UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
--- SECURITIES EXCHANGE OF 1934 for the quarterly period ended
January 31, 1998.
OR
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 for the transition period
from __________________to_________________________.
Commission file number : 333-19013
ALLIANCE RESOURCES PLC
(exact name of registrant as specified in its charter)
ENGLAND AND WALES 73-1405081
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
4200 EAST SKELLY DRIVE, SUITE 1000, TULSA, OKLAHOMA 74135
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (918) 491-1100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the
preceding 12 months (or for such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
On April 30, 1998, the Company had 31,209,408 shares of common stock
outstanding.
ALLIANCE RESOURCES PLC
QUARTERLY REPORT ON FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements. Page
Consolidated Condensed Balance Sheets as of
January 31, 1998 and April 30, 1997 3
Consolidated Condensed Statements of Income
for the three months and nine months ended
January 31, 1998 and 1997 5
Consolidated Condensed Statement of Stockholders'
Equity for the nine months ended January 31, 1998
and the year ended April 30, 1997 6
Consolidated Condensed Statements of Cash Flows for
the nine months ended January 31, 1998 and 1997 7
Notes to Consolidated Condensed Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 13
PART II - OTHER INFORMATION
The information called for by Item1. Legal Proceedings,
Item 2. Changes in Securities, Item 3. Default Upon Senior
Securities, Item 4. Submission of Matters to a Vote of
Security Holders, Item 5. Other Information has been
omitted as either inapplicable or because the answer
thereto is negative.
SIGNATURES
Item 6. Exhibit and Reports on Form 8-K 22
PART 1--FINANCIAL INFORMATION
ALLIANCE RESOURCES PLC
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
JANUARY 31, 1998 APRIL 30, 1997
------------------ ------------------
ASSETS
Current assets:
Cash $ 1,336,276 $ 72,948
Accounts receivable - trade 2,135,584 2,119,406
Other current assets 269,322 54,176
------------------ ------------------
Total current assets 3,741,182 2,246,530
------------------ ------------------
Property, plant, and equipment, at cost:
Oil and gas properties (using full cost method) 42,668,396 36,107,310
Other depreciable assets 993,216 855,512
------------------ ------------------
43,661,612 36,962,822
Less accumulated depreciation and depletion (13,756,223) (10,254,970)
------------------ ------------------
Net property, plant and equipment 29,905,389 26,707,852
------------------ ------------------
Other assets:
Other assets 144,989 282,920
Intangible assets, less accumulated amortization 1,645,589 1,620,185
------------------ ------------------
Total other assets 1,790,578 1,903,105
------------------ ------------------
TOTAL ASSETS $ 35,437,149 $ 30,857,487
================== ==================
See accompanying notes to consolidated condensed financial statements.
3
ALLIANCE RESOURCES PLC
CONSOLIDATED CONDENSED BALANCE SHEETS, CONTINUED
(UNAUDITED)
JANUARY 31, 1998 APRIL 30, 1997
------------------ ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 8,556,090 $ 11,428,872
Accrued expenses payable 871,353 437,736
Current portion long-term debt 1,300,000 --
------------------ ------------------
Total current liabilities 10,727,443 11,866,608
Long-term Liabilities:
Long-term debt 19,266,763 18,095,497
Convertible subordinated unsecured loan notes 1,550,700 --
Other liabilities 162,132 810,783
------------------ ------------------
Total liabilities 31,707,038 30,772,888
------------------ ------------------
Stockholders' equity (deficit):
Common stock - par value 40 pence;
46,000,000 shares authorized representing:
LaTex Series A convertible preferred stock
1,180,110 issued and outstanding at
april 30, 1997; aggregrate liquidation
preference $4,570,510 -- 766,599
LaTex Series B convertible preferred stock
3,239,708 issued and outstanding at
april 30, 1997; aggregrate liquidation
preference $5,245,370 -- 2,104,515
Common stock issued and outstanding:
17,982,068 and 31,209,408 at
April 30, 1997 and 1998, respectively -- 11,681,150
Ordinary shares - par value(pound).40; 46,000,000 shares authorized;
31,152,603 issued and outstanding at January 31, 1998 20,077,486 --
Additional paid-in capital 5,898,198 5,149,146
Accumulated deficit (22,245,573) (19,127,446)
Treasury stock 953,099 common shares at cost at
April 30, 1997 -- (489,365)
------------------ ------------------
Total stockholders' equity (deficit) 3,730,111 84,599
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 35,437,149 $ 30,857,487
================== ==================
See accompanying notes to consolidated condensed financial statements.
