EXHIBIT 99.5
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors
LaTex Resources, Inc.
Tulsa, Oklahoma
We have audited the accompanying consolidated balance sheets of LaTex Resources,
Inc. and subsidiaries (the "Company") as of July 31, 1996 and 1995 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years ended July 31, 1996, 1995, and 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company at
July 31, 1996 and 1995 and the results of the Company's operations and its cash
flows for the years ended July 31, 1996, 1995, and 1994, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company has incurred a significant
net loss for the year ended July 31, 1996 and has working capital deficiencies
and consolidated tangible net worth deficiencies. As discussed in Notes 1 and 5
to the consolidated financial statements, the Company was not in compliance with
certain financial covenants of its credit agreement with its primary lender at
July 31, 1996. These factors raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty and do not include any adjustments to the classification of assets
and liabilities that might result should the Company be unable to continue as a
going concern.
F-1
As discussed in Note 16, the consolidated financial statements as of and for the
year ended July 31, 1995 have been restated to correct the accounting for the
acquisition of Germany Oil Company.
/s/ Briscoe & Burke
BRISCOE & BURKE
Certified Public Accountants
November 6, 1996 except as to
information presented in Notes 1
and 5, for which the date is
November 30, 1996
Tulsa, Oklahoma
F-2
LaTex RESOURCES, INC.
Consolidated Balance Sheets
July 31, 1996 and 1995
ASSETS 1996 1995
------------ -------------
(Restated)
Current assets:
Cash $ 19,337 $ 314,229
Accounts receivable - net of
allowance for doubtful
accounts of $0 in 1996
and $135,000 in 1995 3,324,309 2,836,596
Accounts and notes receivable -
other (Note 3) 515,820 696,688
Inventories 175,493 90,976
Other current assets 27,587 84,791
Assets held for sale 164,792 144,990
------------ ------------
Total current assets 4,227,338 4,168,270
------------ ------------
Property and equipment, at cost
Oil and gas properties (using
successful efforts method) 41,264,573 39,638,656
Exploration prospects in progress - 3,363,000
Other depreciable assets 854,259 954,415
------------ ------------
42,118,832 43,956,071
Accumulated depreciation and
depletion 10,173,524 6,247,190
------------ ------------
Net property and equipment 31,945,308 37,708,881
------------ ------------
Other assets:
Notes receivable, net of
current portion (Note 3) 757,500 -
Deposits and other assets 130,734 137,559
Accounts and notes receivable -
related parties (Note 3) 392,297 590,605
Investments in and advances
to affiliates (Note 3) - 3,647,480
Intangible assets, net of
amortization 1,512,899 1,670,384
------------ ------------
Total other assets 2,793,430 6,046,028
------------ ------------
TOTAL ASSETS $ 38,966,076 $ 47,923,179
============ ============
LIABILITIES and STOCKHOLDERS' EQUITY 1996 1995
------------ ------------
(Restated)
Current liabilities:
Accounts payable $ 9,057,707 $ 4,544,406
Accounts payable - other 132,000 2,959,284
Accrued expenses payable 607,055 139,113
Current portion of long-term debt
(Note 5) 22,235,867 3,644,723
------------ ------------
Total current liabilities 32,032,629 11,287,526
------------ ------------
Long-term debt, net of current portion
(Note 5) - 20,634,809
Other liabilities (Note 11) 615,000 -
------------ ------------
Total liabilities 32,647,629 31,922,335
------------ ------------
Stockholders' equity
Preferred stock - par value $0.01;
5,000,000 shares authorized:
Series A convertible preferred stock
($10 liquidation preference),
449,828 and 441,018 issued and
outstanding, at July 31, 1996 4,498 4,410
and 1995 respectively (Note 10)
Series B convertible preferred stock
($10 liquidation preference),
480,025 and 381,100 issued and
outstanding, at July 31, 1996 and 1995
respectively (Note 10) 4,800 3,811
Common stock - par value $.01,
50,000,000 authorized; issued and
outstanding 19,123,995
18,880,195, at July 31, 1996 and 1995
respectively 191,240 188,802
Additional paid-in capital 18,355,134 17,149,383
Treasury stock 1,008,500 and 958,000
shares, respectively (489,365) (399,106)
Accumulated deficit (11,747,860) (946,456)
------------ ------------
Total stockholders' equity 6,318,447 16,000,844
------------ ------------
Commitments and contingencies (Note 11)
TOTAL LIABILITIES and
STOCKHOLDERS' EQUITY $ 38,966,076 $ 47,923,179
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
LaTex RESOURCES, INC.
Consolidated Statements of Operations
Years Ended July 31, 1996, 1995, and 1994
1996 1995 1994
------------ ----------- -----------
(Restated)
Revenues:
Oil and gas revenue (Note 15) $ 11,979,982 $ 8,585,453 $ 8,703,100
Crude oil and gas marketing 540,156 1,223,188 2,780,543
Lease operations and management fees 1,011,025 634,038 601,723
------------ ----------- -----------
Total operating income 13,531,163 10,442,679 12,085,366
------------ ----------- -----------
Operating expenses:
Lease operating expense 6,608,089 5,264,858 4,840,638
Cost of crude oil and gas marketing 133,455 743,610 2,216,294
Dry hole costs and abandonments (Note 6) 3,586,037 104,179 112,772
General and administrative 2,893,146 2,736,267 2,496,567
Depreciation, depletion, and amortization 4,705,912 2,710,574 2,213,823
------------ ----------- -----------
Total operating expense 17,926,639 11,559,488 11,880,094
------------ ----------- -----------
Net operating income (loss) (4,395,476) (1,116,809) 205,272
Other income (expense):
Equity in losses and write-offs of investments in affiliates (4,184,881) (298,839) (439,916)
Gain on sale of assets 2,365,807 127,926 392,592
Interest expense (Note 15) (2,556,856) (1,291,064) (598,335)
Interest income 351,005 122,540 17,046
------------ ----------- -----------
Net loss from continuing operations before income taxes (8,420,401) (2,456,246) (423,341)
Income tax expense - 35,096 -
------------ ----------- -----------
Net loss from continuing operations (8,420,401) (2,491,342) (423,341)
Loss on disposal of subsidiary, net of income taxes (Note 1) (1,810,382) - -
------------ ----------- -----------
Net loss (10,230,783) (2,491,342) (423,341)
Preferred stock dividends 570,621 132,800 -
------------ ----------- -----------
Net loss for common shareholders $(10,801,404) $(2,624,142) $ (423,341)
============ =========== ===========
Loss per share from continuing operations $ (.50) $ (.15) $ (.02)
============ =========== ===========
Loss per share for common shareholders $ (.60) $ (.15) $ (.02)
============ =========== ===========
Weighted average number of shares outstanding 18,011,826 17,661,428 17,434,159
============ =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
LaTex RESOURCES, INC.
