SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
XX SECURITIES EXCHANGE OF 1934
----
For the quarterly period ended January 31, 1999
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
England and Wales 73-1405081
(State or other jurisdiction of (IRS Employer Identification No.)
Incorporation or organization)
4200 East Skelly Drive, Suite 1000, Tulsa, Oklahoma 74135
(Address of principal executive offices) (Zip Code)
918-491-1100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the
preceding 12 months (or for such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___
---
As of April 15, 1999, there were 47,487,142 shares of the Registrant's
ordinary shares of common stock outstanding and 10,000,000 convertible
restricted voting shares outstanding of the Registrant.
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
Index to Form 10-Q for the Quarterly Period
Ended January 31, 1999
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements. Page
Consolidated Condensed Balance Sheets -
January 31, 1999 and April 30, 1998 2
Consolidated Condensed Statements of Operations -
Three months and Nine months ended January 31, 1999 and 1998 4
Consolidated Condensed Statement of Stockholders' Equity -
Nine months ended January 31, 1999 5
Consolidated Condensed Statements of Cash Flows -
Nine months ended January 31, 1999 and 1998 6
Notes to Consolidated Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 9
Item 3. Quantitative and Qualitative Analysis on Market Risk 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
The information called for by Items 2-5 has been omitted.
Item 6. Exhibit and Reports on Form 8-K 19
SIGNATURES 20
Cautionary Statement Regarding Forward Looking Statements
In the interest of providing the Company's stockholders and potential
investors with certain information regarding the Company's future plans and
operations, certain statements set forth in this Form-10Q relate to
management's future plans and objectives. Such statements are "forward-
looking statements" within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Although any forward-looking statements contained in this Form
10-Q or otherwise expressed by or on behalf of the Company are, to the
knowledge and in the judgement of the officers and directors of the Company,
expected to prove true and to come to pass, management is not able to predict
the future with absolute certainty. Forward-looking statements involve known
and unknown risks and uncertainties which may cause the Company's actual
performance and financial results in future periods to differ materially from
any projection, estimate or forecasted result. These risks and uncertainties
include, among other things, volatility of oil and gas prices, competition,
risks inherent in the Company's oil and gas operations, the inexact nature of
interpretation of seismic and other geological and geophysical data,
imprecision of reserve estimates, the Company's ability to replace and expand
oil and gas reserves, and such other risks and uncertainties described from
time to time in the Company's periodic reports and filings with the
Securities and Exchange Commission. Accordingly, stockholders and potential
investors are cautioned that certain events or circumstances could cause
actual results to differ materially from those projected, estimated, or
predicted.
1
ITEM 1. Financial Statements
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
January 31, 1999 April 30, 1998
(unaudited) (audited)
-------------------- ------------------
ASSETS
Current assets:
Cash $ 611,649 $ 408,439
Accounts receivable - trade 1,725,984 2,132,654
Other current assets 41,365 73,977
-------------------- ------------------
Total current assets 2,378,998 2,615,070
-------------------- ------------------
Property, plant, and equipment, at cost:
Oil and gas properties (using full cost method)
US Properties 43,340,931 43,200,388
UK Properties 29,075,939 -
Other depreciable assets 1,067,248 1,029,118
-------------------- ------------------
73,484,118 44,229,506
Less accumulated depreciation and depletion (16,935,714) (14,421,400)
-------------------- ------------------
Net property, plant and equipment 56,548,404 29,808,106
-------------------- ------------------
Other assets:
Other assets 35,331 144,989
Deferred acquisition costs - 970,305
Deferred loan costs, less accumulated amortization 3,392,584 1,221,650
-------------------- ------------------
Total other assets 3,427,915 2,336,944
-------------------- ------------------
TOTAL ASSETS $ 62,355,317 $ 34,760,120
==================== ==================
See accompanying notes to consolidated condensed financial statements.
2
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
Consolidated Condensed Balance Sheets, Continued
January 31, 1999 April 30, 1998
(unaudited) (audited)
-------------------- ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 8,241,948 $ 8,972,704
Accrued expenses payable 533,507 847,190
Current portion long-term debt - 2,275,000
-------------------- ------------------
Total current liabilities 8,775,455 12,094,894
Long-term Liabilities:
Long-term debt-less current portion (net of discount of $7,171,161 at 38,970,853 18,791,762
January 31, 1999, and $0 at April 30, 1998)
Other liabilities - 139,626
Convertible subordinated unsecured loan notes 1,550,700 1,550,700
-------------------- ------------------
Total long-term liabilities 40,521,553 20,482,088
-------------------- ------------------
Total liabilities 49,297,008 32,576,982
-------------------- ------------------
Stockholders' equity:
Ordinary Shares-par value 40 pence;
46,000,000 shares authorized, 31,209,408 issued and outstanding - 20,114,634
at April 30, 1998
Ordinary Shares - par value 1 pence;
415,001,376 authorized, 47,487,142 issued and outstanding
at January 31, 1999 768,823 -
Deferred Shares - par value 1 pence;
1,414,998,624 authorized, 1,217,166,912 issued and outstanding
at January 31, 1999 19,611,767 -
Convertible Shares - par value 1 pence;
10,000,000 authorized, 10,000,000 issued and outstanding
at January 31, 1999 278,000 -
Additional paid-in capital 21,042,094 5,911,050
Accumulated other comprehensive loss (31,214) -
Accumulated deficit (28,611,161) (23,842,546)
-------------------- ------------------
Total stockholders' equity 13,058,309 2,183,138
-------------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 62,355,317 $ 34,760,120
==================== ==================
See accompanying notes to consolidated condensed financial statements.