4
ALLIANCE RESOURCES PLC
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
Three Three Nine Nine
Months Ended Months Ended Months Ended Months Ended
January 31, 1998 January 31, 1997 January 31, 1998 January 31, 1997
(Restated) (Restated)
----------------- ----------------- ----------------- -----------------
Revenue:
Oil and gas revenue $ 2,401,559 $ 1,180,445 $ 8,377,595 $ 6,371,316
Crude oil and gas marketing -- 42,228 -- 251,613
Lease operations and management fees -- -- -- --
----------------- ----------------- ----------------- -----------------
Total operating income 2,401,559 1,222,673 8,377,595 6,622,929
----------------- ----------------- ----------------- -----------------
Operating expenses:
Lease operating expense 1,388,789 886,348 4,053,709 3,193,177
Cost of crude oil and gas marketing -- (67) -- 24,759
Depreciation, depletion, and amortization 217,956 254,070 1,930,046 1,890,187
Cessation of Overseas Exploration -- -- -- 3,446,795
General and administrative expense 980,457 802,691 3,156,166 3,380,017
Loss on Commodity Derivatives -- -- 1,128,000 --
----------------- ----------------- ----------------- -----------------
Total operating expenses 2,587,202 1,943,042 10,267,921 11,934,935
----------------- ----------------- ----------------- -----------------
Net operating loss (185,643) (720,369) (1,890,326) (5,312,006)
Other income (expense):
Equity in losses and write offs of investments
in affiliates -- 42,144 -- (4,054,237)
Gain on sale of assets 16,946 -- 35,442 --
Interest expense (750,578) (928,554) (1,760,084) (2,462,556)
Interest income 14,286 21,455 50,005 363,274
Miscellaneous income (expense) 39,175 -- 443,379 (1,810,382)
----------------- ----------------- ----------------- -----------------
Net loss from continuing operations before income taxe (865,814) (1,585,324) (3,121,584) (13,275,907)
Income tax expense -- -- -- --
----------------- ----------------- ----------------- -----------------
Net loss (865,814) (1,585,324) (3,121,584) (13,275,907)
Preferred stock dividends -- (170,710) -- (487,965)
----------------- ----------------- ----------------- -----------------
Net loss for common shareholders $ (865,814) $ (1,756,034) $ (3,121,584) $ (13,763,872)
================= ================= ================= =================
Loss per share for common shareholders $ (0.03) $ (0.10) $ (0.10) $ (0.86)
================= ================= ================= =================
Weighted average number of shares outstanding 31,152,603 17,028,963 31,102,603 16,092,237
================= ================= ================= =================
See accompanying notes to consolidated condensed financial statements.
5
ALLIANCE RESOURCES PLC
CONSOLIDATED CONDENSED STATEMENTS OF STOCHOLDERS' EQUITY
NINE MONTHS ENDED JANUARY 31, 1998
Common Stock
-------------------------------
Preferred Number of Par
Stock Shares Value
============== ============== ==============
Balance April 30, 1997 $ 2,871,114 17,982,068 $ 11,681,150
Exchange of Preference Stock (2,871,114) 4,419,818 2,871,114
Cancellation of
Treasury Stock -- (953,099) (619,132)
Issue for LaTex Acquisition -- 8,103,816 5,105,550
Issued shares for acquisition
of overriding royalty interest -- 1,343,750 872,900
Issued shares for settlement
of various advisory and
banking fees -- 256,250 165,904
Foreign exchange adjustment -- -- --
Net loss current period -- -- --
-------------- -------------- --------------
Balance January 31, 1998 $ -- 31,152,603 $ 20,077,486
============== ============== ==============
Additional Retained Earnings Total
Paid-In (Accumulated Treasury Stockholders'
Capital Deficit) Stock Equity
============== ============== ============== ==============
Balance April 30, 1997 $ 5,149,146 $ (19,127,446) $ (489,365) $ 84,599
Exchange of Preference Stock -- -- -- --
Cancellation of
Treasury Stock 129,767 -- 489,365 --
Issue for LaTex Acquisition (1,066,211) -- -- 4,039,339
Issued shares for acquisition
of overriding royalty interest 1,498,400 -- -- 2,371,300
Issued shares for settlement
of various advisory and
banking fees 187,096 -- -- 353,000
Foreign exchange adjustment -- 3,457 -- 3,457
Net loss current period -- (3,121,584) -- (3,121,584)
-------------- -------------- -------------- --------------
Balance January 31, 1998 $ 5,898,198 $ (22,245,573) $ -- $ 3,730,111
============== ============== ============== ==============
See accompanying notes to consolidated condensed financial statements.
