EXHIBIT 99.3
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
PAGE
----
ALLIANCE
Report of Independent Auditors F-2
Statement of Directors' Responsibility for Consolidated Financial Statements F-3
Consolidated Statement of Income for the years ended April 30, 1996, 1995, 1994 F-4
Consolidated Balance Sheet as at April 30, 1996 and 1995 F-5
Consolidated Statement of Stockholders' Equity for the years ended April 30, 1996, 1995, 1994 F-6
Consolidated Statement of Total Recognized Gains and Losses for the years ended April 30,
1996, 1995 1994 F-7
Consolidated Statement of Cash Flows for the years ended April 30, 1996, 1995, 1994 F-8
Notes to the Financial Statements F-9
Supplemental Oil and Gas data (unaudited) F-31
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
ALLIANCE RESOURCES PLC
We have audited the consolidated financial statements of Alliance Resources Plc
and subsidiaries as listed in the accompanying index. These consolidated
financial statements are the responsibility of the company's directors. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United Kingdom, which are substantially in accordance with generally
accepted auditing standards in the United States. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by the directors as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly in all material respects the financial position of Alliance Resources Plc
and subsidiaries as of April 30, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three year period
ended April 30, 1996 in conformity with generally accepted accounting principles
in the United Kingdom.
Generally accepted accounting principles in the United Kingdom vary in certain
significant respects from generally accepted accounting principles in the United
States. Application of generally accepted accounting principles in the United
States would have affected the results of operations and shareholders' equity as
at and for the years ended April 30, 1995 and 1996, to the extent summarized in
Note 29 to the consolidated financial statements.
London, England KPMG Audit Plc
October 16, 1996, except note 26 Chartered Accountants
which is as of February 19, 1997 Registered Auditor
F-2
STATEMENT OF DIRECTORS' RESPONSIBILITY FOR CONSOLIDATED FINANCIAL STATEMENTS
UK company law requires the Directors to prepare financial statements for each
financial year which give a true and fair view of the state of affairs of the
Company and Group and of the profit or loss for that period. In preparing those
financial statements, the Directors are required to:
. select suitable accounting policies and then apply them consistently;
. make judgments and estimates that are reasonable and prudent;
. state whether applicable accounting standards have been followed, subject
to any material departures disclosed and explained in the financial
statements;
. prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the Group will continue in business.
The Directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
Company and to enable them to ensure that the financial statements comply with
the UK Companies Act of 1985. They have general responsibility for taking such
steps as are reasonably open to them to safeguard the assets of the Group and to
prevent and detect fraud and other irregularities.
F-3
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED APRIL 30,
---------------------------------------
1996 1995 1994
NOTES $ 000 $ 000 $ 000
----- -------- -------- --------
Revenues:
Oil and natural gas sales and other operating revenues (2) 3,686 1,483 837
-------- -------- --------
Costs and expenses: (5)
Exceptional amounts written off oil and gas interests (3) - (14,881) -
Exceptional costs arising from irregularities (4) (589) (1,787) -
Direct operating expenses (2,262) (933) (903)
Selling, general and administrative expenses (2,629) (1,637) (927)
Depreciation, depletion and amortization (1,668) (63) (128)
-------- --------- -------
OPERATING (LOSS) (6) (3,462) (17,818) (1,121)
Other income and deductions:
Interest (net) (8) 229 (114) (56)
Profit on sales of fixed asset investment - 183 -
Exceptional amounts written off investments (7) (201) (464) -
Foreign exchange losses (159) - -
-------- --------- --------
NET (LOSS) (3,593) (18,213) (1,177)
======== ========= ========
LOSS PER SHARE (CENTS) (10) (1.1) (13.0) (1.2)
======== ========= ========
F-4
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
AS AT
APRIL 30,
---------------------
ASSETS 1996 1995
NOTES $ 000 $ 000
----- -------- ---------
Current assets:
Cash and cash equivalents 1,177 64
Receivables: (14)
Trade 736 626
Other 557 484
Prepaid expenses 64 88
Other current assets - 26
-------- ---------
Total current assets 2,534 1,288
-------- ---------
Net property, plant and equipment
(full cost method for oil and gas properties) (11) 7,311 8,047
-------- ---------
Total assets 9,845 9,335
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities: (15)
Bank loans and overdrafts 37 366
Development loans 5 2,356
Trade accounts payable 1,279 2,574
Accrued expenses - 1,262
Other 677 2,945
------- ---------
Total current liabilities 1,998 9,503
Long term debt, excluding current installments (16) 92 1,240
Other liabilities (16) - 30
------- ---------
Total liabilities 2,090 10,773
------- ---------
Stockholders' equity:
Ordinary shares, (Pounds)0.01 par value.
Authorized 465,000,000 shares; (17) 5,105 2,524
issued 324,152,633 in 1996 and 161,403,971 shares in 1995
Ordinary shares, (Pounds)0.01 par value to be issued (18) - 2,030
Share premium 20,157 7,922
Merger reserve 401 401
Special reserve (19) - 4,300
Retained earnings (17,908) (18,615)
------- ---------
Total stockholders' equity 7,755 (1,438)
------- ---------
Total liabilities and stockholders' equity 9,845 9,335
======= =========
F-5
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
ORDINARY ADDITIONAL TOTAL
ORDINARY SHARES TO PAID IN MERGER SPECIAL RETAINED STOCKHOLDERS'
SHARES BE ISSUED CAPITAL RESERVE RESERVE EARNINGS EQUITY
$ 000 $ 000 $ 000 $000 $ 000 $ 000 $ 000
------- --------- ------- ------- ------- -------- --------
As at April 30, 1993 3,678 - 5,808 - - (3,422) 6,064
Issues of shares 1,707 - 6,308 - - - 8,015
Goodwill arising on acquisition - - - - - (1,073) (1,073)
Retained loss for the year - - - - - (1,177) (1,177)
Foreign exchange translation - - - - - 460 460
------- --------- ------- ------- ------- -------- --------
As at April 30, 1994 5,385 - 12,116 - - (5,212) 12,289
Issues of shares 449 - 1,931 401 - - 2,781
Shares to be issued - 2,030 - - - - 2,030
Share issue costs - - (317) - - - (317)
Capital reduction (3,310) - (5,808) - 4,300 4,818 -
Retained loss for the year - - - - - (18,213) (18,213)
Foreign exchange translation - - - - - (8) (8)
------- --------- ------- ------- ------- -------- --------
As at April 30, 1995 2,524 2,030 7,922 401 4,300 (18,615) (1,438)
Issues of shares 2,581 (2,030) 12,678 - - - 13,229
Share issue costs - - (443) - - - (443)
Special reserve transfer - - - - (4,300) 4,300 -
Retained loss for the year - - - - - (3,593) (3,593)
------- --------- ------- ------- ------- -------- --------
As at April 30, 1996 5,105 - 20,157 401 - (17,908) 7,755
======= ========= ------- ======= ======= ======== ========
F-6
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF TOTAL RECOGNIZED GAINS AND LOSSES
YEAR ENDED APRIL 30
--------------------------------------------------
1996 1995 1994
$000 $000 $000
---------- ------------- ---------------
Loss for the year (3,593) (18,213) (1,177)
Foreign exchange translation - (8) 460
Total recognized gains and losses for the period (3,593) (18,221) (717)
F-7
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED APRIL 30,
-------------------------------------------------
1996 1995 1994
NOTES $ 000 $ 000 $ 000
----- --------- ---------- ------------
NET CASH (OUTFLOW)/INFLOW FROM OPERATING
ACTIVITIES (20) (5,399) 1,987 (1,597)
------- ------- -------
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest received 236 49 69
Interest paid (28) (163) (125)
------- ------- -------
NET CASH INFLOW/(OUTFLOW) FROM RETURNS ON
INVESTMENTS AND SERVICING OF FINANCE 208 (114) (56)
------- ------- -------
INVESTING ACTIVITIES
Payments to acquire tangible fixed assets (3,270) (3,413) (3,476)
