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, 1996
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 : 0-13399
LaTex Resources, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 73-1405081
- ------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
4200 East Skelly Drive, Suite 1000, Tulsa, Oklahoma 74135
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(Address of principal executive offices) (Zip Code)
918-747-7000
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(Registrant's telephone number, including area code)
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(Former name or former address, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
As of January 21, 1997, there were 19,805,495 shares of the Registrant's
single class of common stock issued and outstanding.
LaTex Resources, Inc.
Index to Form 10-Q for the Quarterly Period
Ended October 31, 1996
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements. Page
--------------------
Consolidated Balance Sheets as of
October 31, 1996 and July 31, 1996 4
Consolidated Statements of Operations
for the three months ended
October 31, 1996 and 1995 6
Consolidated Statements of Cash Flows
for the three months ended
October 31, 1996 and 1995 7
Consolidated Statements of Stockholders'
Equity for the three months ended
October 31, 1996 and the year ended
July 31, 1996 9
Notes to Consolidated Financial
Statements 10
Item 2. Management's Discussion and Analysis
of Financial Condition and Results 11
of Operations.
PART II - OTHER INFORMATION 22
Item 1. Legal Proceedings
The information called for by, Item 2. Changes in Securities, Item 3.
Default Upon Senior Securities, Item 4. Submission of Matters to a Vote of
Security Holders, Item 5. Other Information and Item 6. Exhibits and
Reports on Form 8-K has been omitted as either inapplicable or because the
answer thereto is negative.
SIGNATURES 25
2
PART I
FINANCIAL INFORMATION
3
ITEM 1. Financial Statements
LATEX RESOURCES, INC.
Consolidated Balance Sheet
October 31, 1996 July 31, 1996
(unaudited) (audited)
-------------------- ----------------
ASSETS
Current assets:
Cash $ 6,505 $ 19,337
Accounts receivable-net 3,797,651 3,324,309
Accounts receivable-other 510,000 515,820
Inventories 175,493 175,493
Other current assets 21,903 27,587
Assets held for resale 164,792 164,792
------------------- ----------------
TOTAL CURRENT ASSETS $ 4,676,344 $ 4,227,338
------------------- ----------------
Property, plant, and equipment:
Oil and gas properties - at cost $ 41,226,531 $ 41,264,573
Other depreciable assets 855,512 854,259
------------------- ----------------
$ 42,082,043 $ 42,118,832
Less accumulated depreciation
and depletion 11,193,735 10,173,524
------------------- ----------------
Net property, plant
and equipment $ 30,888,308 $ 31,945,308
------------------- ----------------
Other assets:
Notes Receivable-net of
current portion $ 630,000 $ 757,500
Deposits and other assets 123,839 130,734
Accounts and Notes Receivable
and related parties 5,782 392,297
Intangible assets, net-of
amortization 1,462,220 1,512,899
------------------- ----------------
TOTAL OTHER ASSETS 2,221,841 2,793,430
------------------- ----------------
TOTAL ASSETS $ 37,786,493 $ 38,966,076
=================== ===============
The accompanying notes are an integral part of these financial statements.
LATEX RESOURCES, INC.
Consolidated Balance Sheet
October 31, 1996 July 31,1996
(unaudited) (audited)
-------------------- ---------------
LIABILITIES AND
STOCKHOLDERS EQUITY
Current Liabilities:
Accounts payable $ 10,276,345 $ 9,057,707
Accounts payable-other 672,000 747,000
Accrued expenses payable 598,486 607,055
Current portion long-term debt 21,127,412 22,235,867
-------------------- ---------------
Total current liabilities $ 32,674,243 $ 32,647,629
-------------------- ---------------
Stockholders' equity:
Preferred Stock - Series A $ 4,525,591 $ 4,503,351
Preferred Stock - Series B 4,937,460 4,793,450
Common stock 191,240 191,240
Additional paid-in capital 9,067,631 9,067,631
Treasury stock (489,365) (489,365)
Accumulated deficit (13,120,307) (11,747,860)
-------------------- ---------------
Total stockholders' equity $ 5,112,250 $ 6,318,447
-------------------- ---------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 37,786,493 $ 38,966,076
=================== ==============
The accompanying notes are an integral part of these financial statements.
LATEX RESOURCES, INC.
