SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED APRIL 30, 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
(Exact name of registrant as specified in its charter)
ENGLAND AND WALES 73-1405081
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4200 EAST SKELLY DRIVE
SUITE 1000
TULSA, OKLAHOMA 74135
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (918) 491-1100
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
(NONE) (NONE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Ordinary Shares 1p each
(Title of Class)
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 Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of the Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the Registrant's voting stock held by non-
affiliates as of August 9, 1999 was approximately $3,858,330.
On August 9, 1999, there were 47,487,142 shares of the Registrant's
ordinary shares outstanding and 10,000,000 shares outstanding of the
Registrant's convertible restricted voting stock.
Documents Incorporated by the Reference
NONE
ALLIANCE RESOURCES PLC
FORM 10-K
FISCAL YEAR ENDED APRIL 30, 1999
--------------------------------
TABLE OF CONTENTS
PART I
Item 1. Business........................................................................................... 1
Item 2. Properties......................................................................................... 3
Item 3. Legal Proceedings.................................................................................. 9
Item 4. Submission of Matters to a Vote of Security Holders................................................ 10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.............................. 11
Item 6. Selected Financial Data............................................................................ 12
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................................. 14
Item 8. Financial Statements and Supplementary Data........................................................ 23
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................................................... 23
PART III
Item 10. Directors and Executive Officers of the Registrant................................................. 23
Item 11. Executive Compensation............................................................................. 24
Item 12. Security Ownership of Certain Beneficial Owners and Management..................................... 27
Item 13. Certain Relationship and Related Transactions...................................................... 29
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................... 29
Signatures.................................................................................................... 31
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 10-K 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-K 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 filing 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.
i
PART I
ITEM 1. BUSINESS
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 ("the Group") whose principal activities
are the acquisition, exploration, development and production of oil and gas
properties.
All financial data (and, consequently, all oil and gas reserve
information, descriptions of properties and business and all information
associated with financial or reserve information ) prior to the Company's merger
with LaTex Resources, Inc. ("LaTex") on May 1, 1997, described below, has been
restated to reflect LaTex as the predecessor company to the Company. For
financial, reserve and associated information concerning Alliance prior to its
May 1, 1997 merger with LaTex, reference should be made to the Company's
Registration Statement on Form F-4 (which was filed in its final form with the
Securities Exchange Commission on April 9, 1997 and which contains information
regarding Alliance through January 31, 1997) and to the Company's filing on Form
20-F (which was filed in its final form with the Securities and Exchange
Commission on June 18, 1998).
Because for corporate law purposes (but not financial accounting
purposes) Alliance is the surviving corporation of the May 1, 1997 merger, 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.
Alliance was incorporated and registered under the laws of England and
Wales on August 20, 1990. Alliance's corporate headquarters are at 4200 East
Skelly Drive, Suite 1000, Tulsa, Oklahoma 74135.
RECENT DEVELOPMENTS
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 acquired, through Difco, 10% of Burlington's interest in
the East Irish Sea Properties for cash consideration of approximately
$17,800,000. 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 have the
effect of reducing the Company's revenues from the U.K. Interests. The Company
also issued to its financial advisors 615,385 ordinary shares in payment of a
fee of $330,000.
On April 23, 1999, the Company announced the successful drilling and
testing of the 110/2b - R1 well. The well was the first to be drilled on the
Company's recently acquired East Irish Sea assets and is located in the Dalton
Field. The well was spudded on February 26, 1999, drilled to 4,222 feet, and
suspended on April 12, 1999. Log analysis estimates 605 feet of gross gas
column to be present in the well. Production testing from gross perforations
between 3,395 - 3,700 feet achieved flow rates up to 78 MMCFG/D at 730 psig
flowing tubing pressure.
Also, on April 23, 1999 the Company announced that it had recommended its
recompletion program on its U.S. properties, yielding early success. Notably,
the Ernest Roberts No. 1 Gas Unit in Hinds County, Mississippi was recompleted
in March 1999. The well is currently producing at a rate of 1,626 MCFG/D with
35 BOPD. In addition, the Millie 2-20 well located in Dewey County, Oklahoma,
was recompleted in February, 1999 and is currently producing 560 MCFG/D and 2
BOPD.
1
On July 23, 1999 the Company announced that the Dalton R2 well has been
successfully reentered and recompleted. The R2 well tested at a maximum flow
rate of approximately 54 MMSCF/D on a 120/64 inch choke at 772 psig flowing
tubing pressure. In the East Millom Field, the Millom Q1 well has been
successfully reentered and recompleted. The Q1 well tested at a maximum flow
rate of 18 MMSCF/D on a 68/64 inch choke at 725 psig flowing tubing pressure.
The Dalton R1, R2 and Millom Q1 wells are in the process of being tied back to
the North Morecambe Bay Platform. First production is anticipated in August,
1999.
Effective July 30, 1999, the Company and its principal lender agreed to
amend the terms of its credit agreement to allow for additional immediate
borrowings of $5,000,000, to defer the date of the borrowing base
redetermination from July 31, 1999 to December 31, 1999, and to defer the
repayment date of a portion of the indebtedness from January 31, 2001 to July
31, 2001.
American Rivers Oil Company ("AROC") and Alliance announced that on July
22, 1999, they entered into a preliminary agreement, under which subject to the
satisfaction of certain of various pre-conditions a new subsidiary of AROC would
make a share for share offer for Alliance. The principal conditions to the
making of the offer are the filing of a registration statement with the
Securities and Exchange Commission and due diligence conducted by both parties.
If the share offer is completed, it is expected that the shares of the new
company will be quoted on the U.S. OTC Bulletin Board and will not be listed on
the London Stock Exchange. If the transaction is completed and all the Alliance
shareholders accept the offer, the shareholders of Alliance would hold 98% and
the shareholders of AROC would hold 2% of the enlarged group.
COMPETITION
The oil and natural gas industry is highly competitive in all its
phases. Alliance encounters strong competition from many other energy companies
in acquiring economically desirable producing properties and drilling prospects
and in obtaining equipment and labor to operate and maintain its properties. In
addition, many energy companies possess greater resources than Alliance.
GOVERNMENTAL AND ENVIRONMENTAL REGULATION
Oil and gas production is subject to regulation under many international
and U.S. Federal and State statutes, rules, orders and regulation. Permits for
drilling, reworking and recompletion operations, drilling bonds and reports
concerning operations are required. Most jurisdictions have regulations
governing conservation matters, establishing maximum rates of production and the
regulation of the spacing, plugging and abandonment of wells.
Environmental laws and regulations may affect the Company's operations
and costs. In particular, production and saltwater disposal operations and use
of facilities from treating, processing or otherwise handling hydrocarbons and
wastes therefrom are subject to stringent environmental regulations.
Environmental regulations are subject to frequent change and the Company cannot
predict ongoing costs of compliance or the future impact of such regulations on
operations.
OPERATIONS HAZARDS AND INSURANCE
The operations of the Company are subject to all risks inherent in the
exploration for and production of oil and gas, including such natural hazards as
blowouts, cratering and fires, which could result in damage or injury to, or
destruction of, drilling rigs and equipment, formation, producing facilities or
other property, or could result in personal injury, loss of life or pollution of
the environment. Any such event could result in substantial expense to the
Company which could have a material adverse effect upon the financial condition
of the Company to the extent it is not fully insured against such risks but, in
accordance with standard industry practice, the Company is not fully insured for
all risks, either because such insurance is unavailable or because the Company
elects not to obtain insurance coverage because of cost. Although such
operational risks and hazards may to some extent be minimized, no combination of
experience, knowledge and scientific evaluation can eliminate the risk of
investment or assure a profit to any company engaged in oil and gas operations.
2
EMPLOYEES
At April 30, 1999, Alliance had 15 management and administrative
employees and 9 technical and operating employees, none of whom belonged to a
union. The employees include 15 people located in its Tulsa, Oklahoma office, 8
people in the Tensaw, Alabama office who conduct lease operations in the
Company's South Carlton Field, and 1 field person in Louisiana. The Company's
other field activities are accomplished through independent contractors. The
Company believes its relations with its employees and contractors are excellent.
MARKETING
Alliance's production is primarily from developed fields close to
major pipelines or refineries and established infrastructure. As a result,
Alliance has not experienced any difficulty in finding a market for its product
as it becomes available or in transporting its product to those markets.
Oil Marketing
Alliance markets its oil to a variety of purchasers, most of which are
large, established companies. The oil is generally sold under short-term
contracts with the sales price based on an applicable posted price, plus a
negotiated premium. This price is determined on a well-by-well basis and the
purchaser generally takes delivery at the wellhead.
Gas Marketing
Virtually all of Alliance's gas production is close to existing pipelines
and, consequently, Alliance generally has a variety of options to market its
gas. Alliance sells the majority of its gas on the spot market, with prices
fluctuating month-to-month based on published pipeline indices with slight
premiums or discounts to the applicable index.
ITEM 2. PROPERTIES
PRODUCTION
Alliance owns producing properties located in 10 states in the U.S.,
with proved reserves located primarily in the states of Alabama, Louisiana,
Mississippi, Oklahoma, and Texas. Alliance continuously evaluates the
profitability of its oil, gas and related activities and has a policy of
divesting itself of unprofitable oil and gas properties or areas of operation
that are not consistent with its operating philosophy.
Alliance operates 144 producing wells (119.6 net) in these areas and
also owns non-operated interests in a further 122 active producing wells and
units (21.9 net). These properties produced at a gross average rate of 4,300.9
Bbls of oil per day and 59,749.8 Mcf of gas per day (802.6 BBls of oil per day
and 4,353.2 Mcf of gas per day net to the Company's interest) for the year ended
April 30, 1999. Oil and gas sales from Alliance's producing oil and gas
properties accounted for substantially all of Alliance's revenues for the year
ended April 30, 1999.
The following summarizes Alliance's principal areas of oil and gas
production activity as of April 30, 1999.
South Carlton Field, Alabama. The South Carlton Field is located in
Clarke and Baldwin Counties in southwest Alabama, approximately 50 miles north
of Mobile, Alabama. The field is situated on the Alabama River, and all crude
oil produced is exported from the field by barge. Alliance operates 56 active
producing oil wells and three saltwater disposal wells. Production is from the
Massive and Pilot Sands of the Tuscaloosa Formation at a depth of approximately
6,000 ft. The field produced at a gross average daily rate of 301.8 Bbls of oil
per day (249.6 Bbls of oil per day net to the Company's interest) for the
duration of the year ended April 30, 1999. Production from the field was
allowed to fall during the course of 1998 in order to minimize the impact of low
oil prices on the overall profitability of operations and reached a gross
average daily low of 206 Bbls of oil per day in the month of December 1998.
Workover activities which were kept to a minimum in 1998 were stepped up in
early 1999, and many
3
temporarily shut-in wells were returned to production. The field is now
producing consistently at gross daily rates in excess of 400 Bbls of oil per day
and in July 1999 again reached gross production levels of over 500 Bbls of oil
per day.
Additional infill drilling has been identified in the field, and the
Company believes that the application of horizontal drilling techniques has the
potential to significantly improve recovery per well in view of the heavy
gravity of the oil (12-14/0/ API). Alliance's working interest in this field is
100%. Net proved reserves to Alliance as of April 30, 1999 were 5,864.6 MBbls of
oil.
Bolton Field, Mississippi. The Bolton Field is located in Hinds
County, Mississippi and approximately 18 miles west of Jackson, Mississippi.
Alliance operates 1 active producing well in this field, the Ernest Roberts #1
Gas Unit. Production is from the Cotton Valley Sands at a depth of over 15,500
ft. This property produced at a gross average daily rate of 527 Mcf of gas per
day and 14.2 Bbls of oil per day (372.1 Mcf of gas per day and 10.1 Bbls of oil
per day net to the Company's interest) for the duration of the year ended April
30, 1999.
The well was recompleted in March 1999 in several Cotton Valley Sands
at depths of between 15,590 and 15,916 ft. The well is currently producing at a
stabilized gross rate of approximately 1,620 Mcf of gas per day and 40 Bbls of
oil per day. Alliance's working interest in this field is currently 91%.
Additional proved behind pipe potential has been identified in the well and net
proved reserves to Alliance as of April 30, 1999 were 3,619 MMcf of gas and
132.3 MBbls of oil.
Black Warrior Basin, Mississippi and Alabama. Alliance owns operated
and non-operated working interests in 51 wells (38 operated and 13 non-operated)
in Lamar, Fayette and Pickens Counties, Alabama and Lee and Chickasaw Counties,
Mississippi. Production from these wells and units is from multiple sandstones
of Mississippian (Carter, Lewis and Millerella) and Pennsylvanian (Benton and
Coats) age at depths of 1,900 to 4,600 ft. These properties produced at a gross
average daily rate of 4,046.8 Mcf of gas per day and 318.4 Bbls of oil per day
(1,450.5 Mcf of gas per day and 11.8 Bbls of oil per day net to the Company's
interest) for the duration of the year ended April 30, 1999. Alliance's working
interest in these properties varies from between 1.8% to 100%. Significant
proved behind pipe reserves have been identified in the properties and the
majority are scheduled for recompletion over the next few years with the
potential to add significantly to net cash flow. Net proved reserves to
Alliance as of April 30, 1999 were 14.2 MBbls of oil and 9,698.4 MMcf of gas.
War-Wink South/East Quito Fields, Texas. Alliance owns non-operated
working interests in 41 active wells operated by Texaco and Chevron in the War-
Wink South and East Quito Fields in Ward County, Texas. These fields currently
produce from multiple reservoirs in the Fusselman dolomite (Middle Silurian),
Atoka limestone (Middle Pennsylvanian), and the Wolfcamp and Cherry Canyon
(Lower and Middle Permian) Sands at depths of 6,200 feet to 17,500 feet. These
properties produced at a gross average daily rate of 9,253.7 Mcf of gas per day
and 548.6 Bbls of oil per day (753.8 Mcf of gas per day and 46.1 Bbls of oil per
day net to the Company's interest) for the duration of the year ended April 30,
1999. The University 10-18-1U well which was completed in the Fusselman
dolomite produced at a gross average daily rate of 6,175 Mcf of gas per day
throughout the year. This amounts to approximately 67% of the gross gas
produced from the properties in which Alliance has an interest in these fields.
A number of proved undeveloped drilling locations have been identified on these
properties. Net proved reserves to Alliance as of April 30, 1999 were 94.7
MBbls of oil and 1,697.2 MMcf of gas.
Jefferson Island Field, Louisiana. The Jefferson Island field is
located approximately 12 miles southwest of the town of New Iberia in Iberia
Parish, Louisiana. Alliance has a working interest in a 525-acre lease on the
south side of Lake Peigner, which is currently being maintained by production
from the Will Drill Resources (Texaco) JISMC #4 well. This well is now owned by
Continental Resources Limited ("Continental"). Production intervals are known
to exist in the Siphoni Davisi and Discorbis B sandstone reservoirs at depths of
approximately 8,000 to 9,000 ft. The reservoir traps are combination
structural-stratigraphic traps in a piercement salt dome setting. However,
Alliance has not yet established production from the property. A number of
proved undeveloped drilling locations have been identified on the property and
the Company's working interest in this property is currently 100%. Net proved
reserves to Alliance as of April 30, 1999 were 431.7 MBbls of oil and 1,230.2
Mcf of gas.
4
The Company entered into a farm-out agreement with Continental on this
property, whereby Continental, at its sole risk and expense, has conducted a 3D
seismic survey and is to drill and complete two wells on the lease to earn a
two-thirds working interest. Continental completed the 3-D seismic survey in
late 1998 and spudded the first well under the farm-out agreement in June 1999.
This well was drilled to a total depth of approximately 10,000 ft. and several
potentially productive pay zones were identified on electric logs in Siphoni
Davisi Sands at depths of 8,500 to 9,000 ft. Continental is currently
attempting to complete the well in the lowermost potentially productive sand at
a depth of approximately 9,000 ft.
Tinsley Field, Mississippi. The Tinsley Field is located in Yazoo
County, Mississippi, and approximately 34 miles northwest of the town of
Jackson, Mississippi. Alliance operates 5 active producing wells and 2
saltwater disposal wells. Production is from upper Cretaceous age Eutaw Sands
at depths of around 4,500 ft. This property produced at a gross average daily
rate of 55.4 Bbls of oil per day (45.4 Bbls of oil per day net to the Company's
interest) for the duration of the year ended April 30, 1999. The Company has a
working interest in the property of 100%. One proved undeveloped drilling
location has been identified on the property. Net proved reserves to Alliance
as of April 30, 1999 were 360.3 MBbls of oil.