Payments to acquire investments (59) (165) (402)
Purchases of subsidiaries (23) - (941) 416
Receipts from sale of investments 77 474 -
Receipts from sales of tangible fixed assets 740 - -
------- ------- -------
NET CASH OUTFLOW FROM INVESTING ACTIVITIES (2,512) (4,045) (3,462)
------- ------- -------
NET CASH OUTFLOW BEFORE FINANCING (7,703) (2,172) (5,115)
------- ------- -------
FINANCING (21)
Proceeds from issue of shares 12,087 - 6,031
Share issue costs (443) (317) (512)
(Decrease)/increase in bank borrowings (904) (269) 260
Repayment of notes payable - - (483)
(Repayment)/proceeds from development loans (1,351) 2,351 -
(Repayment)/acquisitions of other loans (528) 620 -
------- ------- -------
NET CASH INFLOW FROM FINANCING 8,861 2,385 5,296
------- ------- -------
INCREASE IN CASH AND CASH EQUIVALENTS (22) 1,158 213 181
======= ======= =======
F-8
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - ACCOUNTING POLICIES
Basis of preparation
At the time of drawing up the 1995 financial statements, the Company was in the
process of investigating significant irregularities in the Group's affairs
during the period in which Mr. O'Brien was Chief Executive and a forensic
investigation had uncovered a number of matters which required significant
adjustments to the books and records of the Group. In addition to the forensic
investigation, the Company instructed Ryder Scott Company, a firm of independent
petroleum reservoir engineers, to carry out an evaluation of the oil and gas
reserves attributable to the Group. As the result of both the investigation
which had at that time not been concluded and the Ryder Scott Company reserve
review, exceptional write downs of $16,668,000 relating to the Group's oil and
gas reserves and $464,000 relating to fixed asset investments, were charged to
the profit and loss account. It was not possible to properly allocate these
charges between items relating to the irregularities and the evaluation of the
Group's oil and gas reserves at that time.
The forensic investigation has been concluded and a settlement with Mr. O'Brien
has been agreed. Consequently, $1,787,000 which had originally been capitalized
and provided for in the 1995 accounts as part of the $16,668,000 exceptional
write down of the Group's oil and gas fixed assets, has since been identified as
the estimated loss to the Group arising from the alleged fraudulent activities
and has now been reclassified as a separate item (see note 4). The exceptional
write down relating to oil and gas assets has accordingly been restated as
$14,881,000. The accumulated cost and depletion of oil and gas interests at 1
May 1995 have been reduced by $1,787,000. In addition $285,000 of payments made
to acquire tangible fixed assets have been similarly classified to operating
cash flow.
The accounting policies set out below have been used by the Company in the
preparation of the financial statements.
Accounting convention
The financial statements have been prepared under the historical cost convention
and in accordance with applicable accounting standards in the United Kingdom.
Basis of consolidation
The consolidated financial statements comprise the financial statements of the
Company and its subsidiaries.
Goodwill
Goodwill relating to businesses purchased by the Group, where arising, is set
off immediately against reserves.
Reporting currency
The Group's current operations are in the oil and gas industry in the United
States and are conducted through its subsidiaries, Alliance Resources (USA),
Inc. and Source Petroleum, Inc. Transactions are conducted primarily in US
dollars. As a result, the directors consider that the US dollar is the
functional currency of the Group and the Group's financial statements have been
prepared in US dollars. The Company's share capital is denominated in sterling
and for the purposes of the financial statements, is translated into US dollars
at the rate of exchange at the time of its issue.
Foreign currency translation
The accounts of companies of the Group whose functional currency is not US
dollars are translated for consolidation purposes at the rate of exchange ruling
at the balance sheet date. Exchange differences arising on the retranslation of
opening net assets are taken directly to reserves.
F-9
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
For those companies whose functional currency is not US dollars, transactions
with third parties are translated into US dollars at the exchange rate
prevailing at the date of each transaction. Monetary assets and liabilities
denominated in foreign currencies are translated into US dollars at the exchange
rate prevailing at the balance sheet date. Any exchange gain or loss is dealt
with through the profit and loss account.
Abandonment
Provision is made for abandonment costs net of estimated salvage values, on a
unit-of-production basis, where appropriate.
Turnover
Turnover represents income from production and delivery of oil and gas, recorded
net of royalties and fees for the provision of technical services. All turnover
arises from activities within the United States.
Oil and gas interests
The Group follows the full cost method of accounting for oil and gas operations
whereby all costs of exploring for and developing oil and gas reserves are
capitalized as tangible fixed assets. Such costs include lease acquisition
costs, geological and geophysical costs, the costs of drilling both productive
and non-productive wells, production equipment and related overhead costs.
Capitalized costs, plus estimated future development costs, are accumulated in
pools on a country-by-country basis and depleted using the unit-of-production
method based upon estimated proved net reserve volumes. Reserve volumes are
combined into equivalent units using relative energy content.
Costs of acquiring and evaluating unproved properties and major development
projects are excluded from the depletion calculation until it is determined
whether or not proved reserves are attributable to the properties, the major
development projects are completed, or impairment occurs, at which point such
costs are transferred into the pool.
Proceeds from the sale or disposal of properties are deducted from the relevant
cost pool with any overall deficit or surplus being recognized in the profit and
loss account.
The Group performs a 'ceiling test' calculation in line with industry practice.
Costs permitted to be accumulated in respect of each cost pool are limited to
the future estimated net recoverable amount from estimated production of proved
reserves.
Depreciation of other fixed assets
Other tangible fixed assets are stated at cost less accumulated depreciation.
Depreciation is provided on a straight line basis to reduce the cost of assets,
net of estimated residual values, over their estimated useful lives as follows:
Fixtures and equipment - 3 to 7 years
Freehold buildings - 30 years
No depreciation is provided on freehold land.
Deferred taxation
Deferred taxation, calculated using the liability method, is provided only where
it is probable that a liability will crystallize.
F-10
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Joint ventures
The Group's exploration, development and production activities are generally
conducted in joint ventures with other companies. The financial statements
reflect the relevant proportions of turnover, production, capital expenditure
and operating costs applicable to the Group's interests.
Fixed asset investments
Fixed asset investments are stated at cost less any provisions required for
permanent diminutions in value.
Leases
Rentals under operating leases are charged to the profit and loss account on a
straight line basis over the lease term.
Cash equivalents
Deposits with original terms of maturity of 90 days or less are considered to be
cash equivalents.
NOTE 2 - SEGMENTAL REPORTING
The Group's current operating activities are principally conducted in the United
States of America and relate to the oil and gas exploration and production
business and the provision of oil and gas services to this business. All
turnover arises from activities within the United States of America, with
turnover by destination not materially different from turnover by origin.