Consolidated Statement of Operations
Unaudited
For The Three Months Ended For The Three Months Ended
October 31, October 31,
1996 1995 (Restated)
-------------- -----------------
Revenue:
Oil and gas sales $ 2,604,440 $ 3,034,752
Crude Oil and Gas Marketing 72,957 188,843
Lease operations and management fees 234,211 235,733
------------ --------------
Total operating income $ 2,911,608 $ 3,459,328
Operating expenses:
Lease operating expense $ 1,360,452 $ 1,561,516
Cost of Crude Oil & Gas Marketing - 84,183
General & administrative expense 715,049 747,863
Depreciation, depletion and amortization 1,129,524 1,247,979
Dry hole costs and abandonments 22,113 73,293
------------ --------------
Total operating expenses $ 3,227,138 $ 3,714,834
------------ --------------
Net operating income (loss) $ (315,530) $ (255,506)
Other income:
Loss on Asset Writedown (375,109) -
Equity in (losses) and writeoffs of
Investments in affiliates $ - $ (41,500)
Gain on sale of assets 21,256 -
Interest Income 2,078 38,653
Interest Expense (538,892) (580,667)
------------ --------------
Net income (loss) from continuing
Operations before income taxes $ (1,206,197) $ (839,020)
------------ --------------
Income taxes - current -
Net income (loss)
from continuing operations $ (1,206,197) $ (839,020)
Preferred stock dividends $ 166,250 $ 136,230
Net loss for common shareholders $ (1,372,447) $ (975,250)
============ ==============
Loss Per Share from continuing operations (.06) (.05)
============ ==============
Loss Per Share for common shareholders (.07) (.05)
============ ==============
Weighted avg. number of shares o/s 19,123,995 17,950,456
============ ==============
The accompanying notes are an integral part of these financial statements.
LATEX RESOURCES, INC.
Consolidated Statements of Cash Flows
Unaudited
Three Three
Months Ended Months Ended
October 31, October 31,
1996 1995 (Restated)
============== ================
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (1,206,197) $ (839,020)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities: - -
Depreciation, amorization and depletion 1,129,524 1,247,979
Write-down of investments - -
Equity in losses and writeoffs of
investments in affiliates - 41,500
Dryhole costs and abondonments 22,113 73,293
Changes in Assets and Liabilities:
Accounts receivable (340,022) (148,474)
Accrued expenses payable (8,569) (12,257)
Accounts payable 1,143,638 (403,356)
Other assets 444,089 103,126
Prepaid expenses 5,684 (76,430)
------------- --------------
Net cash provided by operating activities $ 1,190,260 $ (13,639)
------------- --------------
Cash flows from investing activities:
Investments $ - $ -
Property, plant, and equipment (68,973) (2,011,808)
------------- --------------
Net cash used for investing activities $ (68,973) $ (2,011,808)
The accompanying notes are an integral part of these financial statements
LATEX RESOURCES, INC.
Consolidated Statements of Cash Flows
Unaudited
Three Three
Months Ended Months Ended
October 31, October 31,
1996 1995 (Restated)
============== ==============
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable (1,108,455) 1,742,383
Net cash provided by (used for) financing activities $ (1,108,455) $ 1,742,383
------------- -------------
Net (decrease) in cash and cash equivalents (12,832) $ (283,064)
Cash and cash equivalents beginning of period $ 19,337 $ 314,229
------------- -------------
Cash and cash equivalents end of period $ 6,505 $ 31,165
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 538,892 $ 580,667
Income taxes - -
============= =============
Supplemental schedules of noncash investing and
financing activities: $ - $ -
Decrease in related party accounts receivable for
the acquisition of unconsolidated affiliate - -
Stock issued for public relations services - -
Stock issued to acquire unconsolidated affiliate - -
Stock issued to acquire Phoenix Metals - -
Pre-acquisition exercise of Panda Resources, Inc.
stock options in exchange for note receivable - -
------------- -------------
Total $ - $ -
============= =============
Disclosure of accounting policy:
For purposes of the statement of cash
flows, the company considers all highly
liquid debt instruments purchased with a
maturity of three months or less to be cash
equivalents.
The accompanying notes are an integral part of these financial statements.
LATEX RESOURCES, INC.