3
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
Consolidated Condensed Statement of Operations
Three Three Nine Nine
Months Ended Months Ended Months Ended Months Ended
January 31, 1999 January 31, 1998 January 31, 1999 January 31, 1998
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
--------------------------------------------------------------------------
Revenue:
Oil and gas revenue $ 1,222,596 $ 2,401,559 $ 5,172,367 $ 8,377,595
--------------------------------------------------------------------------
Total operating income 1,222,596 2,401,559 5,172,367 8,377,595
--------------------------------------------------------------------------
Operating expenses:
Lease operating expense 784,627 1,388,789 2,247,186 3,637,862
Depreciation and depletion 394,644 217,956 1,536,696 1,930,046
Loss on commodity deriviatives - - - 1,128,000
General and administrative expense 968,596 980,457 2,547,268 3,156,166
--------------------------------------------------------------------------
Total operating expenses 2,147,867 2,587,202 6,331,150 9,852,074
--------------------------------------------------------------------------
Net operating loss (925,271) (185,643) (1,158,783) (1,474,479)
Other income (expense):
Gain/(Loss) on sale of assets - 16,946 (9,184) 35,442
Interest expense (1,638,936) (750,578) (2,766,609) (1,760,084)
Write-off of deferred loan costs - - (869,906) -
Interest income 8,049 14,286 20,165 50,005
Miscellaneous income (expense) (34,039) 39,175 15,702 27,532
--------------------------------------------------------------------------
Net loss before income taxes (2,590,197) (865,814) (4,768,615) (3,121,584)
Income tax expense - - - -
--------------------------------------------------------------------------
Net loss (2,590,197) (865,814) (4,768,615) (3,121,584)
--------------------------------------------------------------------------
Net loss for common shareholders $ (2,590,197) $ (865,814) $ (4,768,615) $ (3,121,584)
==========================================================================
Loss per share for common shareholders $ (0.05) $ (0.03) $ (0.13) $ (0.10)
==========================================================================
Weighted average number of shares outstanding 47,487,142 31,152,603 36,773,433 31,102,603
==========================================================================
See accompanying notes to consolidated condensed financial statements.
4
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
Consolidated Condensed Statements of Stockholders' Equity
Nine Months Ended January 21, 1999
Ordinary Shares Deferred Shares
----------------- ---------------
Shares Par Shares Par
------------------------------------------------------------------------
Balance at April 30, 1998 31,209,408 $ 20,114,634 - $ -
Subdivide stock - $ (19,611,767) 1,217,166,912 19,611,767
Issued for Difco acquisition - - - -
Issued for financial advisory services 615,385 10,000 - -
Issued to lender 15,545,454 254,000 - -
Warrants issued to lender - - - -
Additional shares issued in connection 116,895 1,956 - -
with LaTex acquisition
Comprehensive loss:
Foreign Exchange - - - -
Net loss current period - - - -
Total comprehensive loss
------------------------------------------------------------------------
Balance January 31, 1999 47,487,142 $ 768,823 1,217,166,912 $ 19,611,767
========================================================================
Additional Accumulated
Convertible Shares Paid-In Other Comprehensive
------------------
Shares Par Capital Income/(Loss)
---------------------------------------------------------------------------
Balance at April 30, 1998 - $ - $ 5,911,050 $ -
Subdivide stock - - - -
Issued for Difco acquisition 10,000,000 278,000 6,930,000 -
Issued for financial advisory services - - 320,000 -
Issued to lender - - 6,398,000 -
Warrants issued to lender - - 1,335,000 -
Additional shares issued in connection - - 148,044 -
with LaTex acquisition
Comprehensive loss:
Foreign Exchange - - - (31,214)
Net loss current period - - - -
Total comprehensive loss
---------------------------------------------------------------------------
Balance January 31, 1999 10,000,000 $ 278,000 $ 21,042,094 $ (31,214)
===========================================================================
Retained Earnings Total
(Accumulated Stockholders'
Deficit) Equity
---------------------------------------
Balance at April 30, 1998 $ (23,842,546) $ 2,183,138
Subdivide stock - -
Issued for Difco acquisition - 7,208,000
Issued for financial advisory services - 330,000
Issued to lender - 6,652,000
Warrants issued to lender - 1,335,000
Additional shares issued in connection - 150,000
with LaTex acquisition
Comprehensive loss:
Foreign Exchange (31,214)
Net loss current period (4,768,615) (4,768,615)
--------------
Total comprehensive loss - (4,799,829)
---------------------------------------
Balance January 31, 1999 $ (28,611,161) $ 13,058,309
=======================================
See accompanying notes to consolidated condensed financial statements.