South Elton Field, Louisiana. The South Elton Field is located
approximately 19 miles north of the town of Jennings in Jefferson Davis Parish,
Louisiana. Alliance operates 4 active producing oil and gas wells and 2
saltwater disposal wells. Production is primarily from the Oligocene age sands
of the Homeseekers D Formation at a depth of approximately 9,000 ft. This
property produced at a gross average daily rate of 140 Bbls of oil per day and
76.7 Mcf of gas per day (99.0 Bbls of oil per day and 45.6 Mcf of gas per day
net to the Company's interest) for the duration of the year ended April 30,
1999. The Company has a working interest in the property of between 65.3% and
99.6%. Another operator is currently acquiring a 3-D seismic survey over the
area and Alliance will receive copies of the data acquired over its property
within two months of completion of processing of the data. One proved
undeveloped drilling location has been identified on the property. Net proved
reserves to Alliance as of April 30, 1999 were 259.8 MBbls of oil and 86.4 Mcf
of gas.
Perkins Field, Louisiana. The Perkins Field is located approximately
4 miles south of the town of De Quincy in Calcasieu Parish, Louisiana. Alliance
operates 7 active producing wells and 1 saltwater disposal well. Production is
from various Miocene age sands at depths of 5,000 to 7,500 ft. The property
produced at a gross average daily rate of 75.1 Bbls of oil per day (58.6 Bbls of
oil per day net to the Company's interest) for the duration of the year ended
April 30, 1999. The Company has a working interest in the property of 100%.
Net proved reserves to Alliance as of April 30, 1999 were 221.7 MBbls of oil.
In addition to these properties, the Company has other producing oil
and gas properties located in Alabama, Arkansas, Colorado, Kansas, Louisiana,
Michigan, Mississippi, Montana, Oklahoma and Texas. These properties produced
at a gross daily rate of 2,847.4 Bbls of oil per day and 45,845.7 Mcf of gas per
day (281.9 Bbls of oil per day and 1,731.1 Mcf of gas per day net to the
Company's interest) for the duration of the year ended April 30, 1999. Net
proved reserves to Alliance, as of April 30, 1999, from these other properties
were 1,328.0 MBbls of oil and 6,520.2 Mcf of gas.
RESERVES
Lee Keeling and Associates, Inc. ("LKA"), Alliance's independent
petroleum engineering consulting firm, has made estimates of Alliance's oil and
gas reserves at April 30, 1999. LKA's report covers the estimated present value
of future net cash flows before income taxes (discounted at 10%) attributable to
Alliance's estimated future net cash flows therefrom.
The quantities of Alliance's proved reserves of oil and natural gas
presented below include only those amounts which Alliance reasonably expects to
recover in the future from known oil and gas reservoirs under existing economic
and operating conditions. Proved developed reserves are limited to those
quantities which are recoverable commercially at current prices and costs, under
existing regulatory practices and with existing technology. Accordingly, any
changes in prices, operating and development costs, regulations, technology or
other factors could significantly increase or decrease estimates of Alliance's
proved developed reserves. Alliance's proved undeveloped reserves include only
those quantities which Alliance reasonably expects to recover from the drilling
of new wells
5
based on geological evidence from offsetting wells. The risks of recovering
these reserves are higher from both geological and mechanical perspective than
the risks of recovering proved developed reserves.
As required by the Securities and Exchange Commission, the estimates
of net proved reserves and proved developed reserves and the estimated future
net revenues from such reserves set forth below, have been made in accordance
with the provisions of Statement of Financial Accounting Standards No. 69,
"Disclosures about Oil and Gas Producing Activities." Estimated future net cash
flows from proved reserves are determined by using estimated quantities of
proved reserves and the periods in which they are expected to be developed and
produced based on economic conditions at the date of the report. The estimated
future production is priced at current prices at the date of the report. The
resulting estimated future cash inflows are then reduced by estimated future
costs to develop and produce reserves based on cost levels at the date of the
report. No deduction has been made for depletion, depreciation or for indirect
costs, such as general corporate overhead. The discounted value was computed by
discounting future net revenues at 10% per annum, without deduction for income
taxes.
The following table sets forth estimates of the proved oil and natural
gas reserves of Alliance at April 30, 1999, as evaluated by LKA.
Oil (MBbls) Gas (Mmcf)
------------------------------------------- ----------------------------------------------
Developed Undeveloped Total Developed Undeveloped Total
------------ ---------------- ----------- ------------- ------------------ -----------
U.S. Reserves
-------------
Alabama 3,855 2,030 5,885 6,429 - 6,429
Louisiana 753 520 1,273 766 2,458 3,224
Mississippi 487 144 631 7,228 - 7,228
Oklahoma 61 - 61 2,373 548 2,921
Texas 406 13 419 2,463 83 2,546
Other 439 - 439 260 243 503
----- ----- ----- ------ ----- ------
Total 6,001 2,707 8,708 19,519 3,332 22,851
===== ===== ===== ====== ===== ======
Oil (MBbls) Gas (Mmcf)
--------------------------------------------- ------------------------------------------------
Developed Undeveloped Total Developed Undeveloped Total
------------ ---------------- ----------- ------------- ------------------ -----------
U.K. Reserves
-------------
Dalton Sweet
Field - - - - 9,733 9,733
============ ================ =========== ============= =============== ==========
The following table sets forth amounts as of April 30, 1999 determined in
accordance with the requirements of the applicable accounting standards
pertaining to the estimated future net cash flows from production and sale of
the proved reserves attributable to Alliance's oil and gas properties before
income taxes and the present value thereof. Nymex benchmark prices used in
determining the future U.S. net cash flow estimates at April 30, 1999 were
$18.66 per barrel for oil and $2.35 per MMBtu for gas. A delivery price of 9.05
pence per therm, equivalent to $1.54 per MMBtu for gas was used in determining
the future U.K. net cash flow estimates at April 30, 1999.
Proved Proved Total
Developed Undeveloped Proved
Reserves Reserves Reserves
------------- ------------- -------------
(in thousands)
U.S. Reserves
-------------
Estimated future net cash flows from proved
reserves before income taxes $ 68,142 $ 25,042 $ 93,184
========== ========== ==========
Present value of estimated future net cash flows
from proved reserves before income taxes
(discounted at 10%) $ 32,224 $ 11,615 $ 43,838
========== ========== ==========
Standardized Measure $ 25,781 $ 9,088 $ 34,869
========== ========== ==========
6
U.K. Reserves
-------------
Estimated future net cash flows from proved
reserves before income taxes $ - $ 3,926 $ 3,926
========== ========== ==========
Present value of estimated future net cash flows
from proved reserves before income taxes
(discounted at 10%) $ - $ 2,794 $ 2,794
========== ========== ==========
Standardized Measure $ - $ 2,794 $ 2,794
========== ========== ==========
The estimation of oil and gas reserves is a complex and subjective
process which is subject to continued revisions as additional information
becomes available. Reserve estimates prepared by different engineers from the
same data can vary widely. Assumptions have to be made regarding the timing of
future production and the timing and amount of future development and production
costs. The calculations assume that economic conditions existing at the end of
the reporting period will continue. Other, but equally valid, assumptions might
lead to a significantly different final result. Therefore, the reserve data
presented herein should not be construed as being exact. Any reserve estimate
presented herein should not be construed as being exact. Any reserve estimate
depends in part on the quality of available data, engineering and geologic
interpretation, and thus represents only an informed professional judgment.
Subsequent reservoir performance may justify upward or downward revision of such
estimate. The information provided, therefore, does not represent management's
estimate of Alliance's expected future cash flows or value of proved reserves.
Alliance has filed estimates of proved reserves with the London Stock
Exchange. These estimates do not differ materially from those contained in this
document.
For further information on reserves, costs relating to oil and gas
activities, and results of operations from producing activities, see Note 17 to
the Consolidated Financial Statements--Supplementary Financial Information for
Oil and Gas Producing Activities incorporated by reference herein.
The following table sets forth Alliance's producing wells at April 30,
1999.
Productive Wells
Oil Gas Total
--------------------- ---------------------- -----------------------
Gross Net Gross Net Gross Net
----- ----- ----- ----- ----- -----
U.S. 148 100.1 118 41.3 266 141.4
--- ----- --- ---- --- -----
U.K. - - 2 0.2 2 0.2
--- ----- --- ---- --- -----
Total 148 100.1 120 41.5 268 141.6
=== ===== === ==== === =====
Productive wells consist of producing wells and wells capable of
production, including gas wells awaiting pipeline connections to commence
deliveries and oil wells awaiting connection to production facilities. Wells
that are completed in more than one producing horizon are counted as one well.
Of the gross wells reported above, 12 had multiple completions.
Developed and Undeveloped Acreage
The following table sets forth the developed and undeveloped leasehold
acreage held by Alliance at April 30, 1999. Developed acres are acres that are
spaced or assignable to productive wells. Undeveloped acres are acres on which
wells have not been drilled or completed to a point that would permit the
production of commercial quantities of oil and gas, regardless of whether or not
such acreage contains proved reserves. Gross acres are the total number of
acres in which Alliance has a working interest. Net acres are the sum of
Alliance's fractional interests owned in the gross acres.
States in which Alliance held developed and undeveloped acreage at
April 30, 1999 include Alabama, Arkansas, Colorado, Kansas, Louisiana,
Mississippi, Montana, New Mexico, North Dakota, Oklahoma, Texas and Wyoming.
7
Gross Net
--------- --------
U.S.
----
Developed acreage......................................... 27,011.9 20,102.7
Undeveloped acreage....................................... 10,956.6 8,428.5
--------- --------
Total..................................................... 37,968.5 28,531.2
========= ========
Gross Net
--------- --------
U.K.
----
Developed acreage......................................... 1,462.0 146.2
Undeveloped acreage....................................... 206,658.0 20,665.8
--------- --------
Total..................................................... 208,120.0 20,812.0
========= ========
PRODUCTION, UNIT PRICES AND COSTS
The following table sets forth information with respect to sales of
production and average unit prices and costs for the periods indicated.
Nine months
Year ended April 30 ended April 30,
------------------------- ---------------
1999 (2) 1998 1997
---------- ---------- ---------------
Production:
Gas (Mmcf) 1,402 1,689 1,640
Oil (MBbls) 278 396 190
Average sales prices (1)
Gas (per Mcf) $ 1.79 $ 2.36 $ 1.70
Oil (per Bbl) $ 13.20 $ 15.75 $ 15.34
Average production costs per BOE (3) $ 6.05 $ 8.13 $ 6.77
(1) After giving effect to the impact of Alliance's price hedging arrangements
with Alliance's principal bank. Without such hedging arrangements, the
average sales prices for the years ended April 30, 1999 and 1998 would have
been $10.11 and $15.14 for oil and $1.92 and $2.34 for gas, respectively,
and $19.15 for oil and $2.40 for gas for the nine months ended April 30,
1997.
(2) No figures are included for U.K. production activities since first
production is not anticipated until mid-August 1999.
(3) The components of production costs may vary substantially among wells
depending on the methods of recovery employed and other factors, but
generally include production taxes, lease overhead, maintenance and repair,
labor and utilities.
8
(4) DRILLING ACTIVITY
During the periods indicated, Alliance drilled or participated in the
drilling of the following exploratory and development wells. The information
excludes wells in which Alliance has only an overriding interest.
Year ended April 30 Nine months ended April 30
------------------------------------------------- ----------------------------
1999 1998 1997
-------------------------- --------------------- ----------------------------
Gross Net Gross Net Gross Net
----------- ------------- --------- ---------- ------------- ------------
U.S.
- ------
Exploratory:
Productive - - - - - -
Non-Productive - - 1 0.10 - -
----------- ------------- --------- ---------- ------------- -----------
Total - - 1 0.10 - -
=========== ============= ========= ========== ============= ===========
Development:
Productive - - 7 0.53 2 .20
Non-Productive - - - - - -
----------- ------------- --------- ---------- ------------- -----------
Total - - 7 0.53 2 .20
=========== ============= ========= ========== ============= ===========
Total:
Productive - - 8 0.53 2 .20
Non-Productive - - 1 0.10 - -
----------- ------------- --------- ---------- ------------- -----------
Total - - 9 0.63 2 .20
=========== ============= ========= ========== ============= ===========
U.K.
- ------
Development:
Productive 1 0.1 - - - -
Non-Productive - 0.0 - - - -
----------- ------------- --------- ---------- ------------- -----------
Total 1 0.1 - - - -
=========== ============= ========= ========== ============= ===========
At April 30, 1999, Alliance was not participating in the drilling of any oil and
gas wells.
All of Alliance's drilling activities are conducted with independent
contractors. Alliance owns no drilling equipment.
TITLE TO PROPERTIES
As is customary in the oil and gas industry, Alliance conducts only a
perfunctory title examination at the time properties believed to be suitable for
drilling operations are first acquired. Prior to commencement of drilling
operations, a thorough drill site title examination is normally conducted and
curative work is performed with respect to significant defects. During
acquisitions, title reviews are performed on all material properties being
acquired.
ITEM 3. LEGAL PROCEEDINGS
The Group is a named defendant in lawsuits, and is subject to claims of
third parties from time to time arising in the ordinary course of business.
While the outcome of lawsuits or other proceedings and claims against the Group
cannot be predicted with certainty, management does not expect these additional
matters to have material adverse effect on the financial position or results of
operations or liquidity of the Group.
9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 30, 1998, Alliance held an Extraordinary General Meeting in
which it adopted resolutions approving the following items:
(a) the acquisition by Alliance of all of the issued share capital of
Difco Limited ("Difco") in exchange for 10 million newly created
convertible restricted voting shares of 1p each (the "Convertible
Restricted Voting Shares") and a contingent right to receive
additional shares, subject to the sales of production actually
achieved from the U.K. Interests (as defined below);
(b) the acquisition through Difco of an undivided ten percent (10%) of
the interest of Burlington Resources (Irish Sea) Limited in and to 13
blocks in the East Irish Sea and Liverpool Bay areas off the West
Coast of the United Kingdom (the "U.K. Interests") for a cash
consideration of approximately $17.8 million;
(c) the creation of the Convertible Restricted Voting Shares and the
allotment of the Convertible Restricted Voting Shares and the
additional shares issuable under the terms of the acquisition
agreement between Alliance and the Difco shareholders;
(d) the allotment of certain ordinary shares and warrants to the lenders
of Alliance and the allotment of equity securities in other specified
instances;
(e) the increase of the borrowing powers of the Directors;
(f) a reduction in the par value of the ordinary shares of the Company;
(g) the adoption of certain amendments to the Articles of Association of
the Company; and
(h) other matters relating to the foregoing.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MARKET INFORMATION AND DIVIDENDS
The Company's Ordinary Shares are traded on the London Stock Exchange
under the symbol "ARS."
The following table sets forth in pounds, for the calendar quarter
indicated, the high and low sales prices for the Alliance Shares on the London
Stock Exchange (in pence) for the periods indicated derived from the official
list of the London Stock Exchange. Bid quotations represent quotations between
dealers without adjustment for retail mark-ups, mark-downs or commissions and
may not necessarily represent actual transactions.
Prices
Alliance Ordinary Shares
----------------------------
High Low
Fiscal year ended April 30, 1998
First Quarter 60 23.5
Second Quarter 35.5 25
Third Quarter 29.5 23
Fourth Quarter 32.5 21
Fiscal year ended April 30, 1999
First Quarter 32.5 32.5
Second Quarter 32.5 32.5
Third Quarter 19 8
Fourth Quarter 8 4.5
As of April 30, 1999, the approximate number of record holders of the
Alliance Ordinary Shares was 2,300.
Quotations for shares listed on the London Stock Exchange are not
generally readily available in newspapers or other publication in the United
States, but are available in the daily U.S. edition of the Financial Times.
However, investors may place orders for the purchase or sale of shares traded on
the London Stock Exchange through most licensed broker dealers in the United
States. Under current U.K. law, the transfer of Alliance Shares will generally
give rise to a liability to U.K. stamp duty, normally at the rate of 50p for
every (Pounds)100 (or part thereof) of the actual consideration paid.