Consolidated Statements of Stockholders' Equity
Years Ended July 31, 1996, 1995, and 1994
Common Stock Additional
Preferred -------------------------- Paid-in Retained
Stock Shares Par Value Capital Earnings
------------ ------------ ------------ ------------ -------------
Balance July 31, 1993 $ - 16,345,195 $ 163,452 $ 6,226,613 $ 2,101,027
Issued for acquisition of stock of
Wexford Technology, Inc. (Note 6) - 100,000 1,000 330,350 -
Issued pursuant to private placement (Note 1) - 2,000,000 20,000 1,995,843 -
Issued for consulting services - 35,000 350 139,650 -
Net loss - - - - (423,341)
------------ ------------ ------------ ------------ ------------
Balance July 31, 1994 - 18,480,195 184,802 8,692,456 1,677,686
Issued for debt - 150,000 1,500 96,938 -
Issued for acquisition of
Germany Oil Company (Note 1) 8,088 250,000 2,500 8,227,322 -
Purchase of Treasury Stock - - - - -
Issued for dividends 133 - - 132,667 (132,800)
Net loss (Restated) - - - - (2,491,342)
------------ ------------ ------------ ------------ ------------
Balance July 31, 1995 (Restated) 8,221 18,880,195 188,802 17,149,383 (946,456)
------------ ------------ ------------ ------------ ------------
Issued for services - 100,000 1,000 77,125 -
Issued for debt of affiliate - 143,800 1,438 59,082 -
Issued for legal settlement (Note 11) 500 - - 499,500 -
Purchase of Treasury Stock - - - - -
Issued for dividends 577 - - 570,044 (570,621)
Net loss - - - - (10,230,783)
------------ ------------ ------------ ------------ ------------
Balance July 31, 1996 $ 9,298 $ 19,123,995 $ 191,240 $ 18,355,134 $(11,747,860)
============ ============ ============ ============ ============
Total
Treasury Stockholders'
Stock Equity
------------- --------------
Balance July 31, 1993 $ (275,000) $ 8,216,092
Issued for acquisition of stock of
Wexford Technology, Inc. (Note 6) - 331,350
Issued pursuant to private placement (Note 1)
Issued for consulting services - 2,015,843
Net loss - 140,000
- (423,341)
------------ ------------
Balance July 31, 1994 (275,000) 10,279,944
Issued for debt - 98,438
Issued for acquisition of
Germany Oil Company (Note 1) - 8,237,910
Purchase of Treasury Stock (124,106) (124,106)
Issued for dividends - -
Net loss (Restated) - (2,491,342)
------------ ------------
Balance July 31, 1995 (Restated) (399,106) 16,000,844
------------ ------------
Issued for services - 78,125
Issued for debt of affiliate - 60,520
Issued for legal settlement (Note 11) - 500,000
Purchase of Treasury Stock (90,259) (90,259)
Issued for dividends - -
Net loss - (10,230,783)
------------ ------------
Balance July 31, 1996 $ (489,365) $ 6,318,447
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
LaTex RESOURCES, INC.
Consolidated Statements of Cash Flows
Years Ended July 31, 1996, 1995, and 1994
1996 1995 1994
------------ ------------ ------------
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(10,230,783) $ (2,491,342) $ (423,341)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation, amortization, and depletion 4,705,912 2,710,574 2,213,823
Gain on sale of assets (2,365,807) (127,926) (392,592)
Equity in losses and write-offs of investments in affilates 4,184,881 298,839 439,916
Dry hole costs and abandonments 3,586,037 104,179 112,772
Interest income (150,467) (64,231) -
Loss on disposal of subsidiary 1,810,382 - -
Changes in assets and liabilities, net of effects from acquisition:
Accounts receivable (17,248) 1,073,004 787,602
Accounts receivable - related party 198,288 (76,591) 82,208
Accrued expenses payable 467,942 (34,017) (363,271)
Accounts payable 596,038 390,146 (1,518,425)
Other assets 44,227 (170,979) (127,334)
Other liabilities 615,000 - -
Inventories (84,517) 130,967 139,643
------------ ------------ ------------
Net cash provided by operating activities 3,359,885 1,742,623 951,001
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of investments - - 136,218
Proceeds from sale of property and equipment 3,984,491 357,445 736,200
Purchases of property and equipment (3,774,264) (4,815,409) (4,257,229)
Increase in accounts and notes receivable-other (2,300,000) - -
Decrease in accounts and notes receivable-other 1,032,500 - -
Reorganization cost - - (66,558)
Acquisition of Germany Oil Company, net of cash acquired - (10,592,292) -
Advances to unconsolidated affiliates and notes receivable (326,394) (1,575,820) (99,703)
Purchases of Treasury stock (90,259) (124,106) -
------------ ------------ ------------
Net cash used for investing activities $ (1,473,926) $(16,750,182) $ (3,551,072)
------------ ------------ ------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
LaTex RESOURCES, INC.
Consolidated Statements of Cash Flows
Years Ended July 31, 1996, 1995, and 1994
1996 1995 1994
----------- ----------- -----------
(Restated)
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred loan costs $ (137,186) $(1,483,143) $ (15,344)
Proceeds from notes payable 6,233,192 26,837,059 2,585,000
Payments on notes payable (8,276,857) (10,100,527) (3,060,000)
Proceeds from notes payable - shareholder - - 490,000
Payments on notes payable - shareholder - (140,000) (350,000)
Proceeds from the issuance of common stock - - 2,015,843
----------- ----------- -----------
Net cash provided by (used for) by financing activities (2,180,851) 15,113,389 1,665,499
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (294,892) 105,830 (934,572)
Cash and cash equivalents beginning of year 314,229 208,399 1,142,971
----------- ----------- -----------
Cash and cash equivalents end of year $ 19,337 $ 314,229 $ 208,399
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 2,403,158 $ 1,307,264 $ 598,335
Income taxes 5,275 7,739 200,648
=========== =========== ===========
Supplemental schedules of noncash investing and financing activities:
Note receivable in exchange for property $ - $ - $ 1,342,506
Common stock issued to acquire stock of Wexford Technology, Inc. - - 331,350
Common stock issued for services 78,125 98,438 140,000
Common stock issued to acquire Germany Oil Company - 144,530 -
Preferred stock issued to acquire Germany Oil Company - 8,093,380 -
Preferred stock issued for legal settlement 500,000 - -
Common stock issued to pay off debt of unconsolidated affiliate 60,520 - -
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
1. ORGANIZATION, FINANCIAL CONDITION AND BUSINESS COMBINATIONS
Organization - LaTex Resources, Inc. (the Company) is an oil and gas
------------
company engaged in the acquisition of and enhancements to producing oil and
gas properties. The Company's principal oil and gas production operations
are conducted in Oklahoma, Texas, Louisiana, Mississippi and Alabama. The
Company, until the fourth quarter of fiscal 1996, was also involved in the
exploration and development of oil and gas prospects located in Tunisia and
Kazakhstan, C. I. S.
Financial Condition - The Company's aggressive policy of oil and gas
-------------------
property acquisitions, unsuccessful foreign oil and gas exploration and
unsuccessful investments in their unconsolidated affiliates, along with
substantial operating losses for the current and preceding two years, has
resulted in a working capital deficit and non-compliance with certain loan
covenants at July 31, 1996. (See Note 5)
The items of non-compliance have not been waived by the lender for the year
ended July 31, 1996 and the Company was operating under a "forbearance"
agreement. The "forbearance period" was from July 26, 1996 to November 29,
1996. The Company is currently seeking an extension of the forbearance
agreement until such time as the proposed Alliance Resources Plc merger
(See Note 17) can be consummated.
The Company's financial statements for the year ended July 31, 1996 have
been prepared on a going concern basis which contemplates the realization
of assets and the settlement of liabilities and commitments in the normal
course of business. The Company incurred a net loss of $10,230,783 for the
year ended July 31, 1996 and as of July 31, 1996 has an accumulated deficit
of $11,747,860 and a deficit working capital of $27,805,291.
Management plans to reduce the working capital deficit include curtailment
of the development of its undeveleloped 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 non
essential. Management plans also include consideration of alliances or
other partnership arrangements or potential merger opportunities.
The Company has retained investment banking counsel to advise it on the
possible sale of equity securities as well as to introduce and assist in
the evaluation of potential merger and partnering opportunities. Management
expects that these efforts will result in the introduction of other parties
with interests and resources which may be compatible with that of the
Company (See Note 17).
There can be no assurance that the Company will be able to successfully
execute the foregoing plans.
F-8
LaTex RESOURCES, INC.
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
1. ORGANIZATION, FINANCIAL CONDITION AND BUSINESS COMBINATIONS (continued)
Disposition of Panda Resources, Inc. and Its Wholly Owned Subsidiary
--------------------------------------------------------------------
Richfield Natural Gas, Inc., July 1993
--------------------------------------
In July 1993 the Company sold its wholly owned subsidiary, Panda Resources,
Inc., and Panda's wholly owned subsidiary, Richfield Natural Gas, Inc.
