comparable period during 1997.
Capital Resources and Liquidity
- -------------------------------
The Company's capital requirements relate primarily to the development of
its oil and gas properties and undeveloped leasehold acreage, exploration
activities, and the servicing of the Company's debt. In general, because the
Company's oil and gas reserves are depleted by production, the success of its
business strategy is dependent upon a continuous exploration and development
program and the acquisition of additional reserves.
Cash Flows and Liquidity. At October 31, 1998, Alliance had current assets
------------------------
of $4.513 million and current liabilities of $10.641 million, which resulted in
a working capital deficit of $6.128 million. The working capital deficit has
been reduced from $9.480 million at year ended April 30, 1998. The $3.352
million improvement was primarily due to the increase in cash balances resulting
from loan drawdowns and a reclassification of bank debt from current to long
term. The current portion of long-term debt was $0 at October 31, 1998,
compared to $2.275 million at April 30, 1998.
For the six months ended October 31, 1998, net cash used in the Company's
operating activities was $.841 million compared to cash used of $2.525 million
for the six months ended October 31, 1997. This improvement in cash flow from
operating activities is substantially due to reduced expenditures on workovers
and overheads.
Investing activities of the Company used $19.386 million in net cash flow
for the six months ended October 31, 1998, compared to $2.901 million generated
for the six months ended October 31, 1997. The difference was principally due
to the Difco acquisition. Financing activities provided $22.421 million for the
six months ended October 31, 1998, compared to $1.927 million for the six months
ended October 31, 1997. The improvement was due primarily to the issuance of
long-term debt for $38.142 million and the issuance of common stock for $6.360
million offset by a payment of long term debt of $22.567 million during the 1998
period.
Overall, cash and cash equivalents improved by $2.194 million in the six
months ended October 31, 1998, compared to $2.303 million in the 1997 period.
Capital Expenditures. The timing of most of the Company's U.S. capital
--------------------
expenditures is discretionary. Currently, there are no material long-term
commitments associated with the Company's U.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
funds available under its credit facility 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
12
<PAGE>
Alliance Resources PLC
Notes to Consolidated Condensed Financial Statements
Company's internally generated cash flows should be insufficient to meet its
banking or other obligations, the Company may reduce the level of discretionary
U.S. capital expenditures or increase the sale of non-strategic oil and gas
properties in order to meet such obligations.
The timing of the Company's U.K. capital expenditures is determined
annually by a budget prepared by Burlington and approved by Alliance.
Currently, there are material commitments for the 1999 calendar year. These
commitments will be met by funds available under the Company's credit facility
and internally generated cash flow.
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 funds available under its credit facility, internally
generated cash flow and the proceeds from oil and gas property divestitures.
Financing Arrangements. In connection with the Acquisition, the Company
----------------------
has entered into agreements providing up to $65,750,000 in debt to the Company.
Bank of America National Trust & Savings Association ("BoA"), Alliance's
principal lender, has increased the Company's revolving credit facility from
$22,500,000 to $30,000,000 at an interest rate, determined by the Company from
time to time, of either (i) the greater of BoA's reference rate and the federal
funds effective rate plus 0.50%, or (ii) 2.0% above the current Interbank rate.
While any Tranche B loan is outstanding, the margins set forth above shall be
increased by an additional 0.50% semi-annually on April 26th and on October 26th
of each year. Interest on the credit line is payable quarterly and principal is
due in equal quarterly payments beginning October 30, 2000 and ending October
30, 2003. The Company's initial borrowing base under the credit line is
$18,500,000 and will be redetermined semiannually.
On July 31, 1998, all of the $22,500,000 available under the previous
credit facility was outstanding. Of this amount, $5,000,000 was converted to
subordinated debt, in addition to the revolving credit facility. The interest
rate on the subordinated debt is either (i) BoA's reference rate plus 5.0%, or
(ii) 7.0% above the current Interbank rate, determined by the Company from time
to time. Principal will be due in equal quarterly installments beginning
January 31, 2001 and ending October 30, 2004.