NOTE 3 - EXCEPTIONAL AMOUNTS WRITTEN OFF OIL AND GAS INTERESTS
The proved oil and gas reserves of the Group and the net recoverable amount
arising therefrom were estimated as at April 30, 1995 by Ryder Scott Company, a
firm of independent petroleum engineers following the discovery that Valentine
#14 well was not capable of commercial production and that the Group had
relinquished title to its undeveloped acreage in the Valentine field.
The amount of $14,881,000 (see note 1) written off in the year to April 30, 1995
represents the write down relating to the carrying value of the Group's oil and
gas interests as restated after the reclassification of $1,787,000 as a separate
exceptional item (see note 4). The net book value of the oil and gas interests
as at April 30, 1995 is included in the balance sheet at that date at the
estimated net amount recoverable through production.
NOTE 4 - EXCEPTIONAL COSTS ARISING FROM IRREGULARITIES
During the year ended April 30, 1996, following the discovery that Mr. O'Brien
appeared to have been fraudulently misrepresenting the position at the Valentine
field relating to the #14 well, the Company undertook (with the assistance of
external advisers) an investigation into the involvement of Mr. O'Brien in the
affairs of the Company.
This investigation has revealed that the Group has suffered a financial loss as
the result of a number of transactions involving Mr. O'Brien or parties now
known to have been connected with him.
F-11
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
The resulting exceptional charge comprises:
1996 1995
$ 000 $ 000
----- ------
Loss arising from transactions with certain companies related to Mr. O'Brien 73 1,787
Professional fees 788 -
Estimated proceeds resulting from the settlement with Mr. O'Brien (272) -
----- ------
589 1,787
===== ======
Loss arising from transactions with certain companies related to Mr. O'Brien
The loss of $73,000 relates to an improper payment on the June 19, 1995 of
(Pounds)48,750 to Jasmine Consultants Limited. Jasmine Consultants Limited is an
off-shore company beneficially owned by Mr. O'Brien.
The loss of $1,787,000 arises from a number of transactions with certain
companies related to Mr. O'Brien in the year to April 30, 1995 as set out below:
. On August 10, 1994, the Company issued 7,500,000 ordinary shares to Progas
Holdings Limited, a company in which Mr. O'Brien now admits to have an
interest and which is incorporated in Delaware, USA. This issue of shares
was in consideration for a 5.75% working interest in the Valentine field.
It has subsequently been discovered that Progas Holdings Limited acquired
this interest in the Valentine field from its previous owners on 21 July
1994 at a price of $255,000.
. On January 15, 1995 the Group entered into a loan agreement with Progas
Holdings Limited to record the terms of a loan of which $1,129,000 had been
advanced by Progas Holdings Limited between July 28, 1994 and December 16,
1994. The principal terms of the loan were:
. a facility of $1,400,000 to be drawn down solely for the purpose of
drilling and developing the Valentine #14 well;
. if the well was successful in proving commercially recoverable
quantities of oil and gas the amount drawn down together with a 100%
premium would be payable to Progas Holdings Limited from commencement
of production to July 30, 1995 at the latest, with the Group reserving
a right of early settlement in full;
. if the well was abandoned within six months of the date of the
agreement the amount drawn down was repayable immediately.
. On February 22, 1995, on the basis of representations from Mr. O'Brien
that Valentine #14 well was successful, it was agreed that 10,351,966
ordinary shares of the Company would be issued to Progas Holdings
Limited at 6p per share in satisfaction of $1,000,000 of the debt with
the remaining $1,258,000 to be repaid in cash.
. On May 10, 1995, 10,351,966 ordinary shares were so issued and the
aggregate sum of (Pounds)794,000 was paid to Progas Holdings Limited
to satisfy the liability of $1,258,000. The premium paid of $1,129,000
was not justified.
. On April 5, 1995, the Group made a payment of $ 175,000 to Progas
Holdings Limited for no apparent commercial reason.
F-12
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
. Between August 26, 1993 and September 1, 1993, the Group acquired a
1.375% overriding royalty interest in the Valentine field from Royalty
Investments Limited (a company which Mr. O'Brien now admits he owns),
for $185,000. Royalty had acquired a 0.125% overriding royalty
interest in the Valentine field from an unrelated third party on
August 23, 1993 for $7,500. The Company believes the interest
purchased to have been overvalued by $102,000.
Professional fees
The exceptional cost of $788,000 in the year to 30 April 1996 relates to the
estimated cost of professional assistance obtained by the directors in relation
to actions taken arising from the alleged fraudulent activities in the period in
which Mr. O'Brien was Chief Executive.
Estimated proceeds resulting from the settlement with Mr. O'Brien
The Company has reached a settlement with Mr. O'Brien. One of the terms of the
settlement requires the disposal of 10,351,966 shares in the Company held in the
name of Progas Holdings Limited and the payment of the proceeds of sale of those
shares to the Company. These shares are currently in the custody of an
independent third party, pending their sale. Mr. J. A. Keenan, the Managing
Director of Alliance, has a proxy over the voting rights attaching to these
shares and to certain other shares in the Company held by Mr. O'Brien, Diamond
Securities Limited and Havensworth Limited, the latter two being companies
beneficially owned by Mr. O'Brien, pending their sale by Mr. O'Brien and these
companies as required by the settlement. The exceptional credit of $272,000
relates to the expected proceeds resulting from the sale of the shares in the
name of Progas Holdings Limited calculated using the market price prior to
suspension of the Company's shares.
NOTE 5 - OPERATING COSTS
1996 1995 1994
$000 $000 $000
-------- -------- --------
Total operating costs were: 7,148 19,301 1,958
====== ======== =====
Made up as follows:
Cost of sales
Exceptional amounts written off oil and gas interests (note 3) - 14,881 -
Exceptional costs arising from irregularities (note 4) - 1,787 -
Operating costs and production taxes 2,318 996 903
Depletion of oil and gas interests 1,612 - 125
3,930 17,664 1,028
====== ======== =====
Administrative expenses
Exceptional professional fees net of expected settlement proceeds (note 4) 589 - -
Administrative expenses 2,629 1,637 930
------ -------- -----
3,218 1,637 930
====== ======== =====
The gross (loss)/profit was: (244) (16,181) 191
====== ======== =====
F-13
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - OPERATING LOSS
The operating loss has been arrived at after charging the following:
1996 1995 1994
$000 $000 $000
------- ------- ------
Auditors' remuneration - audit 188 48 30
Auditors' remuneration - non-audit services 41 68 103
Depreciation, depletion and amortization of tangible fixed assets 56 63 3
(excluding oil and gas assets)
Depreciation, depletion and amortization of oil and gas fixed assets 1,612 14,881 125
(including ceiling test write-down)
Lease costs on buildings 35 62 41
Hire of plant and equipment 78 4 42
------ ------- ----
In the year ended April 30, 1995, in addition to the $68,000 charged to the
profit and loss account , $129,000 of fees paid to KPMG were charged to the
share premium account in connection with the placing and open offer which was
completed on May 9, 1995.
NOTE 7 - EXCEPTIONAL AMOUNTS WRITTEN OFF INVESTMENTS
Following the removal of Mr. O'Brien, the Group reviewed its portfolio of
investments, unlisted investments and joint venture interests. It was
considered unlikely that significant amounts would be recovered from the
Tatarstan investment or from the Geos joint venture. Accordingly, charges have
been made to the profit and loss account in the years ended April 30, 1995 and
1996 in respect of costs incurred in relation to these investments.
