-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O6asQj3IBlbQIPATL7HOy/NvzBYiM80NFynZ0mVmAKGcp8IB4cNcMZ9l8m5HOSyi ZSXQs7gqrFXkXBf847qrPA== 0000930661-99-001909.txt : 19990816 0000930661-99-001909.hdr.sgml : 19990816 ACCESSION NUMBER: 0000930661-99-001909 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19990430 FILED AS OF DATE: 19990813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIANCE RESOURCES PLC CENTRAL INDEX KEY: 0000937568 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 000000000 FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-24691 FILM NUMBER: 99687681 BUSINESS ADDRESS: STREET 1: 4200 EAST SKELLY DRIVE STREET 2: SUITE 1000 CITY: TULSA STATE: OK ZIP: 74135 MAIL ADDRESS: STREET 1: JENKENS & GILCHRIST PC STREET 2: 1445 ROSS AVENUE SUITE 2900 CITY: DALLAS STATE: TX ZIP: 75202 10-K405 1 FORM 10-K405 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 EX-10.1 2 EXECUTIVE SERVICE AGREEMENT - JOHN A. KEENAN Exhibit 10.1 DATED AS OF DECEMBER 1, 1998 ---------------------------- (1) ALLIANCE RESOURCES PLC -and- (2) JOHN A. KEENAN SECOND SUPPLEMENTAL AGREEMENT TO EXECUTIVE SERVICE AGREEMENT Dated 15 October 1996 SECOND SUPPLEMENTAL AGREEMENT TO EXECUTIVE SERVICE -------------------------------------------------- AGREEMENT --------- THIS SECOND SUPPLEMENTAL AGREEMENT TO EXECUTIVE SERVICE AGREEMENT dated as of the 1st day of December 1998 and made between: (1) ALLIANCE RESOURCES PLC, a company registered in England and Wales, whose registered office is at Kingsbury House, 15-17 King Street, London SW1Y 6QU ("the Company"), and (2) JOHN A. KEENAN of 3134 E. 86th Street, Tulsa, Oklahoma 74137-2534, USA ("the Executive") is supplemental to an Agreement dated 15th October 1996 and made between the same parties are parties hereto as modified by Supplemental Agreement to Executive Service Agreement dated 7 April, 1998. RECITALS (A) The Company and the Executive have previously entered into executive service agreement dated 15th October 1996 as modified by Supplemental Agreement to Executive Service Agreement dated 7 April 1998 ("the Agreement") which provides for the Executive to be employed by the Company upon the terms and conditions therein appearing. All defined terms used in the Supplemental Agreement and not otherwise defined have the meanings given in the Agreement. (B) The Company now wishes to make certain alterations to the Agreement as hereinafter appearing. NOW, THEREFORE, the Parties hereto have agreed and do hereby agree as follows: 1. Clause 2.4 of the Agreement shall be deleted and the following Clause 2.4 shall be inserted in its place: On termination of the employment of the Executive at any time and for whatever reason and howsoever arising including, but not limited to, termination of the employment of the Executive following his receipt of the notice provided in Clause 2.3, but subject to the provisions of clause 12, the Company shall pay to the Executive in one lump sum on the day of such termination, a cash payment equal to twice (a) the Executive's annual salary as specified in this Agreement, and (b) aggregate bonuses and benefits for the preceding calendar year. 2. Clause 7.3 of the Agreement shall be deleted and the following Clause 7.3 shall be inserted in its place: During the continuance of his employment hereunder the Executive shall be paid a car allowance sufficient to enable the Executive to acquire, operate and maintain an automobile commensurate with the Executive's capacity which allowance shall accrue from day to day and be paid in arrears on the last day of each month, or if that is not a business day, on the immediately preceding business day. 3. Clause 12.8 (d) (i) of the Agreement shall be deleted and the following clause shall be inserted in its place: (i) In one lump sum a cash payment equal to 2.5 times (A) the Executive's annual salary as specified in this Agreement, and (B) aggregate bonuses and benefits for the preceding calendar year. 4. Save as varied by this supplemental agreement the Agreement shall remain in full force and effect. IN WITNESS whereof this Agreement has been executed on the date first above written. Signed by Philip Douglas (Director and Chairman } of the Remuneration Committee of the Board of } Directors) for and on behalf of ALLIANCE }----------------------------- RESOURCES PLC in the presence of: } Signed by JOHN A. KEENAN in the } presence of: }----------------------------- EX-10.2 3 EXECUTIVE SERVICE AGREEMENT - PAUL R. FENEMORE Exhibit 10.2 DATED AS OF DECEMBER 1, 1998 ---------------------------- (1) ALLIANCE RESOURCES PLC -and- (2) PAUL R. FENEMORE SECOND SUPPLEMENTAL AGREEMENT TO EXECUTIVE SERVICE AGREEMENT Dated 20 September 1996 SECOND SUPPLEMENTAL AGREEMENT TO --------------------------------- EXECUTIVE SERVICE AGREEMENT --------------------------- THIS SECOND SUPPLEMENTAL AGREEMENT TO EXECUTIVE SERVICE AGREEMENT dated as of the 1st day of December 1998 and made between: (1) ALLIANCE RESOURCES PLC, a company registered in England and Wales, whose registered office is at Kingsbury House, 15-17 King Street, London SW1Y 6QU ("the Company"), and (2) PAUL RAYMOND FENEMORE of Flat1, 16-18 Kivelis Street, Nicosia, Cyprus ("the Executive") is supplemental to an Agreement dated 20th September 1996 and made between the same parties as are parties hereto as modified by Supplemental Agreement to Executive Service Agreement dated 6th April 1998. RECITALS (A) The Company and the Executive have previously entered into an executive service agreement dated 20th September 1996 as modified by Supplemental Agreement to Executive Service Agreement dated 6th April 1998 ("the Agreement") which provides for the Executive to be employed by the Company upon the terms and conditions therein appearing. All defined terms used in this Supplemental Agreement and not otherwise defined have the meanings given in the Agreement. (B) The Company now wishes to make certain alterations to the Agreement as hereinafter appearing. NOW, THEREFORE, the Parties hereto have agreed and do hereby agree as follows: 1. Clause 2.2 of the Agreement shall be deleted and the following Clause 2.2 shall be inserted in its place: The employment of the Executive shall (subject to the provisions of Clause 12) be for an initial fixed period of two (2) years from 20th September 1996 and shall automatically be extended without further action of either party for additional two (2) year periods, unless written notice of either party's intention not to extend has been given to the other party hereto at least three (3) months prior to the expiration of the then effective two (2) year period of employment. In the event of the latter the provisions of Clause 2.3 shall still apply. 2. Clause 2.3 of the Agreement shall be deleted and the following Clause 2.3 shall be inserted in its place: On termination of the employment of the Executive at any time and for whatever reason and howsoever arising, but subject to the provisions of Clause 12, the Company shall pay to the Executive in one lump sum on the day of such termination, a cash payment in an amount equal to twice (a) the Executive's annual salary as specified in this Agreement, and (b) aggregate bonuses and benefits for the preceding calendar year. 3. A new clause 7.3 shall be inserted to read: During the continuance of his employment hereunder the Executive shall be paid a car allowance sufficient to enable the Executive to acquire, operate and maintain an automobile commensurate with the Executive's capacity which allowance shall accrue from day to day and be paid in arrears on the last day of each month, or if that is not a business day, on the immediately preceding business day. 4. Clause 12.8(d) of the Agreement shall be deleted and the following Clause 12.8(d) shall be inserted in its place: Upon (x) the termination of the Executive by the Company without cause following a Change in Control of the Company or (y) the Executive's voluntary termination of employment for good reason following a Change in Control, then the Company shall provide the Executive within thirty (30) days after the applicable event, in one lump sum a cash payment equal to 2.5 times (A) the Executive's annual salary as specified in this Agreement, and (B) aggregate bonuses and benefits for the preceding calendar year. 5. Save as varied by this supplemental agreement the Agreement shall remain in full force and effect. IN WITNESS whereof this Agreement has been executed on the date first above written Signed by Philip Douglas (Director and Chairman } of the Remuneration Committee of the Board of } Directors) for and on behalf of ALLIANCE }---------------------------- RESOURCES PLC in the presence of: } Signed by PAUL R. FENEMORE in the } presence of: }---------------------------- EX-10.3 4 EXECUTIVE SERVICE AGREEMENT- FRANCIS M. MUNCHINSKI Exhibit 10.3 DATED AS OF DECEMBER 1, 1998 ---------------------------- (1) ALLIANCE RESOURCES PLC ---------------------- - and - (2) FRANCIS M. MUNCHINSKI --------------------- EXECUTIVE --------- SERVICE AGREEMENT ----------------- THIS AGREEMENT is made as of the 1st day of December, 1998 - --------------- BETWEEN: - -------- (1) ALLIANCE RESOURCES PLC, a company registered in England and Wales whose ---------------------- registered office is at Kingsbury House, 15-17 King Street, London SW1Y 6QU ("the Company"), and (2) FRANCIS M. MUNCHINSKI of 5541 E. 107TH Street., Tulsa, Oklahoma 74137 ("the Executive") WHEREAS (A) it has been agreed that the Executive is to be employed by the Company; and (B) it has been agreed that said employment of the Executive shall be on the terms and subject to the conditions hereinafter written; NOW, THEREFORE, THE PARTIES HERETO HAVE AGREED AND DO HEREBY AGREE AS FOLLOWS: 1. DEFINITIONS AND INTERPRETATION ------------------------------ 1.1 In this Agreement unless the context otherwise required words and phrases defined in Part XXVI of the Companies Act 1985 have the same meanings thereby attributed to them and the following expressions have the following meanings: "Associated Company" means any company which is a holding company or a subsidiary of the Company or a subsidiary of the Company's holding company; "the Board" means the Board of Directors present at a meeting of the directors of the Company at which a quorum is present but excluding the Executive; "Group" means the Company and the Associated Companies; "Intellectual Property" means patent trade marks, service marks, designs, utility models, design rights applications for registration of any of the foregoing and the right to apply for them in any part of the world, inventions, drawings, computer programs, Confidential Information, know-how and rights of like nature arising or subsisting anywhere in the world in relation to all of the foregoing whether registered or unregistered. 2 2. COMMENCEMENT AND TERM --------------------- 2.1 The Executive's employment began on June 16, 1998. 2.2 This Agreement is in substitution for and shall supersede all or any former and existing agreements or arrangements for the employment of the Executive by the Company or an Associated Company all of which shall be deemed to have been canceled with effect from the date of commencement of this Agreement. 2.3 The employment of the Executive shall (subject to the provisions of Clause 12) be for an initial fixed period of two (2) years from January 1, 1999 and shall automatically be extended without further action of either party for additional two (2) year periods, unless written notice of either party's intention not to extend has been given to the other party hereto at least three (3) months prior to the expiration of the then effective two (2) year period of employment. 2.4 On termination of the employment of the Executive at any time and for whatever reason and howsoever arising, including, but not limited to, termination of the employment of the Executive following his receipt of the notice provided in Clause 2.3, but subject to the provisions of Clause 12, the Company shall pay to the Executive in one lump sum on the day of such termination, a cash payment equal to twice (a) the Executive's annual salary as specified in this Agreement and (b) aggregate bonuses and benefits for the preceding calendar year. 3. OBLIGATIONS DURING EMPLOYMENT ----------------------------- 3.1 The Executive shall during the continuance of his employment: (a) serve the Company to the best of his ability in the capacity of General Counsel and shall perform such duties as are customary for a general counsel of comparable companies; (b) faithfully and diligently perform such duties and exercise such powers consistent with them as the Managing Director may from time to time properly assign to or confer upon him; (c) if and so long as the Managing Director so directs perform and exercise the said duties and powers on behalf of any Associated Company and act as a director or other officer of any Associated Company; (d) do all in his power to protect, promote, develop and extend the business interests and reputation of the Group; (e) at all times and in all respects conform to and comply with the business interests and reputation of the Group; 3 (f) promptly give to the Managing Director (in writing if so requested) all such information, explanations and assistance as he may require in connection with the business and affairs of the Company and any Associated Company for which he is required to perform duties; (g) unless prevented by sickness, injury or other incapacity or as otherwise agreed by the Managing Director devote the whole of his time, attention, and abilities during his hours or work (which shall be normal business hours and such additional hours as may be necessary for the proper performance of his duties) to the business and affairs of the Company and any Associated Company for which he is required to perform duties; (h) work at such place of business of the Company or any Associated Company within the United Kingdom and/or the United States as necessary for the proper performance and exercise of his duties and powers and in particular it is agreed that the Executive shall remain domiciled and receive payment for services rendered hereunder in the United States; and the Executive may be required to travel on the business of the Company and any Associated company (whether inside or outside the United Kingdom) for which he is required to perform duties; and (i) at such times as the Managing Director may reasonably request and at the expense of the Company undergo a medical examination by a doctor of the Company's choice. 3.2 Notwithstanding the foregoing or any other provision of the Agreement, the Company may at any time after the Executive has given notice to terminate this Agreement suspend the Executive and/or exclude him from all or any premises of the Company or any Associated Company for any period not exceeding (12) months provided that throughout such period the Executive's salary and other contractual benefits shall continue to be paid or provided by the Company. 4. FURTHER OBLIGATIONS OF THE EXECUTIVE ------------------------------------ 4.1 During the continuance of his employment the Executive shall devote his whole time and attention to his duties under this Agreement and shall not without the prior written consent of the Managing Director (such consent not to be unreasonably withheld or delayed) directly or indirectly carry on or be engaged, concerned or interested in any other business trade or occupation which is similar to or in competition with the business of the Company or any Associated Company otherwise than as a holder directly or through nominees of not more than five per cent in aggregated of any class of shares debentures or other securities in issue from time to time of any company which are for the time being quoted or dealt in on any recognized investment exchange (as defined by Section 207(1) of the Financial Services Act 1986). 4 4.2 The Executive shall during the continuance of his employment (and shall procure that his spouse or partner and his minor children shall comply) with all applicable rules of law, and stock exchange regulations (including the "Model Code" issued by the International Stock Exchange of the United Kingdom and the Republic of Ireland Limited) and codes of conduct of the Company for the time being in force in relation to dealings in shares, debentures or other securities of the Company or any Associated Company or any unpublished price sensitive information affecting the securities of any other company. 4.3 The Executive shall in relation to any dealings in securities of overseas companies comply with all laws of any foreign state affecting dealings in the securities of such companies and all regulations of any relevant stock exchanges on which such dealings take place. 4.4 During the continuance of his employment the Executive shall observe the terms of any policy issued by the Company in relation to any payment, rebate, discount, commission, vouchers, gift or other benefit obtained by him from any third party in respect of any business transacted or proposed to be transacted (whether or not by him) by or on behalf of the Company or any Associated Company. 5. REMUNERATION ------------ 5.1 The Company shall pay to the Executive during the continuance of his employment a salary (which shall accrue from day to day) at the rate of One Hundred Forty Thousand U.S. Dollars (U.S. $140,000) per year. The salary shall be payable by equal bi-monthly installments in arrears on or about the 15th and 30th day of each calendar month. 5.2 The salary payable to the Executive under Clause 5.1 shall be reviewed on no less than an annual basis and may be increased by such amount as the Managing Director in his absolute discretion from time to time decide and notify to the Executive in writing. 5.3 The Executive may during the continuance of his employment be entitled to be paid bonuses of such amounts (if any) at such times and subject to such conditions as the Managing Director may in his discretion decide. 5.4 The Executive shall be entitled to be granted such share options in the share capital of the Company as decided by the Managing Director and/or the Board from time to time. The Company agrees initially to grant the Executive share options under the Company Scheme as set forth on the First ----- Schedule. It is the intention of the Company to grant the Executive -------- additional share options at a minimum of two (2) times the Executive's annual salary, at the earliest available opportunity under the Company Scheme and within the overall constraints of the rules and regulations of the London Stock Exchange regarding the granting of such share options. The Company agrees that the Executive shall be entitled to 5 retain all options granted until expiry date in the event of termination of the employment of the Executive without good cause. 6. INSURANCE --------- 6.1 Subject to his complying with and satisfying any applicable requirements of the relevant insurers the Company shall provide and pay for the provision to the Executive of comprehensive medical, dental and disability insurance in accordance with arrangements made between the Company and an insurance company mutually acceptable to the Company and the Executive. In addition, the Company shall provide and pay for the provision to the Executive of comprehensive travel, associated death and emergency medical insurance, including cover for emergency repatriation to the U.S.A. whilst the Executive is outside the U.S.A. on business at the bequest of the Company. 7. EXPENSES -------- 7.1 The Company shall during the continuance of his employment reimburse the Executive in respect of all reasonable traveling, accommodation, entertainment and other similar out-of-pocket expenses wholly, exclusively and necessarily incurred by him in or about the performance of his duties. 7.2 Except where specified to the contrary, all expenses shall be reimbursed in accordance with the expenses policies of the Company from time to time subject to the Executive providing appropriate evidence (including receipts, invoices, tickets and/or vouchers as may be appropriate) of the expenditure in respect of which he claims reimbursement. 7.3 During the continuance of his employment hereunder the Executive shall be paid a car allowance sufficient to enable the Executive to acquire, operate and maintain an automobile commensurate with the Executive's capacity which allowance shall accrue from day to day and be paid in arrears on the last day of each month, or if that is not a business day, on the immediately preceding business day. 8. HOLIDAYS -------- 8.1 The Executive shall (in addition to the usual public and bank holidays) be entitled during the continuance of his employment to twenty-five (25) working days' paid holiday in each calendar year to be taken at such times as shall have been approved by the Managing Director. 8.2 The Executive shall not be entitled to carry forward any annual holiday entitlement foregone by him for any reason during the calendar year in which it accrued without the prior written consent of the Managing Director. 6 8.3 Upon termination of his employment the Executive's entitlement to accrued holiday pay (which accrues at the rate of 2 days per month) shall be calculated on a pro rata basis in respect of each completed month of service in the calendar year in which his employment terminates and the appropriate amount shall be paid to the Executive provided that if the Executive shall have taken more days' holiday than his accrued entitlement the Company is hereby authorized to make an appropriate deduction from the Executive's final salary payment. 9. SICKNESS -------- 9.1 Subject to his complying with the Company's procedures relating to the notification and certification of periods of absence from work the Executive shall continue to be paid his salary during any periods of absence from work due to sickness, injury or other incapacity up to a maximum of twenty six (26) weeks in aggregate in any period of fifty two (52) consecutive weeks. 9.2 If the Executive shall have been absent from work due to sickness, injury or other incapacity for a continuous period in excess of twenty six (26) weeks, the Managing Director shall decide at his absolute discretion whether to terminate the Executive's employment, in which case the provisions of Clause 2.4 shall apply or continue to pay the Executive at fifty percent (50%) of his salary for an additional twenty six (26) weeks. In the event that the Executive's employment is terminated at the end of the additional twenty six (26) week period the provisions of Clause 2.4 shall still apply. 10. INTELLECTUAL PROPERTY --------------------- 10.1 Subject to the relevant provisions of the Patents Act 1977, the Registered Designs Act 1949 and the Copyright Designs and Patents Act 1988 if at any time in the course of his employment the Executive makes or discovers or participates in the making or discovery of any Intellectual Property relating to or capable of being used in the business of the Company or any Associated Company he shall immediately disclose full details of such Intellectual Property to the Company and at the request and expense of the Company he shall do all things which may be necessary or desirable for obtaining appropriate forms of protection for the Intellectual Property in such parts of the world as may be specified by the Company and for vesting all rights in the same in the Company or its nominees. 10.2 The Executive hereby irrevocably appoints the Company to be his attorney in his name and on his behalf to sign execute or do any instrument or thing and generally to use his name for the purpose of giving to the Company or its nominee the full benefit of the provisions of this Clause and in favour of any third party a certificate in writing signed by any director or the secretary of the Company that any instrument or act falls within the authority conferred by this Clause shall be conclusive evidence that such is the case. 7 10.3 The Executive hereby waives all of his moral rights (as defined in the Copyright Designs and Patents Act 1988) in respect of any acts of the Company or any acts of third parties done with the Company's authority in relation to any Intellectual Property which is the property of the Company by virtue of Clause 10.1. 10.4 All rights and obligations under this Clause in respect of Intellectual Property made or discovered by the Executive during his employment shall continue in full force and effect after the termination of his employment and shall be binding upon the Executive's personal representatives. 11. CONFIDENTIALITY --------------- 11.1 The Executive shall not (other than in the proper performance of his duties or without the prior written consent of the Managing Director or unless ordered by a court of competent jurisdiction) at any time either during the continuance of his employment of after its termination disclose or communicate to any person or use for his own benefit or the benefit of any person other than the Company or any Associated Company any benefits of any confidential information which may come to his knowledge in the course of his employment and the Executive shall during the continuance of his employment use his best endeavours to prevent the unauthorized publication or misuse of any confidential information provided that such restrictions shall cease to apply to any confidential information which may enter the public domain other than through the default of the Executive. 11.2 All notes and memoranda of any trade secret or confidential information concerning the business of the Company and the Associated Companies or any of its or their suppliers, agents, distributors, customers or others which shall have been acquired, received or made by the Executive during the course of his employment shall be the property of the Company and shall be surrendered by the Executive to someone duly authorized in that behalf at the termination of his employment or at the request of the Managing Director at any time during the course of his employment. 11.3 For the avoidance of doubt and without prejudice to the generality of Clauses 11.1 and 11.2 the following is a non-exhaustive list of matters which in relation to the Company and the Associated Companies are considered confidential and must be treated as such by the Executive: (a) any trade secrets of the Company or any Associated Company; (b) any information in respect of which the Company or any Associated Company is bound by an obligation of confidence to any third party; (c) customer lists and details of contacts with or requirements of customers; and 8 (d) any invention, technical data, know-how, instruction or operations manual or other manufacturing or trade secrets of the Group and their clients/customers. 