Alliance has not paid any cash dividends on the Alliance Shares for at
lease the last two complete fiscal years. In addition, Alliance is now
restricted from paying dividends under the Company's credit agreement with the
Bank of America.
EXCHANGE RATES
The table below sets forth, for the periods and dates indicated,
certain information regarding the US dollar/pound sterling exchange rate, based
on the Noon Buying Rate, expressed in US dollars per (Pounds)1.00.
Calendar Year Period End Average Rate High Low
------------- ------------ ------------ ---------- ---------
1996 1.71 1.56 1.72 1.49
1997 1.64 1.64 1.70 1.58
1998 1.66 1.66 1.71 1.61
1999 (1) 1.61 1.63 1.66 1.59
(1) 1999 exchange rates are for the period from January 1, 1999 to April
30, 1999 only.
11
ITEM 6. SELECTED FINANCIAL DATA
On May 1, 1997, Alliance completed its acquisition of LaTex. The
acquisition resulted in the issuance of 21,448,747 shares to the former
shareholders of LaTex compared to the 8,103,816 shares then outstanding. As a
result, the former LaTex shareholders had a controlling interest in the combined
group and so for accounting and financial reporting purposes, LaTex is treated
as having acquired Alliance ("Reverse Acquisition"). The historical financial
information for all financial periods to April 30, 1997 reflect the results of
operations and assets and liabilities of LaTex. LaTex's fiscal year end was
July 31, whereas that of Alliance is April 30.
On October 30, 1998, Alliance completed its acquisition of Difco and
indirectly a contract to acquire an interest in the U.K. Interests. The results
of operations and assets and liabilities of Difco have been included since the
date of acquisition.
12
The selected financial information presented below should be read in conjunction
with the Company's audited financial statements and the notes thereto included
under Item 8 and Management's Discussion and Analysis of financial Condition and
Results of Operations at item 7.
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(in thousands, except per share amounts and average sales data)
Nine months ended
Year ended April 30 April 30 Years ended July 31
Income Statement Data: 1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Revenues:
Oil and gas sales $ 6,234 $ 10,210 $ 5,699 $ 11,980 $ 8,586
Crude oil and gas marketing -- -- 146 540 1,223
-------- -------- -------- -------- --------
Total revenues 6,234 10,210 5,845 12,520 9,809
-------- -------- -------- -------- --------
Operating expenses:
Lease operating expense 3,096 5,506 3,117 5,472 4,643
Cost of crude oil and gas marketing -- -- 16 133 744
Cessation of overseas exploration (1) -- -- -- 3,447 --
General and administrative 3,486 3,364 3,481 2,893 2,736
Depreciation, depletion and amortization 1,671 2,598 1,542 3,511 3,364
Impairment of oil and gas properties 28,260 -- -- -- --
Loss on termination of derivative contract (2) -- 1,128 -- -- --
-------- -------- -------- -------- --------
Total operating expenses 36,513 12,596 8,156 15,456 11,487
-------- -------- -------- -------- --------
Loss from operations (30,279) (2,386) (2,311) (2,936) (1,678)
-------- -------- -------- -------- --------
Other income(expense):
Equity in losses and write-offs of investments
in affiliates -- -- (20) (4,034) (235)
Write-off deferred loan costs (870) -- -- -- --
Gain(loss) on sale of assets (9) 35 -- -- --
Interest income 26 62 52 280 58
Interest expense (3,355) (2,573) (2,102) (2,830) (1,416)
Miscellaneous income(expense) (3) 23 133 (8) (1,810) --
-------- -------- -------- -------- --------
Net loss before income taxes (34,464) (4,729) (4,389) (11,330) (3,271)
Income tax expense -- -- -- -- (35)
-------- -------- -------- -------- --------
Net loss (34,464) (4,729) (4,389) (11,330) (3,306)
Preferred stock dividends -- -- 518 571 133
-------- -------- -------- -------- --------
Net loss for ordinary shareholders $(34,464) $ (4,729) $ (4,907) $(11,901) $ (3,439)
======== ======== ======== ======== ========
Income(loss) per share $ (0.82) $ (0.15) $ (0.30) $ (0.77) $ (0.22)
======== ======== ======== ======== ========
Weighted average shares outstanding (4) 41,936 31,126 16,585 15,508 15,317
======== ======== ======== ======== ========
Balance Sheet Data (end of period):
Total assets $ 36,162 $ 34,760 $ 30,858 $ 36,493 $ 46,549
Net property, plant and equipment 30,355 29,808 26,708 29,473 36,336
Working capital(deficit) (5,621) (9,480) (9,620) (27,970) (7,264)
Long term debt 43,177 18,792 18,095 -- 20,635
Stockholders' equity (deficit) (16,637) 2,183 85 3,846 14,628
Reserve and Production Data:
Production:
Oil (MBbls) 278 396 190 405 359
Gas (MMcf) 1,402 1,689 1,640 3,481 2,612
Average sales prices:
Oil (per Bbl) $ 13.20 $ 15.75 $ 15.34 $ 15.24 $ 12.86
Gas (per Mcf) 1.79 2.36 1.70 1.67 1.48
Proved reserves (end of period):
Oil (MBbls) 8,708 6,494 6,581 6,353 5,432
Gas (MMcf) 32,584 26,321 25,955 28,172 28,113
Present value of estimated future oil and gas net
revenues before income taxes (discounted 10%) $ 46,642 $ 48,600 $ 39,631 $ 53,499 $ 32,912
Standardized Measure $ 37,663 $ 45,106 $ 35,368 $ 43,889 $ 28,802
1) During the year ended July 31, 1996, the Company ceased its overseas
exploration activities in both Tunisia and Kazakhstan and wrote off its
costs relating to these activities of $3,447.
2) On May 15, 1997, the existing commodity price hedging agreements were
terminated through a buyout. On October 23, 1997, new commodity price
hedging agreements were initiated. The loss relating to the buy-out, $1,128
has been recognized in its entirety in the year ended April 30, 1998.
3) The miscellaneous expenses in the year ended July 31, 1996 arose from
litigation in connection with the sale in July 1993 of a subsidiary of the
Company.
4) For periods ending on or before April 30, 1997, the weighted average number
of shares outstanding has been based on the number of Alliance shares
issued on May 1, 1997, which represent the number of LaTex shares
outstanding in each of the relevant periods based on the exchange ratio in
the acquisition of LaTex. The loss for each period is stated after
deducting dividends on the LaTex preferred stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company's acquisition of LaTex on May 1, 1997 has been accounted for as
a "reverse acquisition" of the Company by LaTex. As such, the historical
financial statements and financial information as of and for each of the years
in the two-year period ended July 31, 1996 and for the nine-month period ended
April 30, 1997 are for the business of LaTex alone and include no information
for the Company.
The information in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" refers to the Consolidated Financial
Statements of Alliance included in this Form 10-K which are presented in
accordance with U.S. GAAP.
Unless otherwise indicated, the financial information in this Form 10-K has
been prepared in accordance with U.S. generally accepted accounting principles
("U.S. GAAP"). U.S. GAAP differs in certain respects from generally accepted
accounting principles in the U.K. ("U.K. GAAP"). As a result of the Company's
listing on the London Stock Exchange, the Company is required to file reports
with the London Stock Exchange prepared in accordance with U.K. GAAP.
RESULTS OF OPERATIONS
The factors which most significantly affect results of operations are (i)
the sale prices of crude oil and 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 in efforts to acquire oil and
gas properties and in the ability to maintain or increase production from
existing oil and gas properties through development activities.
The following table reflects certain historical operating data for the
periods presented.
14
Nine Months
Year ended April 30 ended April 30
---------------------- ----------------
1999 1998 1997
---------------------- ----------------
Net sales volumes
Oil (Mbbls) 278 396 190
Natural gas (Mmcf) 1,402 1,689 1,640
Oil equivalent (MBOE) 512 678 463
Average sales prices
Oil (per Bbl) $13.20 $15.75 $15.34
Natural gas (per Mcf) $ 1.79 $ 2.36 $ 1.70
Operating expenses per BOE of net sales
Lease operating $ 5.41 $ 7.16 $ 5.55
Severance tax $ 0.64 $ 0.97 $ 1.22
Depreciation, depletion and amortization $ 3.27 $ 3.84 $ 3.33
General and administrative $ 6.81 $ 4.97 $ 7.52
Loss on termination of commodity
derivative contract $ - $ 1.67 $ -
YEAR ENDED APRIL 30, 1999 COMPARED TO THE YEAR ENDED APRIL 30, 1998
Total revenues for the year ended April 30, 1999 were $6,234,477 compared
to $10,209,881 for the year ended April 30, 1998. This 39% decrease in total
revenue can be attributed to a 30% decrease in oil sales volumes (primarily at
the South Carlton Alabama field), and a 17% decrease in natural gas sales
volumes. A portion of the decreased sales volumes is due to the sale of non-
operated, non-strategic properties. Additionally there was a 16% decrease in the
average sales price received for oil, and a 24% decrease in the average sales
price received for natural gas. Crude oil contributed 56% and natural gas
contributed 44% of oil and gas production revenues during the year ended April
30, 1999. For the year ended April 30, 1998, crude oil contributed 61% and
natural gas contributed 39% of oil and gas production revenues, respectively.
Lease operating expenses decreased 44% to $3,096,468 for the year ended
April 30, 1999, compared to $5,505,826 for the year ended April 30, 1998. The
reduction in operating expenses is a result of a reduced property base, lower
expenses in the Alabama operations, and the shutting-in of marginal operated
wells. On an equivalent barrel basis, lease operating expenses decreased by
$1.75 to $5.41 for the year ended April 30, 1999, compared to $7.16 for the year
ended April 30, 1998.
Depreciation, depletion and amortization expense decreased 36% from
$2,598,066 for the year ended April 30, 1998 to $1,670,711 for the year ended
April 30, 1999. This was due primarily to lower production volumes and reserve
revisions resulting from price declines. On an equivalent barrel basis
depreciation, depletion, and amortization decreased $0.57 to $3.27 for the year
ended April 30, 1999, compared to $3.84 for the year ended April 30, 1998.
Alliance limits, on a country-by-country basis, the net capitalized cost of
proved oil and gas properties, to estimated future net cash flows from proved
oil and gas reserves discounted at 10 percent, net of related tax effects, plus
the lower of cost or fair value of unproved properties included in the costs
being amortized. Since the acquisition of the U.K. Interests on October 30,
1998, developments plans have become firmer, drilling and well re-entry and
recompletion result on 3 wells have been reviewed and significant progress has
been made on the development of the Dalton and Millom Fields. This additional
information indicates that, while the aggregate reserves estimates at the time
of acquisition are confirmed, the reserves are likely to be produced at a slower
rate than originally anticipated and that development costs are likely to be in
excess of those originally anticipated. These factors have led to an impairment
in value of the U.K. Interests. The Company intends to sell a significant
portion of its production from the U.K. Interests
15
under a term contract which will achieve prices significantly greater than the
spot price of gas at April 30, 1999 (9.05 pence per therm). The Directors are
confident of achieving a price of between 13 and 15 pence per therm. (This is a
forward-looking statement; refer to the Cautionary Statement Regarding Forward
Looking Statements). However, as no contract is yet in place, the Group has
utilized the spot price at April 30, 1999 in calculating the carrying cost limit
resulting in an impairment charge of some $28 million. The charge has no impact
on cash flows from operating activities.
Interest costs for 1999 increased $780,981, or 25%, from 1998 primarily due
to the revised credit facility put in place to fund the East Irish Sea
acquisition and development. In 1999, Alliance wrote off $869,906 in deferred
loan costs related to the Company's previous credit facility.
General and administrative expenses for the year ended April 30, 1999 were
$3,486,007 which represents an increase of 3.6% over the $3,363,885 incurred in
the prior fiscal year. On an equivalent barrel basis general and administrative
expenses rose by $1.84 to $6.81 for the year ended April 30, 1999 compared to
$4.97 for the year ended April 30, 1998.
The net loss for the year ended April 30, 1999 was $34,463,502 ($0.82 per
ordinary share) compared to a net loss of $4,728,923 ($0.15 per ordinary share)
for the year ended April 30, 1998.
YEAR ENDED APRIL 30, 1998 COMPARED TO NINE MONTHS ENDED APRIL 30, 1997
Total revenues from the Company's operations for the year ended April 30,
1998 were $10,209,881 compared to $5,844,871 for the nine months ended April 30,
1997. Revenues increased proportionately over the comparable period a year
earlier due principally to the beneficial effect of higher realized gas and
higher oil volumes, offset partially by the absence of marketing margins in the
revenue category. The higher oil volumes were partially attributable to the
inclusion of Alliance's sales volumes and additional volumes attributable to the
acquisition of the BoA ORRI in the 1998 period following the LaTex Merger.
Although sales volumes for the year ended April 30, 1998, were adversely
affected by a continuing decline in volumes from the LaTex properties during the
initial three months of the period, the remedial work program had a beneficial
impact on volumes from the LaTex properties (discussed below). In addition, the
inclusion of Alliance's sales volumes from the start of the current reporting
period more than compensated for the initial decline in the LaTex properties.
The Company concentrated its efforts immediately after the LaTex Merger 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 comprised mainly
returning shut-in wells to production. Gross production from these eleven
fields was increased from an average of 244 BOE per day in April 1997 to an
average of 980 BOE per day by October 1997. Most of the production increase
came from remedial workover operations in the South Carlton field in Alabama.
Gross production from this field alone increased from an average of 89 BOE per
day in April 1997 to an average of 575 BOE per day in September 1997.
Total operating expenses increased proportionately to $12,595,777 for the
year ended April 30, 1998 compared to $8,155,557 for the nine months ended April
30, 1997. On May 15, 1997, the existing commodity price hedging arrangements
were bought out with a loss of $1,128,000 recognized in its entirety in the year
ended April 30, 1998 as a result of new agreements being initiated on October
23, 1997. Lease operating expenses increased to $5,505,826 for the year ended
April 30, 1998 compared to $3,117,341 for the nine months ended April 30, 1997.
The year ended April 30, 1998 was impacted by the remedial work program
mentioned above and the inclusion of the Alliance properties partially offset by
lower operating costs due to the sale of non-operated, non-strategic wells.
Depreciation, depletion and amortization increased to $2,598,066 for the 1998
period compared to $1,541,415 due to higher volumes resulting from the inclusion
of Alliance. General and administrative expenses decreased marginally from
$3,481,003 during the nine months ended April 30, 1997 to $3,363,885 for the
year ended April 30, 1998 primarily due to an employee stock award of $528,125
in the 1997 period.
16
In addition to the marginal increase in the net operating loss to
$2,385,896 for the year ended April 30, 1998 from $2,310,686 for the nine months
ended April 30, 1997, there was also a proportionate decrease in other
income/expense. This was the result of higher interest expense taking into
account the additional quarterly payment.
In summary, due to the above factors, the net loss for the ordinary
shareholders for the year ended April 30, 1998 decreased to $4,728,923 ($0.15
per ordinary share) compared to a net loss of $4,906,946 ($0.30 per ordinary
share) for the nine months ended April 30, 1997.
CAPITAL RESOURCES AND LIQUIDITY
The Company's capital requirements relate primarily to the acquisition of
developed oil and gas properties and undeveloped leasehold acreage and
exploration and development activities, 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
acquisition and exploration and development program and the acquisition of
additional reserves.
CASH FLOWS AND LIQUIDITY
At April 30, 1999, Alliance reported current assets of $2,451,077 and
current liabilities of $8,072,252, which resulted in a net current deficit of
$5,621,175.
For the year ended April 30, 1999 and April 30, 1998, Alliance's operating
activities resulted in negative cash flow of $3,991,251 and $5,184,000,
respectively. The Company had a positive cash flow of $2,098,566 for the nine
months ended April 30, 1997.
Investing activities of Alliance used $24,174,756 as compared to providing
$3,084,970 in net cash flow for the years ended April 30, 1999 and April 30,
1998, respectively. The 1999 increase was a result of the acquisition of Difco
and the U.K. Interests as well as the capital expenditures for oil and gas
development activities.
Financing activities provided $28,043,726 for the year ended April 30,
1999, compared to $2,434,660 for the year ended April 30, 1998. The increase
was due primarily to the issuance of long-term debt of $45,464,123, the issuance
of common stock for $6,360,000, the refinancing of long-term debt of $22,566,762
and the payment of loan acquisition costs of $1,213,635, all in connection with
the Difco and U.K. Interests acquisitions.