6
ALLIANCE RESOURCES PLC
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Nine Nine
Months Ended Months Ended
January 31, 1998 January 31, 1997
(Restated)
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,121,584) $ (13,275,907)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation, amortization, and depletion 1,930,046 1,890,187
Gain on sale of assets (35,442) --
Equity in losses and write offs of investments in affiliates -- 4,113,127
Employee bonus -- 528,125
Litigation Settlement -- 500,000
Cessation of overseas exploration -- 3,446,795
Amortization of deferred loan costs 287,737 351,931
Changes in assets and liabilities, net of effects from acquisition:
Accounts receivable 484,497 1,127,818
Accounts receivable - related party -- 575,775
Accounts payable (3,994,059) 1,942,934
Accrued expenses payable 433,617 478,244
Other current assets (97,845) (44,288)
Other liabilities 357,952 565,000
----------------- -----------------
Net cash (used in) provided by operating activities (3,755,081) 2,199,741
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,539,462) (482,397)
Proceeds from sale of property and equipment 5,523,391 2,634,811
Effect of LaTex Acquisition 192,819
Decrease in accounts and notes receivable -- 1,480,000
Advances to unconsolidated affiliates and notes receivable -- (326,394)
----------------- -----------------
Net cash provided by investing activities 4,176,748 3,306,020
----------------- -----------------
See accompanying notes to consolidated condensed financial statements.
7
ALLIANCE RESOURCES PLC
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Nine Nine
Months Ended Months Ended
January 31, 1998 January 31, 1997
(Restated)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred loan and reorganization costs $ (385,680) $ (137,186)
Payments on notes payable -- (5,518,919)
Proceeds from notes payable 1,227,341 178,014
------------------ ------------------
Net cash provided by (used for) financing activities 841,661 (5,478,091)
------------------ ------------------
Net increase in cash and cash equivalents 1,263,328 27,670
Cash and cash equivalents at beginning of period $ 72,948 --
------------------ ------------------
Cash and cash equivalents at end of period $ 1,336,276 $ 27,670
================== ==================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,159,453 $ 1,838,000
Income taxes -- --
Supplemental schedules of noncash investing and financing activities:
Common stock issued for services and bonus $ 353,000 $ 628,125
Issuance of bank debt to buy out commodity collar 1,128,000 --
Ordinary shares issued on acquisition of LaTex 4,039,939 --
Ordinary shares issued for acquisition of overriding
royalty interest 2,371,300 --
Convertible loan notes issued for acquisition of overriding
royalty interest 1,400,700 --
Convertible loan notes due in settlement of financing fees 150,000 --
See accompanying notes to consolidatd condensed financial statements.
8
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. Alliance Resources PLC (the "Company" or
"Alliance") is organized as a public limited company under the laws of England
and Wales. Alliance is a London-based holding company of a group whose principal
activities are the exploration, development, and production of oil and gas
hydrocarbons and the acquisition of producing oil and gas properties. Alliance
was incorporated and registered under the laws of England and Wales on August
20, 1990. Alliance's corporate headquarters are at Kingsbury House, 15-17 King
Street, London SW1Y 6QU, England, but its operations office is located at 4200
East Skelly Drive, Suite 1000, Tulsa, Oklahoma 74135.
INTERIM REPORTING. The interim consolidated condensed financial
statements reflect all adjustments which, in the opinion of management, are
necessary for a fair presentation of the results for the interim periods
presented. All such adjustments are of a normal recurring nature. Due to the
seasonal nature of the business, the results of operations for the three months
ended January 31, 1998, are not necessarily indicative of the results that may
be expected for the year ended April 30, 1998. For further information, refer to
Form 20-F for the year ended April 30, 1997 (which was filed in its final form
with the Securities Exchange Commission on June 18, 1998).
B. SIGNIFICANT EVENTS
Effective May 1, 1997, Alliance completed its merger (the "Merger")
with LaTex Resources, Inc. ("LaTex") whereby a newly formed wholly owned
subsidiary of Alliance merged with and into LaTex with LaTex being the surviving
corporation for accounting purposes. In consideration, the shareholders of LaTex
received an aggregate of 21,448,787 shares of Alliance, par value (pounds)
(pound)0.40 per share (the "New Alliance Shares") and warrants to purchase an
additional 1,927,908 New Alliance Shares.
As a result, after giving effect to a 40-to-1 reverse stock split of
the Alliance ordinary shares, each shareholder of LaTex at the close of business
on April 30, 1997 received 0.85981 of a New Alliance Share for each share of
LaTex common stock, 2.58201 New Alliance Shares for each share of LaTex Series A
stock then held, 6.17632 New Alliance Shares for each share of LaTex Series B
stock then held, and a warrant to purchase 0.85981 of a New Alliance Share for
each share of the LaTex common stock subject to warrants.
In connection with the Merger, a subsidiary of Alliance entered into a
Credit Agreement (the "Alliance Credit Agreement") with the Bank of America NT &
SA (the "Bank") effective March 19, 1997, which amended and restated LaTex's
Amended and Restated Credit Agreement (the "LaTex Credit Agreement") in order to
restructure LaTex's existing indebtedness to the Bank. As a restructuring fee,
in connection with entering into the Alliance Credit Agreement, Alliance issued
to the Bank 156,250 New
9
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Alliance Shares and has agreed to pay the Bank $150,000, payable in cash or, at
Alliance's option, convertible loan notes.