5
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Nine Nine
Months Ended Months Ended
January 31, 1999 January 31, 1998
(Unaudited) (Unaudited)
-------------------- --------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,768,615) $ (3,121,584)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation, amortization, and depletion 1,536,696 1,930,046
Gain/(Loss) on sale of assets 9,184 (35,442)
Write-off of deferred loan costs 869,906 -
Amortization of deferred loan cost 530,301 287,737
Amortization of debt discount 273,839
Changes in assets and liabilities, net of effects
from acquisition:
Accounts receivable 406,670 484,497
Accounts payable (850,994) (3,994,059)
Accrued expenses payable (313,683) 433,617
Other current assets - (97,845)
Deposits and other assets 142,270 -
Other liabilities (139,626) 357,952
-------------------- --------------------
Net cash used in operating activities (2,304,052) (3,755,081)
-------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Difco (21,744,966) -
Purchases of property and equipment (1,107,479) (1,539,462)
Proceeds from sale of property and equipment 1,107,194 5,523,391
Effect of LaTex acquisition - 192,819
-------------------- --------------------
Net cash provided by (used in) investing activities (21,745,251) 4,176,748
-------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 38,141,876 -
Payment of long term debt (22,566,762) -
Advances on notes payable 3,390,138 1,227,341
Deferred loan and reorganization costs (1,072,739) (385,680)
Proceeds from issuance of common stock 6,360,000 -
-------------------- --------------------
Net cash provided by financing activities 24,252,513 841,661
-------------------- --------------------
Net increase in cash and cash equivalents 203,210 1,263,328
Cash and cash equivalents at beginning of period 408,439 72,948
-------------------- --------------------
Cash and cash equivalents at end of period $ 611,649 $ 1,336,276
==================== ====================
See accompanying notes to consolidated condensed financial statements.
6
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Nine Nine
Months Ended Months Ended
January 31, 1999 January 31, 1998
(Unaudited) (Unaudited)
-------------------- --------------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,920,957 $ 1,159,453
==================== ====================
Supplemental schedules of noncash investing and financing activities:
Ordinary shares issued on acquisition of LaTex $ - $ 4,039,939
Convertible shares issued to Difco shareholders 7,208,000 -
Ordinary shares issued for acquisition of overriding
royalty interest - 2,371,300
Ordinary shares issued for settlement of various advisory and
banking fees 772,000 353,000
Issuance of bank debt to buy out commodity collar - 1,128,000
Convertible loan notes issued for acquisition of overriding
royalty interest - 1,400,700
Convertible loan notes due in settlement of financing fees - 150,000
Foreign exchange adjustment 31,214 -
Overriding royalty interest conveyed to bank 2,100,000 -
See accompanying notes to consolidated condensed financial statements.
7
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 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. The results of operations for the
nine months ended January 31, 1999, are not necessarily indicative of the
results that may be expected for the year ended April 30, 1999. For further
information, refer to the Company's Annual Report on Form 10-K for the year
ended April 30, 1998.
B. Significant Events
On October 30, 1998, Alliance completed its acquisition (the "Acquisition")
of Difco Limited ("Difco"). Alliance acquired all of the capital stock of Difco
and, indirectly a contract to acquire 10% of Burlington Resources, (Irish Sea)
Limited's ("Burlington") interest in the East Irish Sea Properties ("U.K.
Interests"). The Difco shareholders received approximately 8.7% of the
outstanding shares of the Company and could receive up to 29.6% of the
outstanding shares of the Company based upon the production from, or reserves
attributable to the U.K Interests.
The Company then acquired, through Difco, 10% of Burlington's interest in
the East Irish Sea Properties for cash consideration of approximately
$17,000,000. In addition, the Company issued to one of its lenders 15,000,000
ordinary shares and loan notes with a face value of $9,750,000 for a total
consideration of $10,000,000 and 545,454 ordinary shares in payment of a fee of
$292,000. The Company paid another lender a cash fee of $700,000 and granted
the lender warrants to purchase 3,275,000 ordinary shares at a price of 1p per
share and an overriding royalty interest in the U.K. Interests of 0.3% beginning
January 1, 2001. The overriding royalty interest will entitle the lender to
receive a payment equal to the specified percentage of the net revenues
generated by the U.K. Interests. The overriding royalty interest would the have
the effect
8
of reducing the Company's revenues from the U.K. Interests. The Company also
issued to its financial advisor 615,385 ordinary shares in payment of a fee of
$330,000.