Consolidated Statements of Stockholders' Equity
Three Months Ended October 31, 1996 Year Ended July 31, 1996
Common Stock Additional Total
----------------------- Paid In Retained Treasury Preferred Stockholders
Shares Par Value Capital Earnings Stock Stock Equity
========== ========= =========== ============ ========== ========== ============
Balance July 31, 1996 (excluding
subscriptions receivable) 19,123,995 $191,240 $9,067,631 $(11,747,860) $(489,365) $9,296,801 $ 6,318,447
Preferred stock dividends (166,250) 166,250 -
Net loss for the three months ended (1,206,197) (1,206,197)
Balance October 31, 1996 19,123,995 $191,240 $9,067,631 $(13,120,307) $(489,365) $9,463,051 $ 5,112,250
========== ======== ========== ============ ========= ========== ===========
Less treasury shares (1,008,500)
----------
Total outstanding 18,115,495
==========
PART I - FINANCIAL INFORMATION
LaTex Resources, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
(1) Notes Payable
-------------
The Company has a note payable with Bank of America for $23,000,000 with an
option of an additional $2,000,000 for six months for approved workovers,
recompletions and development drilling of specified reserves. Principal is due
monthly of $365,000 which includes the Oakland Petroleum Company payment of
$42,500. Interest is due monthly 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 as of October 31, 1996 was 7.375%. The amounts outstanding are secured by
mortgages which cover the Company's oil and gas properties. The Company is
currently in default under the terms of the credit agreement and as a result has
operated under a "forbearance" agreement. The "forbearance" agreement is
extended to February 28, 1997. Accordingly, the entire unpaid balance is
classified as a current liability at October 31, 1996. On December 4, 1996
Oakland Petroleum Company paid off its outstanding loan in full to LaTex/Bank of
America.
(2) Accounting Policies
-------------------
The accompanying unaudited financial statements have been prepared in accordance
with the instructions to Form 10-Q and do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of only normal recurring items) considered necessary for a fair presentation
have been included. These statements should be read in conjunction with the
LaTex Resources, Inc. financial statements and notes thereto as of July 31, 1996
which are included in the Company's Form 10-K.
(3) Income Taxes
------------
Deferred income taxes are provided on transactions which are recognized in
different periods for financial and tax reporting purposes. Such timing
differences arise primarily from the deduction of certain oil and gas
exploration and development costs which are capitalized for financial reporting
purposes and differences in the methods of depreciation.
The Financial Accounting Standards Board issued SFAS No. 109, Accounting for
Income Tax. The Company has adopted SFAS 109 beginning with its July 31, 1993
financial statements. SFAS 109 allows, but does not require, restatement of
financial statements for previous years. SFAS 109 represents a new method of
accounting for income taxes. It generally requires that deferred taxes be
provided using a liability approach at current enacted income tax rates, rather
than the deferred approach at historical rates which has been required. The
adoption of SFAS 109 has no material effect on the financial statements.
10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
-----------------------------------
Proposed Merger With Alliance Resources Plc
- -------------------------------------------
As a result of the demands placed upon the Company by its primary lender, the
Company's continuing working capital deficit, its deteriorating financial
condition and the inability of the Company to raise additional debt or equity
capital, management of the Company, in the fourth quarter of fiscal 1996,
determined to seek an equity infusion through a strategic merger with a suitable
merger candidate. Management's primary objective in seeking a merger partner
was to solve the working capital deficit of the Company through an equity
infusion while minimizing dilution to the shareholders. Although the Company
considered several potential transactions, Alliance Resources Plc ("Alliance")
emerged as the candidate most likely to meet the objectives of the Company. The
Company has entered into an Agreement and Plan of Merger ("Alliance Merger
Agreement") dated August 12, 1996 with Alliance Resources Plc, a company
organized under the laws of the United Kingdom ("Alliance"), pursuant to which
the Company will merge ("Alliance Merger") with a wholly-owned U.S. subsidiary
of Alliance.
Under the terms of the Alliance Merger Agreement and after giving effect to a 1
for 40 reverse stock split to be completed by Alliance, the holders of the
Company's common stock will receive 0.8806 ordinary shares of Alliance for each
share of such common stock, the holders of the Company's Series A Convertible
Preferred Stock will receive 2.6445 ordinary shares of Alliance for each share
of such Series A Convertible Preferred Stock, and the holders of the Company's
Series B Senior Convertible Preferred Stock will receive 5.8709 ordinary shares
of Alliance for each share of such Series B senior Convertible Preferred Stock.
Following the Alliance Merger, the holders of the Company's common and preferred
stock will own, as a group, approximately 72% of the issued and outstanding
ordinary shares of Alliance and the Company will become a wholly-owned
subsidiary of Alliance. Holders of outstanding warrants to purchase shares of
the Company's common stock will receive from Alliance replacement warrants to
purchase shares of Alliance ordinary shares on substantially the same terms.
It is anticipated that the merger will provide the Company with sufficient
capital resources to eliminate its existing working capital deficit, refinance
the Company's senior debt and eliminate the hedging agreements, and provide
development capital for exploration of the Company's oil and gas properties. In
addition, the Company believes that the combination of the two companies
provides strategic benefits to the Company important to its long-term growth and
the enhancement of shareholder value. Although Alliance's domestic oil and gas
operations are significantly smaller than the Company's, the Company believes
that the merger will enhance the overall financial strength of the Company and
provide a stable platform from which future growth can be achieved. The
strategic objectives of the combined Company will be to continue a policy of
structured and stable growth in the domestic U.S. oil and gas sector while
implementing projects in Western Europe, the Middle East and the former Soviet
Union.