The domestic spot prices of oil and gas have traded, in a volatile manner
over various periods in recent years. To the extent that oil and gas prices are
volatile, material fluctuations in revenues from quarter to quarter can be
expected which, in turn, could adversely affect the Company's ability to service
its debt with its principal bank in a timely manner and to fund its ongoing
operations and could, under certain circumstances, require a write-down of the
book value of the Company's oil and gas reserves.
The Company continues to experience net losses and working capital
deficits. These factors may indicate the Company will be unable to continue as a
going concern for a reasonable period of time. Despite its negative cash flow,
the Company has been able to secure financing to support its operations to date.
The Company was not in compliance with certain covenants of its loan agreements
at April 30, 1999, however, a waiver has been obtained for such violations.
Agreement has been reached with the Company's principal lender to amend the
terms of its credit agreement to allow for additional immediate borrowings of
$5,000,000, to defer the date of the repayment of a portion of its indebtedness
from January 31, 2001 to July 31, 2001 and to defer the date of the borrowing
base redetermination from July 31, 1999 to December 31, 1999. The amendment does
not change the scheduled repayment dates of other portions of its debt, the
first payment of which is due July 31, 2000.
17
The Company's continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis, to
continue to comply with the terms of its borrowing agreements, to obtain
additional financing or refinancing as will be required and ultimately to attain
profitability. Management believes it has a business plan that, if successfully
executed, will achieve these objectives.
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 2000 fiscal 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 and internally
generated cash flow. (This is a forward-looking statement; refer to the
Cautionary Statement Regarding Forward Looking Statements).
FINANCING ARRANGEMENTS
Alliance entered into a Credit Agreement (the "Alliance Credit Agreement")
with the Bank of America effective May 1, 1997, amending and restating the
Group's previous credit agreement. A portion of the borrowings under the
Alliance Credit Agreement bore interest, payable monthly, at a rate equal to the
higher of the Bank of America Reference Rate plus 1% and the Federal Funds Rate
plus 1-1/4%. Another portion of the borrowings bore interest, payable monthly,
at a rate equal to the London Interbank Offered Rate plus 2%. The rate at April
30, 1998 was 7.875%. Principal payments were scheduled to commence on October
31, 1998. The note was scheduled to mature on March 31, 2000. Amounts
outstanding were secured by mortgages which cover the majority of the Group's
oil and gas properties.
In connection with the Difco Acquisition, the Company entered into agreements
with Bank of America National Trust & Savings Association ("BoA"), Alliance's
principal lender and EnCap Equity 1996 Limited Partnership and EnCap Capital
Investment Company PLC (collectively "EnCap") providing up to $64,750,000 in
debt, as follows:
BoA:
Tranche A $30,000,000
Tranche B 20,000,000
Tranche C 5,000,000
-----------
55,000,000
EnCap 9,750,000
-----------
$64,750,000
===========
Tranche A consists of a revolving credit facility secured by a first priority
lien and security interest in all of the oil and gas properties of the Company.
The Company's initial borrowing base is $18,500,000 and is redetermined
semiannually on January 31 and July 31. Interest is at a rate determined by the
Company from time to time, of either
18
(i) the greater of BoA's refernce rate and the federal funds effective rate plus
0.5%, or (ii) 2.0% above the current Interbank rate (7.5% at April 30, 1999).
While any Tranche B loan is outstanding, the preceding margins will be increased
by an additional 0.5% semi-annually on April 26 and on October 26 of each year.
Interest is payable quarterly and principal is due in equal quarterly payments
beginning October 30, 2000 and ending on October 30, 2003.
Tranche B consists of a credit facility secured by a first priority lien and
security interest in all of the oil and gas properties of the Company. Interest
is at a rate determined by the Company from time to time, of either (i) BoA's
Tranche B reference rate plus 2.0%, or (ii) 4.0% above the current Interbank
rate (9.0% at April 30, 1999). The margins for all Tranche B loans will be
increased by an additional 0.5% semi-annually on April 26 and on October 26 of
each year. Interest is payable quarterly and principal is due in full on
January 31, 2001.
Tranche C consists of a credit facility secured by a first priority lien and
security interest in all of the oil and gas properties of the Company. Interest
is at a rate determined by the Company from time to time, of either (i) BoA's
reference rate plus 5.0%, or (ii) 7.0% above the current Interbank rate (12.0%
at April 30, 1999). Interest is payable quarterly and principal is due in equal
quarterly payments beginning January 31, 2001 and ending on October 30, 2004.
The BoA debt facility contains various covenants, including, but not limited to,
maintenance of minimum current and interest coverage ratios, as defined in the
agreement.
EnCap debt is unsecured and bears interest at 10%. Interest is payable
quarterly and principal is due in full on October 30, 2005. Until October 30,
2001, the Company has the option, in lieu of paying cash, of increasing the
principal amount of the debt by the interest due.
The Company 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. The fair value
of the warrants $1,335,000 attaching to the debt was treated as a discount. In
addition, the Company will grant BoA an overriding royalty interest, valued at
the value of the underlying oil and gas reserves, in the U.K. Interests of 0.3%
beginning January 1, 2001. The overriding royalty interest will entitle BoA to
receive payment equal to the specified percentage of the net revenues generated
by the U.K. Interests and has the effect of reducing the Company's revenues
from the U.K. Interests. In connection with obtaining the debt financing from
BoA, the Company was required to enter into commodity price risk management
contract on terms that are mutually agreeable to BoA and the Company for a
period not less than two years with respect to at least 50% of the Company's
estimated producing reserves as of October 31, 1998. BoA also required the
Company to enter into interest rate risk management contracts providing for a
maximum interest rate of 9.0% on the notional amount projected to be outstanding
on the revolving credit facility.
The Company was not in compliance with certain covenants of the loan
agreements, which included but were not limited to the maintenance of minimum
levels of working capital and interest coverage. Prior to these violations
causing an event of default, which would have resulted in an acceleration of the
repayment of the loans, the Company obtained waivers from the lenders for all
covenant violations. Effective July 30, 1999 the loan agreement was amended to
revise the borrowing limit of Tranche B to $25,000,000 and reduce the limit of
Tranche A to a similar amount. This enabled the Company to borrow an additional
$5,000,000 as of July 30, 1999. The due date of Tranche B was extended from
January 31, 2001 to July 31, 2001. In addition, the date of the borrowing base
and collateral value redetermination scheduled to occur on July 31, 1999 was
deferred until December 31, 1999.
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.
19
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.
Oil Gas
--------- ----------
Year ended April 30, 1999 $13.20 $1.79
Year ended April 30, 1998 $15.75 $2.36
Nine months ended April 30, 1997 $15.34 $1.70
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 six months and conversely
limit the benefit of prices in excess of the cap. 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 September 30, 1999, and the
contingency plan phase of the Plan is scheduled to be completed by October 31,
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.
20
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 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.
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 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
21
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
April 30, 1999, the Company's debt consists of $39,830,348 in borrowings under
its Credit Agreement which bear interest at a variable rate, and $10,243,775 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 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 $800,000
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 $0 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
April 30, 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 July 1, 1999, the Company had entered into derivative commodity hedges
covering an aggregate of 40,000 barrels of oil and 320,000 MMbtu's of
22
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 April 30, 1999, would cause a
loss in income and cash flows of $383,250 during 1999, assuming that oil and gas
production remain at current levels. This loss in income and cash flows would be
offset by a $0 increase in income and cash flows associated with the oil and
natural gas derivative contracts that are in effect.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets............................................... F-3
Consolidated Statements of Operations..................................... F-5
Consolidated Statements of Changes in Stockholders' Equity................ F-6
Consolidated Statements of Cash Flows..................................... F-7
Notes to the Consolidated Financial Statements............................ F-8
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
John A. "Jak" Keenan, aged 45, is the Chairman and Managing Director
of Alliance. He has worked in the oil industry since 1976 and was successively
first vice president of corporate development, chief operating officer and
director and president of the oil and gas division of Great Western Resources,
Inc. He resigned his position at Great Western Resources, Inc. in August 1995
and accepted a position at the law firm of Jenkens & Gilchrist in Houston,
Texas, where he specialized in oil and gas transactions. He joined the Board of
Alliance in April 1996.
Michael E. Humphries, aged 42, is the Interim Finance Director of
Alliance. Having begun his career at Britoil Plc, he has spent 16 years working
in the international oil and gas arena and is currently Senior Vice President of
Rothschild Natural Resources, LLC, based in Washington DC, where he has
responsibility for Rothschild's oil and gas activities in North America. He
joined the Board of Alliance in December 1997.
Paul R. Fenemore, aged 43, is the Operations and Business Development
Director of Alliance. He has a B.Sc. degree in combined science obtained in
1975 and a M.Sc. degree in marine geotechnics. He has extensive experience in
detailed technical and economic evaluations of exploration and oil field
appraisal and development projects and project management and has held several
technical and senior management positions with Gulf Oil Corporation, Amoco
Europe and West Africa Limited, Amerada-Hess UK Limited, Hamilton Brothers (UK)
Limited, CSX Oil and Gas Corporation, Cairn Energy PLC and Hunting Surveys
Limited. From 1991 until 1995, he was managing director of Petroleum Ventures
International and Spectron Petroleum Limited and became a fellow of the
Geological Society in 1992. He joined the Board of Alliance in May 1996.
23
Phillip Douglas, aged 60, is a non-executive Director of Alliance. He was
a director and head of international investment at Morgan Grenfell for 16 years
and was a director of G T Management. He also has a number of other non-
executive directorships in public and private companies. He joined the Board of
Alliance in November 1993.
William J. A. Kennedy, aged 60, is a non-executive Director of Alliance.
After 25 years experience in the investment industry, he became vice president
of a major conglomerate, Crownx, Inc. For the past nine years, he has operated
a management consulting service and sits on the board of two public Canadian
companies. He joined the Board of Alliance in January 1994.
John R. Martinson, aged 63, is a non-executive Director of Alliance. He has
a B.Sc. degree in engineering and a masters degree in business administration.
He became a director of LaTex in May 1995, having served as a consultant to that
company since 1994. He is Managing Director of Wood Roberts, LLC, where he has
been engaged in financial consulting since January 1989. From 1973 to 1988, Mr.
Martinson was an independent oil and gas entrepreneur. Previously, he was with
Kidder Peabody & Co., Oppenheimer & Co. and Mobil Corporation. He joined the
Board of Alliance in May 1997.
Other Key Employees and their Business Histories
In addition to the Executive Directors, the Company employs two senior
executives. The names, current ages and positions of these other key employees
are as follows:
Name Age Position
---- --- --------
Francis M. Munchinski 45 General Counsel
Robert E. Schulte 41 Controller
Francis M. Munchinski is the General Counsel of Alliance. He is a U.S.
citizen and a doctor of law. Prior to joining the Company in June 1998, he was
a shareholder at the law firm of Jenkens & Gilchrist in Dallas, Texas where he
specialized in oil and gas law for over 13 years. Mr. Munchinski has been
involved in the oil and gas business for over 18 years.
Robert E. Schulte is the Controller of Alliance. He is a U.S. citizen and
has a B.S. degree in accounting. He has worked in the oil and gas industry
since 1981 in both domestic and international arenas. He has held management
positions with Bow Valley Petroleum, Kelt Energy, Great Western Resources and
Apache Corporation before joining Alliance in September 1997.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
paid or accrued during each of the Company's last three fiscal years to the
Company's Managing Director, John A. Keenan and each of the other most highly
compensated executive officers who earned at least $100,000 in salary and bonus
in fiscal 1999 (the "Named Executives"):
24
Summary Compensation Table
Long Term
Annual Compensation Compensation
----------------------------- ----------------------
Securities
Underlying All Other
Name and Principal Position Fiscal Year Salary ($) Bonus ($) Options/SARs (#) Compensation ($)
- -------------------------------- --------------- -------------- ------------- ---------------------- ----------------------
John A. Keenan.................. 1999 162,000 75,000 890,000 22,500
Managing Director(1) 1998 174,500 30,000 400,000 107,103
1997 150,333 -- 150,000 5,061
Paul R. Fenemore................ 1999 172,000 45,000 670,000 10,000
Operations and Business 1998 164,990 20,000 200,000 8,361
Development Director(2) 1997 142,789 -- 25,000 --
Francis M. Munchinski........... 1999 75,833 42,000 520,000 8,526
General Counsel(3) 1998 -- -- -- --
1997 -- -- -- --
Robert E. Schulte............... 1999 82,083 42,000 285,000 10,321
Controller(4) 1998 45,569 4,000 25,000 4,208
1997 -- -- -- --
(1) Mr. Keenan assumed his position with Alliance on May 22, 1996. Amounts
shown under All Other Compensation in 1999 represent pension and benefits.
Amounts shown under All Other Compensation in 1998 represent relocation
expenses.
(2) Mr. Fenemore assumed his position with Alliance on May 21, 1996. Amounts
shown under All Other Compensation in 1999 represent pension.
(3) Mr. Munchinski assumed his position with Alliance on June 16, 1998.
Amounts shown under All Other Compensation in 1999 represent relocation
expenses and benefits.
(4) Mr. Schulte assumed his position with Alliance on September 17, 1997.
Amounts shown under All Other Compensation in 1999 represent relocation
expenses and benefits.
25
Options Grants in Last Fiscal Year
The following table sets forth all individual grants of options to the
Named Executives of the Company during the fiscal year ended April 30, 1999.
Individual Grants Potential Realizable
- ----------------- Value at Assumed
Annual Rates of Stock
Price Appreciation
For Option Term
-----------------------
% Of Total
Securities Options
Underlying Granted to Exercise or
Options Employees in Base Expiration
Name Granted(#) Fiscal Year Price(1)($) Date 5% ($) 10% ($)
---- ---------- ---------------- ----------- ---------- ---------- ----------
John A. Keenan.................. 890,000 37.6 13.5p 11/29/08 195,844.50 311,188.50
Managing Director
Paul R. Fenemore................ 670,000 28.3 13.5p 11/29/08 147,433.50 234,265.50
Operations and Business
Development Director
Francis M. Munchinski........... 520,000 22.0 13.5p 11/29/08 114,426.00 181,818.00
General Counsel
Robert E. Schulte............... 285,000 12.1 13.5p 11/29/08 62,714.25 99,650.25
Controller
(1) Represents the closing mid-market price of the ordinary shares on the London
Stock Exchange on November 27, 1998.
Fiscal Year End Option Values
Shown below is information with respect to the Named Executives of the
Company regarding option exercises during the fiscal year ended April 30, 1999,
and the value of unexercised options held as of April 30, 1999.
Number of Securities Underlying Value of Unexercised
Unexercised Options In-the-Money
at April 30, 1999 Options at April 30, 1999
-------------------------------------- -------------------------------------
Name Unexercisable Exercisable Unexercisable Exercisable
---- ------------------ ------------------ ----------------- ------------------
John A. Keenan.......................... 1,290,000 -- -- --
Managing Director
Paul R. Fenemore........................ 870,000 -- -- --
Operations and Business
Development Director
Francis M. Munchinski................... 520,000 -- -- --
General Counsel
Robert E. Schulte....................... 310,000 -- -- --
Controller
26
Employment Agreements
Each of Messrs. Keenan, Fenemore, Munchinski, and Schulte have entered into
Executive Service Agreements with Alliance providing for his employment in his
current capacity for an initial fixed term of two years beginning October 15,
1996, September 20, 1996, January 1, 1999 and January 1, 1999, respectively, and
having automatic extensions of the initial term for additional two-year periods
unless written notice of either party's intention not to extend has been given
to the other party at least three months prior to the expiration of the then
effective two-year period of employment, provided that the executive may at any
time terminate his employment by giving a minimum of three months notice. If the
executive's employment terminates for any reason other than the executive's
breach of the agreement, disability or malfeasance, Alliance must pay the
executive an amount equal to twice the annual salary, bonuses and benefits paid
to the executive. Upon the involuntary termination of the executive's employment
without cause or voluntary termination by the executive after a change in his
office location, his responsibilities or reduction in compensation following a
change in control of Alliance, the executive is entitled to the payment of one
lump sum of cash in an amount equal to two and a half times the annual salary,
bonus and benefits paid to the executive.
The annual salary under each agreement is $180,000 for Mr. Keenan,
(pounds)100,000 for Mr. Fenemore, $140,000 for Mr. Munchinski and $100,000 for
Mr. Schulte, plus any bonuses or other compensation determined by Alliance's
Board of Directors in its discretion.