Item 2. 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, 1999. This discussion should be
read in conjunction with the Company's unaudited Consolidated Condensed
Financial Statements above.
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
----------------------------
1999 1998
---- ----
Net Sales Volumes:
Oil (Mbbls) 220 318
Natural Gas (MMcf) 1,072 1,386
Oil Equivalent (MBOE) 399 549
Average Sales Prices:
Oil (per Bbl) $13.49 (1) $15.95 (2)
Natural Gas (per Mcf) $ 2.08 (1) $ 2.39 (2)
Operating Expenses per
Equivalent barrel of Net Sales:
Lease operating $ 4.92 $ 6.16
Severance tax $ 0.71 $ 0.99
Depreciation, depletion, and amortization $ 3.85 $ 3.52
General and administrative $ 6.38 $ 5.75
(1) After giving effect to the impact of the Company's commodity price hedging
arrangements. Without such hedging arrangements, the average sales prices
for the nine months ended January 31, 1999 would have been $9.96/bbl for
oil and $2.05/mcf for gas.
9
(2) After giving effect to the impact of the Company's commodity price hedging
arrangements. 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.
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, 1999 compared to the Three Months Ended
-----------------------------------------------------------------------
January 31, 1998
----------------
Total revenue from the Company's operations for the quarter ended January
31, 1999, was $1,222,596 compared to $2,401,559 for the quarter ended January
31, 1998. Revenue decreased over the comparable period a year earlier due
principally to the effects of lower realized sales prices and volumes. The
primary reason for the decline in sales volumes was due to the sale of certain
marginal non-core properties during the latter portion of the previous fiscal
year.
Total operating expenses decreased to $2,147,867 for the quarter ended
January 31, 1999, compared to $2,587,202 for the same period in 1998. This
decrease was primarily due to a significant decrease in lease operating
expenses. Lease operating expenses decreased to $784,627 for the three-month
period ended January 31, 1999, compared to $1,388,789 for the same period in
1998 due to the completion of remedial workovers and the sale of non-operated,
non-strategic wells in fiscal year 1998. Depreciation, depletion and
amortization increased to $394,644 from $217,956 a year earlier. General and
administrative expenses decreased slightly to $968,596 during the quarter ended
January 31, 1999, from $980,457 for the quarter ended January 31, 1998,
primarily due to the continued efforts by management to reduce corporate
overhead expenses.
The net operating loss of $925,271 for the quarter ended January 31, 1999,
reflects an increase of $739,628 over the net operating loss of $185,643 for the
same period in 1998. Interest expense increased to $1,638,936 for the quarter
ended January 31, 1999, from $750,578 for the same period in 1998 due to the
increase in notes payable, and the amortization of discounts on notes payable.
As a result, net loss increased to $2,590,197 in the three-month period ending
January 31, 1999, compared to a net loss of $865,814 in the comparable period
during 1998
10
Nine Months Ended January 31, 1999 compared to the Nine Months Ended
--------------------------------------------------------------------
January 31, 1998
----------------
Total revenue from the Company's operations for the nine months ended
January 31, 1999, was $5,172,367 compared to $8,377,595 for the nine months
ended January 31, 1998. Revenue decreased significantly over the comparable
period a year earlier due principally to lower oil sales volumes and realized
gas prices, property disposals and the depletion of producing reserves.
Revenues in the 1999 period were adversely affected by the Company's decision to
curtail oil sales in the South Carlton field in Alabama due to low posted oil
prices and property disposals in the last two quarters of fiscal year 1998 also
contributed to the reduction in current gas volumes.
Total operating expenses decreased to $6,331,150 for the nine months ended
January 31, 1999, compared to $9,852,074 for the same period in 1998. This
decrease was primarily due to the buy-out in fiscal year 1998 of a previous
commodity hedge $1,128,000, a significant decrease in lease operating expenses
and a decrease in general and administrative expenses. Lease operating expenses
decreased to $2,247,186 in the 1999 period compared to $3,637,862 for the nine-
month period ended January 31, 1998. This decrease was mainly due to the
completion of remedial workovers and the sale of non-operated, non-strategic
properties in fiscal year 1998. Depreciation, depletion, and amortization
decreased to $1,536,696 from $1,930,046 a year earlier mainly due to lower sales
volumes. General and administrative expenses decreased from $3,156,166 during
the nine months ended January 31, 1998, compared with $2,547,268 during the 1999
period. The decrease was a result of continuing efforts by management to reduce
corporate overhead expenses. Consequently, the net operating loss of $1,158,783
for the nine-month period ended January 31, 1999, reflects a decrease over the
net operating loss of $1,474,479 for the nine-month period ended January 31,
1998.