In addition, BoA has provided an additional $20,000,000 of debt at an
interest rate, determined by the Company from time to time, of either (i) BoA's
("Tranche B loans") reference rate plus 2.0%, or (ii) 4.0% above the current
Interbank rate. The margins for all Tranche B loans shall increase by 0.50%
semi-annually on April 26th and on October 26th of each year while any Tranche B
loan is outstanding. Interest on the additional debt will be payable quarterly
and principal is due any payable in full on
13
<PAGE>
Alliance Resources PLC
Notes to Consolidated Condensed Financial Statements
January 31, 2001. The debt to BoA is secured by a first priority mortgage on
substantially all of the Company's properties, including the U.K. Interests.
The Company has paid BoA a cash fee of $700,000 and granted BoA warrants to
purchase 3,275,000 ordinary shares at a price of 1p per share. In addition, BoA
will receive an overriding royalty interest in the U.K. Interests of 0.3%
beginning January 1, 2001. The overriding royalty interest will entitle BoA to
receive a payment equal to the specified percentage of the net revenues
generated by the U.K. Interests. The overriding royalty interest will have the
effect of reducing the Company's revenues from the U.K. Interests. In
connection with obtaining the debt financing from BoA, the proposed terms
require the Company to enter into commodity price risk management contracts on
terms that are mutually agreeable to BoA and the Company for a period not less
than two years with respect to at least 50% of the Company's estimated producing
reserves as of October 31, 1998. BoA also requires the Company to enter into
interest rate risk management contracts providing for a maximum interest rate of
9.0% on the notional amount projected to be outstanding on the revolving credit
facility.
The Company has issued to EnCap Equity 1996 Limited Partnership and EnCap
Capital Investment Company PLC ("collectively EnCap") debt of $9,750,000, at an
interest rate of 10% per year, and 15,000,000 Shares for an aggregate cash
consideration of $10,000,000. Interest on the EnCap debt will be payable
quarterly, principal is payable in full by October 30, 2005. For the first
three years, the Company has the option of increasing the amount of debt from
EnCap in the amount of the interest payments due, in lieu of paying interest.
The EnCap debt is unsecured.
The Company has also issued to EnCap Investments L.C., 545,454 shares in
consideration of a fee of $292,500. In addition, EnCap, has the right to
designate one member to the Company's board of directors.
Seasonality. The results of operations of the Company are somewhat
-----------
seasonal due to fluctuations in the price for crude oil and natural gas.
Recently, crude oil prices have been generally higher in the third calendar
quarter, and natural gas prices have been generally higher in the first calendar
quarter. Due to these seasonal fluctuations, results of operations for
individual quarterly periods may not be indicative of results, which may be
realized on an annual basis.
Inflation and Prices. In recent years, inflation has not had a significant
--------------------
impact on the operations or financial condition of the Company. The generally
downward pressure on oil and gas prices during most of such periods has been
accompanied by a corresponding downward pressure on costs incurred to acquire,
develop, and operate oil and gas properties as well as the costs of drilling and
completing wells on properties.
Prices obtained for oil and gas production depend upon numerous factors
that are beyond the control of the Company including the extent of domestic and
foreign
14
<PAGE>
production, imports of foreign oil, market demand, domestic and world-wide
economic and political conditions, and government regulations and tax laws.
Prices for oil and gas have fluctuated significantly in recent years. The
following table sets forth the average price received by the Company for each of
the last three years and the effects of the various hedging arrangements noted
above.
<TABLE>
<CAPTION>
Oil Oil Gas Gas
Six Months Ended (excluding the (including the (excluding the (including the
October 31 effects of hedging effects of hedging effects of hedging effects of hedging
- ---------------- transactions) transactions) transactions) transactions)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998 $ 10.66 $ 15.70 $ 1.84 $ 1.88
1997 $ 16.63 $ 16.63 $ 2.38 $ 2.38
1996 $ 20.26 $ 18.03 $ 2.26 $ 1.85
</TABLE>
On October 31, 1998, the Company's commodity price hedge agreements
expired. During February 1999 the Company completed a transaction to hedge
approximately 65% of its existing monthly gas production by installing a floor
of $1.60/MMBTU and a cap of $2.07/MMBTU. This will protect the Company from any
severe declines in natural gas prices over the next eight months. The Company
is also currently negotiating additional agreements as required in its revolving
credit facility with BoA.