NOTE 8 - INTEREST (NET)
1996 1995 1994
$000 $000 $000
-------- -------- --------
Interest receivable 257 49 69
Interest payable on bank loans and overdrafts wholly repayable within
five years (28) (163) (125)
----- ----- ----
229 (114) (56)
===== ===== ====
NOTE 9 - TAXATION
No material charge to UK corporation tax or US federal income tax arises on the
results for the year to April 30, 1996 (1995:$nil, 1994:$nil) due to the
availability of substantial losses for taxation purposes.
Deferred taxation has not been provided as at April 30, 1996 as sufficient
losses exist to extinguish potential deferred liabilities (1995: $nil; 1994:
$nil).
NOTE 10 - LOSS PER SHARE
The calculation of loss per share is based upon the following:
1996 1995 1994
------------- ------------ ------------
Loss for the period ($000) 3,593 18,213 1,177
============ ============ ===========
Weighted average number of shares 317,175,674 140,416,616 99,598,313
============ ============ ===========
F-14
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - NET PROPERTY, PLANT AND EQUIPMENT
FREEHOLD
LAND AND OIL AND GAS FIXTURES &
BUILDINGS INTERESTS EQUIPMENT TOTAL
$000 $000 $000 $000
------------ ------------ ----------- -------
COST
At May 1, 1994 - 16,150 55 16,205
Additions - 6,220 49 6,269
Acquisitions 104 2,012 148 2,264
Disposals - - (29) (29)
------------ ------------ ----------- -------
At May 1, 1995 104 24,382 223 24,709
Additions - 1,657 15 1,672
Disposals - (735) (125) (860)
------------ ------------ ----------- -------
At April 30, 1996 104 25,304 113 25,521
============ ============ =========== =======
DEPRECIATION, DEPLETION AND
AMORTIZATION
At May 1, 1994 - 1,704 17 1,721
Charge for the year 1 - 62 63
Exceptional charge - 14,881 - 14,881
Transfer to current assets - - (3) (3)
------------ ------------ ----------- -------
At May 1, 1995 1 16,585 76 16,662
Charge for the year 3 1,612 53 1,668
Disposals - - (120) (120)
------------ ------------ ----------- -------
At April 30, 1996 4 18,197 9 18,210
============ ============ =========== =======
NET BOOK VALUE
At April 30, 1996 100 7,107 104 7,311
============ ============ =========== =======
At April 30, 1995 103 7,797 147 8,047
============ ============ =========== =======
A substantial portion of the Group's oil and gas exploration, development and
production activities are conducted jointly with others.
All of the Group's producing oil and gas interests are located in one onshore US
oil and gas pool.
As at April 30, 1995 the Group had an interest in the Donkerbroek field, a non-
producing pre-development field located off-shore The Netherlands which had not
been included in the full cost pool and had not been subject to depletion. On
June 5, 1995, the Group sold this interest for consideration after associated
costs of $398,000. On July 12, 1995, the Group sold its oil and gas interests
in Colorado, USA for net consideration of $283,000.
Freehold land of $25,000 is not depreciated.
F-15
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 - INVESTMENTS
$ 000
-----
Cost and net book value
At May 1, 1994
Additions 590
Amounts written off 165
Disposal (464)
(291)
-----
At May 1, 1995
Additions -
Amounts written off 201
Disposal (201)
-
-----
At April 30, 1996
-
=====
As explained in note 7, an exceptional charge of $201,000 (1995: $464,000) was
made in the year ended April 30, 1996 relating to the investment in Tatarstan
and Geos joint venture.
F-16
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 - PRINCIPAL SUBSIDIARIES
The principal subsidiaries of the Company all of which were wholly owned at
April 30, 1996, were as follows:-
ISSUED AND
PLACE OF FULLY PAID %
REGISTRATION SHARE CAPITAL OWNED NATURE OF BUSINESS
Alliance Resources (USA) Inc. USA 2,000 100 Oil and gas
common exploration and
shares US$1 production
each
Manx Petroleum Plc* England 2,585,705 100 Oil services
ordinary
shares of 5p
each and
1,300,000
non-voting
deferred
shares of 95p
each
Celtic Basin Oil England 621,110 100 Oil and gas
Exploration Ltd ordinary exploration and
shares of (Pounds)1 production
each
Source Petroleum Inc. USA 100 common 100 Oil and gas
shares of exploration and
US$1 each production
Alliance Resources Group Inc.* USA 100 common 100 Investment
shares of
US$1 each
ARNO Inc. USA 100 common 100 Oil and gas
shares of no exploration and
par value production
ARCOL Inc. USA 100 common 100 Oil and gas
shares of no exploration and
par value production
* owned directly by the Company.
The place of registration of each subsidiary undertaking is also
its principal country of operation.
F-17
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 - ACCOUNTS RECEIVABLE
1996 1995
$ 000 $ 000
------- -------
Due within one year:
Trade debtors 736 626
Other debtors 557 484
Prepayments and accrued income 64 88
------- -------
1,357 1,198
======= =======
NOTE 15 - CURRENT LIABILITIES
1996 1995
$ 000 $ 000
------- -------
Bank loans (secured) 37 321
Bank overdrafts - 45
Trade creditors 1,279 2,574
Other creditors including taxation and social security 677 2,945
Development loans and other loans 5 2,356
Accruals - 1,262
------- -------
1,998 9,503
======= =======
Development loans represented specific loans granted during the year ended April
30, 1995 to provide funds for drilling and developing the Valentine #14 well.
F-18
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOTE 16 - LONG-TERM DEBT AND OTHER LIABILITIES
1996 1995
$ 000 $ 000
----- -------
Bank loans (secured) - 620
Trade creditors - 30
Other loans (secured) 92 620
----- -------
92 1,270
===== =======
Bank loans and overdrafts were repayable as follows:
1996 1995
$ 000 $ 000
----- -------
Less than one year (see note 15) 37 366
Between one and two years - 311
Between two and five years - 309
37 986
Less: amounts included in current liabilities (37) (366)
----- -------
Amounts due after more than one year - 620
===== =======
Development loans and other loans were repayable as follows:
1996 1995
$ 000 $ 000
----- -------
Less than one year (see note 15) 5 2,356
Between one and two years 6 560
Between two and five years 21 42
After five years 65 18
----- -------
97 2,976
Less: amounts included in current liabilities (5) (2,356)
----- -------
Amounts due after more than one year 92 620
===== =======
The bank loan as at April 30, 1995, of $620,000 falling due after more than one
year and $308,000 falling due within one year, was repayable in equal monthly
instalments by June 6, 1998 at a fixed rate of interest of 8% and was secured by
a $3,000,000 collateral mortgage and security interests in certain mineral
leases of the Group. This loan was repaid after April 30, 1995 from the
proceeds of the placing and open offer which was completed on May 9, 1995.
Other loans as at April 30, 1996 and April 30, 1995 comprised a $92,000
(1995:$95,000) loan repayable in instalments, bearing interest at 9% per annum,
which was secured on the Group's freehold land and buildings. Also included in
other loans at April 30, 1995 a $525,000 loan which was free of interest and
secured upon certain mineral leases of the Group.
Further information in relation to development loans is set out in note 25.