11
Disposition of Oil and Gas Properties
- -------------------------------------
Subsequent to October 31, 1996, the Company closed two oil and gas property
sales for approximately $1,500,000. These properties were not included in the
July 31, 1996 reserve appraisal.
Results of Operations
- ---------------------
The following is a discussion of the results of operations of the Company for
the three months ended October 31, 1996. This discussion should be read in
conjunction with the Company's unaudited Consolidated Financial Statements and
the notes thereto included in Part I of this Quarterly Report.
The Company follows the "successful efforts" method of accounting for its oil
and gas properties whereby costs of productive wells and productive leases are
capitalized and amortized on a unit-of-production basis over the life of the
remaining proved reserves. Amortization of capitalized costs is provided on a
prospect-by-prospect basis. Exploratory expenses, including geological and
geophysical expenses and annual delay rentals, are charged to expense as
incurred. Exploratory drilling costs, including the cost of stratigraphic test
wells, are initially capitalized, but charged to expense if and when the well is
determined to be unsuccessful.
The factors which most significantly affect the Company's results of operations
are (i) the sale 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:
Three Months Ended October 31
-----------------------------
1996 1995
---- ----
Net Sales Volumes:
Oil (Mbbls) 86 110
Natural gas (Mmcf) 778 941
Oil equivalent (MBOE) 216 267
Average Sales Prices:
Oil (per Bbl) $18.62 $13.40
Natural Gas (per Mcf) $ 1.83 $ 1.52
Operating Exp. per BOE of Net Sales:
Lease operating $ 5.59 $ 5.11
Severance tax $ 0.70 $ 0.74
General and administrative $ 3.31 $ 2.80
Depreciation, depletion and amortization $ 5.22 $ 4.68
12
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 price for gas. Spot
market gas prices have generally declined in recent years because of lower
worldwide energy prices as well as excess deliverability of natural gas in the
United States. Relatively modest changes in either oil or gas prices
significantly impact the Company's results of operations and cash flow and could
significantly impact the Company's borrowing capacity.
The Company entered into hedging arrangements in April 1995 designed to offset
fluctuations in oil and gas prices through financial instruments. For fiscal
1997 the Company has experienced a net loss of $431,238 as a result of its
hedging program.
Three months ended October 31,1996 Total revenues from the Company's operations
- ----------------------------------
for the quarter ended October 31, 1996 were $2,911,608 compared to $3,459,328
for the quarter ended October 31, 1995. Revenues decreased over the comparable
period a year earlier due to the negative effect of the product hedges and lower
sales volumes.
Depreciation, depletion and amortization decreased to $1,129,524 from $1,247,979
year earlier due to a decrease in the depletion rate based on the increase in
reserves at year-end 1996 and lower sales volumes.
Lease operating expenses were $1,360,452 and for the three-month period ending
October 31, 1996 compared to $1,561,516 and for the period ending October 31,
1995. The decrease in lease operating expenses are due to the sale of non-
strategic oil and gas properties and shutting in various marginal operated
properties.
General and administrative expenses decreased from $747,863 during the quarter
ended October 31, 1995 to $715,049 for the period ending October 31, 1996. The
decrease is attributable to lower professional fees associated with the year-end
audit and the annual reserve analysis.
The Company had after tax loss from continuing operations of $1,206,197 ($ .06
per share) versus a loss of $839,020 ($.05 per share) for the same period last
year. The decrease in income reflects the effect of the Company's product
hedging arrangements.
The net loss for common shareholders for the quarter ended October 31, 1996 was
$1,372,447 ($.07 per share) compared to a net loss of $975,250 ($.05 per share)
for the previous year. The increase in the loss was a result lower sales
volumes, hedging costs, and asset writedowns associated with uncollectible
receivables.
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. 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.