Final post closing adjustments were in dispute until December 1995 when a
settlement agreement by the various parties resulted in a judgment against
LaTex Resources, Inc. in the amount of $1,810,382. This amount is reflected
in the 1996 consolidated financial statement as a loss on disposal of
discontinued subsidiaries.
Proceeds from Private Placement
-------------------------------
On January 26, 1994, pursuant to a private placement, the Company issued
2,000,000 newly issued shares of common stock.
Proceeds from this offering were as follows:
Gross proceeds $ 2,200,061
Less: Commissions 165,000
Legal fees 10,000
Other expenses 9,218
------------
Net proceeds $ 2,015,843
============
Acquisition of Germany Oil Company
----------------------------------
Effective March 31, 1995 through a series of transactions, the Company
acquired all of the issued and outstanding stock of Germany Oil Company
("Germany") in exchange for 250,000 and 11,800 of the Company's common and
Series A Convertible Preferred Stock, respectively. The ratio of the number
of shares received by the stockholders of Germany was determined through
arms length negotiations between the Chairman of the Board and President of
the Company and the President of Germany. The Company also issued 370,000
shares of the Series B Convertible Preferred Stock and $8,900,000 in cash
to retire a volumetric production payment and acquire all of the related
contract rights mortgages, vendor liens and security interests. In
addition, the Company paid $1,742,294 in cash, issued 427,038 shares of its
Series A Convertible Preferred Stock and $87,998 in notes payable to
acquire and retire certain indebtedness of Germany. The transaction was
accounted for as a purchase. The fair value of assets and liabilities of
Germany at date of acquisition follows:
Current assets $ 773,088
Current liabilities (4,309,479)
Oil and gas properties 22,504,593
-------------
$ 18,968,202
=============
The consolidated statements of operations include the results of operations
of Germany Oil Company since the acquisition date. The following is a
statement of pro forma revenues, loss before income taxes, net loss, and
net loss per share for the years ended July 31, 1995 and 1994 based upon
the assumption that Germany Oil Company was acquired at the beginning of
each of the periods:
1995 1994
---- ----
(in thousands
except per share data
Revenues $ 16,358 $ 19,957
========= =========
Loss before income tax $ (3,307) $ (1,795)
========= =========
Net loss $ (3,382) $ (1,795)
========= =========
Net loss per share $ .19) $ (.10)
========= =========
F-9
LaTex RESOURCES, INC.
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
2. SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying consolidated financial statements is as
follows.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts
have been eliminated in consolidation.
Inventories
-----------
Included in inventories at July 31, 1996 and 1995 are crude oil inventories
at market value of $175,493 and $90,976, respectively.
Accounting Estimates
--------------------
The presentation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Financial Instruments
---------------------
The fair value of current assets and current liabilities are assumed to be
equal to their reported carrying amounts due to the short maturities of
these financial instruments. Due to the Company's financial position, it is
not practicable to estimate the fair value of the Company's long-term debt;
additional information pertinent to its value is provided in Note 5 to the
consolidated financial statements.
The Company is required, by agreement with its primary lender (Bank of
America), to participate in various hedging programs, executed by Bank of
America, to protect against fluctuations in oil gas prices and interest
rates. See Note 15 for discussion of the fair market value of these
contracts.
The carrying value of all other financial instruments approximates fair
value.
F-10
LaTex RESOURCES, INC.
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
2. SUMMARY OF ACCOUNTING POLICIES (continued)
Concentrations of Credit Risk
-----------------------------
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments and
accounts receivable. The Company places its cash investments with high
quality financial institutions and limits the amount of exposure to any one
institution. In the case of default of any one financial institution, no
cash investments exist that are not covered by the FDIC. The Company's
revenues are derived principally from uncollateralized sales to customers
in the oil and gas industry. The concentration of credit risk in a single
industry affects the Company's overall exposure to credit risk because
customers may be similarly affected by changes in economic and other
conditions. The Company has not experienced significant credit losses on
such receivables. The Company performs periodic evaluations of its
customers' financial condition and generally does not require collateral.
Revenue Recognition
-------------------
The Company recognizes oil and gas revenue in the month of production.
Crude oil and gas marketing revenue is recognized in the month of delivery.
Property, Equipment, Depreciation and Depletion
-----------------------------------------------
The Company uses the successful efforts method to account for costs in the
acquisition and exploration of oil and natural gas reserves. Costs to
acquire mineral interests in proved reserves, and to drill and equip
development wells are capitalized. Geological and geophysical costs and
costs to drill exploratory wells which do not find proved reserves are
expensed. Undeveloped oil and gas properties which are individually
significant are periodically assessed for impairment of value and a loss is
recognized at the time of impairment by providing an impairment allowance.
The remaining unproved oil and gas properties are aggregated and an overall
impairment allowance is provided based on Company experience. Depletion and
depreciation are calculated on the units of production method based upon
current estimates of oil and gas reserves provided by management. Upon
sale, retirement or abandonment of proved and unproved properties the cost
and related accumulated depreciation and depletion are eliminated from the
respective accounts and the resulting gain or loss is included in current
earnings.
Non oil and gas property and equipment are stated at cost. Depreciation is
computed by the straight-line method over the estimated useful lives of non
oil and gas assets. Expenditures which significantly increase values or
extend useful lives are capitalized. Expenditures for maintenance and
repairs are charged to expenses as incurred. Upon sale or retirement, the
cost and related accumulated depreciation are eliminated from the
respective accounts and the resulting gain or loss is included in current
earnings.
Intangible Assets
-----------------
Intangible assets consist primarily of debt issuance costs. Debt issuance
costs are amortized over the term of the related debt.
F-11
LaTex RESOURCES, INC.
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
2. SUMMARY OF ACCOUNTING POLICIES (continued)
Income Taxes
------------
Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
Gas Balancing
-------------
The Company follows the sales method of accounting for gas imbalances. A
liability is recorded only if the Company's excess takes of natural gas
volumes exceed its estimated remaining recoverable reserves. No receivables
are recorded for those wells when the Company has taken less than its
ownership share of gas production.
Earnings Per Common Share
-------------------------
Earnings per common share is computed based upon the weighted average
common shares outstanding. Outstanding stock options and warrants of LaTex
Resources are excluded from the weighted average shares outstanding since
their effect on the earnings per share calculation is immaterial or
antidilutive.
FASB Accounting Standards
-------------------------
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 119 (SFAS 119), Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments. This
Statement generally requires disclosures about amounts, nature, and terms
of derivative financial instruments. The Company has adopted SFAS 119 for
the fiscal year ended July 31, 1996.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 121 (SFAS 121), Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of. This
Statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. If the sum of the undiscounted
future cash flows is less than the carrying amount of the asset, an
impairment loss is recognized. This Statement is effective for financial
statements for fiscal years beginning after December 15, 1995. The Company
intends to adopt SFAS 121 for the fiscal year ending July 31, 1997. The
Company expects the adoption of SFAS 121 will not have a material effect on
its financial statements.
F-12
LaTex RESOURCES, INC.
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
2. SUMMARY OF ACCOUNTING POLICIES (continued)
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based
Compensation. This Statement establishes financial accounting and reporting
standards for stock-based employee compensation plans. This Statement
defines a fair value based method of accounting for an employee stock
option or similar equity instrument plan. Under the fair value based
method, compensation cost is measured at the grant date based on the value
of the award and is recognized over the service period, which is usually
the vesting period. This Statement is effective for transactions entered
into in fiscal years that begin after December 15, 1995. The Company
intends to adopt the disclosure requirements of SFAS 123 for the fiscal
year ending July 31, 1997.
Reclassification
----------------
Certain amounts in the 1995 and 1994 consolidated financial statements have
been reclassified to conform with the 1996 presentation.