F-19
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOTE 17 - SHARE CAPITAL
1996 1995
------------ ------------
Authorized
- - ordinary shares of 1p each 465,000,000 216,000,000
============ ============
Allotted, called up and fully paid
- - ordinary shares of 1p each 324,152,633 161,403,971
============ ============
1996 1995
Amount in SterlinG (Pounds)000 (Pounds)000
------------ ------------
Authorized
- - ordinary shares of 1p each 4,650 2,160
------------ ------------
Allotted, called up and fully paid
- - ordinary shares of 1p each 3,242 1,614
============ ============
1996 1995
Amount in US dollars $ 000 $ 000
------------ ------------
Allotted, called up and fully paid
- - ordinary shares of 1p each 5,105 2,524
============ ============
AUTHORIZED SHARE CAPITAL
On May 4, 1995, the authorized share capital of the Company was increased to
465,000,000 ordinary shares of 1p nominal value by the creation of an additional
249,000,000 ordinary shares of 1p each, ranking pari passu with the existing
ordinary shares.
ISSUE OF SHARES
The following 1p ordinary shares were issued in the year to April 30, 1996:
(i) on May 9, 1995, 18,426,500 ordinary shares were issued in part
consideration for the acquisition of a portfolio of oil and gas assets in
the US from North American Gas Investment Trust PLC that had been made
during the year ended 30 April 1995;
(ii) on May 10, 1995, 127,470,196 ordinary shares were issued at 6p per share
by way of a placing and open offer which raised net proceeds of
US$11,663,000 after share issue costs of US$443,000;
(iii) on May 9, 1995, 10,351,966 ordinary shares were issued at 6p in part
repayment of a development loan from Progas Holdings Limited;
(iv) on July 19, 1995, 1,500,000 ordinary shares were issued in consideration
for the acquisition of all the issued 'A' ordinary share capital of
Geological Forecast Technology Limited;
(v) on November 27, 1995, 5,000,000 ordinary shares were issued as final
consideration for the repayment of a development loan from North American
Gas Investment Trust PLC that had been made during the year ended April
30, 1995.
F-20
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
SHARE OPTIONS
On June 15, 1995, the following share options were granted pursuant to Alliance
Resources Plc Share Option Scheme (No. 1) to directors and employees of the
Company, exercisable at 6p per share.
John X F O'Brien 2,500,000 options
Nicholas C Gray 1,500,000 options
Other employees 1,325,000 options
At April 30, 1996 all options had ceased to be exercisable and have subsequently
lapsed.
At the time of issue of the 1996 financial statements, there were no options
granted under the schemes but the Board has resolved that the following share
options be granted to the following executive directors:
John A Keenan 6,000,000 options
H Brian K Williams 2,500,000 options
Paul R Fenemore 1,000,000 options
Such options were to be granted at an appropriate time and at a price to be
determined in accordance with the provisions of the Company's Share Option
Scheme.
By an agreement dated March 31, 1994, the Company granted to John Duncan and Co
Limited an option to subscribe for 2,000,000 ordinary shares at 7.25p per share
in consideration for professional services. The option is exercisable in whole
or in part at any time from January 1, 1998 up to and including December 31,
2001.
NOTE 18 - SHARES TO BE ISSUED
Shares to be issued at April 30, 1995 represent the remainder of the
consideration payable on the acquisition of a portfolio of oil and gas assets in
the US from North American Gas Investment Trust PLC, made during the year to
April 30, 1995 and consideration payable in repayment of a development loan from
North American Gas Investment Trust PLC.
$000
----
Shares in respect of acquisition (issued on May 9, 1995) 1,780
Shares in respect of loan repayment (issued on November 27, 1995) 250
-----
2,030
=====
Consideration given on May 9, 1995 and November 27, 1995 was made up of
18,426,500 and 5,000,000 ordinary shares of 1p each respectively issued at a
premium. Aggregate increases in share capital and share premium were as
follows:
$000 $000
---- ----
Share capital issued on May 9, 1995 297
Share capital issued on November 27, 1995 80
-----
377
Premium on shares issued on May 9, 1995 1,483
Premium on shares issued on November 27, 1995 170
-----
1,653
-----
2,030
=====
F-21
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOTE 19 - SPECIAL RESERVE
The special reserve of $4,300,000 at April 30, 1995 was set up as a result of a
reduction of share capital and share premium account approved by the High Court
on October 5, 1994 and was subject to restrictions imposed by the Court. These
restrictions were to become inoperative when new consideration of an equivalent
amount was received on shares issued after October 6, 1994. This occurred on
May 9, 1995 and, accordingly, the reserve has been transferred to the
accumulated profit and loss account.
NOTE 20 - RECONCILIATION OF OPERATING LOSS TO NET CASH (OUTFLOW)/INFLOW FROM
OPERATING ACTIVITIES
1996 1995 1994
$ 000 $ 000 $ 000
------- ------- -------
Operating loss (3,462) (17,818) (1,121)
Exceptional amounts written off - 14,881 -
Profit on sale of investments (51) - -
Depreciation, depletion and amortization of oil and gas interests 1,612 - 125
Depreciation of non-oil and gas interests 56 63 3
(Increase)/decrease in debtors (138) 114 601
(Decrease)/increase in creditors (3,416) 4,747 (1,205)
------- ------- ------
Net cash (outflow)/inflow from operating activities (5,399) 1,987 (1,597)
======= ======= ======
F-22
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOTE 21 - ANALYSIS OF CHANGES IN FINANCING
NOTES OTHER BANK SHARE
PAYABLE LOANS LOANS CAPITAL
$ 000 $ 000 $ 000 $ 000
-------- ------- ------- -------
Balance at May 1, 1993 483 - 965 9,486
Issues of shares for non-cash consideration - - - 2,496
Proceeds from issue of shares - - - 6,031
Share issue cost - - - (512)
Repayment of notes payable (483) - - -
Exchange gain - - (15) -
Bank borrowings - - 260 -
----- ------- ------- -------
Balance at April 30, 1994 - - 1,210 17,501
Issue of shares for non-cash consideration - - - 2,781
Shares to be issued for non-cash consideration - - - 2,030
Share issue costs - - - (317)
Non-cash share capital reduction - - - (4,818)
Repayment of bank borrowings - - (269) -
Proceeds from development loans - 2,351 - -
Loans in connection with Source acquisition - 625 - -
----- ------- ------- -------
Balance at April 30, 1995 - 2,976 941 17,177
Issue of shares for non-cash consideration - (1,000) - 1,142
Proceeds from issue of shares - - - 12,087
Share issue costs - - - (443)
Non-cash transfer of special reserve - - - (4,300)
Repayment of bank borrowings - - (904) -
Repayment of development loans - (1,351) - -
Repayment of other loans - (528) - -
----- ------- ------- -------
Balance at April 30, 1996 - 97 37 25,663
===== ======= ======= =======
Other loans include development loans and other loans disclosed in notes 15 and
16.
Share capital includes shares to be issued, share premium, merger reserve and
special reserve.
NOTE 22 - ANALYSIS OF CHANGES IN CASH AND CASH EQUIVALENTS
$ 000
-------
Balance at May 1, 1993 (375)
Net cash inflow 181
-------
Balance at May 1, 1994 (194)
Net cash inflow 213
-------
Balance at April 30, 1995 19
Net cash inflow 1,158
-------
Balance at April 30, 1996 1,177
=======
F-23
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Analysis of the balances of cash and cash equivalents as shown on the
consolidated balance sheets:
1996 1995 1994
$ 000 $ 000 $ 000
------- ------- -------
Cash and cash equivalents 1,177 64 288
Bank overdrafts - (45) (482)
------- ------- -------
1,177 19 (194)
======= ======= =======
NOTE 23 - ACQUISITIONS.