13
Historically, the Company's operating needs and capital expenditures have been
funded by borrowings under its bank credit facilities and cash flow from
operations. As a result of significant capital expenditures since 1991, the
Company has experienced a decease in its short-term liquidity and a decline in
its working capital. In connection with the Company's acquisition of Germany
Oil Company in April 1995, the Company's new credit facility provided a source
of long-term financing. As a result of the Germany acquisition, the Company
assumed approximately $4.3 million in liabilities and accounts payable which
created a significant working capital deficit. The Company immediately began a
program designed to reduce these liabilities through negotiated reductions in
amounts owed and term payments out of the Company's cash flow. At October 31,
1996, the Company had current assets of $4.7 million and current liabilities of
$32.8 million which resulted in negative working capital of $28.1 million. This
compares to the Company's current assets of $6.5 million and current liabilities
of $12.3 million, which resulted in negative working capital of $5.8 million, at
October 31, 1995. The increase in the Company's working capital deficit during
fiscal 1997 is primarily due to the current liability classification at October
31, 1996 of all indebtedness of the Company to its principal bank in 1996,
additional litigation costs principally resulting from discontinued operations
of $1.8 million, and increases in royalty and vendor payables in the amount of
$1.8 million resulting from the Company's inability to fund its current
obligations due primarily to product hedging losses. At July 31, 1994 the long-
term portion of the Company's debt to its principal bank was $4.5 million and
negative working capital was $1.11 million. The decline in the Company's
working capital during the last three years is primarily the result of the
Company's assumption of approximately $4.3 million of indebtedness associated
with the acquisition of Germany Oil and the continued funding of its
international operations and two unconsolidated affiliates. Subject to the
availability of capital, the Company intends to continue to pursue its program
to achieve an orderly liquidation of the Germany Oil indebtedness. There can be
no assurance that, without an infusion of additional debt or equity capital, the
Company will be able to timely liquidate these liabilities. As part of the
Company's effort to reduce its working capital shortage, the Company has entered
into the proposed merger transaction with Alliance Resources Plc.
For the quarter ended October 31, 1996, the Company's operating activities
resulted in positive cash flow of $1,190,260 compared to a negative cash flow of
$13,639 for the quarter ended October 31,1995. The improvement in cash flow is
due to additional cash provided by operating activities through continued
deferral of paying obligations of the Company which resulted in increased
accounts payable.
Investing activities of the Company used $68,973 in net cash flow for the
quarter ended October 31, 1996 to fund the Company's oil and gas activities.
Investing activities of the Company used $2,011,808 in net cash flow for the
quarter ended October 31, 1995. The decrease in investing activities in fiscal
1997 was primarily due to the property acquisition from Sackett Oil in 1995.
Financing activities used $1,108,455 in net cash flow for the quarter ended
October 31, 1996 compared to $1,742,383 provided in net cash flow for the
quarter ended October 31, 1995. The decrease from fiscal 1996 was a result of
the monthly amortization of the Company's indebtedness to its principal bank and
additional debt reduction upon the sale of oil and gas properties. The increase
in fiscal 1995 compared to fiscal 1994 was a result of the Company's new credit
facility with Bank of America associated with the Company's acquisition of
Germany Oil Company in April 1995. As a result of the Company's default under
certain provisions of its credit facility with Bank of America, the Company does
not currently anticipate being able to increase its level of borrowing under
such credit facility.
14
The domestic spot price for crude oil has ranged from $11.00 to $40.00 per
barrel over the past ten years. To the extent that crude oil prices continue
fluctuating in this manner, the Company expects material fluctuations in
revenues from quarter to quarter which, in turn, could adversely affect the
Company's ability to timely service its debt to its principal bank and 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.
Since the Company is engaged in the business of acquiring producing oil and gas
properties, from time to time it acquires certain non-strategic and marginal
properties in some of its purchases. A portion of the Company's on-going
profitability is related to the disposition of these non-strategic properties on
a regular basis. The Company expects to continue to pursue sales of these types
of properties in the future. In most cases the revenue from these properties is
insignificant and in many cases does not exceed the lease operating expense. As
a result, a portion of the Company's capital resources are generated by the sale
of assets from continuing operations. Sales of non-strategic and minor interest
oil and gas properties accounted for $2,365,807 in gains during fiscal 1996,
$127,248 in gains during fiscal 1995, and $565,932 in gains during fiscal 1994.
The Company expects to pursue a more aggressive policy of disposition of oil and
gas properties in fiscal 1997. Additionally, the Company incurred a loss in
fiscal 1994 of $173,340 on the disposition of 40,000 shares of Electric & Gas
Technology, Inc. common stock acquired in 1991.
Capital Expenditures
- --------------------
The timing of most of the Company's capital expenditures is discretionary.
Currently there are no material long-term commitments associated with the
Company's capital expenditure plans. Consequently, the Company has a
significant degree of flexibility to adjust the level of such expenditures as
circumstances warrant. The Company primarily uses internally generated cash
flow and proceeds from the sale of oil and gas properties to fund capital
expenditures, other than significant acquisitions, and to fund its working
capital deficit. If the Company's internally generated cash flows should be
insufficient to meet its debt service or other obligations, the Company may
reduce the level of discretionary capital expenditures or increase the sale of
non-strategic oil and gas properties in order to meet such obligations. The
level of the Company's capital expenditures will vary in future periods
depending on energy market conditions and other related economic factors. The
Company anticipates that its cash flow will not be sufficient to fund its
domestic operations and debt service at their current levels for the next year.