The increase in net loss to $4,768,615 for the nine-month period ended
January 31, 1999, from $3,121,584 is due primarily to the increase in interest
expense, and the write-off of deferred loan costs. Interest expense increased
to $2,766,609 for the nine-month period ended January 31, 1999, from $1,760,084
for the 1998 period due to the increase in notes payable and the amortization of
discounts on notes payable. The write-off of $869,906 of deferred loan costs
related to the previous credit facility.
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, 1999, Alliance had current assets
------------------------
of $2.379 million and current liabilities of $8.775 million, which resulted in a
working
11
capital deficit of $6.396 million. The working capital deficit has been reduced
from $9.480 million at year ended April 30, 1998. The $3.084 million improvement
was primarily due to the increase in cash balances resulting from loan drawdowns
and a reclassification of bank debt from current to long term. The current
portion of long-term debt was $0 at January 31, 1999, compared to $2.275 million
at April 30, 1998.
For the nine months ended January 31, 1999, net cash used in the Company's
operating activities was $2.304 million compared to cash used of $3.755 million
for the nine months ended January 31, 1998. This improvement in cash flow from
operating activities is substantially due to reduced expenditures on workovers
and overhead.
Investing activities of the Company used $21.745 million in net cash flow
for the nine months ended January 31, 1999, compared to $4.177 million generated
for the nine months ended January 31, 1998. The difference was principally due
to the Difco acquisition. Financing activities provided $24.253 million for the
nine months ended January 31, 1999, compared to $.842 million for the nine
months ended January 31, 1998. The improvement was due primarily to the
issuance of long-term debt for $38.142 million and the issuance of common stock
for $6.360 million offset by a payment of long-term debt of $22.567 million
during the 1999 period.
Overall, cash and cash equivalents increased by $.203 million in the nine
months ended January 31, 1999, compared to $1.263 million in the 1998 period.
Capital Expenditures. The timing of most of the Company's U.S. capital
--------------------
expenditures is discretionary. Currently, there are no material long-term
commitments associated with the Company's U.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
funds available under its credit facility 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 U.S.
capital expenditures or increase the sale of non-strategic oil and gas
properties in order to meet such obligations.
The timing of the Company's U.K. capital expenditures is determined
annually by a budget prepared by Burlington and approved by Alliance.
Currently, there are material commitments for the 1999 calendar year. These
commitments will be met by funds available under the Company's credit facility
and internally generated cash flow.
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 funds available under its credit facility, internally
generated cash flow and the proceeds from oil and gas property divestitures.
12
Financing Arrangements. In connection with the Acquisition, the Company
----------------------
has entered into agreements providing up to $65,750,000 in debt to the Company.
Bank of America National Trust & Savings Association ("BoA"), Alliance's
principal lender, has increased the Company's revolving credit facility from
$22,500,000 to $30,000,000 at an interest rate, determined by the Company from
time to time, of either (i) the greater of BoA's reference rate and the federal
funds effective rate plus 0.50%, or (ii) 2.0% above the current Interbank rate.
While any Tranche B loan is outstanding, the margins set forth above shall be
increased by an additional 0.50% semi-annually on April 26th and on October 26th
of each year. Interest on the credit line is payable quarterly and principal is
due in equal quarterly payments beginning October 30, 2000 and ending October
30, 2003. The Company's initial borrowing base under the credit line is
$18,500,000 and will be redetermined semiannually.
On July 31, 1998, all of the $22,500,000 available under the previous
credit facility was outstanding. Of this amount, $5,000,000 was converted to
subordinated debt, in addition to the revolving credit facility. The interest
rate on the subordinated debt is either (i) BoA's reference rate plus 5.0%, or
(ii) 7.0% above the current Interbank rate, determined by the Company from time
to time. Principal will be due in equal quarterly installments beginning
January 31, 2001 and ending October 30, 2004.
In addition, BoA has provided an additional $20,000,000 of debt ("Tranche B
loans") at an interest rate, determined by the Company from time to time, of
either (i) BoA's) reference rate plus 2.0%, or (ii) 4.0% above the current
Interbank rate. The margins for all Tranche B loans shall increase by 0.50%
semi-annually on April 26th and on October 26th of each year while any Tranche B
loan is outstanding. Interest on the additional debt will be payable quarterly
and principal is due and payable in full on January 31, 2001. The debt to BoA
is secured by a first priority mortgage on substantially all of the Company's
properties, including the U.K. Interests.