3. ACCOUNTS AND NOTES RECEIVABLE AND INVESTMENTS IN AND ADVANCES TO AFFILIATES
Accounts and Notes Receivable - Related Parties
-----------------------------------------------
1996 1995
----------- ----------
(Restated)
Accounts receivable - officers,
directors and employees $ 100,481 $ 354,261
Note receivable - officers,
directors, shareholders
and employees (See Note 12) 291,816 236,344
---------- ----------
Total $ 392,297 $ 590,605
========== ==========
Accounts and Notes Receivable - Other
-------------------------------------
1996 1995
---------- ----------
(Restated)
Oakland Petroleum Operating Company, Inc. $1,267,500 $ -
Panda Resources, Inc. - 584,172
Other accounts receivable from
third parties 5,820 112,516
---------- ----------
Less current maturities 515,820 696,688
---------- ----------
Total $ 757,500 $ -
========== ==========
F-13
LaTex RESOURCES, INC.
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
3. ACCOUNTS AND NOTES RECEIVABLE AND INVESTMENTS IN AND ADVANCES TO AFFILIATES
The non-interest bearing note receivable from Oakland Petroleum Operating,
Inc. (Oakland) represents the balance due to the Company for a loan entered
into with the Company's primary lender for a joint purchase of property.
The original amount was approximately $2,300,000 of which $1,267,500 was
still outstanding at July 31, 1996. The note receivable is offset by a
comparable amount included in the Company's long-term debt. Oakland pays
all principal and interest payments directly to the Company's primary
lender. The Company has a collateral interest in the Oakland properties.
Interest income has been imputed at the Company's borrowing rate with its
primary lender.
Investments in and Advances to Affiliates
-----------------------------------------
Investments in and advances to affiliates includes the following:
1996 1995
----------- -----------
(Restated)
Wexford Technology, Inc. $ - $ 1,987,898
Imperial Petroleum, Inc. - 1,640,609
Others - 18,973
----------- -----------
Total $ - $ 3,647,480
=========== ===========
See Note 6 - WRITE OFFS.
4. INCOME TAXES
The provisions for income taxes are as follows:
1996 1995 1994
-------- -------- --------
(Restated)
(in thousands)
Current:
State $ - $ 35 $ -
======== ======== ========
F-14
LATEX RESOURCES, INC.
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
4. INCOME TAXES (continued)
Income taxes differed from the amounts computed by applying the U.S.
federal tax rate of 34% as a result of the following:
1996 1995 1994
--------- ---------- ---------
(Restated)
(in thousands)
Computed "expected" tax benefit $(3,478) $ (835) $ (144)
State income taxes net of federal
benefit (1) 12 -
Increase in valuation allowance
for deferred tax assets 3,844 294 93
Equity in net losses of affiliates - 102 72
Excess statutory depletion (152) 237 3
Other (213) 225 (24)
------- -------- ---------
Actual income tax expense $ - $ 35 $ -
======== ======== ========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below:
1996 1995 1994
-------- ---------- --------
(Restated)
(in thousands)
Deferred tax liabilities:
Property, plant and equipment $ 1,574 $1,390 $ 401
------- ------ -------
Total deferred tax liabilities 1,574 1,390 401
------- ------ -------
Deferred tax assets:
Net operating losses 4,300 1,521 350
Investment write-downs 917 - -
Percentage depletion carryforward 392 240 133
Accrued expenses not deductible
until paid 180 - -
Other 5 5 -
------- ------ -------
Total deferred tax assets 5,794 1,766 483
------- ------ -------
Valuation allowance (4,220) (376) (82)
------- ------ -------
Net deferred tax assets 1,574 1,390 401
------- ------ -------
Net deferred tax
asset (liability) $ - $ - $ -
======= ======= =======
F-15
LaTex RESOURCES, INC.
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
4. INCOME TAXES (continued)
A valuation allowance is required when it is more likely than not that all
or a portion of the deferred tax assets will not be realized. The ultimate
realization of the deferred tax assets is dependent upon future
profitability. Accordingly, a valuation allowance has been established to
reduce the deferred tax assets to a level which, more likely than not, will
be realized.
The Company has net operating loss (NOL) carryforward to offset its
earnings of approximately $11,390,000. Additionally, approximately
$10,490,000 of NOL carryforwards are available to offset the future
separate company earnings of Germany. If not previously utilized, the net
operating losses will expire in varying amounts from 2006 to 2011.
5. NOTES PAYABLE
1996 1995
------------ ------------
(Restated)
Bank note (A) $ 22,206,707 $ 24,210,000
Other 29,160 69,532
------------ ------------
Total 22,235,867 24,279,532
Less - current maturities 22,235,867 3,644,723
------------ ------------
Long-term debt, net $ - $ 20,634,809
============ ============
(A) Note payable dated April 18, 1995, for $23,000,000 with option of an
additional $2,000,000 for six months for approved workovers,
recompletions and development drilling of specified reserves.
Principal due monthly of $365,000 including Oakland Petroleum Co.
payment of $42,500 monthly. Interest due monthly at the higher of a
Base Rate (the higher of the Bank of America Reference Rate and the
Federal Fund Rate plus .5% per annum) plus 1% per annum and the London
Interbank Offered Rate plus 2%. The current rate at July 31, 1996 was
7.469%. Matures March 30, 2000. Amounts outstanding are secured by
mortgages which cover certain of the Company's oil and gas properties.
The Company's existing debt agreements contain certain covenants, including
maintaining a positive current ratio of 1.0, excluding current portion of
long-term debt, maintaining a minimum tangible net worth of $10,000,000,
maintaining a minimum cash or cash equivalents balance of $500,000,
maintaining working capital of at least $500,000, the negative covenant
related to permitted investments, and the covenant relating to default on
other indebtedness in excess of $50,000.
F-16
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
5. NOTES PAYABLE (continued)
The Company was not in compliance with the current ratio, cash equivalent,
minimum tangible net worth, and working capital covenants at July 31, 1995.
The items of non-compliance were subsequently waived by the lender for the
year ended July 31, 1995 and through January 31, 1996. The Company was not
in compliance with the above noted covenants at July 31, 1996 and was
operating under a "forbearance" agreement discussed in Note 1 to the
financial statements. The "forbearance" agreement expired on November 29,
1996 and the bank has not extended the agreement. The debt agreement
contains various acceleration provisions of the due date in the event of
non-compliance. Accordingly, the entire unpaid balance has been classified
as a current liability at July 31, 1996.
6. WRITE OFFS
Investments
-----------
During the fourth quarter of fiscal 1996, the Company wrote off its
investments in Wexford Technology, Incorporated (Wexford) and Imperial
Petroleum, Inc. (Imperial). The Company has not been able to obtain
reliable current financial information, accordingly, summarized financial
information is not presented.
The Company acquired 32.3% of Wexford through a series of transactions
culminating in May 1994. During the fourth quarter of fiscal 1996, the
Company recorded a charge to earnings of $2,372,452 to write off its
investment. Wexford is presently in default on its bridge debt and has
received numerous written demands for payment and correspondence
threatening litigation. Included in the write off was $1,462,765 in notes
receivable.
The Company owns 12% of the common stock of Imperial and certain officers,
directors and employees of the Company own 28.8%. During the fourth quarter
of fiscal 1996, the Company recorded a charge to earnings of $1,812,429 to
write off this investment. Imperial is currently in default on its bank
debt. Included in the write off of the Company's investment was $722,603 in
notes receivable.
Wexford and Imperial are both development stage enterprises that are
seeking capital infusion to complete their facilities and achieve
commercial operations. Neither Wexford nor Imperial have been able to raise
additional debt or equity capital. Further, there can be no assurance,
assuming Wexford and Imperial successfully raise additional funds or enter
into a business alliance, that they will achieve commercial operations or
positive cash flow. The Company is not a guarantor of any debt incurred by
Wexford or Imperial.
Exploration Prospects
---------------------
During the fourth quarter of fiscal year 1996, the Company recorded a
charge to earnings of $955,496 to write off costs incurred in connection
with a venture in Kazakhstan C.I.S. Subsequent to July 31, 1996, the
Company received written notice that the Company may be in breach of its
agreements related to the venture. The Company believes it is in
substantial compliance with the operating agreement governing the project.