On January 25, 1995 the Group acquired Source Petroleum Inc. ("Source"), an oil
and gas exploration and production company. The acquisition has been accounted
for using the acquisition method of accounting. The following summarizes the
fair value ascribed at the date of acquisition:
Net assets acquired: $ 000
-------
Tangible fixed assets 2,264
Debtors 340
Bank overdraft (28)
Creditors (1,210)
-------
1,366
=======
Acquisition cost:
Shares allotted 453
Cash 913
-------
1,366
=======
The consideration for the acquisition was satisfied by the issue of 3,205,128
ordinary shares and cash of $800,000. $113,000 was expended in costs connected
with the acquisition.
The amounts attributed to the assets and liabilities of Source represent
estimates of fair market values at the date of acquisition. These amounts were
the same as the book values at acquisition, except that the net book value of
tangible fixed assets was $1,871,000 with the fair value uplift being $393,000
and the net book value of creditors was $1,611,000 with the fair value
attributed being $1,210,000.
The effect of the acquisition on the Group's results for the year to April 30,
1995 was to increase the loss for the financial year by $20,000. Unaudited
financial statements of Source for the five month period ended April 30, 1995
showed a loss for the period of $20,000.
F-24
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOTE 24 - EMPLOYEES
1996 1995 1994
$ 000 $ 000 $ 000
----- ----- -----
Staff costs (including Executive Directors)
Salaries and wages 661 443 215
Social security costs 82 16 6
Termination costs 178 - -
Other pension costs 7 - -
----- ----- -----
928 459 221
===== ===== =====
1996 1995 1994
$ 000 $ 000 $ 000
----- ----- -----
Aggregate directors' emoluments (including
pension contributions) were:
as directors 46 9 7
for management services
salaries 341 216 137
benefits-in-kind 4 - -
pension contributions 7 - -
fees to third parties 26 - -
Payments to former directors in respect of
termination of contracts 156 - -
----- ----- -----
580 225 144
===== ===== =====
The average number of persons employed by the Group, including Executive
Directors, was as follows:
1996 1995 1994
$ 000 $ 000 $ 000
----- ----- -----
Management and administration 8 9 5
Technical and operational 7 11 -
----- ----- -----
15 20 5
===== ===== =====
F-25
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOTE 25 - DIRECTORS' AND RELATED PARTY TRANSACTIONS
Transactions related with parties now known to be connected with Mr. O'Brien are
dealt with in note 4.
The following related party transactions occurred with North American Gas
Investment Trust PLC (NAGIT) which on May 9, 1995 became a substantial
shareholder of the Company:
(i) July 29, 1994, the Group had entered into a loan agreement with NAGIT.
The main terms of the interest free loan were:
. a facility of $250,000 to be drawn down solely for the purpose of
drilling the Valentine #14 well;
. if the well was successful in improving commercially recoverable
quantities of oil and gas, the capital drawn down together with a 100%
premium would be payable to NAGIT from production at 30% of gross
production revenues for the first 125 days, 50% of gross production
thereafter to 365 days after which settlement of the remaining balance
would be made in shares;
. if the well was abandoned, NAGIT was entitled to repayment in shares
to the lesser of 5,000,000 ordinary shares of 1p each and the number
of ordinary shares of 1p each to the value of $250,000;
. if drilling was suspended for more than 30 days due to lack of funds,
NAGIT was entitled to repayment in shares to the value of $250,000.
The full amount of the facility was drawn down.
As Mr. O'Brien appeared to have fraudulently misrepresented that the
Valentine #14 well was successful, on various dates between June 6, 1995
and July 19, 1995 $347,307 in aggregate was originally paid to NAGIT
representing payments from production volumes. Subsequent to the discovery
of the fraudulent misrepresentation concerning the Valentine #14 well, this
amount was off-set against the $1,300,000 cash element of the purchase and
sale agreement with NAGIT (see(ii) below).
At April 30, 1995 $250,000 was included as shares to be issued in respect
of this agreement. These shares were issued on November 27, 1995 as
discussed in note 17.
(ii) on January 25, 1995, NAGIT lent the Group $1,200,000 bearing interest at 7%
per annum for assistance in the financing of the acquisition of Source
Petroleum Inc and to provide additional working capital. At April 30, 1995,
$1,200,000 was outstanding and included in development loans and this
amount was repaid from the proceeds of the placing and open offer on May 9,
1995;
(iii) on April 10, 1995, the Group entered into a purchase and sale agreement
with NAGIT.
The main terms of the agreement were:
. the Group would purchase a portfolio of producing properties located
in the US with an effective date of January 1, 1995;
. consideration for the acquisition would comprise $1,300,000 in cash
and the issue of 18,426,500 ordinary shares;
F-26
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
The 18,426,500 ordinary shares are included as shares to be issued at April
30, 1995 at $1,780,000. The 18,426,500 ordinary shares were issued to NAGIT
on May 9, 1995. At April 30, 1995 $1,300,000 was included in other
creditors. This was settled by the payment on various dates of an aggregate
amount of $347,307 and a payment on November 1, 1995 of $906,000.
NOTE 26 - SUBSEQUENT EVENTS
On August 13, 1996 the Company announced that it had entered into a conditional
agreement to effect a merger ("Merger") with LaTex Resources, Inc. ("LaTex"), a
company listed on the NASDAQ. As a result of the Merger, the Company will issue
to the LaTex shareholders shares of the Company which will equal approximately
72% of the Company's issued shares after the Merger. The Company's shareholders
will own approximately 28% of the issued shares after the Merger. As a
condition of the Merger, the Company will effect a share consolidation, with the
result that each 40 shares that the Company's shareholders currently own will
be converted into one share of the Company; the shares issued to the LaTex
shareholders will be adjusted to take this consolidation into account. At the
Company's request, The London Stock Exchange has suspended the listing of the
Company's shares pending further details of the reorganization of the Company.
Alliance's directors have reached agreement in principle with LaTex's lenders
that LaTex's current facility will be amended with the principal effect that
capital repayments will be suspended until 18 months following completion of the
Merger. The directors consider that the amended facility will provide a sound
financial base for the enlarged group. The Merger is conditional upon a suitable
facility being finalized.
On August 13, 1996, the Company also announced that it has agreed terms to stay
its current litigation against Mr. John O'Brien, its former Chief Executive and
other companies beneficially owned by Mr. O'Brien. Mr. O'Brien has also
withdrawn a counterclaim made against the Company (see note 4).
Other transactions occurred subsequent to April 30, 1996 as follows:
(i) On May 13, 1996 the Group announced that one of its US subsidiaries ARNO
Inc had reached agreement on the sale of its interest in four leases
comprising the McPac field, Matagorda Island, offshore Texas to Louisiana
Land and Exploration Company for a cash consideration of $525,000. The
Group's interest in these blocks varied between 4.2% and 6.3% and its
interest in the McPac platform was 6.3%. On May 30, 1996, the Group
completed this transaction and the gross consideration was adjusted to
reflect the impact of the effective date of January 1, 1996 and a gas
overlift imbalance. This resulted in a net cash consideration of $432,000,
which has been taken as a credit against the carrying cost of the Group's
oil and gas assets in the year to April 30, 1997.