12. TERMINATION OF EMPLOYMENT ------------------------- 12.1 The employment of the Executive may be terminated by the Company forthwith by notice in writing to the Executive if the Executive: (a) commits any material breach of any of the terms, conditions or stipulations contained in this Agreement; (b) is guilty of any serious negligence or gross misconduct in connection with or affecting the business or affairs of the Company or any Associated Company for which he is required to perform duties; (c) is guilty of conduct which brings or is likely to bring himself or the Company or any Associated Company into disrepute; (d) is convicted of an arrestable offence (other than an offence under the road traffic legislation in the United Kingdom or elsewhere for which a non-custodial penalty is imposed); (e) is adjudged bankrupt or makes any arrangement or composition with his creditors; or (f) becomes incapable by reason of mental disorder of discharging his duties. 12.2 [RESERVED] 12.3 The employment of the Executive may be terminated by the Company forthwith by twelve (12) months notice in writing to the Executive if the Executive is found unfit to perform his duties on the basis of a medical report supplied to the Company following his having undergone a medical examination pursuant to paragraph (i) of Clause 3.1. 12.4 The Executive may terminate his employment with the Company forthwith by notice in writing to the Company, if the Company commits any material breach of the terms, conditions or stipulations contained in this Agreement, in which case the provisions of Clause 2.4 shall still apply. 12.5 The employment of the Executive shall terminate automatically and without prior notice upon his attaining the age of 65. 9 12.6 If the Executive shall have been absent from work due to sickness, injury or other incapacity for periods in excess of 6 months in aggregate in any period of twelve consecutive months the Company may terminate his employment by giving to him not less than three months' notice in written expiring at any time. 12.7 Upon the termination of his employment (for whatever reason and howsoever arising) the Executive: (a) shall not take away, conceal or destroy but shall immediately deliver up to the Company all documents (which expression shall include but without limitation notes, memoranda, correspondence, drawings, sketches, plans, designs and any other material upon which data or information is recorded or stored) relating to the business or affairs of the Company or any Associated Company or any of their clients/customers, shareholders, employees, officers, suppliers, distributors and agents (and the Executive shall not be entitled to retain any copies or reproductions of any such documents) together with any other property belonging to the Company or any Associated Company which may then be in his possession or under his control; (b) shall at the request of the Managing Director immediately resign without claim or compensation from office as a director of any Associated Company and from any other office held by him in the Company or any Associated Company (but without prejudice to any claim he may have for damages for breach of this Agreement) and in the event of his failure to do so the Company is hereby irrevocably authorized to appoint some person in his name and on his behalf to sign and deliver such resignations to the Managing Director; (c) shall not at any time thereafter make any untrue or misleading oral or written statement concerning the business and affairs of the Company or any Associated Company nor represent himself or permit himself to be held out as being in any way connected with or interested in the business of the Company or any Associated Company (except as a former employee for the purpose of communicating with prospective employers or complying with any applicable statutory requirements); (d) shall not at any time thereafter use the name Alliance Resources or any name capable of confusion therewith (whether by using such names as part of a corporate name or otherwise); and (e) shall immediately repay all outstanding debts or loans due to the Company or any Associated Company and the Company is hereby authorized to deduct from any wages of the Executive a sum equal to any such debts or loans. 10 12.8 The following provisions will apply in the event of a Change in Control: (a) The Board recognizes that the Executive is one of several key employees whose high quality of job performance is essential to promoting and protecting the best interests of the Company and its shareholders. The Board further recognizes (i) that it is possible that a Change in Control of the Company could occur at some time in the future, (ii) that the uncertainty associated with such a possibility could result in the distraction of the Executive from his assigned duties and responsibilities, (iii) that it is in the best interest of the Company and its shareholders to assure the continued attention by the Executive to such duties and responsibilities without such distraction, and (iv) that the Executive must be able to participate in the assessment and evaluation of any proposal which could effect a Change in Control of the Company without the Executive being influenced in the exercise of his judgment by uncertainties regarding the Executive's future financial security. (b) A "Change in Control" of the Company shall occur if, after the date of this Agreement (i) any Unrelated Party (as hereinafter defined) becomes the beneficial owner, directly or indirectly, of thirty percent (30%) or more of the common stock of the Company issued and outstanding immediately prior to such acquisition and/or securities of the Company which may be converted into shares of common stock of the Company, computing such percentage as if such securities acquired had been converted and are issued and outstanding for the purpose of determining such percentage or, if any Unrelated Party is the beneficial owner of thirty percent (30%) or more of such securities at the date of this Agreement, such Unrelated Party acquires an additional ten percent (10%) of the shares of common stock of the Company and/or securities of the Company which may be converted into shares of common stock of the Company; (ii) the shareholders of the Company approve (x) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of the common stock of the Company are converted into cash, securities or other property, other than a merger of the Company in which the holders of the common stock of the Company immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger, or (y) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company, or (z) any plan or proposal for the liquidation or dissolution of the Company; 11 (iii) a majority of the Board ceases to consist of Continuing Directors. "Continuing Directors" shall mean members of the Board who either (1) are members of the Board at the date of this Agreement or (2) are nominated or appointed to serve as directors by a majority of the then Continuing Directors; or (iv) any tender or exchange offer is made to acquire thirty percent (30%) or more of the common stock of the Company, other than an offer made by the Company, and shares are acquired pursuant to that offer. (c) "Unrelated Party" shall mean any party or group of parties acting together; excluding, however, the Company, a subsidiary of the Company and any trustee under any employee benefit plan maintained by the Company. (d) Upon (x) the termination of the Executive by the Company without cause following a Change in Control of the Company or (y) the Executive's voluntary termination of employment for Good Reason following a Change in Control of the Company prior to expiration of the then effective two (2) year period of employment, then the Company shall provide to the Executive, within thirty (30) days after the applicable event, the following benefits: (i) in one lump sum a cash payment equal to 2.5 times (A) the Executive's annual salary as specified in this Agreement, and (B) aggregate bonuses and benefits for the preceding calendar year. (ii) to the extent permitted by applicable law, inclusion in the Company's life and medical plans as if the Executive were still employed by the Company until the earlier of two (2) years from the date of his termination or until the Executive obtains eligibility under comparable employee plans, with the Company paying that portion of the premium which it was paying for the Executive at the time of his termination. (e) Good Reason. "Good Reason" shall mean: ------------ (i) Without his express written consent, the assignment to the Executive of any duties inconsistent with his positions, duties, responsibilities and status with the Company as of the date of this Agreement or a change in his titles or offices as of same date, or any removal of the Executive from or any failure to re- elect the Executive to any of such positions, except in connection with the termination of his employment for cause or as a result of his 12 Disability or death, or termination by the Executive other than for Good Reason; (ii) Any reduction of the then-existing base salary or a reduction of more than ten percent (10%) in the aggregate value of any benefit plans without the prior written consent of the Executive, which is not remedied within ten (10) calendar days after receipt by the Company of written notice from the Executive of such change or reduction, as the case may be; (iii) A determination by the Executive made in good faith that as a result of a Change in Control of the Company and a change in circumstances thereafter significantly affecting his position, he has been rendered substantially unable to carry out, or has been substantially hindered in the performance of any of the authorities, powers, functions, responsibilities or duties attached to his position immediately prior to the Change in Control of the Company, which situation is not remedied within thirty (30) calendar days after receipt by the Company of written notice from the Executive of such determination; (iv) Failure by the Company to require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place; or (v) The Company shall relocate its principal executive office or require Executive to have his principal location of work or principal residence any location which is in excess of thirty miles from the location as of the date hereof; or (vi) Any material breach of this Agreement by the Company. 12.9 The Executive shall not be required to mitigate the amount of any payments or benefit provided by this Agreement nor shall the amounts of any payment or benefit provided for by this Agreement be reduced by any compensation earned by the Executive as a result of employment by the Company or another employer either before or after a Change in Control of the Company. 12.10 Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor shall anything herein limit or otherwise affect such 13 rights as the Executive may have under any other agreements with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company or any of its affiliated companies at or subsequent to the termination of employment hereunder shall be payable in accordance with such plan or program. 13. NOTICES ------- 13.1 Any notice to be given under this Agreement shall be given in writing and shall be deemed to be sufficiently served by one party on the other if it is delivered personally or is sent by registered or recorded delivery pre-paid post (air mail if overseas) addressed to either the Company's registered office for the time being or the Executive's last known address as the case may be. 13.2 Any notice sent by post shall be deemed (in the absence of evidence of earlier receipt) to be received 2 days after posting (6 days if sent air mail) and in proving the time such notice was sent it shall be sufficient to show that the envelope containing it was properly addressed stamped and posted. 13.3 Notwithstanding any other provision of this Agreement, no provision by virtue of which this Agreement or any agreement or arrangement of which it forms part is subject to registration under the Restrictive Trade Practices Act 1976 and 1977 ("RTPA") shall take effect until after particulars thereof have been furnished to the Director General of Fair Trading in accordance with the requirements of the RTPA. 14. MISCELLANEOUS ------------- 14.1 The Executive hereby warrants that by virtue of entering into this Agreement he will not be in breach of any express or implied terms of any contract or of any other obligation legally binding upon him. 14.2 Any benefits provided by the Company to the Executive or his family which are not expressly referred to in this Agreement shall be regarded as ex gratia benefits provided at the entire discretion of the Company and shall not form part of the Executive's contract of employment. 14.3 The Company shall be entitled at any time during the Executive's employment to make deductions from the Executive's salary or from any other sums due to the Executive from the Company or any Associated Company in respect of any overpayment of any kind made to the Executive or in respect of any debt or other sum due from him. 15. GENERAL PROVISIONS ------------------ 14 15.1 The headings in this Agreement are for convenience only and shall not affect its construction or interpretation. 15.2 References in this Agreement to Clauses and paragraphs and the Schedules are references to Clauses and paragraphs and the Schedules (which are hereby specifically incorporated in this Agreement) to this Agreement. 15.3 Any reference in this Agreement to the employment of the Executive is a reference to his employment by the Company whether or not during the currency of this Agreement. 15.4 Any reference in this Agreement to a person shall where the context permits include a reference to a body corporate and to any unincorporated body of persons. 15.5 Any word in this Agreement which denotes the singular shall where the context permits include the plural and vice versa and any word in this Agreement which denotes the masculine gender shall where the context permits include the feminine and/or the neuter genders and vice versa. 15.6 Any reference in this Agreement to a statutory provision shall be deemed to include a reference to any statutory amendment modification or re- enactment of it. 15.7 This Agreement contains the entire understanding between the parties and supersedes all (if any) subsisting agreements, arrangements and understandings relating to the employment of the Executive which such agreements, arrangements and understandings shall be deemed to have been terminated by mutual consent. 15.8 This Agreement is governed by and shall be construed in accordance with the laws of England and the parties to this Agreement hereby submit to the exclusive jurisdiction of the English courts. 15 IN WITNESS whereof this Agreement has been executed as a deed by the parties - ---------- hereto and is intended to be and is hereby delivered on the date first above written. Executed as a deed by John A. Keenan (Managing Director) } for ALLIANCE RESOURCES PLC in the presence of: } } } Signature -------------------------------- Name -------------------------------- Address -------------------------------- -------------------------------- Occupation -------------------------------- Signed as a deed by } FRANCIS M. MUNCHINSKI (Executive) } in the presence of: } } Signature -------------------------------- Name -------------------------------- Address -------------------------------- -------------------------------- Occupation -------------------------------- 16 THE FIRST SCHEDULE ------------------ One hundred seventy thousand (170,000) Ordinary Options to be issued at the closing mid-market price of Ordinary Shares on the date of grant of such options. Three hundred fifty thousand (350,000) Long Term Options exercisable upon the Company's share price increasing threefold during the 5-year exercise period of such options. All options are to be issued under the Company Share Option Scheme (No. 2) as adopted by the Company in general meeting on 4 May 1995. 17 EX-10.4 5 EXECUTIVE SERVICE AGREEMENT - ROBERT E. SCHULTE Exhibit 10.4 DATED AS OF DECEMBER 1, 1998 ---------------------------- (1) ALLIANCE RESOURCES PLC ---------------------- - and - (2) ROBERT E. SCHULTE ----------------- EXECUTIVE --------- SERVICE AGREEMENT ----------------- THIS AGREEMENT is made as of the 1st day of December, 1998 - -------------- BETWEEN: - -------- (1) ALLIANCE RESOURCES PLC, a company registered in England and Wales whose ---------------------- registered office is at Kingsbury House, 15-17 King Street, London SW1Y 6QU ("the Company"), and (2) ROBERT E. SCHULTE of TULSA, OKLAHOMA ("the Executive") WHEREAS (A) it has been agreed that the Executive is to be employed by the Company; and (B) it has been agreed that said employment of the Executive shall be on the terms and subject to the conditions hereinafter written; NOW, THEREFORE, THE PARTIES HERETO HAVE AGREED AND DO HEREBY AGREE AS FOLLOWS: 1. DEFINITIONS AND INTERPRETATION ------------------------------ 1.1 In this Agreement unless the context otherwise required words and phrases defined in Part XXVI of the Companies Act 1985 have the same meanings thereby attributed to them and the following expressions have the following meanings: "Associated Company" means any company which is a holding company or a subsidiary of the Company or a subsidiary of the Company's holding company; "the Board" means the Board of Directors present at a meeting of the directors of the Company at which a quorum is present but excluding the Executive; "Group" means the Company and the Associated Companies; "Intellectual Property" means patent trade marks, service marks, designs, utility models, design rights applications for registration of any of the foregoing and the right to apply for them in any part of the world, inventions, drawings, computer programs, Confidential Information, know- how and rights of like nature arising or subsisting anywhere in the world in relation to all of the foregoing whether registered or unregistered. 2 2. COMMENCEMENT AND TERM --------------------- 2.1 The Executive's employment began on or about September 20, 1997. 2.2 This Agreement is in substitution for and shall supersede all or any former and existing agreements or arrangements for the employment of the Executive by the Company or an Associated Company all of which shall be deemed to have been canceled with effect from the date of commencement of this Agreement. 2.3 The employment of the Executive shall (subject to the provisions of Clause 12) be for an initial fixed period of two (2) years from January 1, 1999 and shall automatically be extended without further action of either party for additional two (2) year periods, unless written notice of either party's intention not to extend has been given to the other party hereto at least three (3) months prior to the expiration of the then effective two (2) year period of employment. 2.4 On termination of the employment of the Executive at any time and for whatever reason and howsoever arising, including, but not limited to, termination of the employment of the Executive following his receipt of the notice provided in Clause 2.3, but subject to the provisions of Clause 12, the Company shall pay to the Executive in one lump sum on the day of such termination, a cash payment equal to twice (a) the Executive's annual salary as specified in this Agreement, and (b) aggregate bonuses and benefits for the preceding calendar year. 3. OBLIGATIONS DURING EMPLOYMENT ----------------------------- 3.1 The Executive shall during the continuance of his employment: (a) serve the Company to the best of his ability in the capacity of controller and shall perform such duties as are customary for a controller of comparable companies; (b) faithfully and diligently perform such duties and exercise such powers consistent with them as the Managing Director may from time to time properly assign to or confer upon him; (c) if and so long as the Managing Director so directs perform and exercise the said duties and powers on behalf of any Associated Company and act as a director or other officer of any Associated Company; (d) do all in his power to protect, promote, develop and extend the business interests and reputation of the Group; (e) at all times and in all respects conform to and comply with the business interests and reputation of the Group; 3 (f) promptly give to the Managing Director (in writing if so requested) all such information, explanations and assistance as he may require in connection with the business and affairs of the Company and any Associated Company for which he is required to perform duties; (g) unless prevented by sickness, injury or other incapacity or as otherwise agreed by the Managing Director devote the whole of his time, attention, and abilities during his hours or work (which shall be normal business hours and such additional hours as may be necessary for the proper performance of his duties) to the business and affairs of the Company and any Associated Company for which he is required to perform duties; (h) work at such place of business of the Company or any Associated Company within the United Kingdom and/or the United States as necessary for the proper performance and exercise of his duties and powers and in particular it is agreed that the Executive shall remain domiciled and receive payment for services rendered hereunder in the United States; and the Executive may be required to travel on the business of the Company and any Associated company (whether inside or outside the United Kingdom) for which he is required to perform duties; and (i) at such times as the Managing Director may reasonably request and at the expense of the Company undergo a medical examination by a doctor of the Company's choice. 3.2 Notwithstanding the foregoing or any other provision of the Agreement, the Company may at any time after the Executive has given notice to terminate this Agreement suspend the Executive and/or exclude him from all or any premises of the Company or any Associated Company for any period not exceeding (12) months provided that throughout such period the Executive's salary and other contractual benefits shall continue to be paid or provided by the Company. 4. FURTHER OBLIGATIONS OF THE EXECUTIVE ------------------------------------ 4.1 During the continuance of his employment the Executive shall devote his whole time and attention to his duties under this Agreement and shall not without the prior written consent of the Managing Director (such consent not to be unreasonably withheld or delayed) directly or indirectly carry on or be engaged, concerned or interested in any other business trade or occupation which is similar to or in competition with the business of the Company or any Associated Company otherwise than as a holder directly or through nominees of not more than five per cent in aggregated of any class of shares debentures or other securities in issue from time to time of any company which are for the time being quoted or dealt in on any recognized investment exchange (as defined by Section 207(1) of the Financial Services Act 1986). 4 4.2 The Executive shall during the continuance of his employment (and shall procure that his spouse or partner and his minor children shall comply) with all applicable rules of law, and stock exchange regulations (including the "Model Code" issued by the International Stock Exchange of the United Kingdom and the Republic of Ireland Limited) and codes of conduct of the Company for the time being in force in relation to dealings in shares, debentures or other securities of the Company or any Associated Company or any unpublished price sensitive information affecting the securities of any other company. 4.3 The Executive shall in relation to any dealings in securities of overseas companies comply with all laws of any foreign state affecting dealings in the securities of such companies and all regulations of any relevant stock exchanges on which such dealings take place. 4.4 During the continuance of his employment the Executive shall observe the terms of any policy issued by the Company in relation to any payment, rebate, discount, commission, vouchers, gift or other benefit obtained by him from any third party in respect of any business transacted or proposed to be transacted (whether or not by him) by or on behalf of the Company or any Associated Company. 5. REMUNERATION ------------ 5.1 The Company shall pay to the Executive during the continuance of his employment a salary (which shall accrue from day to day) at the rate of One Hundred Thousand U.S. Dollars (U.S. $100,000) per year. The salary shall be payable by equal bi-monthly installments in arrears on or about the 15th and 30th day of each calendar month. 5.2 The salary payable to the Executive under Clause 5.1 shall be reviewed on no less than an annual basis and may be increased by such amount as the Managing Director in his absolute discretion from time to time decide and notify to the Executive in writing. 5.3 The Executive may during the continuance of his employment be entitled to be paid bonuses of such amounts (if any) at such times and subject to such conditions as the Managing Director may in his discretion decide. 5.4 The Executive shall be entitled to be granted such share options in the share capital of the Company as decided by the Managing Director and/or the Board from time to time. The Company agrees initially to grant the Executive share options under the Company Scheme as set forth on the First ----- Schedule. It is the intention of the Company to grant the Executive -------- additional share options at a minimum of two (2) times the Executive's annual salary, at the earliest available opportunity under the Company Scheme and within the overall constraints of the rules and regulations of the London Stock Exchange regarding the granting of such share options. The Company agrees that the Executive shall be entitled to 5 retain all options granted until expiry date in the event of termination of the employment of the Executive without good cause. 6. INSURANCE --------- 6.1 Subject to his complying with and satisfying any applicable requirements of the relevant insurers the Company shall provide and pay for the provision to the Executive of comprehensive medical, dental and disability insurance in accordance with arrangements made between the Company and an insurance company mutually acceptable to the Company and the Executive. In addition, the Company shall provide and pay for the provision to the Executive of comprehensive travel, associated death and emergency medical insurance, including cover for emergency repatriation to the U.S.A. whilst the Executive is outside the U.S.A. on business at the bequest of the Company. 7. EXPENSES -------- 7.1 The Company shall during the continuance of his employment reimburse the Executive in respect of all reasonable traveling, accommodation, entertainment and other similar out-of-pocket expenses wholly, exclusively and necessarily incurred by him in or about the performance of his duties. 7.2 Except where specified to the contrary, all expenses shall be reimbursed in accordance with the expenses policies of the Company from time to time subject to the Executive providing appropriate evidence (including receipts, invoices, tickets and/or vouchers as may be appropriate) of the expenditure in respect of which he claims reimbursement. 