Alliance has also issued 1,343,750 New Alliance Shares, convertible
loan notes and warrants to the Bank in payment of certain fees and in exchange
for an overriding royalty interest owned by the Bank. The convertible loan notes
issued to the Bank may, under certain circumstances, be converted into a maximum
of 1,078,125 New Alliance Shares. The warrants issued to the Bank may, under
certain circumstances, be converted into a maximum of 1,210,938 New Alliance
Shares.
After giving effect to the 40-to-1 reverse stock split, Alliance's pre-
Merger shareholders held 8,103,816 New Alliance Shares as replacement for their
pre-reverse split ordinary shares.
On September 15, 1997, Alliance issued 100,000 New Alliance Shares in
settlement of financial advisory fees and on November 5, 1997, Alliance issued
115,456 convertible loan notes to the Bank in settlement of arrangement fees of
$150,000 noted above which may, under certain circumstances, be converted into
New Alliance Shares.
In summary, as a result of the Merger and related transactions,
Alliance had outstanding at January 31, 1998 approximately 31,152,603 New
Alliance Shares, warrants to purchase up to 3,138,946 New Alliance Shares, and
convertible loan notes convertible into 1,193,581 New Alliance Shares.
Under the terms of the Merger Agreement, LaTex disposed of its interest
in its unconsolidated affiliates, Wexford Technology, Inc. ("Wexford") and
Imperial Petroleum, Inc. ("Imperial"), and its interest in its wholly owned
subsidiaries LaTex Resources International, Inc. and Phoenix Metals, Inc.
Because of the reverse takeover nature of the Merger transaction, LaTex
is deemed to be the acquiror for financial reporting purposes and Alliance the
acquiree. Hence, for financial reporting purposes, all financial data (and,
consequently, all oil and gas reserve information and all information associated
with financial or reserve information) prior to the Merger with LaTex on May 1,
1997 have been restated to reflect LaTex as the predecessor company to Alliance.
Under US GAAP, the transaction was accounted for by application of the
purchase method in accordance with APB 16 "Business Combinations" and after due
consideration of EITF 95-19 "Determination of the Measurement Date for the
Market Price of Securities Issued in a Purchase Business Combination." The fair
value of the assets and liabilities of Alliance under US GAAP at the effective
date of the Merger was as follows:
10
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Oil & gas properties $ 4,269,435
Other fixed assets 253,386
Other assets 202,253
Current assets 1,940,600
Current liabilities (2,504,938)
Other liabilities (121,397)
The purchase price was derived from LaTex's average market capitalization
as reported on NASDAQ during the three trading days either side of the Merger
announcement on August 13, 1996, based on the conclusion that LaTex was the
acquiror for financial reporting purposes.
The consolidated statements of operations include the results of operations
of Alliance since the effective date of the Merger. The following is a statement
of pro forma revenues, loss before income taxes, net loss, and net loss per
share for the nine months ended January 31, 1997 based on the assumption that
Alliance was acquired at May 1, 1996.
Nine months ended
January 31, 1997
-----------------
Revenues $ 9,587,297
Loss before income tax $ (15,231,766)
Net loss $ (15,231,766)
Net loss per share $ (0.95)
The relevant portion of the above pro forma figures covering Alliance
was derived from the published interim results of Alliance for the six months
to October 31, 1996. As Alliance did not publish results for the nine months
ended January 31, 1997, the relevant Alliance portion of the above pro-forma
figures has been based on the year ended April 30, 1997 results (adjusted to
U.S. GAAP) and allocated to the quarter ended January 31, 1997 pro rata to the
relevant sales volumes.
Because for corporate law purposes (but not financial accounting
purposes) Alliance is the surviving corporation, all references to the "Company"
both prior and subsequent to May 1, 1997 refer to Alliance Resources PLC and its
subsidiaries unless otherwise indicated. Unless the context requires otherwise,
all references to "LaTex" include LaTex Resources, Inc., and its consolidated
subsidiaries.
For financial, reserve, and associated information concerning Alliance
prior to the Merger with LaTex, reference should be made to Form 20-F (which was
filed in its final form with the Securities Exchange Commission on June 18,
1998).
C. ACCOUNTING POLICY CHANGE. During the nine months ended April 30, 1997, the
Company changed its method of accounting for oil and gas exploration and
development
11
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
activities from the "successful efforts" method to the "full cost"
method. The financial statements for all prior periods have been restated to
apply the new method retroactively. The effects of the accounting change on the
nine months ended April 30, 1997 and the year ended July 31, 1996 are as
follows:
1997 1996
------------ ----------
Increase (decrease) in:
Net loss $(2,373,358) $1,221,856
============ ==========
Loss per common share $ (0.12) $ 0.07
============ ==========
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
The following is a discussion of the results of operations of the Company
for the three and nine months ended January 31, 1998. As noted elsewhere
herein, for financial reporting purposes, all financial data (and, consequently,
all oil and gas reserve information and all information associated with
financial or reserve information) prior to the Merger have been restated to
reflect LaTex as the predecessor company to Alliance. Therefore, the results
for the nine months ended January 31, 1998 represent the activities of the
enlarged group (Alliance and LaTex groups combined) while the results for the
nine months ended January 31, 1997 represent the activities of the LaTex group
alone. This discussion should be read in conjunction with the Company's
unaudited Consolidated Condensed Financial Statements.