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 the computer systems of
third parties with which it deals, and it is not possible at this time to assess
the effect of a third party's inability to adequately address year 2000 issues.
15
<PAGE>
Alliance Resources PLC
Notes to Consolidated Condensed Financial Statements
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
-----------------
Contingencies
- -------------
As noted in the Company's Annual Report on Form 10-K for the year ended
April 30, 1998, the Company is a named defendant in lawsuits, is a party in
governmental proceedings, and is subject to claims of third parties from time to
time arising in the ordinary course of business. While the outcome to lawsuits
or other proceedings and claims against the Company cannot be predicted with
certainty, management does not expect these additional matters to have a
material adverse effect on the financial position of the Company.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
(a) Effective October 30, 1998, the Company issued 10,000,000 shares of its
convertible restricted voting shares, as described in the Current Report on
Form 8-K dated November 16, 1998. The terms of the convertible restricted
voting shares are described in the Company's proxy statement dated July 13,
1998. In connection with the issuance of the convertible restricted voting
shares, the Company's Articles of Association and Memorandum of Association
were amended effective October 30, 1998, to provide for those shares and
other matters described in the Company's proxy statements dated July 13,
1998, and October 7, 1998. Copies of the amended Articles of Association
and Memorandum of Association are included as Exhibits 3.1 and 3.2 to the
Current Report on Form 8-K dated November 16, 1998.
(b) Not applicable.
(c) The Company's issuance of its convertible restricted voting shares
effective October 30, 1998, was not registered under the Securities Act in
reliance on the exemption provided by Section 4(2) of that act as a
privately negotiated issuance to six persons in connection with the
purchase of certain properties. Other information concerning the issuance
is contained in the Company's Current Report on Form 8-K dated November 16,
1998.
(d) Not applicable.
16
<PAGE>
Alliance Resources PLC
Notes to Consolidated Condensed Financial Statements
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Company held an extraordinary meeting of shareholders on October 30,
1998, to consider the matters described in the Company's proxy statement dated
October 7, 1998. As permitted by U. K. law, the vote on each matter was
conducted by a show of hands of those present at the meeting, without objection.
All matters were passed by at least a majority of those voting.
The Company held an Annual Meeting on March 5, 1999 to consider the matters
described in the Company's Proxy Statement dated February 10, 1999. As
permitted by U.K. law, the vote on each matter was conducted by a show of hands
of those present at the meeting, without objection. All matters were passed by
at least a majority of those voting.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Description of Exhibits
-----------------------
*27.1 Financial Data Schedule of Alliance Resources PLC
*Filed Herewith.
17
<PAGE>
Alliance Resources PLC
Notes to Consolidated Condensed Financial Statements
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Alliance Resources PLC
/s/Michael E. Humphries
-----------------------
Michael E. Humphries, Finance Director
Date: March 23, 1999
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> APR-30-1999 APR-30-1998
<PERIOD-START> AUG-01-1998 AUG-01-1997
<PERIOD-END> OCT-31-1998 OCT-31-1997
<CASH> 2,602,379 2,376,080
<SECURITIES> 0 0
<RECEIVABLES> 1,881,403 2,651,767
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 4,512,525 5,307,956
<PP&E> 72,148,869 47,897,521
<DEPRECIATION> (15,563,453) (17,251,691)
<TOTAL-ASSETS> 64,559,290 37,903,335
<CURRENT-LIABILITIES> 10,641,207 10,021,547
<BONDS> 0 0
0 0
0 0
<COMMON> 20,658,590 20,077,486
<OTHER-SE> (5,101,651) (15,469,856)
<TOTAL-LIABILITY-AND-EQUITY> 64,559,290 37,903,335
<SALES> 2,031,805 3,248,700
<TOTAL-REVENUES> 2,031,805 3,248,700
<CGS> 493,204 1,491,276
<TOTAL-COSTS> 1,954,311 4,038,472
<OTHER-EXPENSES> 945,702 (94,326)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 550,790 609,127
<INCOME-PRETAX> (1,418,998) (1,304,573)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,418,998) (1,304,573)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,418,998) (1,304,573)
<EPS-PRIMARY> (.05) (.04)
<EPS-DILUTED> (.05) (.04)
</TABLE>