7.3 During the continuance of his employment hereunder the Executive shall be paid a car allowance sufficient to enable the Executive to acquire, operate and maintain an automobile commensurate with the Executive's capacity which allowance shall accrue from day to day and be paid in arrears on the last day of each month, or if that is not a business day, on the immediately preceding business day. 8. HOLIDAYS -------- 8.1 The Executive shall (in addition to the usual public and bank holidays) be entitled during the continuance of his employment to twenty-five (25) working days' paid holiday in each calendar year to be taken at such times as shall have been approved by the Managing Director. 8.2 The Executive shall not be entitled to carry forward any annual holiday entitlement foregone by him for any reason during the calendar year in which it accrued without the prior written consent of the Managing Director. 6 8.3 Upon termination of his employment the Executive's entitlement to accrued holiday pay (which accrues at the rate of 2 days per month) shall be calculated on a pro rata basis in respect of each completed month of service in the calendar year in which his employment terminates and the appropriate amount shall be paid to the Executive provided that if the Executive shall have taken more days' holiday than his accrued entitlement the Company is hereby authorized to make an appropriate deduction from the Executive's final salary payment. 9. SICKNESS -------- 9.1 Subject to his complying with the Company's procedures relating to the notification and certification of periods of absence from work the Executive shall continue to be paid his salary during any periods of absence from work due to sickness, injury or other incapacity up to a maximum of twenty six (26) weeks in aggregate in any period of fifty two (52) consecutive weeks. 9.2 If the Executive shall have been absent from work due to sickness, injury or other incapacity for a continuous period in excess of twenty six (26) weeks, the Managing Director shall decide at his absolute discretion whether to terminate the Executive's employment, in which case the provisions of Clause 2.4 shall apply or continue to pay the Executive at fifty percent (50%) of his salary for an additional twenty six (26) weeks. In the event that the Executive's employment is terminated at the end of the additional twenty six (26) week period the provisions of Clause 2.4 shall still apply. 10. INTELLECTUAL PROPERTY --------------------- 10.1 Subject to the relevant provisions of the Patents Act 1977, the Registered Designs Act 1949 and the Copyright Designs and Patents Act 1988 if at any time in the course of his employment the Executive makes or discovers or participates in the making or discovery of any Intellectual Property relating to or capable of being used in the business of the Company or any Associated Company he shall immediately disclose full details of such Intellectual Property to the Company and at the request and expense of the Company he shall do all things which may be necessary or desirable for obtaining appropriate forms of protection for the Intellectual Property in such parts of the world as may be specified by the Company and for vesting all rights in the same in the Company or its nominees. 10.2 The Executive hereby irrevocably appoints the Company to be his attorney in his name and on his behalf to sign execute or do any instrument or thing and generally to use his name for the purpose of giving to the Company or its nominee the full benefit of the provisions of this Clause and in favour of any third party a certificate in writing signed by any director or the secretary of the Company that any instrument or act falls within the authority conferred by this Clause shall be conclusive evidence that such is the case. 7 10.3 The Executive hereby waives all of his moral rights (as defined in the Copyright Designs and Patents Act 1988) in respect of any acts of the Company or any acts of third parties done with the Company's authority in relation to any Intellectual Property which is the property of the Company by virtue of Clause 10.1. 10.4 All rights and obligations under this Clause in respect of Intellectual Property made or discovered by the Executive during his employment shall continue in full force and effect after the termination of his employment and shall be binding upon the Executive's personal representatives. 11. CONFIDENTIALITY --------------- 11.1 The Executive shall not (other than in the proper performance of his duties or without the prior written consent of the Managing Director or unless ordered by a court of competent jurisdiction) at any time either during the continuance of his employment of after its termination disclose or communicate to any person or use for his own benefit or the benefit of any person other than the Company or any Associated Company any benefits of any confidential information which may come to his knowledge in the course of his employment and the Executive shall during the continuance of his employment use his best endeavours to prevent the unauthorized publication or misuse of any confidential information provided that such restrictions shall cease to apply to any confidential information which may enter the public domain other than through the default of the Executive. 11.2 All notes and memoranda of any trade secret or confidential information concerning the business of the Company and the Associated Companies or any of its or their suppliers, agents, distributors, customers or others which shall have been acquired, received or made by the Executive during the course of his employment shall be the property of the Company and shall be surrendered by the Executive to someone duly authorized in that behalf at the termination of his employment or at the request of the Managing Director at any time during the course of his employment. 11.3 For the avoidance of doubt and without prejudice to the generality of Clauses 11.1 and 11.2 the following is a non-exhaustive list of matters which in relation to the Company and the Associated Companies are considered confidential and must be treated as such by the Executive: (a) any trade secrets of the Company or any Associated Company; (b) any information in respect of which the Company or any Associated Company is bound by an obligation of confidence to any third party; (c) customer lists and details of contacts with or requirements of customers; and 8 (d) any invention, technical data, know-how, instruction or operations manual or other manufacturing or trade secrets of the Group and their clients/customers. 12. TERMINATION OF EMPLOYMENT ------------------------- 12.1 The employment of the Executive may be terminated by the Company forthwith by notice in writing to the Executive if the Executive: (a) commits any material breach of any of the terms, conditions or stipulations contained in this Agreement; (b) is guilty of any serious negligence or gross misconduct in connection with or affecting the business or affairs of the Company or any Associated Company for which he is required to perform duties; (c) is guilty of conduct which brings or is likely to bring himself or the Company or any Associated Company into disrepute; (d) is convicted of an arrestable offence (other than an offence under the road traffic legislation in the United Kingdom or elsewhere for which a non-custodial penalty is imposed); (e) is adjudged bankrupt or makes any arrangement or composition with his creditors; or (f) becomes incapable by reason of mental disorder of discharging his duties. 12.2 [RESERVED] 12.3 The employment of the Executive may be terminated by the Company forthwith by twelve (12) months notice in writing to the Executive if the Executive is found unfit to perform his duties on the basis of a medical report supplied to the Company following his having undergone a medical examination pursuant to paragraph (i) of Clause 3.1. 12.4 The Executive may terminate his employment with the Company forthwith by notice in writing to the Company, if the Company commits any material breach of the terms, conditions or stipulations contained in this Agreement, in which case the provisions of Clause 2.4 shall still apply. 12.5 The employment of the Executive shall terminate automatically and without prior notice upon his attaining the age of 65. 9 12.6 If the Executive shall have been absent from work due to sickness, injury or other incapacity for periods in excess of 6 months in aggregate in any period of twelve consecutive months the Company may terminate his employment by giving to him not less than three months' notice in written expiring at any time. 12.7 Upon the termination of his employment (for whatever reason and howsoever arising) the Executive: (a) shall not take away, conceal or destroy but shall immediately deliver up to the Company all documents (which expression shall include but without limitation notes, memoranda, correspondence, drawings, sketches, plans, designs and any other material upon which data or information is recorded or stored) relating to the business or affairs of the Company or any Associated Company or any of their clients/customers, shareholders, employees, officers, suppliers, distributors and agents (and the Executive shall not be entitled to retain any copies or reproductions of any such documents) together with any other property belonging to the Company or any Associated Company which may then be in his possession or under his control; (b) shall at the request of the Managing Director immediately resign without claim or compensation from office as a director of any Associated Company and from any other office held by him the in Company or any Associated Company (but without prejudice to any claim he may have for damages for breach of this Agreement) and in the event of his failure to do so the Company is hereby irrevocably authorized to appoint some person in his name and on his behalf to sign and deliver such resignations to the Managing Director; (c) shall not at any time thereafter make any untrue or misleading oral or written statement concerning the business and affairs of the Company or any Associated Company nor represent himself or permit himself to be held out as being in any way connected with or interested in the business of the Company or any Associated Company (except as a former employee for the purpose of communicating with prospective employers or complying with any applicable statutory requirements); (d) shall not at any time thereafter use the name Alliance Resources or any name capable of confusion therewith (whether by using such names as part of a corporate name or otherwise); and (e) shall immediately repay all outstanding debts or loans due to the Company or any Associated Company and the Company is hereby authorized to deduct from any wages of the Executive a sum equal to any such debts or loans. 10 12.8 The following provisions will apply in the event of a Change in Control: (a) The Board recognizes that the Executive is one of several key employees whose high quality of job performance is essential to promoting and protecting the best interests of the Company and its shareholders. The Board further recognizes (i) that it is possible that a Change in Control of the Company could occur at some time in the future, (ii) that the uncertainty associated with such a possibility could result in the distraction of the Executive from his assigned duties and responsibilities, (iii) that it is in the best interest of the Company and its shareholders to assure the continued attention by the Executive to such duties and responsibilities without such distraction, and (iv) that the Executive must be able to participate in the assessment and evaluation of any proposal which could effect a Change in Control of the Company without the Executive being influenced in the exercise of his judgment by uncertainties regarding the Executive's future financial security. (b) A "Change in Control" of the Company shall occur if, after the date of this Agreement (i) any Unrelated Party (as hereinafter defined) becomes the beneficial owner, directly or indirectly, of thirty percent (30%) or more of the common stock of the Company issued and outstanding immediately prior to such acquisition and/or securities of the Company which may be converted into shares of common stock of the Company, computing such percentage as if such securities acquired had been converted and are issued and outstanding for the purpose of determining such percentage or, if any Unrelated Party is the beneficial owner of thirty percent (30%) or more of such securities at the date of this Agreement, such Unrelated Party acquires an additional ten percent (10%) of the shares of common stock of the Company and/or securities of the Company which may be converted into shares of common stock of the Company; (ii) the shareholders of the Company approve (x) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of the common stock of the Company are converted into cash, securities or other property, other than a merger of the Company in which the holders of the common stock of the Company immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger, or (y) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company, or (z) any plan or proposal for the liquidation or dissolution of the Company; 11 (iii) a majority of the Board ceases to consist of Continuing Directors. "Continuing Directors" shall mean members of the Board who either (1) are members of the Board at the date of this Agreement or (2) are nominated or appointed to serve as directors by a majority of the then Continuing Directors; or (iv) any tender or exchange offer is made to acquire thirty percent (30%) or more of the common stock of the Company, other than an offer made by the Company, and shares are acquired pursuant to that offer. (c) "Unrelated Party" shall mean any party or group of parties acting together; excluding, however, the Company, a subsidiary of the Company and any trustee under any employee benefit plan maintained by the Company. (d) Upon (x) the termination of the Executive by the Company without cause following a Change in Control of the Company or (y) the Executive's voluntary termination of employment for Good Reason following a Change in Control of the Company prior to expiration of the then effective two (2) year period of employment, then the Company shall provide to the Executive, within thirty (30) days after the applicable event, the following benefits: (i) in one lump sum a cash payment equal to 2.5 times (A) the Executive's annual salary as specified in this Agreement, and (B) aggregate bonuses and benefits for the preceding calendar year. (ii) to the extent permitted by applicable law, inclusion in the Company's life and medical plans as if the Executive were still employed by the Company until the earlier of two (2) years from the date of his termination or until the Executive obtains eligibility under comparable employee plans, with the Company paying that portion of the premium which it was paying for the Executive at the time of his termination. (e) Good Reason. "Good Reason" shall mean: ------------ (i) Without his express written consent, the assignment to the Executive of any duties inconsistent with his positions, duties, responsibilities and status with the Company as of the date of this Agreement or a change in his titles or offices as of same date, or any removal of the Executive from or any failure to re-elect the Executive to any of such positions, except in connection with the termination of his employment for cause or as a result of his 12 Disability or death, or termination by the Executive other than for Good Reason; (ii) Any reduction of the then-existing base salary or a reduction of more than ten percent (10%) in the aggregate value of any benefit plans without the prior written consent of the Executive, which is not remedied within ten (10) calendar days after receipt by the Company of written notice from the Executive of such change or reduction, as the case may be; (iii) A determination by the Executive made in good faith that as a result of a Change in Control of the Company and a change in circumstances thereafter significantly affecting his position, he has been rendered substantially unable to carry out, or has been substantially hindered in the performance of any of the authorities, powers, functions, responsibilities or duties attached to his position immediately prior to the Change in Control of the Company, which situation is not remedied within thirty (30) calendar days after receipt by the Company of written notice from the Executive of such determination; (iv) Failure by the Company to require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place; or (v) The Company shall relocate its principal executive office or require Executive to have his principal location of work or principal residence any location which is in excess of thirty miles from the location as of the date hereof; or (vi) Any material breach of this Agreement by the Company. 12.9 The Executive shall not be required to mitigate the amount of any payments or benefit provided by this Agreement nor shall the amounts of any payment or benefit provided for by this Agreement be reduced by any compensation earned by the Executive as a result of employment by the Company or another employer either before or after a Change in Control of the Company. 12.10 Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor shall anything herein limit or otherwise affect such 13 rights as the Executive may have under any other agreements with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company or any of its affiliated companies at or subsequent to the termination of employment hereunder shall be payable in accordance with such plan or program. 13. NOTICES ------- 13.1 Any notice to be given under this Agreement shall be given in writing and shall be deemed to be sufficiently served by one party on the other if it is delivered personally or is sent by registered or recorded delivery pre- paid post (air mail if overseas) addressed to either the Company's registered office for the time being or the Executive's last known address as the case may be. 13.2 Any notice sent by post shall be deemed (in the absence of evidence of earlier receipt) to be received 2 days after posting (6 days if sent air mail) and in proving the time such notice was sent it shall be sufficient to show that the envelope containing it was properly addressed stamped and posted. 13.3 Notwithstanding any other provision of this Agreement, no provision by virtue of which this Agreement or any agreement or arrangement of which it forms part is subject to registration under the Restrictive Trade Practices Act 1976 and 1977 ("RTPA") shall take effect until after particulars thereof have been furnished to the Director General of Fair Trading in accordance with the requirements of the RTPA. 14. MISCELLANEOUS ------------- 14.1 The Executive hereby warrants that by virtue of entering into this Agreement he will not be in breach of any express or implied terms of any contract or of any other obligation legally binding upon him. 14.2 Any benefits provided by the Company to the Executive or his family which are not expressly referred to in this Agreement shall be regarded as ex gratia benefits provided at the entire discretion of the Company and shall not form part of the Executive's contract of employment. 14.3 The Company shall be entitled at any time during the Executive's employment to make deductions from the Executive's salary or from any other sums due to the Executive from the Company or any Associated Company in respect of any overpayment of any kind made to the Executive or in respect of any debt or other sum due from him. 15. GENERAL PROVISIONS ------------------ 14 15.1 The headings in this Agreement are for convenience only and shall not affect its construction or interpretation. 15.2 References in this Agreement to Clauses and paragraphs and the Schedules are references to Clauses and paragraphs and the Schedules (which are hereby specifically incorporated in this Agreement) to this Agreement. 15.3 Any reference in this Agreement to the employment of the Executive is a reference to his employment by the Company whether or not during the currency of this Agreement. 15.4 Any reference in this Agreement to a person shall where the context permits include a reference to a body corporate and to any unincorporated body of persons. 15.5 Any word in this Agreement which denotes the singular shall where the context permits include the plural and vice versa and any word in this Agreement which denotes the masculine gender shall where the context permits include the feminine and/or the neuter genders and vice versa. 15.6 Any reference in this Agreement to a statutory provision shall be deemed to include a reference to any statutory amendment modification or re- enactment of it. 15.7 This Agreement contains the entire understanding between the parties and supersedes all (if any) subsisting agreements, arrangements and understandings relating to the employment of the Executive which such agreements, arrangements and understandings shall be deemed to have been terminated by mutual consent. 15.8 This Agreement is governed by and shall be construed in accordance with the laws of England and the parties to this Agreement hereby submit to the exclusive jurisdiction of the English courts. 15 IN WITNESS whereof this Agreement has been executed as a deed by the parties - ---------- hereto and is intended to be and is hereby delivered on the date first above written. Executed as a deed by John A. Keenan (Managing Director) } for ALLIANCE RESOURCES PLC in the presence of: } } } Signature ------------------------------ Name ------------------------------ Address ------------------------------ ------------------------------ Occupation ------------------------------ Signed as a deed by } ROBERT E. SCHULTE (Executive) } in the presence of: } } Signature ------------------------------ Name ------------------------------ Address ------------------------------ ------------------------------ Occupation ------------------------------ 16 THE FIRST SCHEDULE - ------------------ Eighty-five thousand (85,000) Ordinary Options to be issued at the closing mid- market price of Ordinary Shares on the date of grant of such options. Two hundred thousand (200,000) Long Term Options exercisable upon the Company's share price increasing threefold during the 5-year exercise period of such options. All options are to be issued under the Company Share Option Scheme (No. 2) as adopted by the Company in general meeting on 4 May 1995. 17 EX-10.6 6 1ST AMENDMENT TO THE PURCHASE AGREEMENT, 07/30/99 Exhibit 10.6 FIRST AMENDMENT TO PURCHASE AGREEMENT THIS FIRST AMENDMENT TO PURCHASE AGREEMENT (this "Amendment") is made as of the 30/th/ day of July, 1999 among Alliance Resources PLC, a public limited company organized under the laws of England and Wales (the "Company"), and EnCap Equity 1996 Limited Partnership, a Texas limited partnership ("EnCap LP"), and Energy Capital Investment Company PLC, an English investment company ("ECIC") (with EnCap LP and ECIC sometimes being herein collectively called "Buyer"). W I T N E S S E T H: WHEREAS, the Company, EnCap LP and ECIC entered into that certain Purchase Agreement dated as of October 27, 1998 (the "Original Agreement") for the purposes and consideration therein expressed, pursuant to which Buyer purchased the Securities; and WHEREAS, the Company, EnCap LP and ECIC desire to amend the Original Agreement to reflect certain changes in the ownership of the capital stock of certain Subsidiaries of the Company, with the result being that Difco is the owner of all of the outstanding capital stock of Alliance Resources (Delaware), Inc., a newly formed Delaware corporation, which in turn is the owner of all of the outstanding capital stock of Alliance Group and LRI; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein and in the Original Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto do hereby agree as follows: ARTICLE I. -- Definitions and References -------------------------- (S) 1.1. Terms Defined in the Original Agreement. Unless the context --------------------------------------- otherwise requires or unless otherwise expressly defined herein, the terms defined in the Original Agreement shall have the same meanings whenever used in this Amendment. (S) 1.2. Other Defined Terms. Unless the context otherwise requires, the ------------------- following terms when used in this Amendment shall have the meanings assigned to them in this (S) 1.2. "Amendment" means this First Amendment to Purchase Agreement. --------- "Amendment Documents" means this Amendment, the Consent and Agreement ------------------- of Subsidiary Guarantors attached hereto, the Subsidiary Guaranty of even date herewith by Alliance Resources (Delaware), Inc. in favor of EnCap LP and ECIC and the other documents to be delivered pursuant to Section 3.1(c). "Purchase Agreement" means the Original Agreement as amended hereby. ------------------ 1 ARTICLE II. -- Amendments to Original Agreement -------------------------------- (S) 2.1. Defined Terms. The definitions of "Change of Control", "Key ------------- Employment Agreements", "Senior Credit Facility" and "Subsidiary Guarantors" set forth in Section 1.1 of the Original Agreement are hereby amended in their entirety to read as follows: "Change of Control" means the occurrence of any of the following events: (a) any Person or two or more Persons, other than Buyer or any affiliate of Buyer, acting as a group shall acquire beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Exchange Act, and including holding proxies to vote for the election of directors other than proxies held by the Company's management or their designees to be voted in favor of persons nominated by the Company's Board of Directors) of 33% or more of the outstanding voting securities of the Company, measured by voting power (including both ordinary shares and any preferred stock or other equity securities entitling the holders thereof to vote with the holders of common stock in elections for directors of the Company), exclusive of the issuance of ordinary shares contemplated under this Agreement, (b) the Company shall fail beneficially to own 100% of the outstanding shares of voting capital stock of Manx or Difco on a fully-diluted basis, (c) Difco shall fail beneficially to own 100% of the outstanding shares of voting capital stock of Alliance Delaware on a fully-diluted basis, (d) Alliance Delaware shall fail beneficially to own 100 % of the outstanding shares of voting capital stock of Alliance Group and LRI on a fully-diluted basis, (e) LRI shall fail beneficially to own 100% of the outstanding shares of the voting capital stock of LPC, GOCA, New GOC or Enpro, on a fully-diluted basis, (f) Alliance Group shall fail beneficially to own 100% of the outstanding shares of the voting capital stock of Source, ARNO, ARCOL or Alliance USA, (g) one-third or more of the directors of the Company shall consist of persons not nominated by the Company's Board of Directors (not including as Board nominees any directors which the Board is obligated to nominate pursuant to shareholders agreements, voting trust arrangements or similar arrangements) or (h) within three years of the Closing Date, the employment by the Company of John Keenan or Paul Fenemore terminates for any reason. "Key Employment Agreements" means (i) that certain Executive Service Agreement dated October 5, 1996 between the Company and John A. Keenan, as amended by Supplemental Agreement dated October 15, 1996 and Second Supplemental Agreement dated December 1, 1998, and (ii) that certain Service Agreement dated September 20, 1996 between the Company and Paul Raymond Fenemore, as amended by Supplemental Agreement dated September 20, 1996 and Second Supplemental Agreement dated December 1, 1998. "Senior Credit Facility" means that certain Third Amended and Restated Credit Agreement dated October 27, 1998 by and among the Company, Alliance USA, GOCA, LPC, New GOC and Source and Bank of America National Trust and Savings Association, as amended by that certain First Amendment to Third Amended and Restated Credit Agreement dated July 30, 1999. 