The Company has paid BoA a cash fee of $700,000 and granted BoA warrants to
purchase 3,275,000 ordinary shares at a price of 1p per share. In addition, BoA
will receive an overriding royalty interest in the U.K. Interests of 0.3%
beginning January 1, 2001. The overriding royalty interest will entitle BoA to
receive a payment equal to the specified percentage of the net revenues
generated by the U.K. Interests. The overriding royalty interest will have the
effect of reducing the Company's revenues from the U.K. Interests. In
connection with obtaining the debt financing from BoA, the proposed terms
require the Company to enter into commodity price risk management contracts on
terms that are mutually agreeable to BoA and the Company, during the time any
Tranche B loan is outstanding with respect to at least 50% of the Company's U.S.
estimated producing reserves as of October 30, 1998, and at least 50% of the
aggregate volumes projected to be produced from proven reserves attributable to
those U.K. interests included in a development plan approved by The Department
of Trade and Industry. BoA also requires the Company to enter into interest
rate risk management contracts providing for a maximum interest rate of (I) 8.5%
on the notional amount projected to be outstanding as Tranche A loans; (ii) 10%
on the notional amount projected to be
13
outstanding as Tranche B loans; and, (iii) 12% on the notional amount projected
to be outstanding as Tranche C loans.
The Company has issued to EnCap Equity 1996 Limited Partnership and EnCap
Capital Investment Company PLC ("collectively EnCap") debt of $9,750,000, at an
interest rate of 10% per year, and 15,000,000 ordinary Shares for an aggregate
cash consideration of $10,000,000. Interest on the EnCap debt will be payable
quarterly, principal is payable in full by October 30, 2005. For the first
three years, the Company has the option of increasing the amount of debt from
EnCap in the amount of the interest payments due, in lieu of paying interest.
The EnCap debt is unsecured.
The Company has also issued to EnCap Investments L.C., 545,454 shares in
consideration of a fee of $292,000. In addition, EnCap, has the right to
designate one member to the Company's board of directors.
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 in recent years. The
following table sets forth the average price received by the Company for each of
the last three years and the effects of various hedging arrangements.
(excluding the (including the (excluding the (including the
Nine Months Ended effects of hedging effects of hedging effects of hedging effects of hedging
January 31 transactions) transactions) transactions) transactions)
- -----------------------------------------------------------------------------------------------------------------
1999 $ 9.96 $13.49 $2.05 $2.08
1998 $15.93 $15.95 $2.41 $2.39
1997 $20.36 $17.00 $2.33 $1.52
14
On October 31, 1998, the Company's commodity price hedge agreements
expired. During February 1999 the Company completed a transaction to hedge
approximately 65% of its existing monthly gas production by installing a floor
of $1.60/MMBTU and a cap of $2.07/MMBTU. This will protect the Company from any
severe declines in natural gas prices over the next eight months. During April
1999 the Company completed a transaction to hedge approximately 40% of its
existing monthly oil production by installing a floor of $12.00/barrel. This
will protect the company from any severe declines in oil prices over the next
six months.
Issues Related to the Year 2000
- -------------------------------
General. The following Year 2000 statements constitute a Year 2000
Readiness Disclosure within the meaning of the Year 2000 Information and
Readiness Disclosure Act of 1998. The Year 2000 problem has arisen because many
existing computer programs use only the last two digits to refer to a year.
Therefore, these computer programs do not properly recognize and process date-
sensitive information beyond 1999. In general, there are two areas where Year
2000 problems may exist for the Company: information technology such as
computers, programs and related systems ("IT") and non-information technology
systems such as embedded technology on a silicon chip ("Non IT").
The Plan. Alliance's Year 2000 Plan (the "Plan") has four phases: (i)
assessment, (ii) inventory, (iii) remediation, testing and implementation and
(iv) contingency plans. Approximately twelve months ago, the Company began its
phase one assessment of its particular exposure to problems that might arise as
a result of the new millennium. The assessment and inventory phases have been
substantially completed and have identified Alliance's IT systems that must be
updated or replaced in order to be Year 2000 compliant. Remediation, testing and
implementation are scheduled to be completed by July 30, 1999, and the
contingency plan phase of the Plan is scheduled to be completed by September 30,
1999. Alliance's assessment of the readiness of third parties whose IT systems
might have an impact on Alliance's business has thus far not indicated any
material problems.
With regard to Alliance's Non IT systems, the Company believes that most of
these systems can be brought into compliance on schedule. Alliance's assessment
of third party readiness is not yet completed. Because the potential problem
with Non IT systems involves embedded chips, it is difficult to determine with
complete accuracy where all such systems are located. As part of its Plan, the
Company is making formal and informal inquiries of its vendors, customers and
transporters in an effort to determine the third party systems that might have
embedded technology requiring remediation.
