SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A2
(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
- --------------------------------------------------------------------------------
(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 February 20, 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 Condensed Balance Sheet
October 31, 1996 July 31, 1996
(unaudited) (audited)
-------------------- ----------------
ASSETS
Current assets:
Cash $ 19,721 $ 19,337
Accounts receivable-net 3,208,742 3,324,309
Accounts receivable-other 513,378 515,820
Inventories 175,493 175,493
Other current assets 22,055 27,587
Assets held for resale 164,792 164,792
------------------- ----------------
TOTAL CURRENT ASSETS $ 4,104,181 $ 4,227,338
------------------- ----------------
Property, plant, and equipment:
Oil and gas properties - at cost $ 41,264,288 $ 41,264,573
Other depreciable assets 855,512 854,259
------------------- ----------------
$ 42,119,800 $ 42,118,832
Less accumulated depreciation
and depletion 12,571,037 10,173,524
------------------- ----------------
Net property, plant
and equipment $ 29,548,763 $ 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 2,404 392,297
Intangible assets, net-of
amortization 1,408,272 1,512,899
------------------- ----------------
TOTAL OTHER ASSETS 2,164,515 2,793,430
------------------- ----------------
TOTAL ASSETS $ 35,817,459 $ 38,966,076
=================== ===============
See accompanying notes to financial statements.
LATEX RESOURCES, INC.
Consolidated Condensed Balance Sheet
October 31, 1996 July 31,1996
(unaudited) (audited)
-------------------- ---------------
LIABILITIES AND
STOCKHOLDERS EQUITY
Current Liabilities:
Accounts payable $ 9,991,311 $ 9,057,707
Accounts payable-other 433,641 132,000
Accrued expenses payable 592,784 607,055
Current portion long-term debt 21,127,412 22,235,867
-------------------- ---------------
Total current liabilities $ 32,145,148 $ 32,032,629
-------------------- ---------------
Other liabilities 615,000 615,000
-------------------- ---------------
Total liabilities 32,760,148 32,647,629
-------------------- ---------------
Stockholders' equity:
Preferred stock - par value $0.01;
5,000,000 shares authorized:
Series A convertible preferred stock
($10 liquidation preference),
452,052 and 449,828 issued and
outstanding at October 31, 1996 and
July 31, 1996, respectively $ 4,520 $ 4,498
Series B convertible preferred stock
($10 liquidation preference),
494,426 and 480,025 issued and
outstanding at October 31, 1996 and
July 31, 1996, respectively 4,944 4,800
Common stock - par value $.01,
50,000,000 authorized; issued and
outstanding 20,813,995 and
19,123,995 at October 31, 1996
and July 31, 1996, respectively 208,140 191,240
Additional paid-in capital 19,032,443 18,355,134
Treasury stock (489,365) (489,365)
Accumulated deficit (15,703,371) (11,747,860)
-------------------- ---------------
Total stockholders' equity $ 3,057,311 $ 6,318,447
-------------------- ---------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 35,817,459 $ 38,966,076
==================== ===============
See accompanying notes to financial statements.
LATEX RESOURCES, INC.
Consolidated Condensed Statement of Operations
For The Three Months Ended For The Three Months Ended
October 31, October 31,
1996 1995 (Restated)
(unaudited) (unaudited)
-------------- -----------------
Revenue:
Oil and gas sales $ 2,377,701 $ 3,034,752
Crude Oil and Gas Marketing 90,227 188,843
Lease operations and management fees 249,889 235,733
------------ --------------
Total operating income $ 2,717,817 $ 3,459,328
------------ --------------
Operating expenses:
Lease operating expense $ 1,465,548 $ 1,561,516
Cost of Crude Oil & Gas Marketing 17,271 84,183
General & administrative expense 1,894,744 747,863
Depreciation, depletion and amortization 2,607,551 1,247,979
Dry hole costs and abandonments 22,113 73,293
------------ --------------
Total operating expenses $ 6,007,227 $ 3,714,834
------------ --------------
Net operating loss $ (3,289,410) $ (255,506)
Other income:
Equity in (losses) and writeoffs of
Investments in affiliates $ - $ (41,500)
Gain on sale of assets 68,033 -
Interest Income 32,934 38,653
Interest Expense (599,818) (580,667)
------------ --------------
Net loss $ (3,789,261) $ (839,020)
Preferred stock dividends $ 166,250 $ 136,230
------------ --------------
Net loss for common shareholders $ (3,955,511) $ (975,250)
============ ==============
Loss Per Share for common shareholders (.20) (.05)
============ ==============
Weighted avg. number of shares o/s 19,326,060 17,950,456
============ ==============
See accompanying notes to financial statements.