The factors which most significantly affect the Company's results of
operations are (i) the sales prices of crude oil and natural gas, (ii) the level
of total sales volumes, (iii) the level of lease operating expenses, and (iv)
the level of and interest rates on borrowings. Total sales volumes and the
level of borrowings are significantly impacted by the degree of success the
Company experiences in its efforts to acquire oil and gas properties and its
ability to maintain or increase production from its existing oil and gas
properties through its development activities. The following table reflects
certain historical operating data for the periods presented.
Nine Months Ended January 31
----------------------------
1997 1998
----------- ----------
Net Sales Volumes:
Oil (Mbbls) 211 318
Natural Gas (Mmcf) 1,755 1,386
Oil Equivalent (MBOE) 504 549
Average Sales Prices:
Oil (per Bbl) $ 17.00 (1) $ 15.95 (2)
Natural Gas (per Mcf) $ 1.52 (1) $ 2.39 (2)
Operating Expenses per BOE of Net Sales:
Lease operating $ 5.41 $ 6.39
Severance tax $ 0.97 $ 0.99
Depreciation, depletion, and
amortization $ 3.75 $ 3.52
General and administrative $ 6.71 $ 5.75
(1) After giving effect to the impact of the Company's commodity price
hedging arrangements with the Bank. Without such hedging arrangements,
the average sales prices for the nine months ended January 31, 1997
would have been $20.36/bbl for oil and $2.33/mcf for gas.
13
(2) The commodity price hedging arrangements were bought out on May 15,
1997. On October 23, 1997 new commodity price hedging agreements were
initiated. Without such hedging arrangements, the average sales prices
for the nine months ended January 31, 1998 would have been $15.93/bbl
for oil and $2.41/mcf for gas. The loss relating to the buy-out of the
original arrangements of $1,128,000 has been recognized in its
entirety in the nine months ended January 31, 1998 as a result of the
new agreements being initiated.
Although sales volumes for the nine months ended January 31, 1998 were
adversely affected by the continuing decline in volumes from the LaTex
properties during the initial three months of the period, the remedial work
program reduced the rate of this decline. In addition, the inclusion of
Alliance's sales volumes from the start of the current reporting period more
than compensated for the initial decline on the LaTex properties.
Average sales prices received by the Company for oil and gas have
historically fluctuated significantly from period to period. Fluctuations in oil
prices during these periods reflect market uncertainties as well as concerns
related to the global supply and demand for crude oil. Average gas prices
received by the Company fluctuate generally with changes in the spot market for
gas. Relatively modest changes in either oil or gas significantly impact the
Company's results of operations and cash flow and could significantly impact the
Company's borrowing capacity.
Three Months Ended January 31, 1998 compared to the Three Months Ended
-----------------------------------------------------------------------
January 31, 1997
----------------
Total revenues from the Company's operations for the quarter ended January
31, 1998 were $2,401,559 compared to $1,222,673 for the quarter ended January
31, 1997. Revenues increased over the comparable period a year earlier due
principally to higher barrel of oil equivalent volumes, offset partially by
lower realized oil and gas prices. Revenues in the 1996-97 period were
adversely effected by the LaTex hedge program which effectively capped pricing
at below market levels. Sales volumes for the quarter ended January 31, 1998
were affected by the inclusion of Alliance's sales volumes and the favorable
impact of the remedial work program designed to restore production on the LaTex
properties.
The Company concentrated its efforts immediately after the acquisition of
LaTex on increasing production from eleven existing producing fields operated by
LaTex in the states of Alabama, Mississippi, Oklahoma, Texas, and Louisiana.
Workover operations on these fields commenced in early May 1997 and were
comprised mainly of returning shut-in wells to production. Gross production
from these eleven fields was increased from an average of 244 barrels of oil
equivalent per day ("boepd") in April 1997 to an average of 865 boepd by the
first half of August 1997. Most of the production increase
14
came from remedial workover operations in the South Carlton field in Alabama.
Gross production from this field alone increased from an average of 89 boepd in
April 1997 to an average of 575 boepd in September 1997.