2 "Subsidiary Guarantors" means Difco, Alliance Delaware, Alliance Group, Alliance USA, Source, LRI, LPC, GOCA, New GOC and Enpro. Section 1.1 of the Original Agreement is hereby amended by adding a new definition of "Alliance Delaware" immediately following the definition of "affiliate", to read as follows: "Alliance Delaware" means Alliance Resources (Delaware), Inc., a Delaware corporation. (S) 2.2 Consent to Changes in Stock Ownership. Buyer hereby consents to ------------------------------------- the changes in stock ownership among the Company and certain of its Subsidiaries, whereby Difco became the owner of all of the outstanding capital stock of Alliance Resources (Delaware), Inc., a newly formed Delaware corporation, which in turn became the owner of all of the outstanding capital stock of Alliance Group and LRI, and waives any Default or Event of Default under Sections 10.9, 11.3, 11.5 or 11.6 of the Purchase Agreement caused thereby. (S) 2.3 Consent to Amendment of Senior Credit Facility. Buyer hereby ---------------------------------------------- consents to an amendment to the Senior Credit Facility of even date herewith, substantially in the form of the final draft furnished to Buyer. (S) 2.4 Waiver re: Untimely Delivery of Financial Information. The ----------------------------------------------------- Company previously failed to timely deliver certain financial information in respect of the Fiscal Quarters ended October 31, 1998 and January 31, 1999, as required in Section 10.2 (b) of the Purchase Agreement. Buyer hereby confirms that such information, for such periods, was subsequently delivered to Buyer, and Buyer hereby waives such failure to timely deliver such information and any Default related thereto. (S) 2.5 Buyer Acknowledgment and Agreement re: East Irish Sea Asset Write ----------------------------------------------------------------- Down. As a result of an SEC ceiling test calculation, the Company is required - ---- to write down the cost of the East Irish Sea Assets to approximately $2.5 million for U.S. financial reporting purposes, with such write down being recognized in the Fiscal Year ended April 30, 1999 (the "Required Write Down"). Buyer hereby acknowledges and agrees that the Required Write Down does not, in and of itself, constitute a Material Adverse Effect. ARTICLE III. -- Conditions of Effectiveness --------------------------- (S) 3.1. Effective Date. This Amendment shall become effective as of the -------------- date first above written when and only when the Company will deliver the following documents to Buyer: (a) This Amendment, duly executed by the Company and each Subsidiary Guarantor. (b) The Subsidiary Guarantee of Alliance Delaware, duly executed by Alliance Delaware. (c) Certified copy of a written consent or resolutions of the Board of Directors of the Company and the Subsidiary Guarantors authorizing the execution, delivery and 3 performance by the Company and the Subsidiary Guarantors of this Amendment and the Amendment Documents, as necessary. (d) An Omnibus Certificate, substantially in the form of the omnibus certificates delivered by the Company and Subsidiary Guarantors at Closing, with respect to Alliance Delaware, with attached accurate and complete copies of Alliance Delaware's Organic Documents, the consent or resolutions described in clause (c) above, and indicating the incumbency and specimen signatures of officers executing the Amendment and Ancillary Documents on behalf of Alliance Delaware. (e) Certificate of existence and good standing with respect to Alliance Delaware, dated within a number of days prior to the date hereof reasonably acceptable to Buyer. (f) Such other certificates, instruments, and documents as may be reasonably requested by Buyer prior to the date hereof to carry out the intent and purposes of this Amendment. ARTICLE IV. -- Representations and Warranties ------------------------------ (S) 4.1. Representations and Warranties of the Company. To confirm --------------------------------------------- Buyer's understanding concerning the Company's and its Subsidiaries' businesses, properties and obligations, and to induce Buyer to enter into this Amendment, the Company represents and warrants to Buyer that: (a) (i) All the representations and warranties of the Company and its Subsidiaries contained in the Purchase Agreement and Ancillary Documents are true and correct in all material respects on and as of the date hereof as if made on and as of such date, except as affected by transactions permitted thereby, and except to the extent that any such representation or warranty is made as of a specified date, in which case such representation or warranty shall have been true and correct in all material respects as of such specified date (for the sole purpose of determining whether or not any of such representations and warranties are true and correct as aforesaid on and as of the date hereof, no effect shall be given to any materiality qualification contained in such representation or warranty), (ii) the Company and its Subsidiaries have performed and complied with in all material respects all covenants and agreements contained in the Purchase Agreement and Ancillary Documents, and (iii) no Default or Event of Default has occurred. (b) The Company and each Subsidiary Guarantor has full power and authority to execute and deliver the Amendment Documents and to perform their obligations thereunder, to the extent a party thereto, and to consummate the transactions contemplated hereby and thereby. The execution, delivery, and performance by the Company and each Subsidiary Guarantor of the Amendment Documents, to the extent a party thereto, and the consummation by it of the transactions contemplated hereby and thereby, have been duly authorized by all necessary actions of the Company and each Subsidiary Guarantor. The Amendment Documents have been duly executed and 4 delivered by the Company and each Subsidiary Guarantor, to the extent a party thereto, and constitute, a valid and legally binding obligation of the Company and each Subsidiary Guarantor, enforceable against the Company and each Subsidiary Guarantor in accordance with their respective terms, except that such enforceability may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium, and similar laws affecting creditors' rights generally and (ii) equitable principles which may limit the availability of certain equitable remedies (such as specific performance) in certain instances. (c) The execution, delivery and performance of the Amendment Documents by the Company and each Subsidiary Guarantor, to the extent a party thereto, and the consummation by them of the transactions contemplated hereby and thereby do not and will not (a) violate or conflict with the Organic Documents of the Company or any Subsidiary, (b) conflict with or result in any violation of any provision of, or constitute (with or without the giving of notice or the passage of time or both) a default under, or give rise (with or without the giving of notice or the passage of time or both) to any right of termination, cancellation, or acceleration under, or require any consent, approval, authorization or waiver of, or notice to, any party to, any bond, debenture, note, mortgage, indenture, lease, contract, agreement, or other instrument or obligation to which the Company or any Subsidiary is a party or by which the Company or any Subsidiary or any of their respective properties may be bound or any Permit held by the Company or any Subsidiary, (iii) result in the creation or imposition of any Lien upon the properties of the Company or any Subsidiary (other than as provided in the Senior Credit Facility) or (iv) violate any Applicable Law binding upon the Company or any Subsidiary. (d) No consent, approval, authorization, license, order or permit of, or declaration, filing or registration with, or notification to, any Governmental Entity, or any other Person or entity, is required to be made or obtained by the Company or any Subsidiary in connection with the execution, delivery and performance of the Amendment Documents and the consummation of the transactions contemplated hereby and thereby. ARTICLE V. -- Miscellaneous ------------- (S) 5.1. Ratification of Agreements. The Original Agreement as hereby -------------------------- amended is hereby ratified and confirmed in all respects. The Purchase Agreement and Ancillary Documents, as they may be amended or affected by the various Amendment Documents, are hereby ratified and confirmed in all respects. Any reference to the Purchase Agreement in any Ancillary Document shall be deemed to refer to this Amendment also, and any reference in the Purchase Agreement or any Ancillary Document to any other document or instrument amended, renewed, extended or otherwise affected by any Amendment Document shall also refer to such Amendment Document. The execution, delivery and effectiveness of this Amendment and the other Amendment Documents shall not, except as expressly provided herein or therein, operate as a waiver of any right, power or remedy of Buyer under the Purchase Agreement or any Ancillary Document nor constitute a waiver of any provision of the Purchase Agreement or any Ancillary Document. 5 (S) 5.2. Survival of Agreements. All representations, warranties, ---------------------- covenants and agreements of the Company herein shall survive the execution and delivery of this Amendment and the performance hereof, and shall further survive until all of the Obligations are paid in full. All statements and agreements contained in any certificate or instrument delivered by the Company or any Subsidiary Guarantor hereunder or under the Purchase Agreement to Buyer shall be deemed to constitute representations and warranties by, or agreements and covenants of, the Company under this Amendment and under the Purchase Agreement. (S) 5.3. Ancillary Documents. This Amendment and the other Amendment ------------------- Documents are each an Ancillary Document, and all provisions in the Purchase Agreement pertaining to Ancillary Documents apply hereto and thereto. (S) 5.4. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED ------------- AND ENFORCED IN ACCORDANCE WITH THE LAWS OF ENGLAND AND WALES, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF. (S) 5.5. Entire Agreement. This Agreement, together with the Schedules and ---------------- other writings referred to herein or delivered pursuant hereto, constitute the entire agreement between the parties hereto with respect to the subject matter hereof and supersede all prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof. (S) 5.6. Counterparts. This Amendment may be separately executed in ------------ counterparts and by the different parties hereto in separate counterparts, each of which when so executed shall be deemed to constitute one and the same Amendment. IN WITNESS WHEREOF, this Amendment is executed as of the date first above written. ENCAP EQUITY 1996 LIMITED PARTNERSHIP By: ENCAP INVESTMENTS L.C., General Partner By: ----------------------------------------------- Gary R. Peterson, Managing Director ENERGY CAPITAL INVESTMENT COMPANY PLC By: ----------------------------------------------- Gary R. Peterson, Director ALLIANCE RESOURCES PLC By: ----------------------------------------------- Francis M. Munchinski, Authorized Signatory 6 CONSENT AND AGREEMENT The undersigned hereby (i) consents to the execution and delivery of (a) that certain First Amendment to Purchase Agreement (the "Amendment") by and among Alliance Resources PLC, a public limited company organized under the laws of England and Wales (the "Company"), and EnCap Equity 1996 Limited Partnership, a Texas limited partnership ("EnCap LP"), and Energy Capital Investment Company PLC, an English investment company ("ECIC") (with EnCap LP and ECIC sometimes being herein collectively called "Buyer"), amending the Purchase Agreement (as defined in the Amendment), and (b) the other documents and instruments executed in connection therewith, including without limitation the execution and delivery of the other Amendment Documents, and to the provisions and transactions contemplated therein, and (ii) ratifies and confirms that its Subsidiary Guarantee and any other security or other documents, agreements or instruments (collectively, the "Security Documents") delivered by it to Buyer in connection with the Purchase Agreement or any transaction contemplated therein and agree that all of its respective obligations and covenants thereunder (to the extent it is a party thereto) shall remain unimpaired by the execution and delivery of the Amendment and the other documents and instruments executed in connection therewith and that the Security Documents to which it is a party shall remain in full force and effect. IN WITNESS WHEREOF, this Consent and Agreement is executed by the undersigned as of July 30, 1999. DIFCO LIMITED By:--------------------------------------------- Francis M. Munchinski Authorized Signatory ALLIANCE RESOURCES GROUP, INC. ALLIANCE RESOURCES (USA), INC. SOURCE PETROLEUM, INC. LATEX RESOURCES, INC. LATEX PETROLEUM CORPORATION LATEX/GOC ACQUISITION, INC. GERMANY OIL COMPANY ENPRO, INC. ALLIANCE RESOURCES (DELAWARE), INC. By:--------------------------------------------- Francis M. Munchinski, Vice President 7 EX-10.9 7 1ST AMDT. TO THIRD AMENDED & RESTATED CREDIT AGMT. Exhibit 10.9 FIRST AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT ------------------------------------------- This First Amendment to Third Amended and Restated Credit Agreement (this "Amendment") is entered into and effective as of the 30th day of July, 1999, by - ---------- and among BANK OF AMERICA, N.A. (formerly known as Bank of America National Trust and Savings Association) in its individual capacity as the sole Lender ("Lender") and as Agent for the Lenders ("Agent"), and LATEX PETROLEUM - -------- ----- CORPORATION, LATEX/GOC ACQUISITION, INC., GERMANY OIL COMPANY, ALLIANCE RESOURCES (USA), INC., SOURCE PETROLEUM, INC. and ALLIANCE RESOURCES PLC (individually, a "Borrower," and collectively, "Borrowers"). -------- --------- W I T N E S S E T H: ------------------- WHEREAS, Lender, Agent and Borrowers are parties to that certain Third Amended and Restated Credit Agreement dated as of October 26, 1998 pursuant to which Lender has made certain loans and provided certain other credit accommodations to Borrowers (the "Credit Agreement") (unless otherwise defined ---------------- herein, all defined terms used herein which are defined in the Credit Agreement shall have the meanings assigned to such terms in the Credit Agreement); and WHEREAS, Borrowers have requested that the Credit Agreement be amended to (a) increase the Tranche B Commitment Amount to $25,000,000, (b) decrease the Tranche A Commitment Amount to $25,000,000 and (c) reflect certain changes in the ownership of the capital stock of certain Subsidiaries of Alliance Plc; and WHEREAS, subject to and upon the terms and conditions set forth herein, Lender and Agent are willing to enter into the amendments and grant the waivers Borrowers have requested. NOW, THEREFORE, in consideration of the agreements herein contained, the parties hereto hereby agree as follows: SECTION 1. Amendments. Subject to and upon the terms and conditions ---------- set forth herein, the Credit Agreement is hereby amended as follows: 1.1 Additional Definitions. Section 1.1 of the Agreement is hereby ---------------------- amended to add thereto definitions of "Alliance Delaware,""El Paso," "First ----------------- ------- ----- Amendment," and "Participation Agreement" which shall read in full as follows: - --------- ----------------------- "Alliance Delaware" means Alliance Resources (Delaware), Inc., a Delaware ----------------- corporation and the sole shareholder of Alliance Group and LRI. 1 "El Paso" means El Paso Capital Investments, L.L.C., a Delaware ------- corporation. "First Amendment" means that certain First Amendment to Credit Agreement --------------- dated as of July 30, 1999 by and among Borrowers, Lenders and Agent. "Participation Agreement" means a Participation Agreement dated as of July ----------------------- 30, 1999 by and between Bank of America and El Paso. 1.2 Amendment to Existing Defined Terms. The definitions of "Agreement," ----------------------------------- --------- "Alliance Group," "Alliance Plc," "Change of Control," "Guaranties," -------------- ------------ ----------------- ---------- "Guarantors," "Pledge Agreements," "Security Agreements," "Stated Maturity ---------- ----------------- ------------------- --------------- Date," "Tranche A Commitment Amount," "Tranche B Availability Termination Date" --------------------------- --------------------------------------- and "Tranche B Commitment Amount" contained in Section 1.1 of the Credit --------------------------- Agreement are hereby amended to read in full as follows: "Agreement" means on any date, this Third Amended and Restated Credit --------- Agreement as amended by the First Amendment and as subsequently amended, supplemented, amended and restated, or otherwise modified and in effect on such date. "Alliance Group" means Alliance Resources Group, Inc., a Delaware -------------- corporation and the sole shareholder of each of the Alliance U.S. Subsidiaries. "Alliance Plc" is defined in the Preamble and is the sole shareholder of ------------ -------- Manx and Difco. "Change in Control" means if (a) any Person or "group" (as defined in the ----------------- Securities Exchange Act of 1934) other than (i) John A. Keenan, (ii) Difco Holders, (iii) any trust existing solely for the benefit of the above individuals or the estate or any executor, administrator, conservator, or other legal representative of any of the above individuals, or (iv) EnCap shall own directly or directly greater than 33 1/3% of the issued and outstanding voting share capital of Alliance Plc, (b) Alliance Plc shall fail beneficially to own 100% of the outstanding shares of the voting capital stock of Manx or Difco, on a fully-diluted basis, (c) Difco shall fail beneficially to own 100% of the outstanding shares of the voting capital stock of Alliance Delaware, on a fully- diluted basis, (d) Alliance Delaware shall fail beneficially to own 100% of the outstanding shares of the voting capital stock of LRI or Alliance Group, on a fully-diluted basis, (e) LRI shall fail beneficially to own 100% of the outstanding shares of the voting capital stock of LPC, GOCA, New GOC or ENPRO, on a fully-diluted basis, (f) Alliance Group shall fail beneficially to own 100% of the outstanding shares of the voting capital stock of Source, ARNO, ARCOL or Alliance USA, on a fully-diluted basis, or (g) during the period from the date of one annual general meeting, of Alliance Plc to the next annual meeting, beginning with the 1998 annual general meeting individuals who at the beginning of such period were members of the Board of Directors of Alliance Plc shall cease for any reason to constitute a majority of the members of the Board of Directors of Alliance Plc. "Guaranties" means the guaranties of the Obligations executed and delivered ---------- pursuant to Sections 6.1.4 and 6.2.7 of this Agreement or Section 7.3 of the -------------- ----- ------------ First Amendment, substantially in the form of Exhibit D-2, given by each of LRI, ----------- ENPRO, Alliance Group, and Alliance Delaware and substantially in the form of Exhibit D-1, given by Difco. - ----------- 2 "Guarantors" means Alliance Group, LRI, ENPRO, Difco and Alliance Delaware. ---------- "Pledge Agreements" means a Pledge Agreement executed and delivered ----------------- pursuant to Section 6.1.5 and 6.2.8 of this Agreement or Section 7.4 of the ------------- ----- ----------- First Amendment, substantially in the form of Exhibit F-3 given by each of LRI, ----------- Alliance Group and Alliance Delaware, and substantially in the form of Exhibit ------- F-2 given by Alliance Plc and Difco or such other form as may be appropriate in - --- a jurisdiction other than the US, or a state thereof, and in each case, as amended, supplemented, restated or otherwise modified from time to time. "Security Agreement" means a security agreement and any similar instrument ------------------ or agreement, executed or delivered pursuant to Sections 6.1.7 and 6.2.6 of this -------------- ----- Agreement or Section 7.5 of the First Amendment substantially in the form of ----------- Exhibit C-1 hereto, or such other form as may be appropriate in a jurisdiction - ----------- other than the U.S. or a state thereof, and in each case as amended, supplemented, restated or otherwise modified from time to time. "Stated Maturity Date" means (i) with respect to the Tranche A Loans, the -------------------- date that is three (3) years after the Tranche A Availability Termination Date, (ii) with respect to Tranche B Loans July 31, 2001; and (iii) with respect to Tranche C Loans, October 30, 2004. "Tranche A Commitment Amount" means the lesser of (i) $25,000,000 as --------------------------- reduced from time to time pursuant to the provisions of Section 2.2, and (ii) ----------- the Borrowing Base. "Tranche B Availability Termination Date" means July 31, 2001. --------------------------------------- "Tranche B Commitment Amount" means $25,000,000 as reduced from time to --------------------------- time pursuant to the provisions of Section 2.2. 1.3 Amendment to General Commitment. The second sentence of Section 2.1 ------------------------------- ----------- shall be amended to read in full as follows: On the terms and subject to the conditions hereof, the Borrowers may, from time to time, borrow and prepay Tranche A Loans and Tranche B Loans, but may not borrow or reborrow Tranche B Loans after July 30, 1999 and may not reborrow any amounts paid or repaid in respect of Tranche C Loans. 1.4 Amendment to Tranche B Commitment. Section 2.1.2 of the Credit --------------------------------- ------------- Agreement is hereby amended (a) to restate clause (x) thereof to read in full "July 30, 1999", and (b) to insert the following sentences at the end of such Section: Without limiting the foregoing, on the effective date of the First Amendment, but subject to the satisfaction of all conditions precedent to the effectiveness of such amendment set forth therein, Lenders will make Tranche B Loans to Borrowers in an aggregate amount of $5,000,000; provided, that, notwithstanding Section 11.11.2 hereof Lenders shall only --------------- be obligated to make such Loans on such date if prior thereto El Paso has purchased for $5,000,000 a participation interest in Tranche B Loans pursuant to the Participation Agreement; and provided, further, that -------- ------- notwithstanding the provisions of Section 2.7(b), such Tranche B Loans may -------------- 3 be used by Borrower for general corporate and working capital purposes in addition to Approved Development Activities in respect of the East Irish Sea Assets. Unless and until El Paso purchases such participation interest, Lenders shall have no obligation hereunder or under any other Loan Document to make Tranche B Loans which would result in the aggregate outstanding principal balance of all Tranche B Loans exceeding $20,000,000. 1.5 Amendment to Optional Commitment Termination Provisions. Section ------------------------------------------------------- ------- 2.2.1 of the Credit Agreement is hereby amended to read in full as follows: - ----- Section 2.2.1. Optional. The Borrowers may, from time to time on any -------- Business Day, voluntarily reduce the Commitments in the following order: first, the Tranche A Commitment Amount and when the Tranche A Commitment has been reduced to zero, then the Tranche B Commitment Amount and, when the Tranche B Commitment has been reduced to zero, then the Tranche C Commitment Amount; provided, however, that all such -------- ------- reductions shall require at least three (3) Business Days' prior notice to the Agent and be permanent, and any partial reduction of the Commitment Amount shall be in a minimum amount of $250,000 and in an integral multiple of $50,000. 1.6 Amendment to Optional Prepayment Provisions. Clause (i) of Section ------------------------------------------- ------- 3.1.1(a) of the Credit Agreement is hereby amended to read in full as follows: - -------- (i) any such prepayment shall be made (A) first to Tranche A Loans until all Tranche A Loans have been paid in full, (B) second to Tranche B Loans until all Tranche B Loans have been paid in full, and (C) then to Tranche C Loans. 