In addition, the Company has been notified that Uzenmunaigaz, the regional
production association for the Middle Caspian Basin, may seek to further
alter the terms of a contract in a manner which the Company believes would
be detrimental to the project's viability.
F-17
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
6. WRITE OFFS (continued)
During fiscal 1993 the Company, through a subsidiary, acquired an interest
in a permit granted by the Republic of Tunisia for the exploration and
production of oil and gas from a 4,936 square kilometer (1,220,000 acres)
area located in north-central Tunisia. Initial seismic acquisition
activities began in 1994. The first exploratory well was spudded in fiscal
1995. This well was drilled and temporarily abandoned prior to reaching the
objective depth.
In fiscal 1996, the operator of the project, in response to a request from
the Tunisian government, permanently plugged the well and restored the well
site. The Company has insufficient capital to continue the project and, due
to the limited time remaining on the exploration permit, decided to abandon
the project and write off its investment of $2,491,299.
7. SAVINGS AND PROFIT SHARING PLAN
The Company maintains an employee savings and profit sharing plan (the
Plan) which covers substantially all of its employees. The Plan is
comprised of a 401(k) savings portion and a noncontributory defined
contribution portion. Employees are qualified to participate after
approximately one year of service. Participation in the 401(k) plan is
voluntary, and the Company matches contributions up to four percent of the
employees' salary at a rate of 33 1/3 percent of the employee's
contribution. Employees are allowed to contribute the maximum amount
allowed by the Internal Revenue Code each year, subject to
nondiscrimination rules.
The noncontributory defined contribution portion of the Plan allows the
Company to share annual profits with employees. Annual payments to the Plan
are elective. Management elected to make no contributions to the Plan for
1996, 1995, or 1994. The Company is under no obligation to make
contributions to the Plan in the future.
8. STOCK OPTIONS
Stock Option Plan
-----------------
The 1993 Incentive Stock Plan (the "Plan") was effective December 8, 1993.
The Plan is administered by a Compensation Committee consisting of not less
than three members of the Board of Directors and a special committee
appointed by the Board of Directors, as necessary.
The aggregate number of shares of the Company's Common Stock issuable under
the Plan is 2,000,000. Such stock will be made available from the Company's
authorized but unissued Common Stock or from Stock held as Treasury Stock.
F-18
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
8. STOCK OPTIONS (continued)
Options and Appreciation Rights
-------------------------------
This Plan authorizes the Committee to grant to key employees options to
purchase the Company's Common Stock which may be in the form of incentive
stock options ("ISO's"), or in the form of non-statutory options ("Non-
Statutory Options"). The term of each option shall be for such period as
the Committee determines but no longer than ten years from the date of
grant or five years to an individual who is a 10% stockholder of the
Company.
The aggregate fair market value exercisable by an individual optionee
during any calendar year under all stock option plans of the Company may
not exceed $100,000. The exercise price per share for the Common Stock
covered by any Options shall be determined by the Committee and, provided
that in the case of an ISO and the per share exercise price shall be not
less than the fair market value (or in the case of an ISO granted to an
individual who at the time is a 10% Stockholder, 110% of the fair market
value) of one share of Common Stock. Options to purchase 1,690,000 shares
of common stock were granted under the Plan.
Stock option activity during the periods indicated is as follows:
Weighted
Average
Number of Exercise
Shares Price
------------ ------------
Balance at July 31, 1993 - $ -
Granted 619,000 0.875
-------
Balance at July 31, 1994 619,000 0.875
Forfeited (12,000) 0.875
------------
Balance at July 31, 1995 607,000 0.875
Granted 1,448,000 0.448
Forfeited (365,000) 0.764
------------
Balance at July 31, 1996 1,690,000 $ 0.533
============
At July 31, 1996, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $0.4375 to $0.875 and
3.77 years, respectively. (See Note 17)
Restricted Stock Awards
-----------------------
The Plan authorizes the Committee to grant restricted Common Stock
("Restricted Stock") to key employees. The Committee may designate a
restriction period with respect to such shares of not less than one year
but not more than five years (the "Restriction Period") during which an
employee will not be permitted to sell, transfer, pledge or assign shares
of Restricted Stock awarded to him, provided that within such limitations,
the Committee may provide for the lapse of such restrictions installments
where deemed appropriate. Upon termination of employment during the
Restriction Period for any reason, all shares of Restricted Stock with
respect to which restrictions have not yet expired will be forfeited by the
employee and returned to the Company.
The Plan also authorizes the Committee to award tax gross-up rights which
entitle the grantee to cash payments from the Company at such time as
income and/or excise tax liabilities arise with respect to grants under the
Plan. Tax gross-up rights may be granted coincident with or after the date
of grant of the related Option or Restricted Stock awards. No restricted
shares have been issued at July 31, 1996. (See Note 17)
9. WARRANTS
As of July 31, 1996, the Company, in connection with the sale of previously
unissued common stock, has 2,700,000 Warrants outstanding. The sale
included 2,587,500 of the Warrants which were detachable from the
Stock/Warrant Units upon issuance and trade separately from the Units and
Common Stock. Unless exercised, the 2,587,500 Warrants automatically expire
on November 19, 1997. Pursuant to the terms of the Warrants, the Board of
Directors of the Company may reduce the exercise price, $4.25, of the
Warrants and may also extend the period during which the Warrants may be
exercised. The Warrants may be redeemed by the Company at a price of $0.01
per Warrant with 30 days prior written notice by the Company.
F-19
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
9. WARRANTS (continued)
In addition, the Company issued Warrants to the underwriter of the offering
for $.01 per Warrant (underwriter Warrants) to purchase up to 112,500 units
for $4.44 per unit. These Warrants are exercisable, in part or whole, until
November 16, 1997. The Company also has agreed to register, at its sole
cost and expense, all or a portion of the underwriter Warrants and/or the
shares issuable, upon the exercise of the Warrants during the period
November 10, 1993 to November 16, 1997.
The Company issued 1,080,000 Warrants in connection with private placements
of its common stock. The Company during 1995 issued 536,000 Warrants to a
related party (See Note 12), of which, 100,000 were exercised.
At July 31, 1996, the range of exercise prices of outstanding Warrants was
$.75 to $4.44. These Warrants expire at various dates from January 1997 to
October 2001. It is the intent that the Warrants will be converted into
Alliance Resources Plc (See Note 17) Warrants at a ratio of .8806 for 1.
Stock Warrant activity during the periods indicated is as follows:
Date Number of Convertible Stock Price
Issued Warrants Shares at Issuance
------ --------- ----------- -----------
Balance at
July 31, 1993 3,700,000 2,518,750
Issued 1/26/94 80,000 80,000 $1.813
--------- -----------
Balance at
July 31, 1994 3,780,000 2,598,750
Issued 6/12/95 500,000 500,000 0.469
Exercised (100,000) (100,000)
--------- -----------
Balance at
July 31, 1995 4,180,000 2,998,750
Issued 11/30/95 36,000 36,000 0.469
--------- -----------
Balance at
July 31, 1996 4,216,000 3,034,750
========= =========
10. PREFERRED STOCK
The Board of Directors has the authority to issue 5,000,000 shares of
Preferred Stock, in one or more series, and to fix the rights, preferences,
qualifications, privileges, limitations or restrictions of each such series
without any further vote or action by the shareholders, including the
dividend rights, dividend rate, conversion rights, voting rights, terms of
redemption (including sinking fund provisions), redemption price or prices,
liquidation preferences and the number of shares constituting any series or
the designations of such series.