(ii) On August 15, 1996 the Group disposed of its interest in 4 leases
comprising the Provident City field, Lavaca County, onshore Texas to Shana
Petroleum for a net cash consideration of $435,000. The Groups' working
interest in these blocks varied between 17.7% and 42.4%. The proceeds of
the sale have been taken as a credit against the carrying cost of the
Group's oil and gas assets in the year to April 30, 1997.
(iii) In August 1996 the Company transferred its interest in Geological Forecast
Technology Ltd by transferring its 50 'A' shares to Geos Seismology
Limited as part of a final settlement of an action brought by the latter.
(iv) On October 3, 1996, the Group announced that one of its US subsidiaries
ARNO Inc had reached agreement for the sale of its interests in three US
oil and gas fields to BWAB Incorporated for a cash consideration of
$1,425,000. The disposal covered the Group's interests in the Frost,
Gilmer South and Mocane Laverne fields, which are located in Texas and
Oklahoma and had combined remaining reserves of 25,920 barrels of oil and
1,720 million cubic feet of gas as at May 1, 1996, representing
approximately 16% of the Group's total proved and probable reserves. The
interests comprised 26 wells and the working interests in those wells
varied between 5% and 28%. The proceeds of the sale have been taken as a
credit against the carrying cost of the Group's oil and gas assets in the
year to April 30, 1997.
F-27
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOTE 27 - LITIGATION AND CONTINGENCIES
The Group is party to the following litigation:
(i) the Group is seeking to recover $1,300,000 of unpaid drilling costs from
Drexco Inc, with Drexco Inc and H Huizenga claiming unspecified damages in
respect of conduct, and removal of Alliance Resources (USA) Inc as
operator of the Valentine field. The Group has obtained legal advice and
will vigorously prosecute its claim against Drexco Inc. The Group denies
the counter claim and will vigorously defend the matter;
(ii) the Group has received, on September 12, 1996, a writ from Best Royalties
Plc claiming $186,368 and a declaration that they are entitled to a sum
equal to 40% of Alliance (USA) Inc's net cash proceeds received from the
Arrowhead well (and payment of the said sum), alternatively damages, plus
interest thereon. The Group denies the claim and will vigorously defend
this matter;
(iii) Ernest M Closuit et al. have asserted a claim against the Group for
alleged underpayment of amounts due for Closuit et al.'s interest in the
Buller No. 2 well in the South Elton field and have further claimed an
interest in past and future production from certain other wells in the
field. Total claims amount to approximately $1,200,000. Discovery has just
begun. The Group denies all allegations and claims and will vigorously
defend this matter;
(iv) the directors have not been notified and do not expect to be notified of
any claims arising from the alleged fraudulent activities of Mr. O'Brien.
NOTE 28 - CAPITAL COMMITMENTS
The capital commitments in respect of drilling costs for the forthcoming year
which are authorized but not contracted are as follows:
APRIL 30, 1994 APRIL 30, 1995 APRIL 30, 1996
$ 000 $ 000 $ 000
-------------- -------------- --------------
Capital commitments 6,037 5,300 -
====== ====== =====
NOTE 29 - SIGNIFICANT DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES GENERALLY
ACCEPTED IN THE UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
The Company's accounting policies conform with United Kingdom generally accepted
accounting principles ("UK GAAP") which differ in certain respects from United
States generally accepted accounting principles ("US GAAP"). Differences which
have a significant effect on the consolidated profit after tax (net income) and
shareholders' equity of the Group are set out below.
(a) Ceiling tests
A ceiling test has been carried out, in accordance with UK GAAP on an annual
basis, to determine the maximum net book amount of expenditure within the cost
pool of oil and gas assets which may be recognized. The ceiling test is based
on the Company's best estimate of the future cash flows from the underlying
properties. Under US GAAP, SEC regulations require ceiling tests to be computed
at current prices discounted to present value at 10%.
Under UK GAAP a ceiling test deficit should be written off to expense only if it
indicated a permanent diminution in value. Under US GAAP any deficit should be
charged immediately to the profit and loss account.
F-28
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(b) Goodwill
Under UK GAAP goodwill arising on acquisitions has been set off directly against
reserves. Under US GAAP, goodwill arising from acquisitions is capitalized and
amortized over its estimated useful life. However, following irregularities
mentioned above, US GAAP requires the balance to be written of in 1995.
(c) Estimated proceeds of Alliance shares
As set out in note 4, the Company has recognized an exceptional credit of
$272,000 relating to the right to receive the proceeds of the sale of Alliance
shares resulting from the settlement with Mr. O'Brien under UK GAAP. Under US
GAAP, such proceeds are recognized only on receipt.
(d) Statements of cash flows
The Company has adopted United Kingdom Financial Reporting Standard No. 1 "Cash
Flow Statements" ("FRS 1"). Its objectives and principles are similar to those
set out in the US Statement of Financial Standards No. 95 "Statement of Cash
Flows" ("SFAS 95"). The principal difference between the standards relates to
classification. Under FRS 1, the Company presents its cash flows from (a)
operating activities; (b) returns on investments and servicing of finance; (c)
taxation; (d) investing activities; and (e) financing activities. SFAS 95
requires only three categories of cash flow activity: (a) operating; (b)
investing; and (c) financing. Cash flows and taxation and returns on investments
and servicing of finance shown under FRS 1 would, with the exception of
dividends paid, be included as operating activities under SFAS 95. The payment
of dividends would be included as a financing activity under SFAS 95.
For purposes of reporting cash flows, all cash at bank and in hand and bank
overdrafts repayable on demand are considered cash equivalents.
F-29
ALLIANCE RESOURCES PLC AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
EFFECT ON PROFIT AFTER TAX OF SIGNIFICANT DIFFERENCES BETWEEN UK GAAP AND US
GAAP:
REFERENCE
TO NOTE
ABOVE YEAR ENDED APRIL 30
---------- --------------------
1996 1995
$000 $000
------- --------
(Loss) after tax under UK GAAP (3,593) (18,213)
Adjustments:
Ceiling test a) - (2,428)
Resulting adjustment to depletion
of oil and gas interests 437 -
Goodwill b) - (1,000)
Estimated proceeds of Alliance
shares c) (272) -
------- ----------
Approximate (loss) after tax,
adjusted for US GAAP (3,428) (21,641)
======= ==========
Approximate (loss) per Ordinary
Share (primary), adjusted for US
GAAP (cents) (1.1) (15.4)
======= ==========
(Loss) per Ordinary Share, UK
GAAP (cents) (1.1) (13.0)
======= ==========
EFFECT ON STOCKHOLDERS' EQUITY OF SIGNIFICANT DIFFERENCES BETWEEN UK GAAP AND US
GAAP:
REFERENCE
TO NOTE
ABOVE YEAR ENDED APRIL 30
---------- --------------------
1996 1995
------- --------
$ 000 $ 000
Stockholders' equity under UK GAAP 7,755 (1,438)
Adjustments:
Ceiling test a) (1,991) (2,428)
Estimated proceeds of Alliance shares c) (272) -
------- --------
Approximate stockholders' equity in
accordance with US GAAP 5,492 (3,866)
======= ========
F-30
ALLIANCE RESOURCES PLC
SUPPLEMENTAL OIL AND GAS DATA - (UNAUDITED)
The following supplemental information on oil and gas exploration and production
activities of the group is presented in accordance with Statement of Financial
Accounting Standards No. 69 "Disclosures about Oil and Gas Producing Activities"
("FAS 69").
ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES
The Group's estimated proved developed and undeveloped reserves of oil and gas
and changes thereto for the years 1994, 1995 and 1996 and proved developed
reserves of oil and gas at each year end are set forth in the following table.
Ryder Scott Company, an independent firm of petroleum engineers, carried out an
evaluation of approximately 71% of the Group's proved reserves for the year
ended April 30, 1996 and 100% of the Group's reserves as of April 30, 1995. The
reserves estimated as of April 30, 1994 are based on an evaluation carried out
by Metrovest, an independent firm of petroleum engineers, as of January 1, 1994,
flexed for production to April 30, 1994.
Proved reserves are reserves of crude oil, condensate, natural gas and natural
gas liquids and are estimated quantities as of a specific date, which geological
and engineering data demonstrate with reasonable certainty to be recoverable in
the future from known reservoirs under existing economic and operating
conditions.
Due to the inherent uncertainties and the limited nature of reservoir data,
estimates of reserve quantities are subject to change over time as additional
information becomes available.
1996 1995 1994
--------------- ----------------- ---------------
OIL GAS OIL GAS OIL GAS
----- ------ ------- -------- ------ -------
Proved developed and undeveloped
reserves:
Beginning of year 468 3,058 1,475 47,673 1,220 5,919
Revisions of previous estimates 274 (72) (1,441) (47,607) - -
Improved recovery 114 - - - - -
Purchases of minerals in place - - 481 3,230 - -
Sales of minerals in place (103) - - - - -
Extensions and discoveries - - - - 282 41,909
Production (125) (602) (47) (238) (27) (153)
---- ----- ------ ------- ----- ------
End of year 628 2,384 468 3,058 1,475 47,675
==== ===== ====== ======= ===== ======
Proved developed reserves:
Beginning of year 303 2,083 232 314 356 127
==== ===== ====== ======= ===== ======
End of year 628 2,384 303 2,083 232 314
==== ===== ====== ======= ===== ======
Oil reserves, which include condensate and natural gas liquids, are stated in
thousands of barrels and gas reserves are stated in millions of cubic feet.
Subsequent to April 30, 1996, Alliance has sold substantial properties. See
"Alliance-Recent Developments". The reserves attributable to those properties
accounted for approximately 25% of Alliance's proved reserves at April 30, 1996.
F-31
ALLIANCE RESOURCES PLC
SUPPLEMENTAL OIL AND GAS DATA - (UNAUDITED)
CAPITALIZED COSTS RELATED TO OIL AND GAS PRODUCING ACTIVITIES
The following table summarizes capitalized costs for oil and gas exploration and
production activities and the related accumulated depreciation, depletion and
amortization under UK GAAP.
1996 1995
-------- --------
($000) ($000)
At April 30
Unproved properties 118 398
Proved properties 25,186 23,984
------- -------
Total before depreciation, depletion and amortization 25,304 24,382
Accumulated depreciation, depletion and amortization (18,197) (16,585)
------- -------
Net capitalized costs 7,107 7,797
======= =======
COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION, EXPLORATION AND DEVELOPMENT
ACTIVITIES
The following table sets forth costs incurred in oil and gas property
acquisition, exploration and development activities under UK GAAP.
1996 1995 1994
------ ------ ------
$ 000 $ 000 $ 000
Property acquisitions
unproved 118 - -
proved 794 5,092 506
Exploration and appraisal - 20 -
Development 745 3,120 3,500
------ ------ ------
Total costs incurred 1,657 8,232 4,006
====== ====== ======
F-32
ALLIANCE RESOURCES PLC
SUPPLEMENTAL OIL AND GAS DATA - (UNAUDITED)
RESULTS OF OPERATIONS FROM OIL AND GAS PRODUCING ACTIVITIES
The following sets forth certain information with respect to the Company's
results of operations from oil and gas producing activities for the years ended
April 30, 1994, 1995 and 1996 under UK GAAP. All of the Company's oil and gas
producing activities are located within the United States.
1996 1995 1994
$ 000 $ 000 $ 000
------- -------- -----
Revenues 3,330 1,169 837
Production Costs (1,770) (756) (454)
Gross production taxes (311) (94) (67)
Depreciation depletion and amortization (1,612) - (125)
Write-down of oil and gas properties - (14,881) -
======= ======== =====
Results of operations before income taxes (363) (14,562) 191
Income tax expense - - -
------- -------- -----
Results of operations (excluding corporate
overhead and interest costs) (363) (14,562) 191
======= ======== =====
STANDARD MEASURE OF DISCONTINUED FUTURE NET CASH FLOWS RELATING TO PROVED CRUDE
OIL & GAS RESERVES QUANTITIES
The standardized measure of discounted future net cash flows related to proved
crude oil and natural gas reserves is calculated in accordance with the
requirements of SFAS 69 and uses reserve definitions as prescribed by the
Financial Accounting Standards Board. Estimated future cash flows from
production are computed by applying year end prices for crude oil and natural
gas and year-end exchange rates to year end quantities of estimated net proved
reserves. Future price changes are limited to those provided by contractual
arrangements in existence at the end of the reporting year. Future development
and production costs are those estimated future expenditures necessary to
develop and produce year end estimated proved reserves based on year-end price
levels and assuming the continuance of year end economic conditions. Future
production costs include estimated abandonment liabilities. Discounted future
net cash flows are calculated using 10% mid-period discount factors.
F-33
ALLIANCE RESOURCES PLC
SUPPLEMENTAL OIL AND GAS DATA - (UNAUDITED)
The information provided below does not represent management's estimate of the
Company's expected future cash flows or value of proved reserves. Estimates of
proved reserve quantities are imprecise and change over time as new information
becomes available and in particular, probable and possible reserves, which may
become proved reserves in 1997 or later, are excluded from the calculations.
Also, assumptions have been required regarding the timing of future production
and the timing and amount of future development and production costs. The
calculations assume that economic conditions existing at the end of the
reporting year will continue. Other different but equally valid assumptions
might lead to significantly different final results. Although calculated in
accordance with SFAS 69, the Company therefore cautions against the placing of
unwarranted reliance on this information in view of the highly arbitrary nature
of the assumptions on which it is based.
1996 1995
$ 000 $ 000
------- -------
Future cash inflows 18,402 14,475
Future development and production costs (6,622) (6,909)
------- -------
Undiscounted future cash flows before income taxes 11,780 7,566
10% discount (2,883) (2,500)
------- -------
Standardized measure of discounted future net cash
flows before income taxes 8,897 5,066
======= =======
Alliance Resources Plc is a UK listed company which was not required to present
standardized measure information. Consequently no such information is available
as of April 30, 1994 and the information available as of April 30, 1996 and 1995
is only available on a before tax basis. The table above has been produced on
the basis of all available information.
F-34
ALLIANCE RESOURCES PLC
SUPPLEMENTAL OIL AND GAS DATA - (UNAUDITED)
CHANGES IN STANDARDIZED MEASURE DISCOUNTED FUTURE NET CASH FLOWS
$ 000
-------
Present value at May 1, 1995 5,066
-------
Sales of crude oil & natural gas produced, net of
production costs (1,249)
Net changes in prices and production costs 1,382
Development costs incurred 734
Changes in future development costs 3
Revisions of previous quantity estimates 3,346
Sales of minerals in place (917)
Accretion of discount 532
Net change for the year 3,831
-------
Present value at April 30, 1996 8,897
=======
F-35