Total operating expenses increased to $2,587,202 for the quarter ended
January 31, 1998 compared to $1,943,042 for the same period in 1996-97. This
increase was primarily due to the increase in lease operating expenses. Lease
operating expenses were $1,388,789 for the three-month period ended January 31,
1998 compared to $886,348 for the same period in 1996-97. The quarter ended
January 31, 1998 was impacted by the remedial work program mentioned above, the
inclusion of the Alliance properties, and returning a significant amount of
LaTex properties to production. Depreciation, depletion and amortization
decreased to $217,956 from $254,070. General and administrative expenses were
$980,457 during the quarter ended January 31, 1998 compared to $802,691 for the
quarter ended January 31, 1997. This increase was primarily due to the inclusion
of the Alliance overhead.
In addition to the decrease in the net operating loss to $185,643 for the
quarter ended January 31, 1998 from $720,369 for the same period in 1996-97,
there was also an improvement in other income/expense due to the lower interest
charge in the 1997-98 period.
In summary, due to the above factors, the net loss for the common
shareholders for the quarter ended January 31, 1998 decreased to $865,814 ($0.03
per share) compared to a net loss of $1,756,034 ($0.10 per share) for the same
period in 1996-97.
Nine Months Ended January 31, 1998 compared to the Nine Months Ended
--------------------------------------------------------------------
January 31, 1997
----------------
Total revenues from the Company's operations for the nine months ended
January 31, 1998 were $8,377,595 compared to $6,622,929 for the nine months
ended January 31, 1997. Revenues increased over the comparable period a year
earlier due principally to the beneficial effect of higher oil volumes, offset
partially by the absence of marketing margins in the revenue category. The
revenues in the 1997-98 period benefited from the lack of the LaTex commodity
price hedges and allowed the Company full exposure to higher market prices.
Revenues in the 1996-97 period were adversely affected by the LaTex hedge
program which effectively capped pricing at below market levels. Although sales
volumes for the nine months ended January 31, 1998 were adversely affected by
the continuing decline in sales volumes from the LaTex properties during the
initial three months of the period, the inclusion of Alliance's sales volumes
and the favorable impact of the remedial work program designed to restore
production on the LaTex properties more than compensated for this decline.
The Company continued concentrating its efforts to increase production from
its existing producing fields. Gross production from company-operated fields
was increased
15
from an average of 160 barrels of oil equivalent per day ("boepd") in April 1997
to an average of 2300 boepd by October 1997.
Total operating expenses decreased to $10,267,921 for the nine months ended
January 31, 1998 compared to $11,934,935 for the same period in 1996-97. This
decrease was primarily due to write-offs of $3,446,795 in relation to the
Company's Kazakhstan and Tunisia operations which were taken in the 1996-97
period. Lease operating expenses increased to $4,053,709 for the nine month
period ended January 31, 1998 compared to $3,193,177 for the same period in
1996-97. The nine months ended January 31, 1998 was impacted by the remedial
work program mentioned above, the inclusion of the Alliance properties, and
returning a significant amount of the LaTex properties to production.
Depreciation, depletion, and amortization increased to $1,930,046 from
$1,890,187 a year earlier mainly as a result of higher sales volumes in the
1997-98 period. General and administrative expenses decreased from $3,380,017
during the nine months ended January 31, 1997 primarily due to the employee
stock award in the 1996-97 period noted above partially offset by the inclusion
of the Alliance overhead as well as non-capitalized merger-related cost.
In addition to the decrease in the net operating loss to $1,890,326 for the
nine months ended January 31, 1998 from $5,312,006 for the same period in 1996-
97, there was also a significant improvement in other income/expense. This
improvement was due to the write-offs in the 1996-97 period of $4,054,237
covering investments in Wexford Technology, Inc. and Imperial Petroleum, Inc.
and miscellaneous expenses of $1,810,382 in connection with litigation arising
out of the sale in July 1993 of LaTex's Panda subsidiary.
In summary, due to the above factors, the net loss for the common
shareholders for the nine months ended January 31, 1998 decreased to $3,121,854
($0.10 per share) compared to a net loss of $13,763,872 ($0.86 per share) for
the same period in 1996-97.
CAPITAL RESOURCES AND LIQUIDITY. The Company's capital requirements relate
primarily to the development of its oil and gas properties and undeveloped
leasehold acreage, exploration activities, and the servicing of the Company's
debt. In general, because the Company's oil and gas reserves are depleted by
production, the success of its business strategy is dependent upon a continuous
exploration and development program and the acquisition of additional reserves.
CASH FLOWS AND LIQUIDITY. At January 31, 1998, Alliance has current assets
of $3.741 million and current liabilities of $10.727 million, which resulted in
a net current deficit of $6.986 million. Since the Merger, the net current
deficit has been reduced from $9.620 million at year ended April 30, 1997 to its
current position of $6.986 million. The $2.634 million improvement was
primarily due to the increase in cash balances and a reduction in accounts
payable. The current portion of long-term debt amounted to $1.300 million at
January 31, 1998 compared to $0 at April 30, 1997.