The Company's Series A Convertible Preferred Stock (i) pays annual
dividends at the rate of $0.20 per share payable quarterly in cash (or, if
payment of cash dividends is prohibited by the Company's senior lender,
payable in additional shares of Series A Convertible Preferred Stock), (ii)
has no voting rights except as otherwise required under Delaware law, (iii)
has a liquidation preference over shares of the Company's common stock of
$10.00 per share plus accrued and unpaid dividends, (iv) is redeemable at
the option of the Company at a redemption price of $10.00 per share plus
accrued and unpaid dividends, (v) is convertible by the holder into shares
of the Company's common stock at a conversion price of $3.33 per share, and
(vi) has piggyback registration rights in the event the Company seeks to
make a registered public offering of its common stock. The aggregate
liquidation preference of the Series A Convertible Preferred Stock at July
31, 1996 and 1995 is $4,498,280 and $4,410,180, respectively.
The Series B Convertible Preferred Stock (i) pays annual dividends at the
rate of $1.20 per share payable quarterly in cash (or, if payment of cash
dividends is prohibited by the Company's senior lender, payable in
additional shares of Series B Convertible Preferred Stock), (ii) has no
voting rights except as otherwise required under Delaware law, (iii) has a
liquidation preference over shares of the Company's Series A Convertible
Preferred Stock and the Company's common stock of $10.00 per share plus
accrued and unpaid dividends, (iv) is redeemable at the option of the
Company at a redemption price of $10.00 per share plus accrued and unpaid
dividends, and (v) is convertible by the holder into shares of the
Company's common stock at an initial conversion price of $1.50 per share,
subject to adjustment from time to time to prevent dilution. By separate
agreement, the Company has granted certain demand registration rights and
piggyback registration rights in the event the Company seeks to make a
registered public offering of its common stock. The aggregate liquidation
preference of the Series B Convertible Preferred Stock at July 31, 1996 and
1995 is $4,800,250 and $3,811,000.
Preferred stock, by class, is as follows:
Class A Class B
------- -------
Balance July 31, 1993 - -
------- -------
Balance July 31, 1994 - -
------- -------
Issued for acquisition of Germany
Oil Company 438,838 370,000
Issued for dividends 2,180 11,100
------- -------
Balance July 31, 1995 441,018 381,100
Issued for legal settlement - 50,000
Issued for dividends 8,810 48,925
------- -------
Balance July 31, 1996 449,828 480,025
======= =======
F-20
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
11. LITIGATION, COMMITMENTS AND CONTINGENCIES
Litigation
----------
On October 7, 1994, Northern Natural Gas Company ("Northern") filed a
lawsuit against the Company alleging that the Company had breached two firm
transportation Service Agreements dated December 1, 1990, between Northern
and Panda Resources, Inc. ("Panda"), a former wholly-owned subsidiary of
the Company. On June 6, 1996, Northern and the Company entered into a
Settlement Agreement pursuant to which (a) the Company issued to Northern
50,000 shares of the Company's Series B Senior Convertible Preferred Stock
which are convertible (subject to adjustment) into 333,333 shares of the
Company's common stock, and (b) the Company agreed to pay Northern $465,000
in installments of $50,000 by June 21, 1996, $150,000 by May 1, 1997,
$125,000 by May 1, 1998, and $140,000 May 1, 1999. An agreed judgment was
entered in the case, but Northern has agreed not to seek to enforce the
judgment unless the Company defaults in its payment obligations. Once the
required payments have been made, Northern has agreed to execute a release
of the judgment. These amounts have been reflected in the Company's
consolidated financial statements at July 31, 1996.
On November 17, 1994, Associated Storage Corporation ("Associated") filed a
lawsuit against the Company alleging that the Company had breached a July
21, 1993 agreement between Associated and the Company. Associated seeks
actual damages in the amount of $150,000, prejudgment interest, court
costs, and attorneys' fees. Associated has filed a motion for summary
adjuration which was denied by the court. The Company has asked Associated
to submit to mediation.
In connection with the sale of Panda, the Company became a party in
disputes between Torch Energy Marketing, Inc. ("Torch"), NUEVO Liquids, Inc
("NUEVO") and Panda. On December 7, 1995, the Company entered into a
Settlement Agreement (the "Settlement") to settle all matters related to
the sale of its former wholly owned subsidiaries, Panda and Richfield
Natural Gas, Inc. Pursuant to the Settlement, the Company agreed to pay to
the plaintiffs (a) $20,000 on December 7, 1995, and an additional $30,000
over the course of 90 days following execution of the Settlement, and (b)
to pay $50,000 within one year of the Settlement, an additional $50,000
within two years of the Settlement, and an additional $150,000 within three
years of the Settlement, together with interest in the amount of $36,000.
The Company has accrued the costs associated with this settlement agreement
and has made all required payments under the agreement. To secure its
obligation under the Settlement, the Company stipulated in an agreed
judgment that it would be liable in the amount of $1,000,000 (less any
amounts paid pursuant to the Settlement) upon the Company's default of its
obligations under the Settlement. In addition, the Company agreed to assume
and indemnify the plaintiffs against all obligations and amounts owed under
a May 2, 1989 agreement between Panda and Northern relating to the
transportation of natural gas through a facility located in Dewey County,
Oklahoma. Pursuant to this indemnification, the Company has been asked to
indemnify one of the plaintiffs with respect to claims brought against it
by Northern in a lawsuit filed March 7, 1996, as more fully discussed
below.
On March 7, 1996, Northern Natural Gas Company ("Northern") filed a lawsuit
against Torch Energy Advisors, Inc. ("Torch") for alleged breach of a May
2, 1989 agreement (the "Dewey County Contract") between Torch, Panda and
Northern relating to the transportation of natural gas through a facility
located in Dewey County, Oklahoma. The Company has assumed the defense of
this matter pursuant to the indemnification agreement entered into as part
of the December 7, 1995, settlement among Torch, Panda and the Company
discussed above. Northern contends that Panda failed to transport the
required volumes and that the deficiency resulted in a requirement that
Panda pay a total of $973,000, representing the percentage of the costs of
constructing the facilities calculated under the contract formula. Northern
sued Torch under a written guaranty agreement and has claimed, in addition,
that Torch denuded the assets of Panda and is therefore liable for the
debts of Panda. The Company maintains that, if litigation is unsuccessfull
to the Company, Northern would only be entitled to the amount of the
contractually required volumes.
Germany Oil Company is a named defendant in three wrongful death actions
involving an accident which occurred at a heater-treatment unit on the
Blowhorn Creek Millerella Oil Unit lease in Lamar County, Alabama. Each
plaintiff seeks damages in the amount of $25 million. The three matters are
in the initial stages of discovery and have been referred to Germany Oil
Company's insurance carrier. Germany has an approximate 10% ownership
interest of the property. Management believes that liability insurance
coverage is adequate to cover any potential loss.
F-21
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
11. LITIGATION, COMMITMENTS AND CONTINGENCIES (continued)
Contingencies
-------------
In addition to the foregoing litigation, the Company is named defendant in
lawsuits, is a party in governmental proceedings, and is subject to claims
of third parties from time to time arising in the ordinary course of
business. While the outcome of lawsuits or other proceedings and claims
against 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.
Commitments
-----------
The Company leases office space and certain property and equipment under
various lease agreements. As of July 31, 1996, future lease commitments
were approximately as follows:
Year Ending
July 31,
-----------
1997 $ 168,000
1998 142,000
------------
Total minimum payments $ 310,000
============
F-22
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
12. RELATED PARTY TRANSACTIONS
In regard to the modification and cancellation of the non-compete
agreements with the two previous majority shareholders of Panda, Mr.
Jeffrey T. Wilson, an officer and director of the Company, assumed the
notes receivable due the Company by two former shareholders in the amount
of $339,650 plus accrued interest. The Board has voted to forgive $380,624,
representing the total notes and accrued interest, due from Mr. Wilson. The
Board has also voted to forgive $58,138 due to the Company from Mr. Malcolm
W. Henley, an officer and director of the Company.
Since January 1993 the Company has leased a condominium located in Tulsa,
Oklahoma owned by Jeffrey T. Wilson. Under terms of the oral lease
agreement, the Company pays Mr. Wilson approximately $1,100 per month. At
July 31, 1996, the Company owed Mr. Wilson approximately $8,000 for unpaid
rent.