LATEX RESOURCES, INC.
Consolidated Condensed Statements of Cash Flows
Three Three
Months Ended Months Ended
October 31, October 31,
1996 1995 (unaudited)
(unaudited) (Restated)
============== ================
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (3,789,261) $ (839,020)
Adjustments to reconcile net loss to net cash
provided by operating activities: - -
Depreciation, amorization and depletion 2,607,551 1,247,979
Gain on sale of assets (68,033) -
Equity in losses and writeoffs of
investments in affiliates - 41,500
Dryhole costs and abandonments 22,113 73,293
Employee bonus 528,125 -
Forgiveness of debt 385,391
Changes in Assets and Liabilities:
Accounts receivable 115,567 (148,474)
Accounts and notes receivable-related parties 4,502
Accrued expenses payable (14,271) (12,257)
Accounts payable 1,235,245 (403,356)
Other assets 14,869 103,126
Prepaid expenses - (76,430)
------------- --------------
Net cash provided by (used in) operating activities $ 1,041,798 $ (13,639)
------------- --------------
Cash flows from investing activities:
Proceeds from sale of property and equipment $ 83,625 $ -
Purchases of property and equipment (144,084) (2,011,808)
Collections on notes receivable 127,500 -
------------- --------------
Net cash provided by (used for) investing activities $ 67,041 $ (2,011,808)
See accompanying notes to financial statements.
LATEX RESOURCES, INC.
Consolidated Condensed Statements of Cash Flows
Three Three
Months Ended Months Ended
October 31, October 31,
1996 1995 (Restated)
(unaudited) (unaudited)
============== ==============
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 increase (decrease) in cash and cash equivalents 384 $ (283,064)
Cash and cash equivalents beginning of period $ 19,337 $ 314,229
------------- -------------
Cash and cash equivalents end of period $ 19,721 $ 31,165
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 570,755 $ 580,667
============= =============
See accompanying notes to financial statements.
LATEX RESOURCES, INC.
Consolidated Statements of Stockholders' Equity
Three Months Ended October 31, 1996; Year Ended July 31, 1996
Preferred Stock Additional Total
----------------------- Common Paid-In Accumulated Treasury Stockholders
Class A Class B Stock Capital Deficit Stock Equity
========== ========= =========== ============ ========== ========== ============
Balance July 31, 1996 $ 4,498 4,800 191,240 18,355,134 (11,747,860) (489,365) 6,318,447
Issued 2,224 shares of Class A and
14,401 shares of Class B in lieu
of cash dividends 22 144 - 166,084 (166,250) - -
Issued 1,690,000 shares for
employee bonus - - 16,900 511,225 - - 528,125
Net loss - - - - (3,789,261) - (3,789,261)
---------- --------- -------- ---------- ----------- -------- ---------
Balance October 31, 1996 $ 4,520 4,944 208,140 19,032,443 (15,703,371) (489,365) 3,057,311
========== ========= ======== ========== =========== ======== =========
See accompanying notes to consolidated financial statements.
PART I - FINANCIAL INFORMATION
LaTex Resources, Inc.
Notes to Consolidated Condensed Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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. Due to the seasonal nature of the
business, the results of operations for the three months ended October 31, 1996,
are not necessarily indicative of the results that may be expected for the year
ended July 31, 1997. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Form 10-K
for the year ended July 31, 1996.
RECLASSIFICATION. Certain amounts in the October 1995 consolidated condensed
financial statements have been reclassified to conform with the October 1996
presentation.
(2) ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 121
Effective August 1, 1996, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long Lived Assets to be Disposed Of, which requires impairment losses to be
recognized for long-lived assets when indicators of impairment are present and
the undiscounted cash flows are not sufficient to recover the assets carrying
amount. The impairment loss is measured by comparing the fair value of the
asset to its carrying amount. Fair values are based on discounted future cash
flows or information provided by sales and purchases of similar assets. Under
SFAS No. 121, the Company now evaluates impairment of production assets on a
well by well basis rather than using a total company basis for its proved
properties. As a result, the Company recognized a pre-tax impairment loss of
$1.4 million in the three months ended October 31, 1996. Such loss is included
in depreciation, depletion and amortization expense.