Compensation of Directors
The compensation of the non-executive directors is reviewed by the Board of
Directors from time to time to ensure that this compensation is in line with
current market practice. Under Alliance's Articles of Association, shareholders
determine the maximum aggregate amount payable by way of fees to directors and
this maximum amount is currently fixed at (Pounds)100,000 per year. During the
twelve months ended April 30, 1999, the following directors were paid the
indicated fees for their services as directors: Mr. Douglas $16,000, Mr. Kennedy
$16,000, Mr. Samuelson $12,000, Mr. Martinson $12,000 and Mr. Humphries $12,525.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of April 30, 1999, with
respect to the beneficial ownership of Shares (i) by any person or "group," as
that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934,
known to the Company to own beneficially more than 5% of the outstanding Shares,
(ii) by each director, including executive directors, and each other key
employee of the Company named in the Summary Compensation Table, and (iii) by
all directors, including executive directors, and all key employees of the
Company as a group. Except as otherwise indicated, each of the persons named
below is believed by the Company to possess sole voting and investment power
with respect to the Shares beneficially owned by such person.
Name and Address of Shares Owned Percent Owned
Beneficial Owner(1) Beneficially Beneficially
- ------------------- ------------ -----------
John A. Keenan........................................... 1,390,000(2) 2.6%
Paul R. Fenemore......................................... 870,000(3) 1.7%
Francis M. Munchinski.................................... 520,000(4) 1.0%
Robert E. Schulte........................................ 310,000(5) *
Michael E. Humphries..................................... - -
27
William J.A. Kennedy..................................... 4,125 *
Philip Douglas........................................... 99,583 *
John R. Martinson........................................ 778,987(6) 1.5%
Enron Reserve Acquisition Corp. (7)...................... 3,239,708 6.2%
LaSalle Street Natural Resources Corporation(8).......... 7,179,519 12.3%
EnCap Equity 1996 Limited Partnership(9)................. 11,250,000 21.4%
Energy Capital Investment Company PLC(10)................ 3,750,000 7.1%
EnCap Investments L.C.(11)............................... 15,545,454 29.6%
All Directors, including executive directors, and all
key employees of Alliance as a group
(8 persons) (2), (3), (4), (5), (6)................... 3,972,695 5.7%
- --------------------------------
* Less than 1%
(1) All of the Company's directors may be contacted at 12 St. James's Square,
London SW1Y 4RB.
(2) Includes options to purchase 1,290,000 Shares granted pursuant to the
Company's executive share option plans.
(3) Consists of options to purchase 870,000 Shares granted pursuant to the
Company's executive share option plans.
(4) Consists of options to purchase 520,000 Shares granted pursuant to the
Company's executive share option plans.
(5) Consists of options to purchase 310,000 Shares granted pursuant to the
Company's executive share option plans.
(6) Includes presently exercisable warrants to purchase 374,877 Shares held by
Wood Roberts, Inc., a corporation under the control of Mr. Martinson and
presently exercisable warrants to purchase 218,334 Shares held by Wood
Roberts, LLC, a Texas limited liability company 50% owned by Mr. Martinson.
(7) The address of Enron Reserve Acquisition Corp. is 1400 Smith Street,
Houston, Texas 77002. After April 30, 1999, Enron Reserve Acquisition
Corp. advised the Company that it sold all of its shares.
(8) Consists of 1,500,000 Shares, convertible loan notes and immediately
exercisable warrants convertible into or exercisable for 2,404,519 Shares
issued to an affiliate of Bank of America and warrants to purchase
3,275,000 Shares at a price of 1p per share. The address of LaSalle Street
Natural Resources is 231 S. LaSalle Street, Chicago, Illinois 60697.
(9) The address of EnCap Equity 1996 Limited Partnership is 1100 Louisiana,
Suite 3150, Houston, Texas 77002. EnCap Equity 1996 Limited Partnership
shares voting and dispositive power with EnCap Investments L.C., its
general partner.
28
(10) The address of Energy Capital Investment Company PLC is c/o Aberdeen Asset
Management, 1 Bow Churchyard, Cheapside, London EC4M 9HH, England. Energy
Capital Investment Company PLC shares dispositive and voting power over
these shares with EnCap Investments L.C.
(11) The address of EnCap Investments L.C. is 1100 Louisiana, Suite 3150,
Houston, Texas 77002. EnCap Investments L.C. shares dispositive and voting
power over 15,000,000 of these shares with EnCap Equity 1996 Limited
Partnership and Energy Capital Investment Company PLC.
(12) In addition to the interests set out above, John A. Keenan is interested in
45,000 Shares held in the name of Diamond Securities Limited and 102,500
Shares held in the name of Havensworth Limited by virtue of having proxy
over the voting rights attached to these Shares pending their sale, as
required by a settlement of legal proceedings with the former Managing
Director of the Company in August 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements (included at Item 8. Financial Statements and
Supplementary Data)
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company with the Securities and
Exchange Commission during the fourth quarter of the Company's fiscal year
ended April 30, 1999.
(c) Exhibits.
Exhibit Description
- ------- -----------
3.1(3) Memorandum of Association of Alliance Resources Plc (3.1)
3.2(3) Articles of Association of Alliance Resources Plc (3.7)
3.3(2) Form of Warrant Agreement relating to Warrants issued to Society
National Bank as Warrant Agent for holders of certain LaTex Warrants
(3.3)
3.4(2) Warrant Agreement and form of Warrant issued to all other holders of
LaTex Warrants (3.4)
3.5(2) Form of Convertible Loan Note Instrument entered into between
Alliance Resources Plc and Bank of America NT & SA (3.5)
3.6(2) Registration Rights Agreement between Alliance Resources Plc and
affiliate of Bank of America NT & SA (3.6)
10.1(1)(2) Executive Service Agreement between Alliance Resources Plc and John
A. Keenan dated October 15, 1996 as amended by Supplemental
Agreement dated April 7, 1998 and Second Supplemental Agreement
dated as of December 1, 1998 (10.1)
10.2(1)(2) Executive Service Agreement between Alliance Resources Plc and Paul
R. Fenemore dated September 20, 1996 as amended by Supplemental
Agreement dated April 16, 1998 and Second Supplemental Agreement
dated as of December 1, 1998 (10.2)
10.3(1) Executive Service Agreement between Alliance Resources Plc and
Francis M. Munchinski dated as of December 1, 1998.
29
10.4(1) Executive Service Agreement between Alliance Resources Plc and
Robert E. Schulte dated as of December 1, 1998.
10.5(3) Purchase Agreement dated October 27, 1998, by and between Alliance
Resources PLC and EnCap Equity 1996 Limited Partnership and Energy
Capital Investment Company Plc.
10.6 First Amendment to the Purchase Agreement, dated effective as of
July 30, 1999.
10.7(3) Registration Rights Agreement dated as of October 30, 1998 by and
between Alliance Resources PLC, EnCap Equity 1996 Limited
Partnership, Energy Capital Investment Company Plc and EnCap
Investments, L.C.
10.8(3) Third Amended and Restated Credit Agreement dated as of October 27,
1998, among Alliance Resources PLC and certain of its subsidiaries
and Bank of America National Trust and Savings Association.
10.9 First Amendment to the Third Amended and Restated Credit Agreement,
dated effective as of July 30, 1999.
10.10(3) Registration Rights Agreement dated as of October 30, 1998 between
the Company and LaSalle Street Natural Resources Corporation.
10.11(3) Registration Rights Agreement dated as of October 30, 1998, among
Alliance Resources PLC and F. Fox Benton and certain members of his
family.
10.12 Exchange and Merger Agreement by and among American Rivers Oil
Company, a Wyoming corporation, American Rivers Oil Company, a
Delaware corporation, and Alliance Resources Plc, dated July 22,
1999.
22.1 Subsidiaries
- -------------
(1) Constitutes compensation plan or arrangement
(2) Incorporated by reference from the indicated exhibit filed with Alliance's
Registration Statement on Form F-4 (No. 333-19013).
(3) Incorporated by reference from the indicated exhibit filed with Alliance's
Form 8-K filed November 16, 1998.
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
Date: August 12, 1999 /s/ John A. Keenan
---------------------
John A. Keenan, Chairman
and Managing Director
Pursuant to the requirements of the Securities Act of 1934, this Report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ John A. Keenan Chairman and Managing Director August 12, 1999
- -------------------------
John A. Keenan
/s/ Paul R Fenemore Operations and Business Development August 12, 1999
- ------------------------- Director
Paul R Fenemore
30
/s/ Phillip Douglas Director August 12, 1999
- -------------------------
Phillip Douglas
/s/ William J A Kennedy Director August 12, 1999
- -------------------------
William J A Kennedy
/s/ Michael E Humphries Director August 12, 1999
- -------------------------
Michael E Humphries
/s/ John R Martinson Director August 12, 1999
- -------------------------
John R Martinson
31
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets............................................... F-3
Consolidated Statements of Operations..................................... F-5
Consolidated Statements of Changes in Stockholders' Equity................ F-6
Consolidated Statements of Cash Flows..................................... F-7
Notes to the Consolidated Financial Statements............................ F-8
F-1
Independent Auditors' Report
Board of Directors
Alliance Resources PLC and Subsidiaries
We have audited the consolidated balance sheets of Alliance Resources PLC and
subsidiaries as of April 30, 1998 and 1999 and the related consolidated
statements of operations, stockholders' equity, and cash flows for the nine
months ended April 30, 1997 and the years ended April 30, 1998 and 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Alliance Resources PLC and subsidiaries as of April 30, 1998 and 1999, and the
results of their operations and their cash flows for the nine months ended April
30, 1997 and the years ended April 30, 1998 and 1999, in conformity with
generally accepted accounting principles in the United States.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the consolidated
financial statements, the Company has suffered recurring losses from operations,
has a net capital deficiency and is obliged to commence repayments on its
borrowings on October 30, 2000. These matters raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
KPMG Audit Plc
London, United Kingdom
August 12, 1999
F-2
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
Consolidated Balance Sheets
April 30, 1998 and 1999
Assets 1998 1999
------ ------------ ------------
Current assets:
Cash $ 408,439 $ 286,158
Accounts receivable 2,132,654 2,105,082
Other current assets 73,977 59,837
------------ ------------
Total current assets 2,615,070 2,451,077
------------ ------------
Property and equipment, at cost
Oil and gas properties, full cost method:
United States 43,200,388 42,901,608
United Kingdom - 31,054,083
Other depreciable assets 1,029,118 1,095,147
------------ ------------
44,229,506 75,050,838
Less accumulated depreciation, depletion, and (14,421,400) (44,695,726)
impairments ------------ ------------
Net property, plant and equipment 29,808,106 30,355,112
------------ ------------
Other assets:
Deposits and other assets 144,989 141,422
Deferred acquisition costs 970,305 -
Deferred loan costs, less accumulated amortization 1,221,650 3,215,384
------------ ------------
$ 34,760,120 $ 36,162,995
============ ============
See accompanying notes to consolidated financial statements.
F-3
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
Consolidated Balance Sheets
April 30, 1998 and 1999
(continued)
Liabilities and Stockholders' Equity 1998 1999
------------------------------------ ------------ ------------
Current liabilities:
Accounts payable - trade $ 8,972,704 $ 7,238,502
Accrued expenses payable 847,190 833,750
Current portion of long-term debt 2,275,000 -
------------ ------------
Total current liabilities 12,094,894 8,072,252
Long-term liabilities:
Long-term debt, less current portion 18,791,762 43,176,621
Other liabilities 139,626 -
Convertible subordinated unsecured loan notes 1,550,700 1,550,700
------------ ------------
Total liabilities 32,576,982 52,799,573
------------ ------------
Stockholders' equity:
Ordinary Shares-par value 40 pence;
46,000,000 shares authorized; 31,209,408 issued and outstanding
at April 30, 1998 20,114,634 -
Ordinary Shares - par value 1 pence;
415,001,376 authorized; 47,487,142 issued and outstanding
at April 30, 1999 - 768,823
Deferred Shares - par value 1 pence;
1,414,998,624 authorized; 1,217,155,912 issued and
outstanding at April 30, 1999 - 19,611,767
Convertible Shares - par value 1 pence;
10,000,000 authorized; 10,000,000 issued and outstanding
at April 30, 1999 - 278,000
Additional paid-in capital 5,911,050 21,042,094
Accumulated other comprehensive income(loss) 13,823 (17,391)
Accumulated deficit (23,856,369) (58,319,871)
------------ ------------
Total stockholders' equity(deficit) 2,183,138 (16,636,578)
------------ ------------
Commitments (Note 13)
$ 34,760,120 $ 36,162,995
============ ============
See accompanying notes to consolidated financial statements.
F-4
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
Consolidated Statements of Operations
Nine Months Ended April 30, 1997
and Years Ended April 30, 1998 and 1999
Nine months
ended Year ended Year ended
April 30, 1997 April 30, 1998 April 30, 1999
-------------- -------------- --------------
Revenues
Oil and gas revenue $ 5,698,490 $10,209,881 $ 6,234,477
Crude oil and gas marketing 146,381 - -
----------- ----------- ------------
Total revenues 5,844,871 10,209,881 6,234,477
----------- ----------- ------------
Operating expenses
Lease operating expenses 3,117,341 5,505,826 3,096,468
Cost of crude oil and gas marketing 15,798 - -
General and administrative expenses 3,481,003 3,363,885 3,486,007
Depreciation, depletion, and amortization 1,541,415 2,598,066 1,670,711
Impairment of oil and gas properties - - 28,260,037
Loss on termination of derivative contracts - 1,128,000 -
----------- ----------- ------------
Total operating expenses 8,155,557 12,595,777 36,513,223
----------- ----------- ------------
Loss from operations (2,310,686) (2,385,896) (30,278,746)
----------- ----------- ------------
Other income (expense):
Write-off of deferred loan costs - - (869,906)
Interest expense (2,102,933) (2,573,646) (3,354,627)
Interest income 52,038 62,226 26,299
Miscellaneous income (expense) ( 27,752) 132,951 22,662
Gain (loss) on sale of assets - 35,442 (9,184)
----------- ----------- ------------
Total other income (expense) (2,078,647) (2,343,027) (4,184,756)
----------- ----------- ------------
Net loss (4,389,333) (4,728,923) (34,463,502)
Preferred stock dividends (517,613) - -
----------- ----------- ------------
Net loss for ordinary
shareholders $(4,906,946) $(4,728,923) $(34,463,502)
=========== =========== ============
Basic loss per ordinary share $ (0.30) $ (0.15) $ (0.82)
=========== =========== ============
Weighted average number of shares outstanding 16,585,113 31,125,689 41,935,718
=========== =========== ============
See accompanying notes to consolidated financial statements.