The Company has entered into an agreement to sell its interests in its
wholly owned subsidiaries, LaTex Resources International, Inc. and Phoenix
Metals, Inc., and its investments in Wexford Technology, Inc. and Imperial
Petroleum, Inc. (See Note 17). Mr. Wilson is a major stockholder of
Imperial Petroleum, Inc.
The Company was previously a party to an agreement with Wood Roberts, Inc.
("WRI"), a company controlled by John R. Martinson, a Director of the
Company, pursuant to which WRI acted as a financial advisor to the Company.
Under the agreement, the Company paid WRI a monthly fee of $4,000 and
agreed to pay WRI a success fee in connection with any merger or
acquisition involving a party introduced to the Company by WRI, and any
financing facility arranged by WRI. Through July 31, 1996, the Company paid
WRI cash retainer and success fees of $55,000. In addition, the Company has
issued to WRI six year common stock purchase warrants to purchase 536,000
shares at $.75 per share, of which WRI has exercised and purchased 100,000
shares (See Note 8). As of March 4, 1996, the financial advisor agreement
between the Company and WRI was terminated by agreement of the parties. By
separate agreement, the Company agreed to pay Wood Roberts, LLC. a fee of
$240,000 upon completion of the proposed merger with Alliance Resources Plc
and a fee equal to 0.5% of the amount of any credit facility obtained by
the Company from a bank or other financial institution introduced to the
Company by Wood Roberts in order to refinance its indebtedness to Bank of
America.
The Company from time to time, has made loans to certain officers,
directors and stockholders. The loans are evidenced by demand notes payable
due on or before December 31, 1996, bearing interest at various rates.
13. BUSINESS SEGMENTS
The Company's operations involve oil and gas exploration, production and
lease operations. Additionally, crude oil and crude oil by-products are
marketed through a wholly owned subsidiary. Intersegment sales are made at
prices prevailing in the industry at the time of sale. The following table
sets forth information with respect to the industry segments of the
Company.
1996 1995 1994
---------- --------- ---------
(Restated)
(in thousands)
Revenues:
Oil and gas
production and
lease operations $12,991 $ 9,220 $ 9,305
Marketing 540 1,223 2,780
------- ------- -------
Total revenues 13,531 10,443 12,085
Intersegment 3,658 3,023 2,884
------- ------- -------
$17,189 $13,466 $14,969
======= ======= =======
Operating income (loss):
Oil and gas
production and
lease operations $(4,477) $(1,440) $ (187)
Marketing 78 231 317
Other 4 93 75
------- ------- -------
Net operating income
(loss) $(4,395) $(1,116) $ 205
======= ======= =======
The Company sold 16% of its consolidated oil and gas revenue to Enron Reserve
Acquisition Corporation for the year ended July 31, 1996. The Company had no
other purchasers in excess of 10% of consolidated oil and gas revenue.
F-23
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
13. BUSINESS SEGMENTS (continued)
1996 1995 1994
-------- -------- --------
(Restated)
(In thousands)
Identifiable assets:
Oil and gas production $31,830 $37,371 $12,677
Marketing 429 606 620
Other 6,707 9,946 7,962
------- ------- -------
$38,966 $47,923 $21,259
======= ======= =======
Depreciation, depletion,
and amortization:
Oil and gas production $ 4,210 $ 2,403 $ 1,984
Marketing 3 5 7
Other 493 303 223
------- ------- -------
$ 4,706 $ 2,711 $ 2,214
======= ======= =======
Capital expenditures:
Oil and gas production $ 3,759 $ 4,759 $ 4,205
Marketing - - -
Other 15 56 52
------- ------- -------
$ 3,774 $ 4,815 $ 4,257
======= ======= =======
14. SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
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 July 31, 1996, 1995 and 1994. All of the Company's oil and gas
producing activities are located within the United States. The dry hole
costs include $2,491,299 related to the Tunisia project.
F-24
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
14. SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
(continued)
1996 1995 1994
---------- ---------- ----------
(Restated)
(In thousands)
Revenues $ 11,980 $ 8,585 $ 8,703
Production costs 5,737 4,693 4,312
Gross production taxes 871 572 529
Dry hole costs and
abandonments 3,586 104 113
Depreciation and depletion 4,210 2,403 1,984
---------- ---------- ----------
Results of operations
before income taxes (2,424) 813 1,765
Income tax expense - - 671
---------- ---------- ----------
Results of operations
(excluding corporate
overhead and interest
costs) $ (2,424) $ 813 $ 1,094
========== ========== ==========
Capitalized Costs and Costs Incurred Relating to Oil and Gas Producing Activities
---------------------------------------------------------------------------------
1996 1995 1994
---------- ---------- ----------
(Restated)
(In thousands)
Proven properties $ 40,316 $ 38,690 $ 16,208
Unproven properties 949 4,312 -
---------- ---------- ----------
Total capitalized costs 41,265 43,002 16,208
Less - accumulated
depreciation and
depletion 9,435 5,631 3,555
---------- ---------- ----------
Net capitalized costs $ 31,830 $ 37,371 $ 12,653
========== ========== ==========
Costs incurred during
the year:
Property acquisition
costs $ - $ - $ -
Exploration costs 2,631 104 113
Development costs 1,480 763 787
Purchase of minerals
in place 2,800 22,613 1,740
F-25
LaTex RESOURCES, INC.
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
14. SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
(continued)
Estimated Quantities of Proved Oil and Gas Reserves (Unaudited)
---------------------------------------------------------------
The estimates of proved oil and gas reserves utilized in the preparation of
the consolidated financial statements were prepared by independent
petroleum engineers at July 31, 1996. Such estimates are in accordance with
guidelines established by the Securities and Exchange Commission and the
Financial Accounting Standards Board, which require that reserve reports be
prepared under existing economic and operating conditions with no provision
for price and cost escalations except by contractual arrangements. The
Company's reserves are located onshore in the United States.
The Company emphasizes that reserve estimates are inherently imprecise.
Accordingly, the estimates are expected to change as more current
information becomes available. In addition, a portion of the Company's
proved reserves are undeveloped, which increases the imprecision inherent
in estimating reserves which may ultimately be produced.
Proved reserves are estimated quantities of crude oil, natural gas, and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions. Proved
developed reserves are those which are expected to be recovered through
existing wells with existing equipment and operating methods. The following
is an analysis of the Company's proved oil and gas reserves.
Oil (MBbls) Gas (MMcf)
----------- ----------
Proved reserves at July 31, 1993 2,455.3 9,391
Revisions of previous estimates 423.3 346
Extensions, discoveries and other additions 2,075.9 2,215
Production (335.3) (2,107)
Purchases of reserves-in-place 112.4 1,924
Sales of reserves-in-place (211.7) (836)
----------- ----------
Proved reserves at July 31, 1994 4,519.9 10,933
Revisions of previous estimates (1,686.8) (1,793)
Extensions, discoveries and other additions - -
Production (359.0) (2,612)
Purchases of reserves-in-place 1,562.3 21,202
Sales of reserves-in-place - -
----------- ----------
Proved reserves at July 31, 1995 (Restated) 4,036.4 27,730
F-26
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
14. SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
(continued)
Oil (MBbls) Gas (MMcf)
----------- ----------
Revisions of previous estimates 2,566.8 3,888
Extensions, discoveries and other additions - -
Production (405.0) (3,481)
Purchases of reserves-in-place 248.7 2,190
Sales of reserves-in-place (93.9) (2,155)
----------- ----------
Proved reserves at July 31, 1996 6,353.0 28,172
=========== ==========
Oil (MBbls) Gas (MMcf)
----------- ----------
Proved developed reserves at
July 31, 1993 2,217.0 8,858
July 31, 1994 3,843.0 9,495
July 31, 1995 (Restated) 4,036.4 27,730
July 31, 1996 4,952.9 27,757
Subsequent to year end, the Company has entered into letters of intent with
two parties to sell oil and gas properties for approximately $1,500,000.