1.7 Amendment to ORRI Provision. Section 3.5(b) of the Credit Agreement --------------------------- is hereby deleted. SECTION 2. Deferral of July 31, 1999 Scheduled Redetermination of the ---------------------------------------------------------- Borrowing Base and Collateral Value. The redetermination of the Borrowing Base - ----------------------------------- and Collateral Value scheduled to occur on July 31, 1999 pursuant to Section ------- 2.6(a) of the Credit Agreement shall be deferred until December 31, 1999. - ------ SECTION 3. Certain Acknowledgments of Borrowers. Each Borrower ------------------------------------ acknowledges and agrees that as of the date hereof (a) the Borrowing Base is $18,500,000, (b) the aggregate amount of all Tranche A Loans outstanding and all Letter of Credit Outstandings is $18,500,000 (i) the amount available to be drawn under the Tranche A Commitment is zero (0), (c) the Tranche B Commitment is $25,000,000, (d) the aggregate principal amount of all Tranche B Loans outstanding is $20,000,000, (e) the aggregate amount available to be drawn under the Tranche B Commitment is $5,000,000 (provided, that the availability of such Tranche B Commitment is subject to El Paso's purchase of a participation interest in the Loans in a corresponding amount and Borrowers' satisfaction of all other conditions precedent to the 4 availability of Tranche B Loans under the Credit Agreement and the other Loan Documents), (f) the Tranche C Commitment is $5,000,000, (g) the aggregate outstanding principal amount of all Tranche C Loans is $5,000,000, and (h) the aggregate amount available to be drawn under the Tranche C Commitment is zero (0). SECTION 4. Certain Acknowledgment of Guarantors. By executing the ------------------------------------ acknowledgment to this Amendment, each Guarantor hereby confirms and agrees that the Guaranty and each Security Document to which it is a party is, and shall continue to be, in full force and effect and is hereby ratified and confirmed in all respects, except that, on and after the date hereof, each reference therein to the "Credit Agreement," "thereunder," "thereof" or words of like import referring to the Credit Agreement, shall mean and refer to the Credit Agreement after giving effect to this Amendment. SECTION 5. Releases. Each Borrower hereby releases, and each other -------- Obligor by executing its acknowledgment hereto hereby releases Agent, Lender and their respective officers, directors, shareholders, agents, employees, attorneys, Affiliates and representatives (collectively, the "Released Parties") from all claims, liabilities, looses, damages or demands whether liquidated or unliquidated, actual or contingent, now known, unknown or unforeseen (hereinafter, collectively, the "Claims") which any Borrower or any Obligor may hold which in anyway arise out of, or relate to, the Commitments, the Loans, the Credit Agreement, the Loan Documents, or any transaction contemplated thereby or which in anyway arise out of or relate to any prior credit facility provided by Lender, any of its predecessors or any of their Affiliates to any Borrower or any other Obligor, any of their predecessors or any of their Affiliates (any "Prior Credit Facility"). Without limiting the foregoing, the claims released herein expressly include any claims arising out of, or alleged to arise out of (a) the application for or the negotiation of the terms of the Loans, the Loan Documents or any Prior Credit Facility, (b) the administration by Lender of the Commitments, the Loans, the Loan Documents and any Prior Credit Facility, or (c) the contracting for charging, taking, reserving, collecting or receiving interest in excess of the highest lawful rate applicable thereto. SECTION 6. Representations and Warranties. In order to induce Agent ------------------------------ and Lender to enter into the amendments to the Credit Agreement contained in Section 1, Borrowers hereby represent and warrant to Lender and Agent as - --------- follows: 6.1 Reaffirmation of Representations and Warranties. After giving effect ----------------------------------------------- to the amendments contained in Section 1 hereof and certain waivers contained in --------- a letter agreement of even date herewith by and among Agent, Lender and Borrowers (the "Waiver Letter"), each representation and warranty of Borrowers ------------- contained in the Credit Agreement and the other Loan Documents is true and correct. 6.2 Due Authorization, No Conflicts. The execution, delivery and ------------------------------- performance by each Borrower of this Amendment and the Waiver Letter are within each Borrower's corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental body, agency or official and do not violate or constitute a default under any provision of application law or any material agreement binding upon any Borrower or any of its Subsidiaries or result in the creation or imposition of any Lien upon any of its respective assets. 5 6.3 Validity and Binding Effect. This Amendment and the Waiver Letter --------------------------- constitute the valid and binding obligations of each Borrower enforceable in accordance with its terms, except as (a) the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditor's rights generally, and (b) the availability of equitable remedies may be limited by equitable principles of general application. 6.4 No Defenses. Neither any Borrower nor any other Obligor has any ----------- defense to payment, counterclaim or right of set-off with respect to the Obligations existing on the date hereof. SECTION 7. Conditions to Effectiveness. --------------------------- 7.1 Effective Date. This amendments contained in Section 1 hereof shall -------------- --------- be effective on July 30, 1999, when each of the conditions set forth in this Section 7 have been satisfied. - --------- 7.2 Resolutions, etc. The Agent and Lender shall have received from each ----------------- Borrower, LRI, Alliance Group, Alliance Delaware, ENPRO, Difco and any other Obligor a certificate of the Secretary of Assistant Secretary of such Obligor as to: (a) resolutions of the Board of Directors of such Obligor then in full force and effect authorizing the execution, delivery and performance of this Amendment and the Waiver Letter and each other Loan Document, as applicable, to be executed by it pursuant hereto; (b) the incumbency and signatures of those of its officers or Persons authorized to act with respect to this Amendment, and the Waiver Letter and each other Loan Document, as applicable, executed by it pursuant hereto; (c) with respect to Alliance Delaware only, the Organic Documents of such Obligor; and (d) with respect to Alliance Delaware only, evidence that such Obligor is in good standing under Applicable Laws of the jurisdiction of its organization, upon which certificate the Agent may conclusively rely until it shall have received a further certificate of the Secretary of such Obligor canceling or amending such prior certificate. 7.3 Guaranty. The Agent shall have received executed counterparts of a -------- Guaranty, dated as of the date hereof, in form, substance and scope satisfactory to the Agent, duly executed by Alliance Delaware. 7.4 Pledge Agreements. The Agent shall have received executed ----------------- counterparts of Pledge Agreements or amendments of Pledge Agreements previously delivered under the Credit Agreement, dated as of the date hereof, in form, substance and scope satisfactory to the Agent, duly executed by (i) Alliance Plc pledging its interest in the capital stock of Manx and Difco, (ii Difco pledging its interest in the capital stock of Alliance Delaware, and (iii) Alliance Delaware pledging its interest in the capital stock of Alliance Group and LRI, together with the 6 certificates, evidencing all of the issued and outstanding shares of capital stock pledged pursuant to such pledge agreement or amendment, which certificates shall in each case be accompanied by undated stock powers duly executed in blank, or, if any securities pledged pursuant to such pledge agreement are uncertificated securities, confirmation and evidence satisfactory to the Agent that the security interest in such uncertificated securities has been transferred to and perfected by the Agent in accordance with Section 8-313 and Section 8-321 of the Uniform Commercial Code, as in effect in the State of Illinois, and as applicable, with the evidence of completion (or satisfactory arrangement for the completion) of all filings and recording of such pledge agreements as may be necessary, or in the reasonable opinion of the Agent, desirable, effectively to create a valid, perfected first priority lien against and security interest in the collateral covered thereby. 7.5 Security Agreements. The Agent shall have received from Alliance Plc, ------------------- Alliance Delaware and Difco duly executed, original counterparts of Security Agreements, or amendments of Security Agreements previously delivered under the Credit Agreement, in form, substance and scope satisfactory to the Agent, together with: (a) executed copies of Uniform Commercial Code financing statements (Form UCC-1), in proper form for filing, naming the Borrowers (or their Subsidiaries, as applicable) as the debtor and the Agent as the secured party, or other similar instruments or documents, filed (or satisfactory arrangements for the completion of all filings and recordings) under the Uniform Commercial Code in all jurisdictions as may be necessary or, in the opinion of the Agent, desirable, effectively to create valid, perfected first priority liens against and security interests in the collateral covered thereby; and (b) executed copies of proper Uniform Commercial Code Form UCC-3 termination statements, if any, necessary to release all Liens and other rights of any Person in any collateral described in such Security Agreement together with such other Uniform Commercial Code Form UCC-3 termination statements as the Lender may reasonable request from the Borrowers. 7.6 Stock Transfer Agreement. The Agent shall have received and approved ------------------------ a true, correct and complete copy of the documents evidencing the transfer of all of the outstanding shares of voting capital stock of Alliance Group and LRI from Alliance Plc to Alliance Delaware. 7.7 Amendment to EnCap Purchase Agreement. The Agent shall have received ------------------------------------- and approved a true, correct and complete copy of the documents under which the Purchase Agreement dated as of October 27, 1998 among Alliance Plc, EnCap Equity 1996 Limited Partnership and Energy Capital Investment Company PLC is being amended to reflect the same changes in the ownership of the capital stock of certain Subsidiaries of Alliance Plc as are more particularly described in the Waiver Letter. 7.8 Execution of Counterparts. The Agent shall have received counterparts ------------------------- of this Amendment duly executed and delivered on behalf of each Obligor, the Agent and the Lenders. 7 7.9 Closing Fees, Expenses, etc. The Agent shall have received all fees ---------------------------- and all reasonable costs and expenses due and payable pursuant to Sections 3.3 ------------ and 11.3 of the Credit Agreement, if then invoiced, including, without ---- limitation, all fees and expenses of counsel to Agent incurred by Agent in connection with the preparation, negotiation, execution and closing of this Amendment and the Waiver Letter. 7.1 Legal Details, etc. All documents executed or submitted pursuant ------------------ hereto, and all legal matters incident thereto, shall be satisfactory in form and substance to the Agent and its counsel. 7.1 July 31 Interest Payment. All interest on the Loans which has accrued ------------------------ or shall accrue through July 31, 1999 shall be paid in full. 7.1 Termination Date. If all of the conditions set forth in Section 7 ---------------- --------- hereof shall not have been satisfied on or prior to 5:00 p.m. Dallas, Texas time, July 30, 1999, the agreements of the parties contained in this Amendment and the Waiver Letter shall, unless otherwise agreed by the Agent, terminate effective immediately at such time and without further action. SECTION 8. Miscellaneous. ------------- 8.1 Reaffirmation of Loan Documents; Extension of Liens. Any and all of --------------------------------------------------- the terms and provisions of the Credit Agreement and the Loan Documents shall, except as amended and modified hereby, remain in full force and effect. Each Borrower hereby ratifies, confirms and extends the Liens securing the Obligations until the Obligations have been paid in full or are specifically released by Agent prior thereto, and agrees that the amendments and modifications herein contained shall in no manner adversely affect or impair the Obligations or the Liens securing payment and performance thereof. 8.2 Parties in Interest. All of the terms and provisions of this ------------------- Amendment shall bind and inure to the benefit of the parties hereto and their respective successors and assigns. 8.3 Legal Expenses. Borrowers hereby agree to pay on the date hereof all -------------- reasonable fees and expenses of counsel to Agent incurred by Agent, in connection with the preparation, negotiation and execution of this Amendment and all related documents. 8.4 Counterparts. This Amendment may be executed in counterparts, and all ------------ parties need not execute the same counterpart. Facsimiles shall be effective as originals. 8.5 Complete Agreement. THIS AMENDMENT, THE CREDIT AGREEMENT (AS AMENDED ------------------ PURSUANT TO THIS AMENDMENT) AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. 8 8.6 Headings. The headings, captions and arrangements used in this -------- Amendment are, unless specified otherwise, for convenience only and shall not be deemed to limit, amplify or modify the terms of this Amendment, nor affect the meaning thereof. 9 IN WITNESS WHEREOF, the parties hereto have cause this Amendment to be executed by their respective officers hereunto duly authorized as of the day and first year above written. BORROWERS: ---------- LATEX PETROLEUM CORPORATION By: ----------------------------------------------- Title: -------------------------------------------- LATEX/GOC ACQUISITION, INC. By: ----------------------------------------------- Title: -------------------------------------------- GERMANY OIL COMPANY By: ----------------------------------------------- Title: -------------------------------------------- ALLIANCE RESOURCES (USA), INC. By: ----------------------------------------------- Title: -------------------------------------------- SOURCE PETROLEUM, INC. By: ----------------------------------------------- Title: -------------------------------------------- ALLIANCE RESOURCES PLC By: ----------------------------------------------- Title: -------------------------------------------- 10 AGENT: ----- BANK OF AMERICA, N.A., FORMERLY BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Agent for the Lenders By: ----------------------------------------------- Title: --------------------------------------- LENDERS: ------- BANK OF AMERICA, N.A., FORMERLY KNOWN AS BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: ----------------------------------------------- Title: --------------------------------------- Acknowledged and Accepted: LATEX RESOURCES, INC. By: --------------------------- Name: Title: ENPRO, INC. By: --------------------------- Name: Title: 11 ALLIANCE RESOURCES (DELAWARE), INC. By: -------------------- Name: Title: ALLIANCE RESOURCES GROUP, INC. By: -------------------- Name: Title: DIFCO LIMITED By: -------------------- Name: Title: 12 EX-10.12 8 EXCHANGE AND MERGER AGMT - AMERICAN RIVERS OIL Exhibit 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 TABLE OF CONTENTS ----------------- Page ---- 1. Definitions........................................................... 1 2. The Exchange Offer and Merger......................................... 5 2.1. Filings by AROC......................................... 5 2.2. Filings by Alliance..................................... 6 2.3. Solicitation of Offer................................... 7 2.4. Solicitation of The Merger.............................. 7 3. Mailing Date Actions and Completion of the Merger..................... 7 3.1. Mailing Date............................................ 7 3.2. The Merger.............................................. 9 4. Representations, Warranties and Covenants of AROC..................... 12 4.1. Corporate Organization.................................. 12 4.2. Capitalization.......................................... 12 4.3. Authority; No Violation................................. 13 4.4. Consents and Approvals.................................. 14 4.5. Violations of Laws, Permits, etc........................ 14 4.6. AROC Reports............................................ 14 4.7. AROC Financial Statements............................... 14 4.8. No Undisclosed Liabilities, etc......................... 14 4.9. Absence of Certain Changes.............................. 15 4.10. Data Regarding the AROC Assets.......................... 15 4.11. Litigation.............................................. 15 4.12. Tax Returns and Payments................................ 16 4.13. Bank Accounts........................................... 16 4.14. Contracts............................................... 16 4.15. Compensation and Employee Plans......................... 17 4.16. Brokers, Finders and Advisors........................... 17 4.17. Labor Force............................................. 17 4.18. Books and Records....................................... 17 4.19. Payments................................................ 18 4.20. Commission Filings...................................... 18 4.21. Disclosure.............................................. 18 5. Representations, Warranties and Covenants of Alliance................. 18 5.1. Organization, etc....................................... 18 5.2. Capitalization.......................................... 19 5.3. Authority; No Violation................................. 19 5.4. Consents and Approvals.................................. 20 5.5. Violations of Laws, Permits, etc........................ 20 5.6. Alliance Reports........................................ 20 5.7. Alliance Financial Statements........................... 20 i 5.8. No Undisclosed Liabilities, etc......................... 21 5.9. Absence of Certain Changes.............................. 21 5.10. Data Regarding the Alliance Assets...................... 21 5.11. Litigation.............................................. 21 5.12. Tax Returns and Payments................................ 22 5.13. Contracts............................................... 22 5.14. Compensation and Employee Plans......................... 23 5.15. Brokers, Finders and Advisors........................... 23 5.16. Labor Force............................................. 23 5.17. Books and Records....................................... 23 5.18. Payments................................................ 23 5.19. Commission Filings...................................... 24 5.20. Disclosure.............................................. 24 6. Actions of AROC Prior to the Mailing Date............................. 24 6.1. Affirmative Covenants................................... 24 6.2. Negative Covenants...................................... 24 6.3. Consents................................................ 24 6.4. Advice of Changes....................................... 24 6.5. Best Efforts............................................ 25 6.6. Access to Properties and Records........................ 25 6.7. Supply Documents, Reports, etc.......................... 25 6.8. AROC Disclosure Schedule................................ 25 7. Actions of Alliance Prior to the Mailing Date......................... 25 7.1. Affirmative Covenants................................... 25 7.2. Negative Covenants...................................... 26 7.3. Consents................................................ 26 7.4. Advice of Changes....................................... 26 7.5. Best Efforts............................................ 26 7.6. Access to Properties and Records........................ 26 7.7. Supply Documents, Reports, etc.......................... 26 7.8. Alliance Disclosure Schedule............................ 27 8. Conditions to Alliance's Obligations.................................. 27 9. Conditions to AROC's Obligations...................................... 28 10. Additional Agreements................................................. 29 10.1. Confidentiality......................................... 29 10.2. Further Assurances...................................... 29 10.3. Offices................................................. 30 10.4. Warrants................................................ 30 10.5. Convertible Shares...................................... 30 10.6. Convertible Loan Notes.................................. 30 10.7. AROC Delaware Capitalization............................ 30 ii 10.8. Indemnification......................................... 30 11. Termination, Waiver and Amendment..................................... 31 11.1. Termination............................................. 31 11.2. Manner of Exercise...................................... 32 11.3. Effect of Termination................................... 32 12. Miscellaneous......................................................... 32 12.1. Survival................................................ 32 12.2. Expenses................................................ 32 12.3. Press Releases.......................................... 32 12.4. Binding Effect.......................................... 32 12.5. Severability............................................ 32 12.6. Notices................................................. 33 12.7. Entire Agreement........................................ 33 12.8. Amendments; Waivers..................................... 33 12.9. Headings................................................ 33 12.10. Counterparts............................................ 34 12.11. Specific Performance.................................... 34 12.12. GOVERNING LAW........................................... 34 12.13. Schedules............................................... 34 12.14. Time of Essence......................................... 34 12.15. Best Efforts............................................ 34 iii EXCHANGE AND MERGER AGREEMENT ----------------------------- THIS EXCHANGE AND MERGER AGREEMENT (this "Agreement") is entered into as of July 22, 1999, by and among AMERICAN RIVERS OIL COMPANY, a Wyoming corporation ("AROC"), AMERICAN RIVERS OIL COMPANY, a Delaware corporation ("AROC Delaware"), and ALLIANCE RESOURCES PLC, a public limited company incorporated in England and Wales ("Alliance"). Recitals -------- The parties desire to effect certain transactions on the terms, and subject to the provisions and conditions, of this Agreement. Agreement --------- NOW, THEREFORE, for and in consideration of the premises and the mutual agreements hereinafter set forth, in accordance with the provisions of applicable law, the parties hereby agree as follows: 1. Definitions. As used in this Agreement and the Exhibits, Schedules and ----------- documents delivered pursuant to this Agreement, the following terms shall have the following meanings: "ADEA" means the Age Discrimination in Employment Act, as amended, or any successor statute. "Affiliate" means an "affiliate" or associate" as those terms are defined in Rule 12b-2 promulgated by the Commission under the Exchange Act. "Alliance" means Alliance Resources PLC, a public limited company incorporated in England and Wales. "Alliance Assets" means all of the rights, titles and interests, whether direct or indirect, of the Alliance Entities in and to all of the property, rights and interests incident to, all oil, gas and mineral properties of every kind and character, whether producing, non-producing, developed or undeveloped, wherever situated, including without limitation all of the rights, titles and interests of the Alliance Entities in and to all leases, royalty interests, overriding royalty interests, rights-of-way, easements, options, orders and rulings of applicable regulatory agencies, wells, lease and well equipment, machinery, production facilities, processing facilities, gathering systems, transportation systems, disposal systems, fixtures and other items of personal property and improvements now or as of the Mailing Date appurtenant to such properties or used, obtained or held for use in connection with the operation of such properties or with the production, treatment, sale or disposal of hydrocarbons or water produced therefrom or attributable thereto. "Alliance Disclosure Schedule" means the Disclosure Schedule delivered by Alliance to AROC within seven calendar days after the execution of this Agreement. Each heading in the Alliance Disclosure Schedule shall refer to the applicable section of this Agreement. 1 "Alliance Entities" means Alliance and its Subsidiaries. "Alliance Financial Statements" means, collectively, the audited consolidated financial statements of the Alliance Entities as of and for the year ended April 30, 1998; and the unaudited interim financial statements of the Alliance Entities as of and for the nine months ended January 31, 1999. "Alliance Convertible Loan Notes" means the convertible loan notes of Alliance that are convertible into 1,193,581 Alliance Ordinary Shares. "Alliance Convertible Shares" means the convertible restricted voting shares of (Pounds)0.01 each in the capital of Alliance. "Alliance Form 10-K" means Alliance's Annual Report on Form 10-K for the year ended April 30, 1998. "Alliance Ordinary Shares" means the ordinary shares of (Pounds)0.01 each in the capital of Alliance. "Alliance Proxy Statement" means the proxy statement for the annual meeting of Alliance Stockholders held March 5, 1999. "Alliance Reports" means each registration statement, schedule, report, proxy statement or information statement prepared by Alliance since April 30, 1998, including, without limitation, (i) the Alliance Form 10-K, (ii) Alliance's Quarterly Reports on Form 10-Q for the periods ended July 31, October 31, 1998 and January 31, 1999, and (iii) the Alliance Proxy Statement, each in the form (including exhibits and any amendments thereto) filed with the Commission. "Alliance Shares" means the Alliance Ordinary Shares and the Alliance Convertible Shares. "Alliance Stockholders" means the holders of Alliance Shares from time to time. "Alliance Warrants" means the outstanding warrants to purchase a total of 5,079,149 Alliance Ordinary Shares. "AROC" means American Rivers Oil Company, a Wyoming corporation. "AROC Assets" means all assets of the AROC Entities. "AROC Class B Shares" means all of the issued and outstanding shares of class B common stock of AROC, par value $0.01 per share. "AROC Common Shares" means all of the issued and outstanding common stock of AROC, par value $0.01 per share. "AROC Delaware" means American Rivers Oil Company, a Delaware corporation. 2 "AROC Delaware Shares" means the common stock, par value $0.01 per share, of AROC Delaware. "AROC Disclosure Schedule" means the Disclosure Schedule delivered by AROC to Alliance within seven calendar days after the execution of this Agreement. Each heading in the AROC Disclosure Schedule shall refer to the applicable section of this Agreement. "AROC Entities" means AROC and its Subsidiaries. "AROC Financial Statements" means, collectively, the respective audited consolidated financial statements of the AROC Entities as of and for the years ended March 31, 1998 and 1999. "AROC Form 10-K" means AROC's Annual Report on Form 10-K for the year ended March 31, 1999. "AROC Reports" means each registration statement, schedule, report, proxy statement or information statement prepared by AROC since March 31, 1998, including, without limitation, (i) the AROC Form 10-K, and (ii) AROC's Quarterly Reports on Form 10-Q for the periods ended June 30, September 30 and December 31, 1998, each in the form (including exhibits and any amendments thereto) filed with the Commission. "AROC Shares" means the AROC Common Shares and the AROC Class B Shares. "AROC Stockholders" means the holders of AROC Shares from time to time. "City Code" means the City Code on Takeovers and Mergers of the United Kingdom. "Code" means the Internal Revenue Code of 1986, as amended, or any successor statute. "Commission" means the Securities and Exchange Commission and/or any other Governmental Entity that administers either the Securities Act or the Exchange Act. "DGCL" means the Delaware General Corporation Law. "Dissenting Shares" has the meaning given that term in Section 3.2(g)(1). "Effective Time" has the meaning given that term in Section 3.2(a). "Encumbrance" means any option, pledge, security interest, lien, charge, encumbrance, or restriction (whether on voting, sale, transfer, disposition or otherwise), whether imposed by agreement, understanding, law or otherwise, except those arising under applicable federal or state securities laws. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, or any successor statute. "Exchange Act" means the Securities Exchange Act of 1934, as amended, or any successor statute. 3 "Exchange Agent" means the transfer agent for the AROC Shares. "Excluded Shares" has the meaning given that term in Section 3.2(g)(1). "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants, in statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession, which are applicable to the circumstances as of the date of determination. "Governmental Entity" means any federal, state, municipal, domestic or foreign court, tribunal, administrative agency, department, commission, board, bureau or other governmental authority or instrumentality. "Indemnified Parties" has the meaning given in Section 10.8. "Information Statement" means the information statement filed by AROC pursuant to Section 2.1(b) and any amendments or supplements to the information statement. "Mailing Date" has the meaning given in Section 3.1. "Material Effect" means a material adverse effect on the business or financial condition of a party and its Subsidiaries taken as a whole. "Merger" means the merger of AROC with and into Newco, with Newco being the surviving corporation, pursuant to Section 3.2. "Merger Consideration" has the meaning given that term in Section 3.2(g)(1). "Newco" means a Delaware corporation to be formed as a subsidiary of AROC Delaware. "Offer" means the offer made pursuant to Section 2.3. "Offer Documents" means the prospectus included in the Registration Statement and any other documents used to solicit the Alliance Stockholders to accept the Offer. "Plan" means (i) any employee benefit plan as defined in Section 3(3) of ERISA, which is (a) maintained by a party or any of its Subsidiaries, or (b) to which a party or any of its Subsidiaries is making or accruing an obligation to make contributions, or (ii) any other formal or informal obligation to, arrangement with, or plan or program for the benefit of, employees of a party or any of its Subsidiaries, including, but not limited to, stock options, stock bonuses, stock purchase agreements, bonuses, incentive compensation, deferred compensation, supplemental pensions, vacations, severance pay, insurance or any other benefit, program or practice. "Registration Statement" means the registration statement filed by AROC Delaware pursuant to Section 2.1 and any amendments or supplements to the registration statement. "Securities Act" means the Securities Act of 1933, as amended, or any successor statute. 4 "Subsidiary" or "Subsidiaries" means any corporation more than fifty percent (50%) of the voting power of which is owned directly or indirectly by a party or other relevant person, as the context requires. "Surviving Corporation" has the meaning given that term in Section 3.2(b). "Taxes" means all taxes, charges, fees, levies, duties or other assessments, including, without limitation, income, gross receipts, excise, ad valorem, property, production, severance, sales, use, license, payroll and franchise taxes, imposed by any Governmental Entity and includes any estimated tax, interest and penalties or additions to tax. "Tax Return" means a report, return or other information required to be supplied by a party comprising a part of the Alliance Entities or the AROC Entities, as the case may be, to a Governmental Entity in connection with Taxes including, where permitted or required, combined or consolidated returns for any group of entities that includes that entity. "WBCA" means the Wyoming Business Corporation Act. 2. The Exchange Offer and Merger. ----------------------------- 2.1. Filings by AROC. --------------- (a) As soon as reasonably practicable after the date of this Agreement, AROC Delaware will, in compliance with all applicable state and federal laws, and in form and substance satisfactory to Alliance, file with the Commission a registration statement relating to the AROC Delaware Shares to be offered to the Alliance Stockholders pursuant to the Offer and to be issued to the AROC Shareholders in the Merger (the "Registration Statement"), and will thereafter use its best efforts to obtain as promptly as possible and to continue the effectiveness of the Registration Statement. (b) As soon as reasonably practicable after the date of this Agreement, AROC will, in compliance with all applicable state and federal laws, and in form and substance satisfactory to Alliance, file with the Commission an information or proxy statement relating to a meeting of the AROC Stockholders to approve the Merger (the "Information Statement"), and will thereafter use its best efforts to respond as promptly as possible to all comments of the Commission with respect to the Information Statement. (c) Prior to delivering the Offer Documents to the Alliance Stockholders, AROC Delaware will, in compliance with all applicable state and federal laws, and in form and substance satisfactory to Alliance, file with the Commission a Tender Offer Statement on Schedule 14D-1 relating to the Offer containing the prospectus included in the Registration Statement. (d) AROC Delaware will prepare and file with the Commission and use its best efforts to cause as promptly as possible and to continue the effectiveness of such amendments and supplements to the registration statement, the prospectus included in the Registration Statement and the Schedule 14D-1 for so long as the Offer shall continue, and to comply with the requirements of all applicable laws regarding the conduct of the Offer. 5 (e) AROC Delaware will use its best efforts to register or qualify the AROC Delaware Shares offered pursuant to the Offer and the Merger under the securities or blue sky laws of such jurisdictions as Alliance shall request and do any and all other acts or things that may be necessary or advisable to enable to Offer and the Merger to be made and consummated. (f) After the Commission completes its review of the Information Statement, and contemporaneously with the making of the Offer, AROC will deliver the Information Statement, together with such documents as are required under the City Code, to the AROC Stockholders. (g) The materials filed by AROC and AROC Delaware with the Commission and the materials sent by AROC Delaware to the Alliance Stockholders in connection with the Offer and to the AROC Stockholders in connection with the Information Statement will not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The materials shall in form and substance be satisfactory to Alliance and shall include all information regarding the AROC Entities required by applicable law and the City Code to inform the Alliance Stockholders of the Offer and to inform the AROC Stockholders of the matters contemplated by this Agreement. (h) Alliance agrees to furnish to AROC and AROC Delaware all information (which shall meet the standard of the preceding paragraph) reasonably requested by AROC and AROC Delaware in connection with preparing such materials. 2.2. Filings by Alliance. ------------------- (a) Not less than 10 business days after the commencement of the Offer, Alliance will, in compliance with all applicable state and federal laws, and in form and substance satisfactory to AROC, file with the Commission and deliver to the Alliance Stockholders a Tender Offer Solicitation/Recommendation Statement on Schedule 14D-9, and file with applicable state authorities such other documents as may be necessary or appropriate, recommending (subject to the fiduciary duties of the directors of Alliance) that the Alliance Stockholders accept the Offer. (b) Alliance will prepare and file with the Commission and use its best efforts to cause as promptly as possible and to continue the effectiveness of such amendments and supplements to the Schedule 14D-9 for so long as the Offer shall continue, and to comply with the requirements of all applicable laws and the City Code regarding the conduct of the Offer. (c) As soon as reasonably practicable after the date of this Agreement, Alliance will, in compliance with all applicable laws, and in form and substance satisfactory to AROC, file with London Stock Exchange Limited and all other applicable regulatory bodies in the United Kingdom, all materials reasonably necessary to make, and use its best efforts, to obtain the approval of those authorities to, the Offer. (d) The materials filed by Alliance and the materials sent by Alliance to the Alliance Stockholders in connection with the Offer will not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The materials shall in form and substance be satisfactory to AROC and shall include all information regarding the 6 Alliance Entities required by applicable law and the City Code to inform the Alliance Stockholders of the Offer. (e) AROC agrees to furnish to Alliance all information (which shall meet the standard of the preceding paragraph) reasonably requested by Alliance in connection with preparing such materials. 2.3. Solicitation of Offer. Promptly after the satisfaction of all --------------------- applicable regulatory requirements, including the filings contemplated by Sections 2.1 and 2.2 and the completion of the actions contemplated by Section 3, each of Alliance, AROC and AROC Delaware agrees (subject to the fiduciary duties of the directors of each of them): (a) that AROC will deliver the Information Statement, together with such documents as are required under the City Code, to the AROC Stockholders; (b) to use its best efforts to solicit the Alliance Stockholders to accept the offer of AROC Delaware to exchange one AROC Delaware Share for each Alliance Ordinary Share and 0.5 AROC Delaware Shares for each Alliance Convertible Share (the "Offer"); (c) to make such press announcements as are required under the City Code in relation to the Offer; (d) to make the Offer unconditional under U.K. law and the City Code as soon as practicable after Alliance Stockholders holding a majority of both the Alliance Ordinary Shares and the Alliance Convertible Shares have accepted the Offer; and (e) to continue the Offer for so long as required by applicable U.S. and U.K. law and the City Code. 2.4. Solicitation of The Merger. Promptly after the satisfaction of all -------------------------- applicable regulatory requirements, including the filings contemplated by Sections 2.1 and 2.2 and the completion of the actions contemplated by Section 3, each of Alliance, AROC and AROC Delaware agrees (subject to the fiduciary duties of the directors of each of them): (a) to use its best efforts to deliver the Information Statement to the AROC Stockholders and recommend and solicit the vote of the AROC Stockholders to approve the Merger; (b) to hold the meeting of AROC Stockholders contemplated by the Information Statement; 3. Mailing Date Actions and Completion of the Merger. -------------------------------------------------- 3.1. Mailing Date. On or prior to the date the Offer Documents are to be ------------ mailed to the Alliance Stockholders (the "Mailing Date"), the parties shall deliver the following documents at the offices of Jenkens & Gilchrist, P.C., 1445 Ross Avenue, Suite 3200, Dallas, Texas at 10:00 a.m., local time. (a) AROC shall deliver to Alliance the following: 7 (1) A copy of the charters of each of the AROC Entities certified as of a date within ten days of the Mailing Date by the Secretary of State of the state of incorporation of each of the respective entities and certified by the respective corporate secretary as to the absence of any amendments between the date of certification by the respective Secretary of State and the Mailing Date; (2) A certificate from the appropriate governmental officials of the state of incorporation as to the existence and good standing of each of the AROC Entities and the payment of Taxes by each of the AROC Entities as of a date within ten days of the Mailing Date, and, if available, a telecopy from such officials as to the same matters dated the business day before the Mailing Date; (3) A certificate of the corporate secretary of each of the AROC Entities attaching thereto a true and correct copy of the bylaws of the respective entity; (4) A certificate of the corporate secretary of AROC attaching copies of the resolutions of the board of directors approving the Offer; (5) All correspondence of AROC with the Commission relating to the filing of the documents referred to in Section 2.1; ----------- (6) The certificate of an officer of AROC referred to in Section 8(c); ------------ (7) The opinion of AROC's counsel referred to in Section 8(e); ------------ (8) All consents or approvals of any third party that are required to be identified pursuant to Section 4.4; and ----------- (9) Such other documents as are required pursuant to this Agreement or as may reasonably be requested from AROC by Alliance or its counsel. (b) Alliance shall deliver to AROC the following: (1) a copy of the Memorandum and Articles of Association (and all amendments thereto, if any) of Alliance and each of Alliance's U.K. Subsidiaries certified by the corporate secretary as to the absence of any amendments as of the Mailing Date; (2) a copy of the charters of each of Alliance's U.S. Subsidiaries certified as of a date within ten days of the Mailing Date by the appropriate governmental officials of the jurisdiction of organization of each of the respective entities and certified by the respective corporate secretary as to the absence of any amendments between the date of certification by the governmental official and the Mailing Date; (3) A certificate from the appropriate governmental officials of the jurisdiction of organization of each of Alliance's U.S. Subsidiaries as to the existence and good standing of such Subsidiary as of the date within ten days of the Mailing Date, and, if available, a telecopy from such officials as to the same matters dated the business day before the Mailing Date; 8 (4) A certificate of the corporate secretary of each of Alliance's U.S. Entities attaching thereto a true and correct copy of the bylaws of the respective entity; (5) A certificate of the corporate secretary of Alliance attaching copies of corporate resolutions duly adopted by its board of directors resolving to recommend the Offer; (6) All correspondence of Alliance with the Commission relating to the filing of the documents referred to in Section 2.2; (7) The certificate of an officer of Alliance referred to in Section 9(b); ------------ (8) The opinion of Alliance's counsel referred to in Section 9(d); ------------ (9) All consents or approvals of any third party that are required to be identified pursuant to Section 5.4; ----------- (10) Such other documents as are required pursuant to this Agreement or as may reasonably be requested from Alliance by AROC or its counsel. 3.2. The Merger. ---------- (a) As soon as practicable after the AROC shareholders have approved the Merger and it is determined that at least a majority of the Alliance Stockholders have accepted the Offer, and immediately before the Offer becomes unconditional and AROC Delaware Shares are issued to those Alliance Stockholders who have accepted the Offer, provided that this Agreement has not been terminated or abandoned pursuant to Article 11, AROC and Newco will cause a (i) a Certificate of Merger to be executed and filed with the Secretary of State of Delaware as provided in Section 251 of the DGCL and (ii) Articles of Merger to be executed and filed with the Secretary of State of Wyoming as provided in Section 17-16-1105 of the WBCA. The Merger shall become effective on the date on which the Delaware Certificate of Merger has been duly filed with the Secretary of State of Delaware and the Wyoming Articles of Merger have been duly filed with the Secretary of State of the State of Wyoming, and such time is hereinafter referred to as the "Effective Time." (b) At the Effective Time AROC shall be merged with and into Newco and the separate corporate existence of AROC shall thereupon cease. Newco shall be the surviving corporation (the "Surviving Corporation") in the Merger and shall continue to be governed by the laws of the State of Delaware, and the separate corporate existence of Newco with all its rights, privileges, immunities, powers and franchises shall continue unaffected by the Merger, except as set forth in Section 3.2(f) and (g). The Merger shall have the effects specified in the - -------------- --- Delaware General Corporation Law and the Wyoming Business Corporation Act. (c) Change of Name of AROC Delaware. The Information Statement and ------------------------------- Registration Statement shall provide for, and concurrently with the Effective Time, AROC Delaware shall file a Certificate of Amendment to its Certificate of Incorporation to effect, a change of the name of AROC Delaware to "Alliance Resources Inc." 9 (d) The Certificate of Incorporation. The Certificate of Incorporation of -------------------------------- Newco in effect at the Effective Time shall be the Certificate of Incorporation of the Surviving Corporation, until duly amended in accordance with the terms thereof and the DGCL. (e) By-Laws. The By-Laws of Newco in effect at the Effective Time shall ------- be the By-Laws of the Surviving Corporation, until duly amended in accordance with the terms thereof and the DGCL. (f) Directors and Officers. The directors and officers of AROC Delaware ---------------------- and of Newco shall, from and after the Effective Time, and until their successors have been duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the respective corporation's Certificate of Incorporation and By-Laws, be the following: John A. Keenan President and Director of AROC Delaware and Newco Francis M. Munchinski Secretary of AROC Delaware and Newco Paul R. Fenemore Director of AROC Delaware and Newco Robert E. Schulte Director of Newco M. Phillip Douglas Director of AROC Delaware Michael E. Humphries Director of AROC Delaware William J.A. Kennedy Director of AROC Delaware John R. Martinson Director of AROC Delaware (g) Conversion or Cancellation of Shares. The manner of converting or ------------------------------------ canceling shares of AROC in the Merger shall be as follows: (1) At the Effective Time, each AROC Share issued and outstanding immediately prior to the Effective Time, other than AROC Shares that are owned by AROC or any direct or indirect subsidiary of AROC or Shares ("Dissenting Shares") which are held by stockholders ("Dissenting Stockholders") properly exercising appraisal rights pursuant to (S)17-16-1321 and (S)17-16-1323 of the WBCA, if applicable (collectively, "Excluded Shares") shall, by virtue of the Merger and without any action on the part of the holder thereof, be converted into the right to receive, 0.11 AROC Delaware Shares (the "Merger Consideration"). At the Effective Time, all AROC Shares, by virtue of the Merger and without any action on the part of the holders thereof, shall no longer be outstanding and shall be canceled and retired and shall cease to exist, and each holder of a certificate representing any such AROC Shares (other than Excluded Shares) shall thereafter cease to have any rights with respect to such AROC Shares, except the right to receive the Merger Consideration for such AROC Shares upon the surrender of such certificate in accordance with Section 3.2(h) or the right, if any, to receive payment from the Surviving Corporation of the "fair value" of such Shares as determined in accordance with (S)17-16-1325 of the WBCA. 10 (2) At the Effective Time, each AROC Share issued and outstanding at the Effective Time and owned by AROC Delaware or held in AROC's treasury or owned by AROC or any direct or indirect subsidiary of AROC shall, by virtue of the Merger and without any action on the part of the holder thereof, cease to be outstanding, shall be canceled and retired without payment of any consideration therefor and shall cease to exist. (3) At the Effective Time, each Newco Share issued and outstanding at the Effective Time shall continue to be outstanding and shall not be affected by the Merger. (4) At the Effective Time, each AROC Delaware Share issued and outstanding at the Effective Time (other than AROC Delaware Shares issued or to be issued pursuant to the Offer) shall, by virtue of the merger and without any action on the part of the holder thereof, cease to be outstanding, shall be canceled and retired without payment of any consideration therefore and shall cease to exist. (h) Payment for AROC Shares. ----------------------- (1) AROC Delaware shall make available or cause to be made available to the Paying Agent at the Effective Time certificates representing the AROC Delaware Shares sufficient to enable the Paying Agent to deliver the necessary certificates to the former holders of AROC Shares as required by paragraph (b). (2) On or after the Effective Time, each person who was immediately before the Effective Time a holder of record of issued and outstanding AROC Shares may deliver to the Paying Agent a letter of transmittal in a form suitable to the Paying Agent duly executed and completed in accordance with the instructions thereto, together with such holders' certificates representing such AROC Shares, and AROC Delaware shall cause the Paying Agent to deliver to such holders certificates in respect of the AROC Delaware Shares and any dividends or distributions thereon to which such holders are then entitled. (3) Fractional AROC Delaware Shares will not be issued to any person. In lieu of issuing a fractional AROC Delaware Share to any person, AROC Delaware will round the number of AROC Delaware Shares to be issued to each person to the nearest whole number of AROC Delaware Shares. (4) If AROC Delaware Shares are to be issued to a person other than the registered holder of the certificates surrendered, it shall be a condition of such issue that the certificates so surrendered shall be properly endorsed or otherwise in proper form for transfer and that the person requesting such delivery shall pay any transfer or other taxes required by reason of the delivery to a person other than the registered holder of the certificates surrendered or establish to the satisfaction of AROC Delaware or the Paying Agent that such tax has been paid or is not applicable. (i) Dissenters' Rights. ------------------ (1) Notwithstanding anything in this Agreement to the contrary, AROC Shares that are issued and outstanding immediately prior to the Effective Time and that are held by AROC 11 Stockholders who have delivered a written demand for appraisal of such AROC Shares in the manner provided in Section 17-16-1321 of the WBCA (the "Dissenting Shares") shall not be canceled and the holders thereof shall not receive the right to receive the consideration provided in Section 3.2(g)(1), unless and until such holder shall have failed to perfect or shall have effectively withdrawn or lost the right to appraisal and payment under the WBCA, as the case may be. If such holder shall have failed to perfect or shall have effectively withdrawn or lost such right, the AROC Shares shall thereupon be deemed to have been canceled and the holders thereof to have become entitled, with effect from the Effective Time, to receive the consideration specified in Section 3.2(g)(1). (2) AROC promptly shall give Alliance notice of any demand made by or on behalf of any dissenting AROC Stockholder to be paid the "fair value" of the AROC Stockholder's AROC Shares, as provided in Section 17-16-1321 of the WBCA, and the Surviving Corporation shall thereupon have sole and exclusive rights to conduct and resolve, in its sole discretion, all negotiations and proceedings with respect to, and the ultimate disposition of, any such demands in any manner that the Surviving Corporation may elect. All such payments shall be made solely by the Surviving Corporation and shall not be made by, nor shall Alliance reimburse the Surviving Corporation for, such payments. (j) Transfer of AROC Shares After the Effective Time. No transfers of AROC ------------------------------------------------ Shares shall be made on the stock transfer books of the Surviving Corporation at or after the Effective Time. If, after the Effective Time, certificates formerly representing AROC Shares are presented to the Surviving Corporation, they shall be canceled and the holders thereof shall instead be entitled to be issued AROC Delaware Shares as provided in this Section 3.2. ----------- 4. Representations, Warranties and Covenants of AROC. Except as expressly set ------------------------------------------------- forth and specifically identified by section number of this Agreement in the AROC Disclosure Schedule, AROC represents, warrants and covenants to Alliance, on the date hereof and as of the Mailing Date, as follows: 4.1. Corporate Organization. ---------------------- (a) Each of the AROC Entities is a corporation duly organized and validly existing as a corporation and in good standing under the laws of its jurisdiction of incorporation. (b) Each of the AROC Entities has the requisite corporate power and authority to carry on its business as now being conducted and to own, lease and operate its property and assets, and each of the AROC Entities is duly qualified or licensed to do business and is in good standing in every jurisdiction in which the failure to be so qualified and licensed could have a Material Effect. (c) AROC has delivered or made available to Alliance true, correct and complete copies of each of the AROC Entities' respective Certificate of Incorporation and Bylaws as presently in effect. 