F-5
Alliance Resources PLC and Subsidiaries
Consolidated Statements of Stockholders'
Equity (Deficit) and Comprehensive Income
Nine Months Ended April 30, 1997
and Years Ended April 30, 1998 and 1999
Additional
Preferred Ordinary Deferred Convertible Paid-in
Stock Shares Shares Shares Capital
------------ ------------ ------------ ------------ -------------
Balance at July 31, 1996 $ 2,680,411 $ 10,681,373 $ -- $ -- $ 5,193,888
Issuance of 85,986 shares for services -- 55,857 -- -- 44,143
Issuance of 1,453,079 shares for
employee bonuses -- 943,920 -- -- (415,795)
Issuance of 51,735 shares for dividends 190,703 -- -- -- 326,910
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at April 30, 1997 2,871,114 11,681,150 -- -- 5,149,146
Issuance of 4,419,818 shares for
preferred shares (2,871,114) 2,871,114 -- -- --
Issuance of 8,103,816 shares to Alliance
shareholders -- 5,105,550 -- -- (1,066,211)
Issuance of 1,343,750 shares for acquisition
of overriding royalty interest -- 872,900 -- -- 1,498,400
Issuance of 256,250 shares for settlement
of various advisory and banking fees -- 165,904 -- -- 187,096
Issuance of 56,805 shares for warrants -- 37,148 -- -- 12,852
Cancellation of 953,099 treasury shares -- (619,132) -- -- 129,767
Comprehensive income:
Foreign exchange adjustment -- -- -- -- --
Net loss -- -- -- -- --
Total comprehensive loss
------------ ------------ ------------ ------------ ------------
Balance at April 30, 1998 -- 20,114,634 -- -- 5,911,050
Capital reorganization -- (19,611,767) 19,611,767 -- --
Issuance of 10,000,000 shares for Difco Limited -- -- -- 278,000 6,930,000
Issuance of 15,545,454 shares to lender -- 254,000 -- -- 6,398,000
Warrants issued to principal lender -- -- -- -- 1,335,000
Issuance of 732,280 shares for services -- 11,956 -- -- 468,044
Comprehensive income:
Foreign exchange adjustment -- -- -- -- --
Net loss -- -- -- -- --
Total comprehensive loss
------------ ------------ ------------ ------------ ------------
Balance at April 30, 1999 $ -- $ 768,823 $ 19,611,767 $ 278,000 $ 21,042,094
------------ ------------ ------------ ------------ ------------
Accumulated
Other
Comprehensive Accumulated Treasury
Income (Loss) Deficit Stock Total
------------- ------------- ------------ ------------
Balance at July 31, 1996 $ -- $(14,220,500) $ (489,365) $ 3,845,807
Issuance of 85,986 shares for services -- -- -- 100,000
Issuance of 1,453,079 shares for
employee bonuses -- -- -- 528,125
Issuance of 51,735 shares for dividends -- (517,613) -- --
Net loss -- (4,389,333) -- (4,389,333)
------------ ------------ ------------ ------------
Balance at April 30, 1997 -- (19,127,446) (489,365) 84,599
Issuance of 4,419,818 shares for
preferred shares -- -- -- --
Issuance of 8,103,816 shares to Alliance
shareholders -- -- -- 4,039,339
Issuance of 1,343,750 shares for acquisition
of overriding royalty interest -- -- -- 2,371,300
Issuance of 256,250 shares for settlement
of various advisory and banking fees -- -- -- 353,000
Issuance of 56,805 shares for warrants -- -- -- 50,000
Cancellation of 953,099 treasury shares -- -- 489,365 --
Comprehensive income:
Foreign exchange adjustment 13,823 -- -- 13,823
Net loss -- (4,728,923) -- (4,728,923)
------------
Total comprehensive loss (4,715,100)
------------ ------------ ------------ ------------
Balance at April 30, 1998 13,823 (23,856,369) -- 2,183,138
Capital reorganization -- -- -- --
Issuance of 10,000,000 shares for Difco Limited -- -- -- 7,208,000
Issuance of 15,545,454 shares to lender -- -- -- 6,652,000
Warrants issued to principal lender -- -- -- 1,335,000
Issuance of 732,280 shares for services -- -- -- 480,000
Comprehensive income:
Foreign exchange adjustment (31,214) -- -- (31,214)
Net loss -- (34,463,502) -- (34,463,502)
------------
Total comprehensive loss (34,494,716)
------------ ------------ ------------ ------------
Balance at April 30, 1999 $ (17,391) $(58,319,871) $ -- $(16,636,578)
------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements.
F-6
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended April 30, 1997
and Years Ended April 30, 1998 and 1999
Nine months
ended Year ended Year ended
April 30, April 30, April 30,
1997 1998 1999
----------- ----------- ------------
Cash flows from operating activities:
Net loss $(4,389,333) $(4,728,923) $(34,463,502)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation, depletion and amortization 1,541,415 2,598,066 1,670,711
Write-off of deferred loan costs - - 869,906
Impairment of oil and gas properties - - 28,260,037
Other amortization 394,000 813,096 1,289,493
Employee bonus 528,125 - -
(Gain)loss on sale of assets - (35,442) 9,184
Changes in assets and liabilities, net of
effects from acquisition:
Accounts receivable 1,204,903 487,427 27,572
Due from related parties 392,297 - -
Other assets 161,530 97,500 17,707
Accounts payable 2,239,165 (4,032,763) (1,519,293)
Accrued expenses payable (169,319) 409,454 (13,440)
Other liabilities 195,783 (792,554) (139,626)
----------- ----------- ------------
Net cash provided by (used in) operating 2,098,566 (5,184,139) (3,991,251)
activities ----------- ----------- ------------
Cash flows from investing activities:
Proceeds from sale of property and equipment 1,573,625 5,729,300 1,742,336
Purchases of property and equipment, including (350,322) (2,407,162) (3,829,425)
interest capitalized
Acquisition of Difco - (221,987) (22,087,667)
Decrease in accounts and notes receivable-other 1,273,320 - -
Effect of LaTex acquisition - (15,181) -
----------- ----------- ------------
Net cash provided by (used in) investing activities $ 2,496,623 $ 3,084,970 $(24,174,756)
----------- ----------- ------------
Cash flows from financing activities:
Deferred loan and reorganization costs $ (401,208) $ (385,680) $ (1,213,635)
Proceeds from issuance of long-term debt - 2,770,340 45,464,123
Exercise of warrants - 50,000 -
Payments of long-term debt (4,140,370) - (22,566,762)
Proceeds from issuance of stock - - 6,360,000
----------- ----------- ------------
Net cash provided by (used in) financing activities (4,541,578) 2,434,660 28,043,726
----------- ----------- ------------
Net increase (decrease) in cash 53,611 335,491 (122,281)
Cash at beginning of period 19,337 72,948 408,439
----------- ----------- ------------
Cash at end of period $ 72,948 $ 408,439 $ 286,158
=========== =========== ============
Supplemental disclosures of cash flow information-
Cash paid during the period for interest $ 1,623,985 $ 1,634,360 $ 2,910,000
=========== =========== ============
Supplemental disclosure of noncash investing and
financing activities:
Common stock issued for services and bonus $ 100,000 $ 353,000 $ 772,000
Shares issued for employee bonus 462,500 - -
Issuance of convertible loan notes - 150,000 -
Common stock issued on acquisition of LaTex - 4,039,339 -
Common stock issued for overriding royalty - 2,371,300 -
Convertible loan notes issued for overriding royalty - 1,400,700 -
Convertible shares issued to Difco shareholders - - 7,208,000
Overriding royalty interest conveyed to bank - - (2,100,000)
See accompanying notes to consolidated financial statements.
F-7
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1) Organization and Summary of Significant Accounting Policies
Organization and basis of presentation
Alliance Resources PLC ("Alliance" or "the Company") and its subsidiaries
are engaged in the exploration, development and production of oil and gas
and, until April 30, 1997, oil and gas marketing. Oil and gas production
operations are currently conducted principally in Oklahoma, Texas,
Louisiana, Mississippi and Alabama. The Company acquired proved
undeveloped oil and gas interests in the East Irish Sea effective October
30, 1998 (See Note 2). Included in oil and gas revenue are sales from 10
significant producing properties which aggregated approximately $2,700,000,
$2,210,000, and $2,155,000 for the nine months ended April 30, 1997, and
years ended April 30, 1998 and 1999, respectively.
Alliance is a London-based public limited company organized under the laws
of England and Wales and its shares are listed on the London Stock
Exchange. The Company prepares its statutory financial statements in
accordance with U.K. law and U.K. generally accepted accounting principles.
These financial statements are prepared in accordance with generally
accepted accounting principles in the United States.
On May 1, 1997, Alliance completed its acquisition of LaTex Resources, Inc.
("LaTex"), a US independent oil and gas exploration and production company.
As the LaTex shareholders had a controlling interest in the combined group,
LaTex was treated as having acquired Alliance ("Reverse Acquisition").
Accordingly, in the consolidated financial statements for the period
beginning May 1, 1997, the assets and liabilities of Alliance are recorded
at fair values while the assets and liabilities of LaTex and its
subsidiaries are recorded at their historical costs. The consolidated
financial statements of the Company for the nine months ended April 30,
1997, reflect the results of operations and assets and liabilities of LaTex
and its subsidiaries. Adjustments have been made to reflect, in that
period, the changes in the capital structure resulting from the
acquisition. Earnings per share have been restated on the basis of the
number of Alliance shares which, based on the exchange ratio used in the
acquisition, represents the weighted average number of LaTex common shares
outstanding in the relevant period.
In these financial statements the "Group" refers to Alliance and its
subsidiaries for periods ending on or after May 1, 1997 and to LaTex
Resources, Inc. and its subsidiaries for periods ending on or before April
30, 1997.
Financial Condition
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. As shown in the financial
statements during the nine months ended April 30, 1997 and the years ended
April 30, 1998 and 1999, the Company incurred losses of $4,389,333;
$4,728,923; and $34,463,502, respectively, continues to experience working
capital deficits and is obliged to commence repayments on the borrowings on
October 30, 2000. These factors among others may indicate the Company will
be unable to continue as a going concern for a reasonable period of time.
The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern. Despite its
negative cash flow, the Company has been able to secure financing to
support its operations to date. As described in note 7, the Company was
not in compliance with certain covenants of its loan agreements at April
30, 1999, but a waiver was obtained for such violations. The Company has
also reached agreement with its principal bank to amend certain provisions
of the loan agreement to allow for additional borrowing capacity under
Tranche B, to defer the borrowing base redetermination date from July 31,
1999 to December 31, 1999 and extend the repayment due date to July 31,
2001. The amendment does not, however, change the scheduled repayment
dates of Tranche A which commence on October 30, 2000.
F-8
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Company's continuation as a going concern is dependent upon its ability
to generate sufficient cash flow to meet is obligations on a timely basis,
to continue to comply with the terms of its borrowing agreements, to obtain
additional financing or refinancing as will be required and ultimately to
attain profitability. Management believes it has a business plan that, if
successfully executed, will achieve these objectives.
Reporting Currency
The current operations are in the oil and gas industry in the United States
and the United Kingdom and are conducted through subsidiaries, LaTex
Petroleum Corporation, Alliance Resources (USA) Inc., Germany Oil Company,
Difco Limited, and Source Petroleum Inc. Transactions are conducted
primarily in U.K. Sterling and US dollars. The directors consider that the
US dollar is the functional currency of the Group and the Group's
consolidated financial statements have been prepared in US dollars.
Consolidation
The consolidated financial statements comprise the financial statements of
the Company and all other companies in which the Group's holding exceeds 50
percent. Transactions and balances between group companies are eliminated
on consolidation.
Earnings Per Share
Basic loss per share has been computed by dividing the net loss
attributable to ordinary shareholders by the weighted average number of
ordinary shares outstanding during the period.
The effect of potential common shares (warrants, options and convertible
subordinated unsecured loan notes) is anti-dilutive. Accordingly, diluted
loss per share is not presented.
Foreign Currency Translation
The financial statements of companies of the Group whose functional
currency is not US dollars are translated for consolidation purposes at the
rate of exchange ruling at the balance sheet date. Exchange differences
arising on the retranslation of net assets are reported as a component of
stockholders' equity(deficit) in accumulated other comprehensive loss. In
the underlying financial statements, transactions with third parties are
translated into the functional currency at the exchange rate prevailing at
the date of each transaction. Monetary assets and liabilities denominated
in currencies other than the functional currency are translated into US
dollars at the exchange rate prevailing at the balance sheet date. Any
exchange gain or loss is dealt with through the consolidated statement of
operations.
The Group's share capital is denominated in sterling and for the purposes
of the consolidated financial statements, is translated into US dollars at
the rate of exchange at the time of its issue.
Revenues
Revenues represents income from production and delivery of oil and gas,
recorded net of royalties in kind. The Group follows the sales method of
accounting for gas imbalances. A liability is recorded only if the Group's
excess takes of gas volumes exceed its estimated recoverable reserves from
the relevant well and no receivable is recorded where the Group has taken
less than its entitlement to gas production.
F-9
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Oil and Gas Interests
The Group follows the full cost method of accounting for oil and gas
operations whereby all costs of exploring for and developing oil and gas
reserves are capitalized as tangible fixed assets. Such costs include
lease acquisition costs, geological costs, the costs of drilling both
productive and non-productive wells, capitalized interest, production
equipment and related overhead costs. Capitalized costs, plus estimated
future development costs, are accumulated in pools on a country-by-country
basis and depleted using the unit-of-production method based upon estimated
net proved reserve volumes. Reserve volumes are combined into equivalent
units using approximate relative energy content.
Costs of acquiring and evaluating unproved properties and major development
projects are excluded from the depletion calculation until it is determined
whether or not proved reserves are attributable to the properties, the
major development projects are completed, or impairment occurs, at which
point such costs are transferred into the pool.
Proceeds from the sale or disposal of properties are deducted from the
relevant cost pool except for sales involving significant reserves where a
gain or loss is recognized.
The Group performs a "ceiling test" calculation in line with industry
practice. Costs permitted to be accumulated in respect of each cost pool
are limited to the future estimated net recoverable amount from estimated
production of proved reserves. Future estimated net recoverable amounts
are determined after income taxes, discounting and using prices and cost
levels at the balance sheet date.
Provision is made for abandonment costs net of estimated salvage values, on
a unit-of-production basis, where appropriate.
Depreciation of Other Fixed Assets
Other tangible fixed assets are stated at cost less accumulated
depreciation. Depreciation is provided on a straight line basis to write
off the cost of assets, net of estimated residual values, over their
estimated useful lives as follows:
Fixtures and equipment - 3 to 7 years
Buildings - 30 years
Deferred Taxation
Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in the consolidated statement of operations in the period that includes the
enactment date.
Joint Ventures
The Group's exploration, development and production activities are
generally conducted in joint ventures with other companies. The
consolidated financial statements reflect the relevant proportions of
turnover, production, capital expenditure and operating costs applicable to
the Group's interests.
F-10
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The effects of redeterminations of equity interests in joint ventures are
accounted for when the outcome of the redetermination is known.
Leases
Rentals under operating leases are charged to the consolidated statement of
operations on a straight line basis over the lease term.
Debt Issuance Costs
Debt issuance costs are initially capitalized as intangible assets and are
amortized over the term of the debt to which they relate.
Derivatives
Changes in value of financial instruments, utilized to hedge commodity
price and interest rate risk are recognized in the consolidated statement
of operations when the underlying transactions are recognized. Changes in
value of financial instruments which do not meet the criteria to be treated
as a hedge of an underlying risk are recognized in the consolidated
statement of operations as they occur.
The Group's criteria for a derivative instrument to qualify for hedge
accounting treatment are as follows:
--the timing or duration, quantum and characteristics of the underlying
exposure must have been identified with reasonable certainty;
--changes in the value of the derivative must correlate to a high degree
with changes in the present value of the exposure under a wide range of
possible circumstances;
--the derivative has been designated as a hedge or is a synthetic
alteration of a specific asset, liability or anticipated transaction;
and
--the derivative instrument either: (a) reduces exposure of net income or
cash flow to fluctuations caused by movements in commodity prices,
currency exchange rates or interest rates, including fixing the cost of
anticipated debt issuance; or (b) alters the profile of the group's
interest rate or currency exposures, or changes the maturity profile of
the investment portfolio, to achieve a resulting overall exposure in
line with policy guidelines.
For any termination of derivatives receiving hedge accounting treatment,
gains and losses are deferred when the relating underlying exposures remain
outstanding and are included in the measurement of the related transaction
or balance. In addition, upon any termination of the underlying exposures,
the derivative is marked-to-market and the resulting gain or loss is
included with the gain or loss on the terminated transaction. The Group
may re-designate the remaining derivative instruments to other underlying
exposures provided the normal criteria are all met.
Cash Flow Statement
For the purposes of the consolidated statement of cash flows, the Group
treats all investments with an original maturity of three months or less to
be cash equivalents.
Stock Option Plan
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 123, Accounting for Stock-Based Compensation, which permits entities to
recognize as expense over the vesting period the fair value of all stock-
based awards on the date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock-Based
F-11
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Compensation, and provide pro forma net income and pro forma earnings per
share disclosures for employee stock option grants made in future years if
the fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123.
Accounting Estimates
In the course of preparing financial statements, management makes various
assumptions and estimates to determine the reported amounts of assets,
liabilities, revenue and expenses and in relation to the disclosure of
commitments and contingencies. Changes in these assumptions and estimates
will occur as a result of the passage of time and the occurrence of future
events and, accordingly, the actual results could differ from the amounts
estimated.
Business Segments
The Group adopted Financial Accounting Standard (FAS) 131 "Segment
Disclosures and Related Information" during the year ended April 30, 1998.
Prior to April 30, 1997, the Group sold a portion of its oil and gas
production volumes through its oil and gas marketing subsidiary although
the operations and net assets of that subsidiary were not separately
managed. The Group considers itself to be involved in one business
activity and does not meet the criteria established by FAS 131.