The Company chose not to include those properties in its reserve appraisal
at July 31, 1996.
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
---------------------------------------------------------------------------
Oil and Gas Reserves (Unaudited)
--------------------------------
The "Standardized Measure of Discounted Future Net Cash Flows Relating to
Proved Oil and Gas Reserves" (Standardized Measure) is a disclosure
requirement under SFAS No. 69. The Standardized Measure does not purport to
present the fair market value of proved oil and gas reserves. This would
require consideration of expected future economic and operating conditions,
which are not taken into account in calculating the Standardized Measure.
Under the Standardized Measure, future cash inflows were estimated by
applying year-end prices, adjusted for fixed and determinable escalations,
to the estimated future production of year-end proved reserves. Future cash
inflows were reduced by the estimated future production and development
costs based on year-end costs to determine pre-tax cash inflows. Future
income taxes were computed by applying the statutory tax rate to the excess
of pre-tax cash inflows over the Company's tax basis in the associated
proved oil and gas properties. Tax credits and permanent differences were
also considered in the future income tax calculation. Future net cash
inflows after income taxes were discounted using a 10% annual discount rate
to arrive at the Standardized Measure.
F-27
LaTex RESOURCES, INC.
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
14. SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
(continued)
Year Ended
-------------------------------------------
July 31, 1994 July 31, 1995 July 31, 1996
------------- ------------- -------------
(Restated)
(In thousands)
Future cash inflows $ 87,093 $ 99,585 $ 181,566
Future costs - future production
and development costs 49,490 43,794 79,763
------------- ------------- -------------
Future net cash inflows before
income tax expense 37,603 55,791 101,803
Future income tax expense 9,151 8,705 25,486
------------- ------------- -------------
Future net cash flows 28,452 47,086 76,317
10% annual discount for estimated
timing of cash flows 14,175 22,130 35,869
------------- ------------- -------------
Standardarized Measure of
discounted future net cash
flows $ 14,277 $ 24,956 $ 40,448
============= ============= =============
Changes in Standardized Measure of Discounted Future Net Cash Flows
-------------------------------------------------------------------
Relating to Proved Oil and Gas Reserves (Unaudited)
---------------------------------------------------
The following is an analysis of the changes in the Standardized Measure
during the periods presented:
Year Ended
-------------------------------------------
July 31, 1994 July 31, 1995 July 31, 1996
------------- ------------- -------------
(Restated)
(In thousands)
Standardized Measure -
beginning of year $ 9,993 $ 14,277 $ 24,956
Increases (Decreases)
Sales, net of production costs (3,799) (3,800) (5,779)
Net change in sales prices,
net of production costs 2,600 (9,108) 20,712
Discoveries and extensions,
net of related future
development production costs 4,762 - -
Changes in estimated future
development costs (1,521) 1,182 (2,889)
Revisions of previous
quantity estimates 225 (4,260) 11,260
Accretion of discount - 1,428 2,181
Net change in income taxes - 236 (8,944)
Purchases of reserves-in-place 2,459 20,700 2,093
Sales of reserves-in-place (974) - (3,142)
Timing of production of
reserves and other 532 4,301 -
------------- ------------- -------------
Standardized Measure - end of year $ 14,277 $ 24,956 $ 40,448
============= ============= =============
F-28
Note to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
15. HEDGING
Oil and Gas - The Company is required, by agreement with its primary lender
-----------
(Bank of America), to participate in a price protection program, executed
by Bank of America, for a majority of its gas sales for a 36 month period
until March 31, 1998. Oil is hedged at a floor of $16.50/Bbl and a ceiling
of $19.82/Bbl based on projected monthly production. Gas is hedged at
$1.806/MMBtu based on projected monthly production. The production rates
were calculated by Bank of America from reserve report data and are fixed
by Bank of America. The monthly hedge amount is calculated by Bank of
America from published market rates. The current hedging agreement does not
allow for full benefit from prices above the ceiling amount.
The hedging gains or losses for the years ended July 31, 1996 and 1995 are
as follows:
1996 1995
---------- ----------
(Restated)
Oil $ (200,447) $ (4,397)
Gas (1,275,206) 161,698
----------- ---------
Net hedging income (loss) $(1,475,653) $ 157,301
=========== =========
The hedging gains and losses are included in oil and gas revenue for the
years indicated.
Interest - The Company is required, by agreement with its primary lender
--------
(Bank of America), to participate in an interest rate protection program,
executed by Bank of America, until February 29, 2000, for its debt to its
primary lender. Interest is hedged to achieve a fixed rate of 7.49% based
on a fixed amortization schedule determined at loan origination. The
hedging losses for the year ended July 31, 1996 and 1995 are $504,303 and
$80,151, respectively, and are included in interest expense for the years
indicated.
The off-balance sheet liability for all future hedging commitments based on
current year end prices and rates are as follows:
Oil $ 669,405
Gas 1,688,202
Interest 1,291,680
-----------
Net liability $ 3,649,287
===========
F-29
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
16. 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
=========== =========== ===========
As a result of the restatement, loss per share decreased by $0.01 per
share.
17. SUBSEQUENT EVENTS
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 forth 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.
F-30
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
17. SUBSEQUENT EVENTS (continued)
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.
Under the terms of the Alliance Merger Agreement, the Company is required
to dispose of its interests in its unconsolidated affiliates, Wexford
Technology, Inc. ("Wexford") and Imperial Petroleum, Inc. ("Imperial"), and
its interests in its wholly-owned subsidiaries LaTex Resources
International, Inc. ("LaTex Resources International") and Phoenix Metals,
Inc. ("Phoenix Metals"). Effective July 31, 1996, the Company has written
off its $1,812,429 investment in Imperial, its $2,372,452 investment in
Wexford, and its $955,496 Investment in LaTex Resources International. The
Company has entered into a Purchase Agreement with Imperial pursuant to
which the Company will sell its interests in Wexford, Imperial, LaTex
Resources International and Phoenix Metals to Imperial for 100,000 shares
of the Company's common stock. Imperial is controlled by the Company's
President and largest stockholder, Jeffrey T. Wilson. Prior to the
completion of the sale, the Company intends to obtain an opinion from an
independent investment banking firm as to the fairness of the transaction
to the Company's stockholders.
F-31
Notes to Consolidated Financial Statements
July 31, 1996, 1995, and 1994
17. SUBSEQUENT EVENTS(continued)
Effective October 21, 1996, each holder of options granted under the
Company's 1993 Incentive Stock Plan agreed to terminate all options held
and receive grants of restricted common stock of the Company. 1,690,000
options were canceled and 1,690,000 shares of restricted common stock were
granted. The terms of the Restricted Shares provide that a holder may not
sell, transfer, or otherwise dispose of any Restricted Shares as long as
the Company has the right to a forfeiture of the Shares. The terms of the
Restricted Stock provide that in the event that a holder's employment with
the Company shall terminate for any reason other than death or total
disability prior to the earlier of (a) February 1, 1997, or (b) a change
in control occurs with respect to the Company, the holder shall
immediately forfeit any right to the shares of Restricted Stock for which
the restrictions have not otherwise lapsed. Compensation expense of
$528,125, reflecting the market value of the Company's publicly traded
stock on the date of grant, was recorded on that date. It is the intent
that the holders of the restricted stock will convert their shares to
Alliance ordinary shares on substantially the same basis as the Company's
common stockholders. The Company did not grant any tax gross-up rights in
connection with the issuance of the restricted stock.
Disposition of Oil and Gas Properties - Subsequent to year end, the
-------------------------------------
Company has entered into letters of intent with two parties to sell oil
and gas properties for approximately $1,500,000. The Company chose not to
include those properties in its reserve appraisal at July 31, 1996. The
Company does not expect the transaction to have a significant impact on
the results of operations.
F-32