16
For the nine months ended January 31, 1998, net cash used in the Company's
operating activities was $3.755 million compared to cash provided of $2.200
million for the nine months ended January 31, 1997. A principal factor in this
deterioration was the change in "Accounts Payable" shown in this cash flow
statement for the 1998 period which showed an outflow of $3,994,059. This
effectively represented an allocation of funds to improve the working capital
deficit and was partially responsible for the $2.6 million improvement in the
balance sheet working capital position at January 31, 1998.
Investing activities of the Company generated $4.177 million in net cash
flow for the nine months ended January 31, 1998 compared to $3.306 million for
the nine months ended January 31, 1997. The improvement was principally due to
property sales of $5.523 million. Financing activities provided $.842 million
for the nine months ended January 31, 1998 compared to a use of $5.478 million
for the nine months ended January 31, 1997. The improvement was due to the
drawdown of additional funds under the Alliance Credit Agreement and the
abatement of scheduled principal payments until October 31, 1998.
The arrangements related to the abatement of principal cover the 12 months
ended October 31, 1998 for monthly amounts of $0.325 million. During the
current period no principal repayments were made to Bank of America. Under the
terms of the Previous Credit Agreement, the contractual maturities of long term
debt as at January 31, 1998 are $1.300 million, $3.900 million and 15.367
million due in the years ending January 31, 1999, 2000 and 2001 respectively.
Overall, cash and cash equivalents improved to $1.336 million in the nine
months ended January 31, 1998 compared to $0.073 million in the 1996-97 period.
CAPITAL EXPENDITURES. A 37 well recompletion program is currently underway
and has the potential to significantly increase daily production over the next
12 months although there can be no guarantee of a successful outcome of this
program given the relevant technical and pricing risks. In the event that the
recompletion program is continued according to plan and is successful, the
Company anticipates that it will provide significant net revenues beyond the
capital expenditures necessary to complete the program. The timing of most of
the Company's capital expenditures is discretionary. Currently, there are no
material long-term commitments associated with the Company's capital expenditure
plans. Consequently, the Company has a significant degree of flexibility to
adjust the level of such expenditures as circumstances warrant. The Company
primarily uses internally generated cash flow and proceeds from the sale of oil
and gas properties to fund capital expenditures, other than significant
acquisitions, and to fund its working capital deficit. If the Company's
internally generated cash flows should be insufficient to meet its banking or
other obligations, the Company may reduce the level of discretionary capital
expenditures or increase the sale of non-strategic oil and gas properties in
order to meet such obligations. The level of the Company's capital expenditures
will vary in future periods depending on energy market conditions and other
related economic factors. As a result, the Company will continue its current
policy of funding capital expenditures with internally generated cash flow and
the proceeds from oil and gas property divestitures.
17
FINANCING ARRANGEMENTS. Under the Alliance Credit Agreement, principal
payments are suspended until October 31, 1998 on which date the first scheduled
repayment of $325,000 is due. However, cash flows generated by Alliance and its
subsidiaries in excess of amounts provided for in the business plan that formed
the basis of negotiation with the Bank will be used to reduce outstanding
principal indebtedness. The maturity date of the existing line of credit
remains at March 31, 2000.
Substantially all of the existing security for the outstanding indebtedness
under the LaTex Credit Agreement, being the mortgages of all of LaTex's
producing oil and gas properties and pledges of stock of the existing Borrowers
and ENPRO, remains in place. As additional security, the Bank has received
mortgages on substantially all of Alliance's producing oil and gas properties
and pledges of the stock of Alliance's subsidiaries.
Under the Alliance Credit Agreement, the borrowing base will be equal to
the outstanding indebtedness under the LaTex Credit Agreement as of the date of
the Merger. The borrowing base is to be redetermined annually as of December 31
and June 30 of each year.
Borrowings under the Alliance Credit Agreement maintained from time to time
as a "Base Rate Loan" bear interest, payable monthly, at a fluctuating rate
equal to the higher of (i) the rate of interest announced from time to time by
the Bank as its "reference rate" plus 1% or (ii) the "Federal Funds Rate" (as
defined in the Alliance Credit Agreement) plus 1 1/4%. Borrowings under the
Alliance Credit Agreement maintained from time to time as a "LIBO Rate Loan"
bear interest, payable on the last day of each applicable interest period (as
defined in the Alliance Credit Agreement), at a fluctuating rate equal to the
LIBO Rate (Reserve Adjusted) (as defined in the Alliance Credit Agreement) plus
2%. As at January 31, 1998, advances to Alliance under the Alliance Credit
Agreement were maintained as LIBO Rate Loans that bore interest at the annual
rate of 7.625%.