(3) RESTATEMENT OF PRIOR YEAR
Effective March 31, 1995 the Company acquired Germany Oil Company ("Germany") in
a purchase transaction. The net assets acquired consisted primarily of oil and
gas properties. In connection with the transaction the Company failed to
allocate the purchase price to all assets acquired as required by generally
accepted accounting principles. During fiscal 1996 the Company, based on the
reports of independent petroleum engineers, reallocated the adjusted purchase
price as of the date of acquisition. Accordingly, the previously reported 1995
amounts have been restated as follows:
Statement of
Asset Liability Operations
Increase (Increase) (Increase)
(Decrease) Decrease Decrease
------------ ----------- ------------
Oil and gas properties $ 7,859,993 $ - $ -
Goodwill (9,929,199) - -
Deferred loan cost 871,270 - -
Accounts payable - 1,197,936 -
Goodwill amortization (220,650) - 220,650
Depletion expense (49,283) - 49,283
Amortization expense 58,085 - (58,085)
------------ ---------- -----------
Total $ (1,409,784) $1,197,936 $ 211,848
============ ========== ===========
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. The sales proceeds approximated net book
value.
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
lease-by-lease 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) 619 941
Oil equivalent (MBOE) 189 267
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 $ 6.92 $ 5.11
Severance tax $ 0.70 $ 0.74
General and administrative $ 9.99 $ 2.80
Depreciation, depletion and amortization $13.75 $ 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.
The amended operating data table primarily reflects the adoption of Financial
Accounting Standards No. 121 recognized in Depreciation, Depletion and
Amortization, the issuance of restricted Common Stock to the employees reflected
in general and administrative expense and the recognition of a gas balancing
liability due to the Company's overproduced status resulting in reduced sales
volumes.
Three months ended October 31,1996 Total revenues from the Company's operations
- ----------------------------------
for the quarter ended October 31, 1996 were $2,717,817 compared to $3,459,328
for the quarter ended October 31, 1995. Revenues decreased over the comparable
period a year earlier due principally to the negative effect of the product
hedges, ($542,729) lower sales volumes ($4,991) and gas imbalance adjustments
($231,327).
Depreciation, depletion and amortization increased to $2,607,551 from $1,247,979
year earlier as a result of $1,424,079 impact of FAS 121 dealing with asset
impairments.
Lease operating expenses were $1,465,548 for the three-month period ending
October 31, 1996 compared to $1,561,516 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 increased from $747,863 during the quarter
ended October 31, 1995 to $1,894,744 for the period ending October 31, 1996. The
increase is attributable to the issuance of restricted stock to employees and
additional legal fees associated with the Alliance Merger.
The net loss for common shareholders for the quarter ended October 31, 1996 was
$3,955,511 ($.20 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 of lower sales
volumes, hedging costs, the asset impairments, employee restricted stock
issuance and the gas balancing liability.
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 decrease 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 $4.1 million and current liabilities of
$32.8 million which resulted in negative working capital of $28.7 million. The
Company's working capital deficit is primarily due to the current liability
classification of all indebtedness of the Company to its principal bank, and
increases in royalty and vendor payables resulting from the Company's inability
to fund its current obligations due primarily to product hedging losses. 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.
Management plans to reduce the working capital deficit include curtailment of
the development of its undeveloped properties, strategic sales of certain of its
oil and gas properties, and the aggressive reduction of administrative and such
other costs that have been determined to be nonessential. Management plans also
include consideration of alliances or other partnership arrangements or
potential merger opportunities. 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 $1,041,798 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 generated $67,041 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 decrease in property acquisitions.
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 1996 was a result of the
monthly amortization of the Company's indebtedness to its principal bank. 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 oil and gas properties. Sales of non-strategic and minor interest oil and gas
properties accounted for $68,033 of gains in the current quarter. The Company
expects to pursue a more aggressive policy of disposition of oil and gas
properties in fiscal 1997.
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. 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's proposed
merger with Alliance Resources Plc, if completed, would be a source of such
equity capital.
15
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 and to date, 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. The Company is currently in compliance with all
conditions required by the Bank for adherence to the Forbearance Agreement.
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: March 12, 1997
25