Estimated Costs. Although it is difficult to estimate the total costs of
implementing the Plan through January 1, 2000 and beyond, Alliance's preliminary
15
estimate is that such costs will not be material. To date, the Company has
determined that its IT systems are either compliant or can be made compliant for
less than $50,000. However, although management believes that its estimates are
reasonable, there can be no assurance, for the reasons stated in the next
paragraph, that the actual cost of implementing the Plan would not differ
materially from the estimated costs.
Potential Risks. The failure to correct a material Year 2000 problem could
result in an interruption in, or a failure of, certain normal business
activities or operations. This risk exists both as to Alliance's IT and Non IT
systems, as well as to the systems of third parties. Such failures could
materially and adversely affect Alliance's results of operations, cash flow and
financial condition. Due to the general uncertainty inherent in the Year 2000
problem, resulting in part from the uncertainty of the Year 2000 readiness of
third party suppliers, vendors and transporters, the Company is unable to
determine at this time whether the consequences of Year 2000 failures will have
a material impact on Alliance's results of operations, cash flow or financial
condition. Although the Company is not currently able to determine the
consequences of Year 2000 failures, its current assessment is that its area of
greatest potential risk in its third party relationships is in connection with
the transporting and marketing of the oil and gas produced by the Company. The
Company is contacting the various purchasers and pipelines with which it
regularly does business to determine their state of readiness for the Year 2000.
Although the purchasers and pipelines will not guaranty their state of
readiness, the responses received to date have indicated no material problems.
The Company believes that in a worst case scenario, the failure of its
purchasers and transporters to conduct business in a normal fashion could have a
material adverse effect on cash flow for a period of six to nine months.
Alliance's Year 2000 Plan is expected to significantly reduce Alliance's level
of uncertainty about the compliance and readiness of these material third
parties. The evaluation of third party readiness will be followed by Alliance's
development of contingency plans.
Cautionary Statement Regarding Forward-Looking Statements. In addition, the
dates for completion of the phases of the Year 2000 Plan are based on Alliance's
best estimates, which were derived using numerous assumptions of future events.
Due to the general uncertainty inherent in the Year 2000 problem, resulting in
part from the uncertainty of the Year 2000 readiness of third-parties and the
interconnection of computer systems, the Company cannot ensure its ability to
timely and cost-effectively resolve problems associated with the Year 2000 issue
that may affect its operations and business. Accordingly, shareholders and
potential investors are cautioned that certain events or circumstances could
cause actual results to differ materially from those projected, estimated or
predicted.
Item 3. Quantitative and Qualitative Analysis on Market Risk
----------------------------------------------------
The Company's primary market risks relate to changes in interest rates and
in the prices received from sales of oil and natural gas. The Company's primary
risk
16
management strategy is to partially mitigate the risk of adverse changes in its
cash flows caused by increases in interest rates on its variable rate debt, and
decreases in oil and natural gas prices, by entering into derivative financial
and commodity instruments, including swaps, collars and participating commodity
hedges. By hedging only a portion of its market risk exposures, the Company is
able to participate in the increased earnings and cash flows associated with
decreases in interest rates and increases in oil and natural gas prices;
however, it is exposed to risk on the unhedged portion of its variable rate debt
and oil and natural gas production.
Historically, the Company has attempted to hedge the exposure related to
its variable rate debt and its forecasted oil and natural gas production in
amounts which it believes are prudent based on the prices of available
derivatives and, in the case of production hedges, the Company's deliverable
volumes. The Company attempts to manage the exposure to adverse changes in the
fair value of its fixed rate debt agreements by issuing fixed rate debt only
when business conditions and market conditions are favorable.
The Company does not use or hold derivative instruments for trading
purposes nor does it use derivative instruments with leveraged features. The
Company's derivative instruments are designated and effective as hedges against
its identified risks, and do not of themselves expose the Company to market risk
because any adverse change in the cash flows associated with the derivative
instrument is accompanied by an offsetting change in the cash flows of the
hedged transaction.
Personnel who have appropriate skills, experience and supervision carry out
all derivative activity. The personnel involved in derivative activity must
follow prescribed trading limits and parameters that are regularly reviewed by
senior management. The Company uses only well-known, conventional derivative
instruments and attempts to manage its credit risk by entering into financial
contracts with reputable financial institutions.
Following are disclosures regarding the Company's market risk sensitive
instruments by major category. Investors and other users are cautioned to avoid
simplistic use of these disclosures. Users should realize that the actual
impact of future interest rate and commodity price movements will likely differ
from the amounts disclosed below due to ongoing changes in risk exposure levels
and concurrent adjustments to hedging positions. It is not possible to
accurately predict future movements in interest rates and oil and natural gas
prices.
Interest Rate Risks (non-trading) - the Company uses both fixed and
variable rate debts to partially finance operations and capital expenditures.