As a result, the Company anticipates that it will be necessary to increase the
level of sales of the Company's oil and gas properties or seek additional equity
capital, of which there can be no assurance. The Company's proposed merger with
Alliance Resources Plc, if completed, would be a source of such equity capital.
Substantially all of the Company's capital expenditures over its recent history
have been made to acquire oil and gas properties. During fiscal 1993, 1994,
1995 and 1996, the Company made a number of significant acquisitions of oil and
gas properties. During the year ended July 31, 1993, the Company completed two
acquisitions of oil and gas properties for a cost of approximately $3,013,000.
During the year ended July 31, 1994, the Company completed one acquisition of
oil and gas properties for a cost of approximately $1,740,000. During the year
ended July 31, 1995 the Company completed the acquisition of Germany Oil for a
cost of approximately $18.1 million.
15
Subsequent to July 31, 1995, the Company participated with Oakland Petroleum
Operating Company in the acquisition of producing oil and gas properties from
Sackett Oil Company and The Prudential Insurance Company of America for a total
purchase price of $5,850,000, less adjustments. The properties are located in
Texas, Louisiana and California. Of the total purchase price, the Company paid
$2,885,320 for the properties located in Texas and Louisiana. The Company
provided Oakland a loan in the principal amount of $2,300,000 to finance
Oakland's purchase of the properties. This acquisition was funded through
additional borrowings under the Company's principal credit facility. The
Company's strategy is to continue to expand its reserve base principally through
acquisitions of producing oil and gas properties. As a result, it is likely
that capital expenditures will exceed cash provided by operating activities in
years where significant growth occurs in the Company's oil and gas reserve base.
In such cases, additional external financing is likely to be required.
The Company intends to continue its practice of reserve replacement and growth
through the acquisition of producing oil and gas properties, although at this
time it is unable to predict the number and size of such acquisitions, if any,
which will be completed. The Company's ability to finance its oil and gas
acquisitions is determined by its cash flow from operations and available
sources of debt and equity financing. Exclusive of potential acquisitions and
subject to the availability of capital, the Company presently anticipates
capital expenditures in fiscal 1997 of approximately $800,000 for oil and gas
property enhancement activities.
Financing Arrangements
- ----------------------
Since July 31, 1991, the Company has made 12 acquisitions of oil and gas
properties. These acquisitions have been financed primarily through borrowings
under the Company's bank credit facilities and through internal cash flow. The
Company's acquisition of Germany Oil Company, including the cash portion of the
purchase price paid by the Company for the volumetric production payments and
overriding interests acquired from ENRON Reserve Acquisition Corp. and the cash
portion of the consideration paid by the Company pursuant to the exchange offer,
were financed through borrowings by the Company under a 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 the Company's wholly-owned
subsidiaries, LaTex Petroleum,. Germany Oil and LaTex/GOC Acquisition
("Borrowers"). In addition, under the new credit facility the Company and the
Borrowers refinanced the Company's then existing indebtedness to the Company's
former principal lender. The Company and its wholly owned subsidiary, ENPRO,
have guaranteed the obligations of the Borrowers under the Credit Agreement.
Under the Credit Agreement, the Bank agreed to make loans to the Borrowers (i)
in the amount of $23,000,000 (the "Acquisition Loan") for the purposes of
refinancing the Borrower's then existing indebtedness, partially funding the
acquisition of Germany Oil and for working capital, and (ii) in the amount of
$2,000,000 (the "Development Loan") for additional approved development
drilling, workover or recompletion work on oil and gas properties mortgaged by
the Borrowers to the bank as security for the loans under the Credit Agreement.
On October 31, 1996, the outstanding balance of the loan was $21,127,412.
16
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 October 31, 1996, all advances to the Company
under the Credit Agreement are maintained as LIBO Rate Loans which currently
bear interest at the annual rate of 7.375%.
Principal on any loans under the Credit Agreement is currently repayable in
monthly installments of $322,500 (net of 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. All unpaid
principal and accrued interest under the Credit Agreement is due March 31, 2000.
The Oakland Petroleum portion of the debt was paid off December 4, 1996.