4.2. Capitalization. -------------- (a) The authorized capital stock of AROC consists of 20,000,000 shares of common stock, par value $0.01 per share, 3,615,770 of which are issued and outstanding, 8,000,000 shares of class B common stock, par value $0.01 per share, 7,267,820 of which are issued and outstanding, and 12 5,000,000 shares of preferred stock, par value $0.50 per share, none of which are outstanding. The authorized capital stock of AROC Delaware consists of 100 shares of common stock, par value $0.001 per share, all of which are issued and outstanding. Section 4.2 of the AROC Disclosure Schedule sets forth the number and type of securities of AROC that may be acquired pursuant to outstanding options or rights to purchase AROC Common Shares and the exercise prices at which such equity securities may be acquired. All of the issued shares of each of the AROC Entities are, and all of the AROC Delaware Shares to be issued pursuant to the Offer, when issued in accordance with the terms of the Offer, will be validly issued, fully paid and nonassessable and none of such shares have been issued in violation of the preemptive rights of any person. AROC has no shares of capital stock reserved for issuance. (b) Except as described in Section 4.2(a), there are no (i) shares of capital stock or other securities bearing voting or other equity rights, whether contingent or not, of any of the AROC Entities outstanding; (ii) outstanding subscriptions, puts, options, warrants or other rights, contract ual or otherwise, to purchase or acquire any capital stock of any of the AROC Entities; or (iii) contracts, commitments, understandings, arrangements or restrictions by which any of the AROC Entities is or may become bound to issue any additional equity interests or any options or rights with respect thereto, or any securities convertible into any equity interests. (c) The issued and outstanding stock of AROC owned by the directors, executive officers and 5% or greater stockholders of AROC is owned of record, and to the knowledge of AROC, beneficially, as described in the AROC Form 10-K. AROC owns all of the issued and outstanding stock of each of its Subsidiaries, directly or indirectly, free and clear of all Encumbrances. Except for its Subsidiaries, neither AROC nor any of its Subsidiaries owns or holds any equity, debt or other interest in any entity or business or any option to acquire any such interest, except for accounts receivable that have arisen in the ordinary course of business. 4.3. Authority; No Violation. ----------------------- (a) The execution and performance of this Agreement by AROC have been duly and validly authorized by the board of directors of AROC and, except for the approval of the AROC shareholders, no other corporate action is necessary to authorize the execution, delivery and performance of this Agreement by AROC. AROC has full, absolute and unrestricted right, power and authority to execute and perform this Agreement and, subject to the approval of the AROC shareholders, to carry out the transactions contemplated hereby. This Agreement has been duly and validly executed by AROC and, is a valid and binding obligation of AROC, enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, moratorium, reorganization, receivership or similar laws affecting the rights of creditors generally. (b) None of the execution, delivery or performance of this Agreement does or will, after the giving of notice, lapse of time or otherwise, (i) result in any violation of or be in conflict with or constitute a default under any term or provision of the Certificate of Incorporation or Bylaws of any of the AROC Entities of or any term or provision of any judgment, decree, order, statute, injunction, rule or regulation applicable to any of the AROC Entities, or of any material note, bond, mortgage, indenture, lease, license, franchise, agreement or other instrument or obligation to which any of the AROC Entities is bound; (ii) result in the creation of any material Encumbrance upon AROC Shares, any of the Alliance Assets or any of the AROC Assets pursuant to any such term or provision; or (iii) constitute a material default under or give any party the right to accelerate, amend or modify, 13 terminate, abandon or refuse to perform or comply with, any material contract, agreement, arrangement, commitment or plan to which any AROC Entities is a party, or by which any of the AROC Entities or any of their rights, properties or assets may be subject or bound. 4.4. Consents and Approvals. No consent, waiver, approval or ---------------------- authorization of, or declaration, designation, filing, registration or qualification with, any Governmental Entity or any third party, is required to be made or obtained by the AROC Entities in connection with the execution, delivery and performance of this Agreement or to preserve any material rights and benefits enjoyed by any of the AROC Entities on the date hereof following the consummation of the transactions contemplated by this Agreement except (a) those that have already been obtained or (b) those specifically contemplated by this Agreement. 4.5. Violations of Laws, Permits, etc. --------------------------------- (a) None of the AROC Entities is in violation of any term or provision of its Certificate of Incorporation or Bylaws. None of the AROC Entities is in violation of any term or provision of any judgment, decree, order, statute, injunction, rule, ordinance or regulation applicable to it, or of any agreement or instrument applicable to such entity where the violation thereof would result in a Material Effect. (b) Each of the AROC Entities holds and has maintained in full force and effect all certificates, licenses and permits material to the conduct of its business, and has not received any notification that any revocation or limitation thereof is threatened or pending where such revocation or limitation would result in a Material Effect. 4.6. AROC Reports. AROC has made available to Alliance each of the AROC ------------ Reports. As of their respective dates, the AROC Reports did not, and any AROC Reports filed with the Commission subsequent to the date of this Agreement will not, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances in which they were made, not misleading. 4.7. AROC Financial Statements. ------------------------- (a) In all material respects the consolidated AROC Financial Statements fairly present the consolidated assets, liabilities and financial position of the respective entities purported to be covered thereby as of the dates thereof and the results of their operations and cash flow for the respective periods ended on such dates, all in conformity with GAAP consistently applied. (b) The AROC Financial Statements were prepared from the books and records of each of the respective entities purported to be covered thereby. Such AROC Financial Statements do not contain any items of a material special or nonrecurring nature, except as expressly noted in such statements. 4.8. No Undisclosed Liabilities, etc. None of the AROC Entities has any -------------------------------- material liabilities or obligations, whether direct, indirect, absolute or contingent (including, without limitation, liabilities as guarantor or otherwise with respect to obligations of others), except (a) liabilities that are fully reflected on or reserved against on the latest balance sheet of such entity included in the AROC Financial Statements or (b) liabilities incurred in the ordinary course of 14 business since the date of the latest balance sheet included in the AROC Financial Statements that are consistent with past practice. 4.9. Absence of Certain Changes. Since the date of the latest audited -------------------------- AROC Financial Statement, none of the AROC Entities has: (a) Suffered any change that would result in a Material Effect; (b) Borrowed any money or incurred, assumed or become subject to, whether directly or by way of guarantee or otherwise, any other material obligation or liability for borrowed money, whether absolute or contingent; (c) (i) Issued, purchased or redeemed any of its capital securities or any option, warrant or right to purchase any of the same; or (ii) authorized, declared or made any dividends, distributions of earnings or capital on, or splits or any other reclassification of its equity securities; (d) Acquired any material assets or properties having a value in excess of $100,000 in the aggregate; (e) Increased the salaries, compensation, pension or other benefits payable, or paid any bonuses, to its officers and directors or their Affiliates; (f) Agreed, either in writing or otherwise, to take any action described in this Section 4.9. ----------- 4.10. Data Regarding the AROC Assets. All of the information made or to ------------------------------ be made available to Alliance and its representatives regarding the AROC Assets is accurate and complete in all material respects, when considered in context and together with all relevant information made available. 4.11. Litigation. ---------- (a) There is no action, proceeding, investigation or inquiry pending or, to the knowledge of the AROC Entities, threatened (i) against or affecting any of the AROC Entities or their assets or ordinary conduct of the business that, if determined adversely to the AROC Entities, would result in a Material Effect, except as described in the AROC Reports, or (ii) that questions this Agreement or any action contemplated by this Agreement or in connection with the Merger. (b) There are no citations, fines or penalties heretofore asserted against any of the AROC Entities or their assets under any federal, state or local law relating to air, noise or water pollution or other environmental protection matters, or relating to occupational health or safety, of which such entity has received notice and that remain unpaid or that could otherwise bind the assets of any of the AROC Entities and that would result in a Material Effect. (c) AROC has no knowledge of any state of facts or of the occurrence or nonoccurrence of any event or group of related events, that should reasonably cause AROC to determine that there exists any basis for any material claim against the AROC Entities for any of the matters described in paragraphs (a) or (b). 15 4.12. Tax Returns and Payments. ------------------------ (a) The AROC Entities (or the common parent of any affiliated group of which any of such entities is or has been a member) have duly filed in correct form in all material respects all Tax Returns required to be filed by such entities and have duly paid or provided for payment of (or there have been paid on their behalf) all Taxes due or claimed to be due from them by federal, state, local or foreign taxing authorities, excluding Taxes that are being contested in good faith by appropriate proceedings and as to which adequate reserves have been provided in the AROC Financial Statements. (b) There are no tax liens upon any property or assets owned by any of the AROC Entities that would have a Material Effect. (c) All Tax Returns of the AROC Entities filed, including any amendments to date, have been prepared in good faith without willful misrepresentation and are complete and accurate in all material respects. The federal income tax returns of the AROC Entities have been examined by the Internal Revenue Service for all periods described in Section 4.12 of the AROC Disclosure Schedule, and all deficiencies assessed as a result of such examination have been paid in full or finally settled and no issue has been raised by the Internal Revenue Service in any such examination that has been resolved adversely to any of the AROC Entities or is still pending and, by application of similar principles, reasonably could be expected to result in an assertion by the Internal Revenue Service of a material deficiency in any other taxable year or with respect to any other of the AROC Entities. There are no outstanding agreements, waivers or other arrangements providing for an extension of time with respect to the filing of any Tax Returns or the payment by, or assessment against, any of the AROC Entities for any Taxes. (d) The reserves made for Taxes on the respective balance sheets in the AROC Financial Statements are sufficient for the payment of all unpaid Taxes due and payable by the AROC Entities attributable to all periods ended on or before the date of the respective balance sheets in accordance with GAAP. 4.13. Bank Accounts. AROC has provided Alliance with the names and ------------- locations of all bank institutions at which the AROC Entities maintain accounts or lock boxes of any nature, the account or box number and the names of all persons authorized to draw thereon or make withdrawals therefrom. 4.14. Contracts. --------- (a) AROC has made available to Alliance complete and correct copies of all written agreements, contracts and commitments, together with all amendments thereto, and accurate (in all material respects) descriptions of all oral agreements, to which any of the AROC Entities is a party or by which any of their properties is bound. Such agreements, contracts and commitments are in full force and effect, and all of such entities and, to the knowledge of the AROC Entities, all other parties to such agreements, contracts and commitments have performed all obligations required to be performed by them to date thereunder in all material respects and are not in default thereunder in any material respect. 16 (b) None of the AROC Entities is a party to or bound by any employment, management, consulting, option, note, loan, lease or other agreements with any of the officers, directors or shareholders of more than 5% of the outstanding securities of any of the AROC Entities; (c) None of the AROC Entities is a party to any agreement that, upon or after completion of the Merger, could result in the creation of any Encumbrance upon any of the Alliance Assets or any of the assets of AROC Delaware other than the AROC Assets. (d) None of the AROC Entities has outstanding any powers of attorney, including powers of attorney with respect to representation before any Governmental Entity, customs agents and brokers, or given in connection with qualification to conduct business in any other jurisdiction. 4.15. Compensation and Employee Plans. ------------------------------- (a) AROC has provided Alliance (i) the names and current annual compensation rates of all present directors, officers, employees, independent contractors or agents of each of the AROC Entities and (ii) the number, job category and range of compensation by job category of all employees of such entities. (b) AROC has made available to Alliance the name of each Plan applicable to any of the AROC Entities and all documents evidencing any Plan applicable to any of the AROC Entities. (c) Each Plan applicable to any of the AROC Entities is now, and has been from its inception, administered in compliance in all material respects with the provisions of all applicable laws and regulations, including ERISA, the Code and the ADEA, insofar as such statutes are applicable to such Plan. 4.16. Brokers, Finders and Advisors. AROC has not employed any broker, ----------------------------- finder, or investment advisor on its behalf, or incurred any liability for any brokerage or finder's fees or commissions in connection with the transaction contemplated hereby. 4.17. Labor Force. Each of the AROC Entities is in compliance in all ----------- material respects with all applicable laws (including without limitation federal income tax laws), ordinances, regulations, statutes, rules and restrictions of any Governmental Entity respecting employment and employment practices and terms and conditions of employment. 4.18. Books and Records. The books and records of each of the AROC ----------------- Entities (including, without limitation, the books of account, minute books and stock record books) are complete and correct in all material respects and have been maintained in accordance with sound business practices. The minute books of each of the AROC Entities contain accurate and complete records in all material respects of all meetings held of, and corporate action taken by, the shareholders and the Boards of Directors of the respective entities and no meetings of or actions by such shareholders or any such Boards of Directors have been held or taken for which minutes have not been prepared and are not contained in such minute books. None of the records and written documents furnished or made available to Alliance's representatives or agents by the AROC Entities concerning the AROC Assets, when considered in context and together with any relevant or related documents also so furnished or made available, contain any untrue statement of material fact or omit a material fact necessary to make any statement therein not misleading. 17 4.19. Payments. None of the AROC Entities has, directly or indirectly, -------- paid or delivered any fee, commission or other sum of money or item of property however characterized to any finder, agent, government official or other party, in the United States or any other country, in any manner related to its business or operations, which such entity knows or has reason to believe to have been illegal under any federal, state or local laws of the United States or any other country or territory having jurisdiction over such entity, and has not participated, directly or indirectly, in any boycotts or similar practices. 4.20. Commission Filings. AROC has filed all forms, reports and documents ------------------ required to be filed with the Commission since January 1, 1996 . All of such filings were prepared in accordance with the requirements of all applicable laws and did not at the time they were filed contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. 4.21. Disclosure. No representation or warranty made by AROC in this ---------- Agreement (including, without limitation, in the AROC Disclosure Schedule) contains any untrue statement of material fact or omits or will omit to state any material fact necessary to make the statements herein or therein not misleading in light of the circumstances under which made. 5. Representations, Warranties and Covenants of Alliance. ----------------------------------------------------- Except as expressly set forth and specifically identified by section number of this Agreement in the Alliance Disclosure Schedule, Alliance represents, warrants and covenants to AROC, on the date hereof and as of the Mailing Date, as follows: 5.1. Organization, etc. ----------------- (a) Alliance is a public limited company duly incorporated and validly existing under the laws of England and Wales. (b) Each of Alliance's U.K. Subsidiaries is a limited company duly incorporated and validly existing under the laws of England and Wales. Each of Alliance's other Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation. (c) Each of the Alliance Entities has the requisite corporate power and authority to carry on its business as now being conducted and to own, lease and operate its property and assets, and each of the United States Alliance Entities is duly qualified or licensed to do business and is in good standing in every jurisdiction in which the failure to be so qualified and licensed could have a Material Effect. (d) Alliance has delivered or made available to AROC true, correct and complete copies of the organizational documents of each of the Alliance Entities as presently in effect. 18 5.2. Capitalization. -------------- (a) The authorized capital stock of Alliance consists of 415,001,376 ordinary shares of (Pounds)0.01 each, 47,487,142 of which are issued and outstanding, 10,000,000 shares of Alliance Convertible Stock, of which 10,000,000 are issued and outstanding and 1,414,998,624 deferred shares of 1p each of which 1,217,166,912 are issued and outstanding. There are outstanding options to subscribe for 3,040,000 Alliance Ordinary Shares at subscription prices varying from 13.5p to (Pounds)3.00. There are outstanding warrants to purchase 5,079,149 Alliance Ordinary Shares at purchase prices varying from 1p to (Pounds)1.00 per share and outstanding convertible loan notes that are convertible into 1,078,125 Alliance Common Shares at any time upon the payment by the holder to Alliance of 1p per share. All of the issued shares of each of the Alliance Entities are validly issued, fully paid and nonassessable and none of such shares have been or will be issued in violation of the preemptive rights of any person. (b) Except as described in Section 5.2(a), there are no (i) shares of capital stock or other securities bearing voting or other equity rights, whether contingent or not, of any of the Alliance Entities outstanding; (ii) outstanding subscriptions, puts, options, warrants or other rights, contract ual or otherwise, to purchase or acquire any capital stock of any of the Alliance Entities; or (iii) contracts, commitments, understandings, arrangements or restrictions by which any of the Alliance Entities is or may become bound to issue any additional equity interests or any options or rights with respect thereto, or any securities convertible into any equity interests. (c) The issued and outstanding stock of Alliance owned by the directors and 5% or greater stockholders of Alliance is owned of record, and to the knowledge of Alliance, beneficially, as described in the Alliance Proxy Statement. Alliance beneficially owns all of the issued and outstanding stock of each of its Subsidiaries, directly or indirectly, free and clear of all Encumbrances. Except for its Subsidiaries, neither Alliance nor any of its Subsidiaries owns or holds any equity, debt or other interest in any entity or business or any option to acquire any such interest, except for accounts receivable that have arisen in the ordinary course of business. 5.3. Authority; No Violation. ----------------------- (a) The execution and performance of this Agreement by Alliance have been duly and validly authorized by the board of directors of Alliance and no other corporate action is necessary to authorize the execution, delivery and performance of this Agreement by Alliance. Alliance has full, absolute and unrestricted right, power and authority to execute and perform this Agreement and to carry out the transactions contemplated hereby. This Agreement has been duly and validly executed by Alliance and is a valid and binding obligation of Alliance, enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, moratorium, reorganization, receivership or similar laws affecting the rights of creditors generally. (b) None of the execution, delivery or performance of this Agreement does or will, after the giving of notice, lapse of time or otherwise, (i) result in any violation of or be in conflict with or constitute a default under any term or provision of the organizational documents of any of the Alliance Entities, or any term or provision of any judgment, decree, order, statute, injunction, rule or regulation applicable to any of the Alliance Entities or of any material note, bond, mortgage, indenture, lease, license, franchise, agreement or other instrument or obligation to which any of the Alliance Entities is bound; (ii) result in the creation of any material Encumbrance upon Alliance 19 Shares, any of the AROC Assets or any of the Alliance Assets pursuant to any such term or provision; or (iii) constitute a material default under or give any party the right to accelerate, amend or modify, terminate, abandon or refuse to perform or comply with, any material contract, agreement, arrangement, commitment or plan to which any of the Alliance Entities is a party, or by which any of the Alliance Entities or any of their rights, properties or assets may be subject or bound. 5.4. Consents and Approvals. No consent, waiver, approval or ---------------------- authorization of, or declaration, designation, filing, registration or qualification with, any Governmental Entity or any third party, is required to be made or obtained by any of the Alliance Entities in connection with the execution, delivery and performance of this Agreement or to preserve any material rights and benefits enjoyed by any of the Alliance Entities on the date hereof following the consummation of the transactions contemplated by this Agreement except (a) those that have already been obtained or (b) those specifically contemplated by this Agreement. 5.5. Violations of Laws, Permits, etc. --------------------------------- (a) None of the Alliance Entities is in violation of any term or provision of its organizational documents. None of the Alliance Entities is in violation of any term or provision of any judgment, decree, order, statute, injunction, rule, ordinance or regulation applicable to it, or of any agreement or instrument applicable to such entity where the violation thereof would result in a Material Effect. (b) Each of the Alliance Entities holds and has maintained in full force and effect all certificates, licenses and permits material to the conduct of its business, and has not received any notification that any revocation or limitation thereof is threatened or pending where such revocation or limitation would result in a Material Effect. 5.6. Alliance Reports. Alliance has made available to AROC each of the ---------------- Alliance Reports. As of their respective dates, the Alliance Reports did not, and any Alliance Reports filed with the Commission subsequent to the date of this Agreement will not, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances in which they were made, not misleading. 5.7. Alliance Financial Statements. ----------------------------- (a) In all material respects the consolidated Alliance Financial Statements fairly present the consolidated assets, liabilities and financial position of the respective entities purported to be covered thereby as of the dates thereof and the results of their operations and cash flow for the respective periods ended on such dates, all in conformity with GAAP consistently applied, except that the January 31, 1999, unaudited interim financial statements do not contain footnotes (that, if presented, would not differ materially from those in the audited Alliance Financial Statements) and are subject to normal, recurring year-end adjustments (which will not, individually or in the aggregate, have a Material Effect). (b) The Alliance Financial Statements were prepared from the books and records of each of the respective entities purported to be covered thereby. Such Alliance Financial Statements do not contain any items of a material special or nonrecurring nature, except as expressly noted in such statements. 20 5.8. No Undisclosed Liabilities, etc. None of the Alliance Entities has -------------------------------- any material liabilities or obligations, whether direct, indirect, absolute or contingent (including, without limitation, liabilities as guarantor or otherwise with respect to obligations of others), except (a) liabilities that are fully reflected on or reserved against on the latest balance sheet of such entity included in the Alliance Financial Statements or (b) liabilities incurred in the ordinary course of business since the date of the latest balance sheet included in the Alliance Financial Statements that are consistent with past practice. 5.9. Absence of Certain Changes. Since the date of the latest audited -------------------------- Alliance Financial Statement, except as specifically disclosed in the January 31, 1999, unaudited interim consolidated Alliance Financial Statements, none of the Alliance Entities has: (a) Suffered any change that would result in a Material Effect; (b) Borrowed any money or incurred, assumed or become subject to, whether directly or by way of guarantee or otherwise, any other material obligation or liability for borrowed money, whether absolute or contingent; (c) (i) Issued, purchased or redeemed any of its capital securities or any option, warrant or right to purchase any of the same; or (ii) authorized, declared or made any dividends, distributions of earnings or capital on, or splits or any other reclassification of its equity securities; (d) Acquired any material assets or properties, other than oil and gas production in the ordinary course of business, or other assets having a value in excess of $100,000 in the aggregate; (e) Increased the salaries, compensation, pension or other benefits payable, or paid any bonuses, to its officers and directors or their Affiliates; (f) Agreed, either in writing or otherwise, to take any action described in this Section 5.9. ----------- 5.10. Data Regarding the Alliance Assets. All of the information made or ---------------------------------- to be made available to AROC and its representatives regarding the Alliance Assets is accurate and complete in all material respects, when considered in context and together with all relevant information made available. 