As a condition to the Bank making the loans under the LaTex Credit
Agreement, LaTex's subsidiary, LaTex Petroleum, entered into hedging agreements
with the Bank designed to enable LaTex to (a) obtain agreed upon net realized
prices for LaTex's oil and gas production (the "Oil and Gas Hedging Agreements")
and (b) protect LaTex against fluctuations in interest rates with respect to the
principal amounts of all loans under the LaTex Credit Agreement. Under the
Alliance Credit Agreement, the Bank has agreed to make available, at its sole
discretion, to Alliance the amount of $2,500,000 to reduce or terminate the Oil
and Gas Hedging Agreements.
At January 31, 1998, the outstanding balance under the Alliance Credit
Agreement was $20.567 million of which $1.300 million in included as the current
portion on the balance sheet. The outstanding loan balance has increased $2.471
million since the Company's April 30, 1997 year-end as a result of the following
items which have been added to the outstanding loan balance: $0.116 million of
loan interest; $0.732 million related to unpaid product hedge payments as of
April 30, 1997 (the hedge liability
18
was provided for in the April 30, 1997 financial statements and has subsequently
been reclassified to the bank debt). Other additions to the outstanding loan
balance covered drawdowns in respect of the cost of the buyout of the commodity
price hedges (noted above) of $1.128 million on May 15, 1997, merger-related
legal costs of the Bank's attorneys of $0.110 million, and the $0.386 million
cost of new commodity price hedges purchased on October 23, 1997 for the twelve
months ended October 31, 1998.
In connection with the Merger and the Alliance Credit Agreement, the
Company, effective May 1, 1997 acquired an overriding royalty interest in all of
LaTex's existing producing oil and gas properties, other than those located in
the State of Oklahoma, the Perkins Field in Louisiana, and certain other minor
value properties located in other states, from an affiliate of the Bank in
exchange for 1,343,750 New Alliance Shares, convertible loan notes and warrants.
SEASONALITY. The results of operations of the Company are somewhat
seasonal due to fluctuations in the price for crude oil and natural gas.
Recently, crude oil prices have been generally higher in the third calendar
quarter, and natural gas prices have been generally higher in the first calendar
quarter. Due to these seasonal fluctuations, results of operations for
individual quarterly periods may not be indicative of results which may be
realized on an annual basis.
INFLATION AND PRICES. In recent years, inflation has not had a significant
impact on the operations or financial condition of the Company. The generally
downward pressure on oil and gas prices during most of such periods has been
accompanied by a corresponding downward pressure on costs incurred to acquire,
develop, and operate oil and gas properties as well as the costs of drilling and
completing wells on properties.
Prices obtained for oil and gas production depend upon numerous factors
that are beyond the control of the Company including the extent of domestic and
foreign production, imports of foreign oil, market demand, domestic and world-
wide economic and political conditions, and government regulations and tax laws.
Prices for oil and gas have fluctuated significantly from 1995 through 1998.
The following table sets forth the average price received by the Company for
each of the last three years and the effects of the various hedging arrangements
noted above.
Oil Oil Gas Gas
Nine Months Ended (excluding the (including the (excluding the (including the
January 31 effects of hedging effects of hedging effects of hedging effects of hedging
- ------------------------- transactions) transactions) transactions) transactions)
- ----------------------------------------------------------------------------------------------------------------
1998 $15.93 $15.95 $2.41 $2.39
1997 $20.36 $17.00 $2.33 $1.52
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On October 23, 1997, the Company entered into new commodity price hedge
agreements to protect against price declines which may be associated with the
volatility in oil and natural gas spot prices. Unlike the previous hedging
agreements entered into by LaTex, the new commodity price hedge agreements,
while protecting the downside, also provide the Company with exposure to price
increases beyond certain agreed price levels. The commodity price hedges have
been achieved through the purchase of put options (floors) by the Company, and
the associated premia cost was funded by additional drawdowns under the Alliance
Credit Agreement. The commodity price hedges cover the year to October 31, 1998
and cover in excess of 90% of Alliance's current monthly sales volumes. The
floors currently equate to approximately $18.50/bbl Nymex WTI contract and
$2.20/mmbtu Nymex Natural Gas contract.
ISSUES RELATED TO THE YEAR 2000. As the year 2000 approaches, there are
uncertainties concerning whether computer systems will properly recognize the
date-sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or fail.
Because of the nature of the oil and gas industry and the necessity for the
Company to make reserve estimates and other plans well beyond the year 2000, the
Company's computer systems and software were already configured to accommodate
dates beyond the year 2000. The Company believes that the year 2000 will not
pose significant operational problems for the Company's computer systems. The
Company has not, however, completed its assessment of the computer systems of
third parties with which it deals, and it is not possible at this time to assess
the effect of a third party's inability to adequately address year 2000 issues.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27-1 Financial Data Schedule
(b) Reports
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Alliance Resources PLC
Registrant
By: H.B.K. Williams
-----------------------------------
H.B.K Williams, Finance Director
Date: June 17, 1998
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