The Company's indebtedness to the Bank under the Credit Agreement is secured by
mortgages on all of the Company's producing oil and gas properties and pledges
of the stock of the Company's subsidiaries, LaTex Petroleum, Germany Oil
Company, LaTex/GOC Acquisition and ENPRO. On a semi-annual basis, the value of
the oil and gas properties securing loans under the Credit Agreement is
redetermined by the Bank based upon its review of the Company's oil and gas
reserves. To the extent that the aggregate principal amount of all loans under
the Credit Agreement exceeds the collateral value as determined by the Bank, the
Company must either pay the Bank an amount sufficient to eliminate such excess,
or provide additional oil and gas properties as security for the loans having a
value satisfactory to the Bank.
Under the Credit Agreement, the Company has also granted an affiliate of the
Bank an overriding royalty interest in all of the Company's existing producing
oil and gas properties, other than those situated in the State of Oklahoma (the
"Bank ORRI"). The Bank ORRI is 6.3% of Company's net revenue interest in each
property. The Bank is not entitled to the Bank ORRI on any property acquired
after closing of the financing. On the later to occur of (i) March 31, 1998 or
(ii) at such time as the Bank has received a 15% internal rate of return on the
$25,000,000 commitment amount under the Credit Agreement, the Bank ORRI will be
adjusted downward to 2.1%.
As a condition to the Bank making the loans under the Credit Agreement, the
Company's subsidiary, LaTex Petroleum, has entered into hedging agreements
designed to enable the Company to obtain agreed upon net realized prices for the
Company's oil and gas production and designed to protect the Company against
fluctuations in interest rates with respect to the principal amounts of all
loans under the Credit Agreement. Under the current hedging arrangements with
the Bank, the Company presold 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,
the Company 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
17
for oil average 324,228 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 7.47%. The effect of these hedging arrangements has been
to reduce the Company's working capital in fiscal 1997 and 1996 by 563,212 and
$1,979,956 respectively, as a result of additional payments to the Bank above
scheduled principal and interest payments.
The Credit Agreement contains affirmative and negative covenants which impose
certain restrictions and requirements on the Company, including: limitations on
the amount of additional indebtedness the Company may incur; prohibition against
payment by the Company of cash dividends; requirements that the Company
maintains a current ratio (current assets to current liabilities) of at least
1.0 to 1.0, tangible net worth of at least $5.0 million, no less than $500,000
in cash equivalent investments on hand at any given time, and no less than
$500,000 in working capital; limitations on the ability of the Company to sell
assets or to merge or consolidate with or into any other person; and
requirements that the Company maintain a consolidated current ratio of at least
1.0 to 1.0 and consolidated tangible net worth of at least $10 million.
During the year ended July 31, 1996, the Company was in violation of various
provisions of the Credit Agreement. The Company has acknowledged to the Bank
these events of default and, pursuant to a Forbearance Agreement between the
Company and the Bank dated July 23, 1996, as amended, the Bank agreed to delay
enforcement of its rights under the Credit Agreement and related loan documents
as a result of these events of default until the earlier of November 29,1996,
the occurrence of any default by the Company under the Credit Agreement, or the
Company's cure of the defaults, The Bank has indicated its willingness to
further amend the Forbearance Agreement, or the Company's cure of the defaults.
The Bank has indicated its willingness to further amend the Forbearance
Agreement to extend its agreement to forbear any action on the Company's default
through February 28, 1997. Under the terms of the Forbearance Agreement, the
Company agreed to (a ) obtain promissory notes from Imperial Petroleum, Inc.
("Imperial"), Wexford Technology, Inc. ("Wexford"), and LaTex Resources
International evidencing their indebtedness to the Company at August 16, 1996 in
the amounts of $677,705, $1,372,799 and $3,363,000, respectively, (b) obtain
from Imperial a lien on and security interest in certain of Imperial's assets
(subject to existing perfected liens and security interests) to secure
Imperial's indebtedness to the Company, and (c) pay all unpaid overriding
royalties due LaSalle Street National Resources Corporation in three monthly
installments, beginning August 1, 1996, with interest at the Bank's prime rate
plus two percent.
In addition, in accordance with the requirements of the Forbearance Agreement,
the Company and Bank entered into Amendment No. 2 to Amended and Restated Credit
Agreement dated as of August 16, 1996 ("Amendment No. 2") pursuant to which each
of the Borrowers and Guarantors under the Credit Agreement granted Bank a
security interest in substantially all of their assets which had not otherwise
been previously pledged to the Bank under the Credit Agreement. In addition,
the Company granted to the Bank a security interest in the indebtedness owed to
the Company by Imperial, Wexford and LaTex, together with a security interest in
the collateral pledged to the Company by Imperial to secure Imperial's
indebtedness to the Company, which consists primarily of unpatented mining
claims in the states of Arizona and Montana. In addition, the Company granted
the Bank a security interest in the shares of common stock Wexford and Imperial
owned by the Company.