Accordingly, information regarding marketing activities has not been
included for any periods presented.
Comprehensive Income (Loss)
The Company has adopted Financial Accounting Standards Board issued
Statement of Financial Standards No. 130, "Reporting Comprehensive Income"
(Statement No. 130). Statement No. 130 establishes standards for reporting
and display of comprehensive income and its components in a full set of
general-purpose financial statements. The Company has reported accumulated
other comprehensive loss as a separate line item in consolidated balance
sheets. The components of total comprehensive income (loss) for the
periods consist of net losses and foreign currency translation.
Significant Differences between U.S. and U.K. Accounting Principles
The accounting policies used in the preparation of these financial
statements conform with U.S. generally accepted accounting principles
("U.S. GAAP") which differ in certain respects from U.K. generally accepted
accounting principles ("U.K. GAAP"). Differences which may have a
significant effect on net loss and shareholders' deficit are set out below.
Nine months ended Year ended Year ended
April 30, 1997 April 30, 1998 April 30, 1999
(in thousands) (in thousands) (in thousands)
----------------- ----------------- -----------------
Effect on net loss--
Net loss under U.S. GAAP $(4,389) $(4,729) $(34,464)
Ceiling test adjustment (a) - - 23,481
------- ------- --------
Approximate net loss under U.K.
GAAP $(4,389) $(4,729) $(10,983)
======= ======= ========
F-12
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
April 30
------------------------------
1998 1999
(in thousands) (in thousands)
-------------- --------------
Effect on shareholders deficit--
Stockholders' equity under U.S. GAAP $2,183 $(16,637)
Adjustments:
Ceiling test (a) - 23,481
Convertible subordinated unsecured loan notes (b) 1,551 1,551
Acquisition of Difco (c) - 1,272
------ --------
$3,734 $ 9,667
====== ========
(a) Under U.S. GAAP, ceiling tests are calculated using prices prevailing
at the year end. Under U.K. GAAP, a reasonable assessment of future
prices is used. At April 30, 1999, the spot price for gas in the U.K.
was significantly below management's reasonable expectation of future
prices resulting in a significantly greater charge under U.S. GAAP
than under U.K. GAAP.
(b) Under U.S. GAAP, the convertible subordinated unsecured loan notes are
treated as a liability. Under U.K. GAAP, the convertible subordinated
unsecured loan notes are included as part of shareholders' equity as
in substance their terms are economically equivalent to warrants with
a zero strike price and Alliance has no obligation to transfer future
economic benefit to the holder of the loan notes.
(c) Under U.S. GAAP, the shares issued to the vendors of Difco are
recorded at the more readily determinable value. Under U.K. GAAP, the
shares are recorded at the value of the underlying interest in the
East Irish Sea Interests.
In addition there are a number of other classification and disclosure
differences which do not impact net loss or shareholders' deficit.
(2) Acquisition of Difco Limited and U.K. Interests
On October 30, 1998, Alliance completed its 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 10,000,000 convertible shares
valued at $7,208,000. Such value was derived based on the value of the
underlying market value of the shares issued. The shares issued represented
approximately 8.7% of the outstanding shares of the Company. The former
Difco shareholders 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 acquired, through Difco, 10% of
Burlington's interest in the East Irish Sea Properties for cash
consideration of approximately $17,800,000. The Company issued to its
financial advisor 615,385 ordinary shares in payment of a fee of $330,000
incurred in connection with the transactions. The total acquisition cost,
including transaction costs, was allocated to oil and gas properties.
F-13
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The following unaudited pro forma financial information presents the
combined results of operations of the Company and Difco as if the
acquisition had occurred as of the beginning of fiscal years 1998 and 1999,
after giving effect to certain adjustments, including increased interest
expense on debt related to the acquisition and amortization of deferred
loan costs and debt discount. The pro forma financial information does not
necessarily reflect the results of operations that would have occurred had
the Company and Difco constituted a single entity during such periods.
(Unaudited)
--------------------------------
Year ended April 30
--------------------------------
1998 1999
----------- ------------
Revenues $10,209,881 $ 6,234,477
=========== ============
Net loss $(7,760,657) $(36,497,108)
=========== ============
Loss per share $ (0.15) $ (0.77)
=========== ============
(3) Acquisition of LaTex
On May 1, 1997, Alliance, completed its acquisition of 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 and warrant holders of LaTex received an
aggregate of 21,448,787 shares of Alliance (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 on May 1, 1997,
received 0.85981 ordinary shares for each share of LaTex common stock,
2.58201 ordinary shares for each share of the LaTex Series A preferred
stock then held, 6.17632 ordinary shares for each share of LaTex Series B
preferred stock then held, and a warrant to purchase 0.85981 share for each
share of LaTex Common Stock subject to warrants.
The purchase price was arrived at as follows:
Value of 8,103,816 Alliance shares outstanding $4,039,339
Acquisition costs 871,000
----------
$4,910,339
==========
The value of the Alliance shares outstanding was arrived at by using the
share price of LaTex at the time of announcement of the acquisition
adjusted by the exchange ratio.
Transaction costs incurred by Alliance reduced the fair value of Alliance's
monetary assets and liabilities at the date of the acquisition.
The fair value of the assets and liabilities of the acquired business at
the effective date of acquisition is as follows:
Cash $ 1,460,555
Other current assets 480,045
Other assets 202,253
Oil and gas assets 5,268,929
Other fixed assets 253,386
Debt (85,420)
Other liabilities and provisions (2,669,409)
-----------
$ 4,910,339
===========
F-14
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
In connection with the acquisition, Alliance issued to Bank of America, the
Company's principal lender, 156,250 ordinary shares and convertible
subordinated unsecured loan notes convertible into 115,456 ordinary shares
to settle fees of $200,000 and $150,000 payable upon restructuring of
LaTex's bank debt. In addition the Company agreed to issue 116,895 ordinary
shares to Rothschild Natural Resources, LLC in settlement of outstanding
fees of $150,000.
Alliance has also issued 1,343,750 ordinary shares, convertible
subordinated unsecured loan notes convertible into 1,078,125 ordinary
shares and 1,210,938 warrants to Bank of America in exchange for an
overriding royalty interest in most of LaTex's properties held by Bank of
America.
The purchase price was allocated to oil and gas properties and has been
arrived at as follows:
Value of 1,343,750 ordinary shares and warrants issued $2,371,300
Value of convertible subordinated unsecured loan
note issued 1,400,700
----------
$3,772,000
==========
(4) Impairment of U.K. Interests
As discussed in Note 1, the Company utilizes the full cost method of
accounting for its oil and gas operations and performs a "ceiling test."
The ceiling test limits the costs accumulated in respect of each cost pool
to net amounts that can be recovered from the estimated production of
proved reserves. The net amounts recovered are determined utilizing a 10%
discount factor and pricing and cost levels at the balance sheet date.
The U.K. Interests consist of proven reserves and the current development
program is being conducted to produce these reserves. Although the Company
intends to enter into term gas delivery contracts which would be expected
to be at prices above the spot price at April 30, 1999, the Group does not
have contracts in place at April 30, 1999 with purchasers and, accordingly,
has utilized the spot market price to value such interests. The utilization
of these factors has resulted in a ceiling test write-down of approximately
$28,000,000 for U.S. GAAP purposes.
(5) Financial Instruments
The carrying value of cash and cash equivalents, accounts receivables and
accounts payable approximate the estimated fair value of those financial
instruments due to their short maturities. The estimated fair value of the
interest rate swap agreement, based on current market rates, approximated a
net payable of $445,767 and $248,884 at April 30, 1998 and 1999,
respectively. The estimated fair value of the commodity derivative
instruments approximates a net receivable of $409,395 at April 30, 1998 and
a net payable of $128,479 at April 30, 1999. The carrying value of long-
term debt approximates to the fair value, as advised by the Group's
bankers. See note 15.
Fair value is defined as the amount at which the instrument could be
exchanged in a current transaction between willing parties.
F-15
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(6) Income Taxes
Income taxes different from the amounts computed by applying the U.S.
federal tax rate of 34% as a result of the following (in thousands):
Nine months
ended Year ended Year ended
April 30, April 30, April 30,
1997 1998 1999
--------------- ----------------- -----------------
Computed expected tax benefit $ (1,492) $ (1,608) $ (11,718)
Increase in valuation allowance for 1,301 6,792 11,296
deferred tax, assets
Net operating losses acquired - (5,513) -
Other 191 329 422
------- ------- --------
Actual income tax benefit $ - $ - $ -
======= ======= ========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below in
thousands:
1998 1999
----------------- ------------------
Total deferred tax liabilities -
Property and equipment $ 1,754 $ -
-------- --------
Deferred tax assets:
Net operating and other loss carryovers 15,473 15,238
Property and equipment - 10,034
Investment write-downs 917 917
Percentage depletion carryforward 390 267
Accrued expenses not deductible until paid 219 85
-------- --------
Total deferred tax assets 16,999 26,541
Valuation allowance (15,245) (26,541)
-------- --------
Net deferred tax assets 1,754 -
-------- --------
Net deferred tax asset (liability) $ - $ -
======== ========
A valuation allowance is required when it is more likely than not that all
or a portion of the deferred tax assets will not be realized. The ultimate
realization of the deferred tax assets is dependent upon future
profitability. Accordingly, a valuation allowance has been established to
reduce the deferred tax assets to a level which, more likely than not, will
be realized.
The Group has net operating loss carryovers to offset future taxable
earnings of approximately $44,000,000, including approximately $36,000,000
of losses limited under Section 382 of the Internal Revenue Code. If not
previously utilized or limited, the net operating losses will expire in
varying amounts from 2004 to 2019.
F-16
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(7) Long-Term Debt
Long-term debt at April 30, 1998 and 1999 consists of the following:
1998 1999
------------ -----------
BoA:
Tranche A $ - $18,500,000
Tranche B - 16,330,348
Tranche C - 5,000,000
EnCap - 10,243,775
Alliance Credit Agreement 21,066,762 -
----------- -----------
21,066,762 50,074,123
Less unamortized discount - 6,897,502
----------- -----------
Long-term debt 21,066,762 43,176,621
Less current portion 2,275,000 -
----------- -----------
Long-term debt less current portion $18,791,762 $43,176,621
=========== ===========
Alliance entered into a Credit Agreement (the "Alliance Credit Agreement")
with the Bank of America effective May 1, 1997, amending and restating the
Group's previous credit agreement. A portion of the borrowings under the
Alliance Credit Agreement bore interest, payable monthly, at a rate equal
to the higher of the Bank of America Reference Rate plus 1% and the Federal
Funds Rate plus 1-1/4%. Another portion of the borrowings bore interest,
payable monthly, at a rate equal to the London Interbank Offered Rate plus
2%. The rate at April 30, 1998 was 7.875%. Principal payments were
scheduled to commence on October 31, 1998. The note was scheduled to
mature on March 31, 2000. Amounts outstanding were secured by mortgages
which cover the majority of the Group's oil and gas properties.
In connection with the Difco Acquisition (See Note 2), the Company entered
into agreements with Bank of America National Trust & Savings Association
("BoA"), Alliance's principal lender and EnCap Equity 1996 Limited
Partnership and EnCap Capital Investment Company PLC (collectively "EnCap")
providing up to $64,750,000 in debt, as follows:
BoA:
Tranche A $30,000,000
Tranche B 20,000,000
Tranche C 5,000,000
-----------
55,000,000
EnCap 9,750,000
-----------
$64,750,000
===========
Tranche A consists of a revolving credit facility secured by a first
priority lien and security interest in all of the oil and gas properties of
the Company. The Company's initial borrowing base is $18,500,000 and is
redetermined semiannually on January 31 and July 31. Interest is at a 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 0.5%, or
(ii) 2.0% above the current Interbank rate (7.5% at April 30, 1999).
While any Tranche B loan is outstanding, the preceding margins will be
increased by an additional 0.5% semi-annually on April 26 and on October 26
of each year. Interest is payable quarterly and principal is due in equal
quarterly payments beginning October 30, 2000 and ending on October 30,
2003.
F-17
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Tranche B consists of a credit facility secured by a first priority lien
and security interest in all of the oil and gas properties of the Company.
Interest is at a rate determined by the Company from time to time, of
either (i) BoA's Tranche B reference rate plus 2.0%, or (ii) 4.0% above the
current Interbank rate (9.0% at April 30, 1999). The margins for all
Tranche B loans will be increased by an additional 0.5% semi-annually on
April 26 and on October 26 of each year. Interest is payable quarterly and
principal is due in full on January 31, 2001.
Tranche C consists of a credit facility secured by a first priority lien
and security interest in all of the oil and gas properties of the Company.
Interest is at a rate determined by the Company from time to time, of
either (i) BoA's reference rate plus 5.0%, or (ii) 7.0% above the current
Interbank rate (12.0% at April 30, 1999). Interest is payable quarterly
and principal is due in equal quarterly payments beginning January 31, 2001
and ending on October 30, 2004. The BoA debt facility contains various
covenants, including, but not limited to, maintenance of minimum current
and interest coverage ratios, as defined in the agreement.
EnCap debt is unsecured and bears interest at 10%. Interest is payable
quarterly and principal is due in full on October 30, 2005. Until October
30, 2001, the Company has the option, in lieu of paying cash, of increasing
the principal amount of the debt by the interest due.
The Company 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. The fair
value of the warrants, $1,335,000, attaching to the debt was treated as a
discount. In addition, the Company granted BoA an overriding royalty
interest, valued at the value of the underlying oil and gas reserves, in
the U.K. Interests of 0.3% beginning January 1, 2001. The overriding
royalty interest will entitle BoA to receive payment equal to the specified
percentage of the net revenues generated by the U.K. Interests. In
connection with obtaining the debt financing from BoA, the Company was
required to enter into commodity price risk management contract on terms
that are mutually agreeable to BoA and the Company for a period not less
than two years with respect to at least 50% of the Company's estimated
producing reserves as of October 31, 1998. BoA also required the Company
to enter into interest rate risk management contracts providing for a
maximum interest rate of 9.0% on the notional amount projected to be
outstanding on the revolving credit facility (See Note 2).
In connection with the issuance of the EnCap debt, the Company sold EnCap
15,000,000 ordinary shares with a fair value of $6,360,000 for cash
consideration. The difference was treated as a discount on the debt. The
Company also issued EnCap Investments L.C. 545,454 shares in consideration
of a fee of $292,000.
The Company was not in compliance with certain covenants of the loan
agreements, which included but were not limited to the maintenance of
minimum levels of working capital and interest coverage. Prior to these
violations causing an event of default, which would have resulted in an
acceleration of the repayment of the loans, the Company obtained waivers
from the lenders for all covenant violations. Effective July 30, 1999, the
loan agreement was amended to revise the borrowing limit of Tranche B to
$25,000,000 and reduce the limit of Tranche A to a similar amount. The due
date of Tranche B was extended from January 31, 2001 to July 31, 2001. In
addition, the date of the borrowing base and collateral value
redetermination, scheduled to occur on July 31, 1999, was deferred until
December 31, 1999.
The revised schedule of contractual maturities of long-term debt at April
30, 1999 are as follows and do not include $5,000,000 borrowed under
Tranche B subsequent to year end which is repayable during the year ending
April 30, 2002:
Year ending April 30, 2000 $ -
2001 5,245,775
2002 23,740,348
2003 7,410,000
2004 2,810,000
Thereafter 10,868,000
F-18
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Group capitalizes interest cost as a component of the North Sea U.K.
Interests development program. The following is a summary of interest cost
incurred:
Nine Months ended Year ended April 30
April 30
------------------- ---------------------------------------
1997 1998 1999
------------------- ------------------ -------------
Interest cost capitalized $ - $ - $1,170,235
Interest cost charged to income 2,102,933 2,573,646 3,354,627
---------- ---------- ----------
Total interest cost incurred $2,102,933 $2,573,646 $4,524,862
========== ========== ==========
(8) Savings and Profit Sharing Plan
The Group maintains an employee savings and profit sharing plan (the Plan)
which covers substantially all of its employees. The Plan is comprised of
a 401(k) saving portion and a noncontributory defined contribution portion.