As of January 31, 1999, the Company's debt consists of $36.4 million in
borrowings under its Credit Agreement which bears interest at a variable rate,
and $10 million in borrowings under its 10% Senior Subordinated Notes which bear
interest at a fixed rate. The Company hedges a portion of the risk associated
with its variable rate debt through derivative instruments, which consist of
interest rate swaps and collars. Under the swap contracts, the Company
17
makes interest payments on its Credit Agreement as scheduled and receives or
makes payments based on the differential between the fixed rate of the swap and
a floating rate plus a defined differential. These instruments reduce the
Company's exposure to increases in interest rates on the hedged portion of its
debt by enabling it to effectively pay a fixed rate of interest or a rate, which
only fluctuates within a predetermined ceiling and floor. A hypothetical
increase in interest rates of two percentage points would cause a loss in income
and cash flows of $727,840 during 1999, assuming that outstanding borrowings
under the Credit Agreement remain at current levels. This loss in income and
cash flows would be offset by a $255,000 increase in income and cash flows
associated with the interest rate swap and collar agreements that are in effect
for 1999. A hypothetical decrease in interest rates of two percentage points
would cause an increase in the fair value of $0 in the Company's Senior
Subordinated Notes from their fair value at January 31, 1999.
Commodity Price Risk (non trading) - The Company hedges a portion of the
price risk associated with the sale of its oil and natural gas production
through the use of derivative commodity instruments, which consist of collars
and participating hedges. These instruments reduce the Company's exposure to
decreases in oil and natural gas prices on the hedged portion of its production
by enabling it to effectively receive a fixed price on its oil and natural gas
sales or a price that only fluctuates between a predetermined floor and ceiling.
As of May 13, 1999, the Company had entered into derivative commodity hedges
covering an aggregate of 67,333 barrels of oil and 640,000 MMbtu's of gas that
extend through October 1999. Under these contracts, the Company sells its oil
and natural gas production at spot market prices and receives or makes payments
based on the differential between the contract price and a floating price which
is based on spot market indices. The amount received or paid upon settlement of
these contracts is recognized as oil or natural gas revenues at the time the
hedged volumes are sold. A hypothetical decrease in oil and natural gas prices
of 10% from the price in effect as of January 31, 1999, would cause a loss in
income and cash flows of $450,438 during 1999, assuming that oil and gas
production remain at current levels. This loss in income and cash flows would
be offset by a $201,999 increase in income and cash flows associated with the
oil and natural gas derivative contracts that are in effect.
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
-----------------
Contingencies
- -------------
As noted in the Company's Annual Report on Form 10-K for the year ended
April 30, 1998, the Company is a named defendant in lawsuits, is a party in
governmental proceedings, and is subject to claims of third parties from time to
time arising in the ordinary course of business. While the outcome to lawsuits
or other proceedings and claims against the Company cannot be predicted with
certainty, management does not
18
expect these additional matters to have a material adverse effect on the
financial position of the Company.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
(a) Effective October 30, 1998, the Company issued 10,000,000 shares of its
convertible restricted voting shares, as described in the Current Report on
Form 8-K dated November 16, 1998. The terms of the convertible restricted
voting shares are described in the Company's proxy statement dated July 13,
1998. In connection with the issuance of the convertible restricted voting
shares, the Company's Articles of Association and Memorandum of Association
were amended effective October 30, 1998, to provide for those shares and
other matters described in the Company's proxy statements dated July 13,
1998, and October 7, 1998. Copies of the amended Articles of Association
and Memorandum of Association are included as Exhibits 3.1 and 3.2 to the
Current Report on Form 8-K dated November 16, 1998.
(b) Not applicable.
(c) The Company's issuance of its convertible restricted voting shares
effective October 30, 1998, was not registered under the Securities Act in
reliance on the exemption provided by Section 4(2) of that act as a
privately negotiated issuance to six persons in connection with the
purchase of certain properties. Other information concerning the issuance
is contained in the Company's Current Report on Form 8-K dated November 16,
1998.
(d) Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Company held an extraordinary meeting of shareholders on October 30,
1998, to consider the matters described in the Company's proxy statement dated
October 7, 1998. As permitted by U. K. law, the vote on each matter was
conducted by a show of hands of those present at the meeting, without objection.
All matters were passed by at least a majority of those voting.
The Company held an Annual Meeting on March 5, 1999 to consider the matters
described in the Company's Proxy Statement dated February 10, 1999. As
permitted by U.K. law, the vote on each matter was conducted by a show of hands
of those present at the meeting, without objection. All matters were passed by
at least a majority of those voting.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
19
(a) Exhibits
Description of Exhibits
-----------------------
*27.1 Financial Data Schedule of Alliance Resources PLC
*Filed Herewith.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Alliance Resources PLC
/s/Michael E. Humphries
---------------------------
Michael E. Humphries, Finance Director
Date: May 25, 1999
20