18
The Company has dedicated a significant portion of its available revenues and
cash flows to remaining current in its payment obligations to the Bank. In
addition, proceeds from sales of oil and gas properties by the Company have been
used to further reduce the Company's indebtedness to the Bank, with only limited
amounts of such proceeds being made available to fund the Company's working
capital needs. As a result, the Company continues to fall further behind in
making required payments to royalty owners and vendors. The effect of the
continuation of this policy, over the long term, will be to increase the
Company's accounts payable while reducing its debt to the Bank. Because the
level of required payments to the Bank remains constant over the terms of the
Credit Agreement, the rate at which the Company's accounts payable deficit
increases will become greater with time and, ultimately may jeopardize certain
of the Company's oil and gas leases.
The Company believes that its cash flow from operations will be insufficient to
meet its anticipated capital requirements for the foreseeable future. As a
result, the Company will be required to increase the level of sales of its oil
and gas properties, seek additional equity capital, or restructure its existing
Credit Agreement with the Bank, none of which can be assured. However, because
future cash flows and the availability of debt or equity financing are subject
to a number of variables, such as the level of production and the prices of oil
and gas, there can be no assurance that the Company's capital resources will be
sufficient to maintain current operations or planned levels of capital
expenditures.
Seasonality
- -----------
The results of operations of the Company 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.
Inflation and Prices
- --------------------
In recent years, inflation has not had a significant impact on the Company's
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.
In connection with the execution of the Credit Agreement with the Bank, the
Company has entered into a crude oil and natural gas hedging arrangement
designed to enable the Company to receive a net realized price of not less than
$1.81 per MMBtu of natural gas and $16.50 per barrel of crude oil on sale of the
volumes of crude oil and natural gas set forth in the Credit Agreement.
Prices obtained for oil and gas production depend upon numerous factors that are
beyond the control of the Company, including the extent of domestic and foreign
production, imports of foreign oil, market demand, domestic and world-wide
economic and political conditions, and government regulations and tax laws.
Prices for both oil and gas have fluctuated significantly in 1996 and 1995. The
following table sets forth the average price received by the Company for each of
the last three years and the effects of the hedging arrangement described below.
19
Oil Oil Gas Gas
(excluding the (including the (excluding the (including the
effects of effects of effects of effects of
Year Ended hedging hedging hedging hedging
July 31 transactions) transactions) transactions) transactions)
- --------------------------------------------------------------------------------
1997 $18.62 $15.45 $1.83 $1.63
1996 $15.73 $15.24 $2.03 $1.67
1995 $12.86 $12.86 $1.48 $1.48
The Company has entered into a master agreement to hedge the price of its oil
and natural gas. The purpose of the hedging arrangement is to provide
protection against price drops and to produce a measure of stability in the
volatile environment of oil and natural gas spot pricing.
20
PART II
OTHER INFORMATION
21
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
-----------------
Contingencies
- -------------
In addition to the litigation set forth in the Company's annual report in the
Company's form 10-K, 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
---------------------
Not applicable.
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
Item 4. Submission to Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable.
Item 5. Other Information
-----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
SEC
Exhibit
No. Description of Exhibits
--- -----------------------
(2) Plan of Acquisition, Reorganization,
Arrangement Liquidation or Succession
-------------------------------------
Not Applicable.
22
(4) Instruments Defining the Rights of Security
Holders, Including Indentures
-----------------------------
Not Applicable.
(10) Material Contacts
-----------------
Not Applicable.
(11) Statement re Computation of Per-Share
-------------------------------------
Earnings
--------
Not Applicable.
(15) Letter re Unaudited Interim Financial
-------------------------------------
Information
-----------
Not Applicable.
(18) Letter re Change in Accounting Principles
-----------------------------------------
Not Applicable.
(19) Report Furnished to Security Holders
------------------------------------
Not Applicable.
(22) Published Report Regarding Matter submitted
-------------------------------------------
to Vote of Security Holders
---------------------------
Not Applicable.
(23) Consents of Experts and Counsel
-------------------------------
Not Applicable.
(24) Power of Attorney
-----------------
Not Applicable
(27) Financial Data Schedule
-----------------------
*27.1 Financial Data Schedule of LaTex
Resources, Inc.
23
(99) Additional Exhibits
-------------------
Not Applicable.
*Filed Herewith.
(b) Reports on Form 8-K
--------------------
Not Applicable.
24
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.
LaTex Resources, Inc.
By: /s/ JOHN L. COX
--------------------------------
John L. Cox, Vice President
and Chief Financial Officer
Date: January 21, 1997
25