Employees are qualified to participate after approximately one year of
service. Participating in the 401(k) plan is voluntary, and the Group
matches contributions up to six percent of the employees' salary at a rate
of 50 percent of the employee's contribution. The Group contributed
$8,481, $9,243, and $17,523 to the plan during the nine months ended April
30, 1997, and the years ended April 30, 1998 and 1999, respectively.
The noncontributory portion of the Plan allows the Group to share annual
profits with employees. Annual payments to the Plan are elective.
Management elected to make no contributions to the Plan for the nine months
ended April 30, 1997 and the years ended April 30, 1998 and 1999. The
Group is under no obligation to make contributions to the Plan in the
future.
(9) Capital Stock
On May 1, 1997, the Company's share capital was consolidated such that
every 40 ordinary shares of 1 pence each were consolidated into 1 ordinary
share of 40 pence. All prior capital stock amounts have been restated to
reflect this reverse stock split. At the same date, the Company issued
21,448,747 ordinary shares of 40 pence each to the holders of the issued
ordinary shares and preference shares of LaTex outstanding at that date.
On October 30, 1998, the Company entered into a capital reorganization plan
that subdivided each ordinary share into one new ordinary share with a par
value of 1 pence and 39 deferred shares with a par value of 1 pence each.
The resulting ordinary shares have the same rights as the ordinary shares
at 40 pence each. The deferred shares have no substantive rights, are not
represented by certificates issued to shareholders, and may be redeemed by
the Company by the payment of a total of 1 pence for all of the deferred
shares.
(10) Stock Option Plans
Effective October 21, 1996, each holder of options granted under the
Group's 1993 Incentive Stock Plan agreed to terminate all options held and
receive grants of 1,690,000 Restricted shares of LaTex Common Stock which,
on May 1, 1997, was exchanged for Alliance shares. The Group recognized an
employee bonus of $528,125 related to this transaction based on the market
value of LaTex's stock on the date of grant. No tax gross up rights were
granted in connection with the issue of the Restricted Stock.
F-19
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Since May 1, 1997, the Group operates two employee share option schemes.
Both schemes have similar terms, the principal terms being:
-- any director or employee may be granted options over Shares;
-- the subscription price will be no less than market price at the date
of grant;
-- options granted to an individual are limited such that the aggregate
market value of shares subject to option taken together with the
aggregate market value of shares which have been acquired under rights
granted under the schemes in the previous ten years does not exceed
four times cash salary;
-- the exercise of options may be subject to performance tests. Long term
options (exercisable after 5 years) may be subject to growth in
earnings per share over the immediately preceding five years matching,
exceeding growth in earnings per share of the companies ranked in the
top 25 of the FTSE-100 share index, or growth in the Company's share
price during the five year exercise period.
A summary of the status of the share option schemes is as follows:
Shares Weighted average
service price
--------- ----------------------
As at May 1, 1997 - -
Granted 675,000 24.5 pence
On acquisition of LaTex 237,500 80 pence
---------
As at April 30, 1998 912,500 38.9 pence
Granted 2,365,000 13.5 pence
Cancelled (175,000) 80 pence
---------
As at April 30, 1999 3,102,500 17.2 pence
=========
Included in the options granted during the year ended April 30, 1999 were
1,700,000 long-term options which were subject to the Company's share price
increasing three-fold during the five year exercise period of the options.
The Group's accounting policy for compensation cost is in line with
Accounting Principles Board Opinion 25. Accordingly, compensation cost has
not been recognized for share option plans except to deal with any
discounts on option exercise prices, compared with market prices at the
measurement date. For the year ended April 30, 1998, had compensation
costs been charged against income based on the fair value at the grant-
dates for awards under the share option plans, consistent with Statement of
Financial Accounting Standards No. 123, the net loss and net loss per share
would not have been materially different. This was determined using the
Black Scholes option pricing model utilizing the following assumptions:
Risk free interest rate 5.3%
Expected life 10 years
Volatility 5.93%
At April 30, 1999, the Company also had outstanding 50,000 options to
purchase shares at 300 pence per share which have been issued other than
pursuant to the employee share options schemes.
F-20
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11) Warrants
On May 1, 1997 the Company issued warrants to subscribe for 1,927,908
ordinary shares of 40 pence each in exchange for the then outstanding
warrants to subscribe for ordinary shares in LaTex. For periods ended on
or before April 30, 1997, the warrants outstanding reflect the Alliance
warrants issued on May 1, 1997, as though issued at the date of issue of
the LaTex warrants for which the Alliance warrants were exchanged.
Warrants to subscribe for 1,210,938 ordinary shares were issued to Bank of
America as part consideration for the acquisition of the overriding royalty
interest (see note 3). At April 30, 1998, the Company had outstanding
2,916,527 warrants.
Warrants to subscribe to 3,275,000 common shares at a price of 1 pence per
share were issued to Bank of America in connection with the Difco
acquisition (see Note 7).
In November, 1998, warrants to purchase 1,112,378 Ordinary Shares at a
price equal to the sterling equivalent of $4.94 expired.
Warrant series Strike price Last date for exercise No. of shares
Series "D" $0.87 March 31, 2001 287,119
Series "E" $0.87 October 31, 2001 30,953
Series "F" $1.40 December 16, 2002 275,139
Series "G" (BOA) (Pounds) 1.00 April 30, 2007 1,210,938
Series "H" 1 p. October 31, 2009 3,275,000
---------
5,079,149
---------
(12) Convertible Subordinated Unsecured Loan Notes
At April 30, 1998 and 1999 the Group had outstanding loan notes convertible
into 1,193,581 ordinary shares of which loan notes convertible into
1,078,125 ordinary shares were issued in part consideration for the
acquisition of the overriding royalty interest amounting to $1,400,700 (see
note 3) and loan notes convertible into 115,456 ordinary shares were issued
to settle restructuring and arrangement fees of $150,000 in connection with
the LaTex acquisition. The loan notes, which are non-interest bearing, are
convertible by the holders (on the payment of a nominal cash consideration)
any time up to ten years following their date of issue. They are
convertible in the following six months on like terms at the option of the
Company. Any loan notes not converted prior to the date ten years and six
months from issue will be repaid on that date at an amount equal to twice
the amount paid up on the notes.
(13) Contingencies and Commitments
The Group is a named defendant in lawsuits, and is subject to claims of
third parties from time to time arising in the ordinary course of business.
While the outcome of lawsuits or other proceedings and claims against the
Group cannot be predicted with certainty, management does not expect these
additional matters to have material adverse effect on the financial
position or results of operations or liquidity of the Group.
F-21
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Group leases office space and certain property and equipment under
various lease agreements. As of April 30, 1999, future minimum lease
commitments were approximately as follows:
Year Ending April 30
--------------------
2000 $ 193,701
2001 196,905
2002 200,098
2003 203,301
2004 16,964
Rent expense under all operating leases was $160,780, $252,627, and
$251,447 during the nine months ended April 30, 1997, and the years ended
April 30, 1998 and 1999, respectively.
(14) Related Party Transactions
The Group, prior to May 1, 1997, has made loans to certain officers,
directors and stockholders. During the nine months ended April 30, 1997,
the board of directors forgave $391,218, of notes and accrued interest, due
from directors and former officers of the Group. This amount is included
in general and administrative expenses.
During the year ended April 30, 1998, the Company received $123,000 of
proceeds from the sale of 10,351,966 shares in the Company which had
previously been owned by the former Chief Executive of the Company. The
right to receive the proceeds from the sale of the shares arose from a
settlement agreed between the Company and Mr. O'Brien following the
discovery that the Company had suffered a financial loss as a result of a
number of transactions involving Mr. O'Brien or parties connected with him.
(15) Derivatives
Oil and Gas
Effective May 15, 1997, the Group terminated a previously existing oil and
gas pricing derivative at a cost of $1,128,000 settled by an increase in
the Bank of America loan. The loss relating to the buy-out was recognized
in its entirety during the year ended April 30, 1998, consequent upon the
Group entering into a new price protection agreement.
On October 23, 1997, the Group entered into commodity price hedge
agreements to protect against price declines which may be associated with
the volatility in oil and gas spot prices. The commodity price hedges were
achieved through the purchase of put options (floors) by the Group, and the
associated premium cost was funded by additional drawdowns under the
current credit agreement. The commodity price hedges covered 32,000 bbls
and 100,000 MMBTUs per month for the year to October 31, 1998, and covered
in excess of 90% of the Group's current monthly sales volumes. The floors
equated to approximately $18.50/bbl Nymex WTI contract and $2.20/MMBTU
Nymex Natural Gas contract. On October 31, 1998, the Group'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 (NYMEX Natural Gas). 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 (NYMEX WTI). This commodity price hedge agreement will
protect the Company from any severe declines in oil and gas prices until
expiration on October 31, 1999.
F-22
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Interest
The Group is required, by agreement with its primary lender (see Note 7) to
participate in an interest rate protection program, for interest on the
debt payable to the primary lender until March 31, 2000. Interest is
hedged to achieve a fixed rate of 7.49% calculated on a monthly basis
based on a fixed amortization schedule determined on loan origination. The
notional principal is reduced each month by $365,000. The notional
principal outstanding at April 30, 1999 was $13,784,000 and this will have
reduced at termination to $9,769,000. The hedging gains/losses are
included in interest expense.
(16) Disposition of Oil and Gas Properties
During the nine months ended April 30, 1997 and the years ended April 30,
1998 and 1999, the Group sold oil and gas properties for approximately
$1,500,000, $5,600,000 and $1,742,000, respectively. Proceeds of such
sales were credited to the full cost pool.
(17) Supplemental Financial Information for Oil and Gas Producing Activities
(Unaudited)
Results of Operations from Oil and Gas Producing Activities
The following sets forth certain information with respect to the Group's
results of operations from oil and gas producing activities for the nine
months ended April 30, 1997 and the years ended April 30, 1998 and 1999.
All of the Group's oil and gas producing activities are located within the
United States.
1997 1998 1999
(in thousands) (in thousands) (in thousands)
-------------- -------------- --------------
Revenues $ 5,698 $ 10,210 $ 6,234
Production costs (2,550) (4,849) (2,770)
Gross production taxes (567) (657) (326)
Depreciation, depletion and impairments (1,457) (2,571) (29,931)
Loss on termination of derivative contract - (1,128) -
----------- ----------- ----------
Income (loss) from operations before income taxes 1,124 1,005 (26,793)
Income tax expense - - -
----------- ----------- ----------
Results of operations (excluding corporate $ 1,124 $ 1,005 $ (26,793)
overhead and interest costs) =========== =========== ==========
F-23
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Capitalized Costs and Cost Incurred Relating to Oil and Gas Activities
1997 1998 1999
(in thousands) (in thousands) (in thousands)
------------------- ------------------ -------------------
United States $ 36,107 $ 43,200 $ 42,902
United Kingdom - - 31,054
--------- --------- ---------
Total capitalized costs 36,107 43,200 73,956
Less accumulated depreciation, 9,432 13,571 43,842
depletion and impairments --------- --------- ---------
Net capitalized costs $ 26,675 $ 29,629 $ 30,114
========= ========= =========
Costs incurred during the year:
Exploration costs:
United States $ - $ - $ -
United Kingdom - - -
--------- --------- ---------
$ - $ - $ -
========= ========= =========
Development costs:
United States $ 348 $ 1,821 $ 974
- 276 3,535
--------- --------- ---------
United Kingdom $ 348 $ 2,097 $ 4,509
========= ========= =========
Purchase of minerals in place:
United States $ - $ 9,041 $ 125
United Kingdom - - 29,625
--------- --------- ---------
$ - $ 9,041 $ 29,750
========= ========= =========
F-24
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Estimated Quantities of Proved Oil and Gas Reserves
The estimates of proved oil and gas reserves were prepared by independent
petroleum engineers. The Group emphasizes that reserve estimates are
inherently imprecise. Accordingly, the estimates are expected to change as
more current information becomes available. In addition, a portion of the
Group's proved reserves are undeveloped, which increases the imprecision
inherent in estimating reserves which may ultimately be produced.
Proved reserves are estimated quantities of crude oil, natural gas, and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions. Proved
developed reserves are those which are expected to be recovered through
existing wells with existing equipment and operating methods.
The following is an analysis of the Group's proved oil and gas reserves.
United States United Kingdom
--------------------------------------- --------------------
Oil (Mbbls) Gas (MMcf) Gas (MMcf)
------------------- ------------------ --------------------
Proved reserves at July 31, 1996 6,353.0 28,172 -
Revisions of previous estimates 417.7 (577) -
Production (190.0) (1,640) -
--------- -------- ----------
Proved reserves at April 30, 1997 6,580.7 25,955 -
Revisions of previous estimates (735.5) 2,149 -
Production (396.2) (1,689) -
Purchases of reserves-in-place 1,335.7 4,173 -
Sales of reserves-in-place (290.4) (4,266) -
--------- -------- ----------
Proved reserves at April 30, 1998 6,494.3 26,322 -
Purchase of reserves-in-place - - 73,870
Revisions of previous estimates 2,624.7 (1,125) (64,137)
Production (278.1) (1,402) -
Sales of reserves-in-place (133.6) (943) -
--------- -------- ----------
Proved reserves at April 30, 1999 8,707.3 22,852 9,733
========= ======== ==========
Proved developed reserves at:
April 30, 1997 5,166.9 25,461 -
========= ======== ==========
April 30, 1998 3,773.7 22,632 -
========= ======== ==========
April 30, 1999 6,000.7 19,519 -
========= ======== ==========
During the nine months ended April 30, 1997, the Group sold oil and gas
properties for approximately $1,500,000. The Group chose not to include
those properties in its reserve appraisal at July 31, 1996.
F-25
ALLIANCE RESOURCES PLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Discounted Future Net Cash Flows
In accordance with Statement of Financial Accounting Standards No. 69,
estimates of the standardized measure of discounted future cash flows were
determined by applying period-end prices, adjusted for fixed and
determinable escalations, to the estimated future production of year-end
proved reserves. Future cash inflows were reduced by the estimated future
production and development costs based on period-end costs to determine
pre-tax cash inflows over the Group's tax basis in the associated proved
oil and gas properties. Net operating losses, credits and permanent
differences were also considered in the future income tax calculation.
Future net cash inflows after income taxes were discounted using a 10%
annual discount rate to arrive at the Standardized Measure.
Future income tax expenses are estimated using the statutory tax rate of
34% and 30% in the United States and United Kingdom, respectively.
Estimates for future general and administrative and interest expense have
not been considered.
The estimated standardized measure of discounted future cash flows (in
thousands) follows:
U.S. U.K.
-------------------------------------------- -------------
1997 1998 1999 1999
------------ ------------ ------------ -------------
Future cash inflows $ 139,587 $ 131,858 $ 167,154 $ 13,981
Future production and (64,086) (48,683) (73,970) (10,055)
development costs ------------ ------------ ------------ -------------
Future net cash inflows before 75,501 83,175 93,184 3,926
income tax expense
Future income tax expense (11,477) (10,444) (18,416) -
------------ ------------ ------------ -------------
Future net cash flows 64,024 72,731 74,768 3,926
10% annual discount for estimated (28,656) (27,625) (39,899) (1,132)
timing of cash flows ------------ ------------ ------------ -------------
Standardized measure of discounted $ 35,368 $ 45,106 $ 34,869 $ 2,794
future net cash flows ============ ============ ============ =============
The changes in standardized measure of discounted future net cash flows
(in thousands) follows:
U.S. U.K.
------------------------------------------------ --------------
Nine months
ended Year ended Year ended Year ended
April 30, 1997 April 30, 1998 April 30, 1999 April 30, 1999
-------------- -------------- -------------- --------------
Beginning of period $ 43,889 $ 35,368 $ 45,106 $ -
Increases (decreases)
Sales, net of production costs (4,074) (4,338) (2,765) -
Net change in sales prices, net of
production costs (12,690) 7,671 (1,903) (10,205)
Changes in estimated future
development costs (280) (1,161) (924) (134)
Revisions of previous quantity estimates 1,282 (1,778) 12,115 (4,254)
Accretion of discount 5,350 3,963 4,856 827
Net change income taxes 5,345 813 (2,700) -
Purchases of reserves-in-place - 12,720 - 16,560
Sales of reserves-in-place - (4,975) (1,875) -
Changes of production rates
(timing) and other (3,454) (3,177) (17,041) -
-------------- -------------- -------------- ---------------
End of period $ 35,368 $ 45,106 $ 34,869 $ 2,794
============== ============== ============== ===============
F-26