5.11. Litigation. ---------- (a) There is no action, proceeding, investigation or inquiry pending or, to the knowledge of the Alliance Entities, threatened (i) against or affecting any of the Alliance Entities or their assets or ordinary conduct of the business that, if determined adversely to the Alliance Entities, would result in a Material Effect, except as described in the Alliance Reports, or (ii) that questions this Agreement or any action contemplated by this Agreement or the transactions contemplated hereby. (b) There are no citations, fines or penalties heretofore asserted against any of the Alliance Entities or their assets under any federal, state or local law relating to air, noise or water pollution or other environmental protection matters, or relating to occupational health or safety, of which such 21 entity has received notice and that remain unpaid or that could otherwise bind the assets of any of the Alliance Entities and that would result in a Material Effect. (c) Alliance has no knowledge of any state of facts or of the occurrence or nonoccurrence of any event or group of related events, that should reasonably cause Alliance to determine that there exists any basis for any material claim against the Alliance Entities for any of the matters described in paragraphs (a) or (b). 5.12. Tax Returns and Payments. ------------------------ (a) The Alliance Entities (or the common parent of any affiliated group of which any of such entities is or has been a member) have duly filed in correct form in all material respects all Tax Returns required to be filed by such entities and have duly paid or provided for payment of (or there have been paid on their behalf) all Taxes due or claimed to be due from them by federal, state, local or foreign taxing authorities, excluding Taxes that are being contested in good faith by appropriate proceedings and as to which adequate reserves have been provided in the Alliance Financial Statements. (b) There are no tax liens upon any property or assets owned by any of the Alliance Entities that would have a Material Effect. (c) All Tax Returns of the Alliance Entities filed, including any amendments to date, have been prepared in good faith without willful misrepresentation and are complete and accurate in all material respects. The federal income tax returns of the Alliance Entities have been examined by the Internal Revenue Service for all periods described in Section 5.12 of the Alliance Disclosure Schedule, and all deficiencies assessed as a result of such examination have been paid in full or finally settled and no issue has been raised by the Internal Revenue Service or other relevant tax authority in any such examination that has been resolved adversely to any of the Alliance Entities or is still pending and, by application of similar principles, reasonably could be expected to result in an assertion by the Internal Revenue Service or other relevant tax authority of a material deficiency in any other taxable year or with respect to any other of the Alliance Entities. There are no outstanding agreements, waivers or other arrangements providing for an extension of time with respect to the filing of any Tax Returns or the payment by, or assessment against, any of the Alliance Entities for any Taxes. (d) The reserves made for Taxes on the respective balance sheets in the Alliance Financial Statements are sufficient for the payment of all unpaid Taxes due and payable by the Alliance Entities attributable to all periods ended on or before the date of the respective balance sheets in accordance with GAAP. 5.13. Contracts. --------- (a) Alliance has made available to AROC complete and correct copies of all written agreements, contracts and commitments, together with all amendments thereto, and accurate (in all material respects) descriptions of all oral agreements, in all cases, to which any of the Alliance Entities is a party or by which any of their properties is bound. Such agreements, contracts and commitments are in full force and effect, and all of such entities and, to the knowledge of the Alliance Entities, all other parties to such agreements, contracts and commitments have performed 22 all obligations required to be performed by them to date thereunder in all material respects and are not in default thereunder in any material respect. (b) None of the Alliance Entities has outstanding any powers of attorney, including powers of attorney with respect to representation before any Governmental Entity, customs agents and brokers, or given in connection with qualification to conduct business in any other jurisdiction. 5.14. Compensation and Employee Plans. ------------------------------- (a) Alliance has provided AROC (i) the names and current annual compensation rates of all present directors, officers, employees, independent contractors or agents of each of the Alliance Entities and (ii) the number, job category and range of compensation by job category of all employees of such entities. (b) Alliance has made available to AROC the name of each Plan applicable to any of the Alliance Entities and all documents evidencing any Plan applicable to any of the Alliance Entities. (c) Each Plan applicable to any of the Alliance Entities is now, and has been from its inception, administered in compliance in all material respects with the provisions of all applicable laws and regulations, including ERISA, the Code and the ADEA, insofar as such statutes are applicable to such Plan. 5.15. Brokers, Finders and Advisors. Alliance has not employed any ----------------------------- broker, finder, or investment advisor on its behalf, or incurred any liability for any brokerage or finder's fees or commissions in connection with the transaction contemplated hereby. 5.16. Labor Force. Each of the Alliance Entities is in compliance in all ----------- material respects with all applicable laws (including without limitation federal income tax laws), ordinances, regulations, statutes, rules and restrictions of any Governmental Entity respecting employment and employment practices and terms and conditions of employment. 5.17. Books and Records. The books and records of each of the Alliance ----------------- Entities (including, without limitation, the books of account, minute books and stock record books) are complete and correct in all material respects and have been maintained in accordance with sound business practices. The minute books of each of the Alliance Entities contain accurate and complete records in all material respects of all meetings held of, and corporate action taken by, the shareholders and the Boards of Directors of the respective entities and no meetings of or actions by such shareholders or any such Boards of Directors have been held or taken for which minutes have not been prepared and are not contained in such minute books. None of the records and written documents furnished or made available to AROC's representatives or agents by the Alliance Entities concerning the Alliance Assets, when considered in context and together with any relevant or related documents also so furnished or made available, contain any untrue statement of material fact or omit a material fact necessary to make any statement therein not misleading. 5.18. Payments. None of the Alliance Entities has, directly or -------- indirectly, paid or delivered any fee, commission or other sum of money or item of property however characterized to any finder, agent, government official or other party, in the United States or any other country, in any manner related to its business or operations, which such entity knows or has reason to believe to have been 23 illegal under any federal, state or local laws of the United States or any other country or territory having jurisdiction over such entity, and has not participated, directly or indirectly, in any boycotts or similar practices. 5.19. Commission Filings. Alliance has filed all forms, reports and ------------------ documents required to be filed with the Commission since May 1, 1997. All of such filings were prepared in accordance with the requirements of all applicable laws and did not at the time they were filed contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. 5.20. Disclosure. No representation or warranty made by Alliance in this ---------- Agreement (including, without limitation, in the Alliance Disclosure Schedule) contains any untrue statement of material fact or omits or will omit to state any material fact necessary to make the statements herein or therein not misleading in light of the circumstances under which made. 6. Actions of AROC Prior to the Mailing Date. ----------------------------------------- 6.1. Affirmative Covenants. Prior to the Mailing Date, AROC covenants --------------------- that, unless the prior written consent of Alliance is first obtained, which consent shall not be unreasonably withheld, the AROC Entities will: (a) Carry on their respective businesses in the usual, regular and ordinary course in substantially the same manner as heretofore conducted and use all reasonable efforts to (i) preserve intact their respective present business organizations, (ii) keep available the services of their respective present officers and key employees and (iii) preserve their respective relationships with customers, suppliers and any others having business dealings with them; and (b) Duly comply with all laws applicable to them and their respective properties, operations, business and employees which if not complied with would result in a Material Effect. 6.2. Negative Covenants. Prior to the Mailing Date, except with the ------------------ prior written consent of Alliance, the AROC Entities will not: (a) Do any of the restricted acts set forth in Section 4.9 hereof, or ----------- enter into any agreement of a nature set forth in Section 4.14 hereof; ------------ (b) Enter into or permit any of the AROC Entities to enter into any transaction other than in the ordinary course of business; or (c) Amend the respective organizational or governing documents of any of the AROC Entities. 6.3. Consents. The AROC Entities will use their best efforts to obtain -------- all consents from third parties necessary or appropriate to effectuate the transactions contemplated by this Agreement. 6.4. Advice of Changes. AROC will promptly advise Alliance in writing ----------------- from time to time prior to the Mailing Date with respect to any matter hereafter arising and known to it that, if 24 existing or occurring at the date of this Agreement, would have been required to be set forth or described in the AROC Disclosure Schedule or would have resulted in any representation of AROC in this Agreement being untrue. 6.5. Best Efforts. The AROC Entities will use their best efforts to ------------ cause to be fulfilled those of the conditions to Alliance's obligations to consummate the transactions contemplated by this Agreement that are dependent upon their actions and to execute and deliver such instruments and take such other actions as necessary or appropriate in order to carry out the intent of this Agreement. 6.6. Access to Properties and Records. From and after the date of this -------------------------------- Agreement through the earlier of the Mailing Date or the termination of this Agreement, the AROC Entities shall (a) provide Alliance an identification of and access to all books, records and documents, including contracts, agreements, consents, settlements, revenue and expense information, and all other data and information relating to the AROC Assets, (b) afford to Alliance and their officers, attorneys, accountants and other authorized representatives free and full access during normal business hours to the offices, properties, books and records of the AROC Entities, and (c) cause counsel and accountants to the AROC Entities to furnish such additional financial and operating data and other information as Alliance shall from time to time request in order that Alliance may have full opportunity to make such investigation as they shall desire to make of the affairs of the AROC Entities and their assets. 6.7. Supply Documents, Reports, etc. ------------------------------- (a) AROC shall furnish or make available to Alliance all documents, reports and other information and data (including financial statements) concerning the AROC Entities as Alliance may reasonably require in connection with any statement, application, or document required to be filed with applicable Governmental Entities in connection with the transactions contemplated by this Agreement or furnished to any other person, firm, corporation or Governmental Entity in connection with this Agreement, including, but not limited to the Commission, the Federal Trade Commission and the Department of Justice. (b) AROC represents and warrants that all such information shall be true, correct, and complete in all material respects and shall not omit any material fact required to be stated to make such information not misleading in light of the circumstances under which made. 6.8. AROC Disclosure Schedule. AROC agrees to deliver the AROC ------------------------ Disclosure Schedule to Alliance within seven calendar days after the execution of the Agreement by all parties. 7. Actions of Alliance Prior to the Mailing Date. --------------------------------------------- 7.1. Affirmative Covenants. Prior to the Mailing Date, Alliance --------------------- covenants that, unless the prior written consent of AROC is first obtained, which consent shall not be unreasonably withheld, the Alliance Entities will: (a) Carry on their respective businesses in the usual, regular and ordinary course in substantially the same manner as heretofore conducted and use all reasonable efforts to (i) preserve intact their respective present business organizations, (ii) keep available the services of their 25 respective present officers and key employees and (iii) preserve their respective relationships with customers, suppliers and any others having business dealings with them; and (b) Duly comply with all laws applicable to them and their respective properties, operations, business and employees which if not complied with would result in a Material Effect. 7.2. Negative Covenants. Prior to the Mailing Date, except with the ------------------ prior written consent of AROC, the Alliance Entities will not: (a) Do any of the restricted acts set forth in Section 5.9 hereof, or ----------- enter into any agreement of a nature set forth in Section 5.13 hereof; ------------ (b) Enter into or permit any of the Alliance Entities to enter into any transaction other than in the ordinary course of business; or (c) Amend the respective organizational or governing documents of any of the Alliance Entities. 7.3. Consents. The Alliance Entities will use their best efforts to -------- obtain all consents from third parties necessary or appropriate to effectuate the transactions contemplated by this Agreement. 7.4. Advice of Changes. Alliance will promptly advise AROC in writing ----------------- from time to time prior to the Mailing Date with respect to any matter hereafter arising and known to it that, if existing or occurring at the date of this Agreement, would have been required to be set forth or described in the Alliance Disclosure Schedule or would have resulted in any representation of Alliance in this Agreement being untrue. 7.5. Best Efforts. The Alliance Entities will use their best efforts to ------------ cause to be fulfilled those of the conditions to AROC's obligations to consummate the transactions contemplated by this Agreement that are dependent upon their actions and to execute and deliver such instruments and take such other actions as necessary or appropriate in order to carry out the intent of this Agreement. 7.6. Access to Properties and Records. From and after the date of this -------------------------------- Agreement through the earlier of the Mailing Date or the termination of this Agreement, the Alliance Entities shall (a) provide AROC an identification of and access to all books, records and documents, including contracts, agreements, consents, settlements, maps, revenue and expense information, production data and geological and geophysical data relating to the Alliance Assets, (b) afford to AROC and their officers, attorneys, accountants and other authorized representatives free and full access during normal business hours to the offices, properties, books and records of the Alliance Entities, and (c) cause counsel and accountants to the Alliance Entities to furnish such additional financial and operating data and other information as AROC shall from time to time request in order that AROC may have full opportunity to make such investigation as they shall desire to make of the affairs of the Alliance Entities and their assets. 7.7. Supply Documents, Reports, etc. ------------------------------- (a) Alliance shall furnish or make available to AROC all documents, reports and other information and data (including financial statements) concerning the Alliance Entities as AROC may 26 reasonably require in connection with any statement, application, or document required to be filed with applicable Governmental Entities in connection with the transactions contemplated by this Agreement or furnished to any other person, firm, corporation or Governmental Entity in connection with this Agreement, including, but not limited to the Commission, the Federal Trade Commission and the Department of Justice. (b) Alliance represents and warrants that all such information shall be true, correct, and complete in all material respects and shall not omit any material fact required to be stated to make such information not misleading in light of the circumstances under which made. 7.8. Alliance Disclosure Schedule. Alliance agrees to deliver the ---------------------------- Alliance Disclosure Schedule to AROC within seven calendar days after the execution of the Agreement by all parties. 8. Conditions to Alliance's Obligations. Each and every obligation of ------------------------------------ Alliance under this Agreement to be performed on or before the Mailing Date is, at the option of Alliance, subject to the satisfaction on or before the date on which the formal press announcement of the Offer pursuant to the City Code is made (following which the Offer shall be subject only to the conditions set out in the press announcement, including the completion of the Merger) of each of the following conditions: (a) All outstanding options or rights to purchase or acquire AROC Shares shall have been canceled. (b) All employment, management, consulting, option, note, loan, lease or other agreements with any of the officers, directors or shareholders of more than 5% of the outstanding securities of any of the AROC Entities shall have been terminated without liability to Alliance, AROC or AROC Delaware. All amounts owed to AROC by any officer, director or shareholder of more than 5% of the outstanding securities of any of the AROC Entities shall have been repaid in full. (c) The agreements described in Sections 10.4, 10.5 and 10.6 shall have ------------- ---- ---- been entered into and the actions required by Section 10.7 shall have occurred. ------------ (d) (i) All of the terms, covenants and conditions of this Agreement to be complied with or performed by AROC at or before the Mailing Date shall have been duly complied with and performed in all material respects, (ii) the representations and warranties of AROC set forth in Article 4, as modified by --------- the statements contained in the AROC Disclosure Schedule, shall be true in all material respects on and as of the Mailing Date with the same force and effect as if such representations and warranties had been made on and as of the Mailing Date (but this provision shall not mean that representations and warranties relating to a specific date, shall relate to any other date) and (iii) Alliance shall have received a certificate to such effect from an officer of AROC. Whether the conditions in subparagraphs (i) and (ii) above have been satisfied shall be determined without regard to any materiality qualifications or provisions contained in any such covenants, representations or warranties. (e) All consents, waivers, approvals, licenses, authorizations of, or filings or declarations with third parties or Governmental Entities required to be obtained by the AROC Entities in order to permit the transactions contemplated by this Agreement to be consummated in accordance with governmental laws, rules, regulations and agreements shall have been obtained, and the registration 27 statement required by Section 2.1(a) shall be effective under the Securities -------------- Act, no stop orders suspending the effectiveness of the registration statement shall have been issued, no action, suit, proceeding or investigation by the Commission to suspend the effectiveness thereof shall have been initiated and be continuing, and all necessary approvals under state securities laws or the Securities Act or the Securities Exchange Act of 1934 relating to the issuance or trading of the Alliance Shares issuable pursuant to the Offer shall have been received. (f) Alliance shall have received the opinion of counsel for AROC, dated the Mailing Date, in substance and form acceptable to Alliance and its counsel. (g) All actions, proceedings, instruments and documents in connection with the consummation of the transactions contemplated by this Agreement, including the forms of all documents, legal matters, opinions and procedures in connection therewith, shall have been approved in form and substance by counsel for Alliance, which approval shall not be unreasonably withheld. (h) The AROC Entities shall have furnished such certificates to evidence compliance with the conditions set forth in this Article, as may be reasonably requested by Alliance or its counsel. (i) There shall not have been any material loss resulting from destruction of the AROC Assets due to acts of God, fire, explosion or other casualty which is not reimbursable in all material respects under policies of insurance maintained by or for the benefit of the AROC Entities. (j) No material information or data provided or made available to Alliance by or on behalf of AROC shall be incorrect in any material respect. 9. Conditions to AROC's Obligations. Each and every obligation of AROC under -------------------------------- this Agreement to be performed on the Mailing Date is, at the option of AROC, subject to the satisfaction on or before the date on which the formal press announcement of the Offer pursuant to the City Code is made (following which the Offer shall be subject only to the conditions set out in the press announcement, including the completion of the Merger) of each of the following conditions: (a) The agreements described in Sections 10.4, 10.5 and 10.6 shall have ------------- ---- ---- been entered into and the actions required by Section 10.7 shall have occurred. ------------ (b) (i) All of the terms, covenants and conditions of this Agreement to be complied with or performed by Alliance at or before the Mailing Date shall have been duly complied with and performed in all material respects, (ii) the representations and warranties of Alliance set forth in Article 5, as modified --------- by the statements contained in the Alliance Disclosure Schedule, shall be true in all material respects on and as of the Mailing Date with the same force and effect as if such representations and warranties had been made on and as of the Mailing Date (but this provision shall not mean that representations and warranties relating to a specific date shall relate to any other date), and (iii) AROC shall have received a certificate to such effect from an officer of each of Alliance at Mailing Date. Whether the conditions in subparagraphs (i) and (ii) above have been satisfied shall be determined without regard to any materiality qualifications or provisions contained in any such covenants, representations or warranties. (c) All consents, waivers, approvals, licenses, authorizations of, or filings or declarations with third parties or Governmental Entities required to be obtained by Alliance in order to permit 28 the transactions contemplated by this Agreement to be consummated in accordance with governmental laws, rules, regulations and agreements shall have been obtained, and the registration statement required by Section 2.1(a) shall be -------------- effective under the Securities Act, no stop orders suspending the effectiveness of the registration statement shall have been issued, no action, suit, proceeding or investigation by the Commission to suspend the effectiveness thereof shall have been initiated and be continuing, and all necessary approvals under state securities laws or the Securities Act or the Securities Exchange Act of 1934 relating to the of the Alliance Shares pursuant to this Agreement shall have been received. (d) AROC shall have received opinions from counsel for Alliance dated the Mailing Date, in substance and form acceptable to AROC and its counsel. (e) All outstanding options or other rights to purchase or acquire AROC Shares (other than the Warrants) shall have been canceled without further liability to AROC or Alliance. (f) All actions, proceedings, instruments and documents in connection with the consummation of the transactions contemplated by this Agreement, including the forms of all documents, legal matters, opinions and procedures in connection therewith, shall have been approved in form and substance by counsel for AROC, which approval shall not be unreasonably withheld. (g) Alliance shall have furnished such certificates of its officers and others to evidence compliance with the conditions set forth in this Article, as may be reasonably requested by AROC or its counsel. (h) There shall not have been any material loss resulting from destruction of the Alliance Assets due to acts of God, fire, explosion or other casualty which is not reimbursable in all material respects under policies of insurance maintained by or for the benefit of the Alliance Entities. (i) No material information or data provided or made available to AROC by or on behalf of Alliance shall be incorrect in any material respect. 10. Additional Agreements. --------------------- 10.1. Confidentiality. The parties hereto will, and will cause their --------------- officers, directors, employees and authorized representatives to, hold in confidence all, and not to use or to disclose to others any, nonpublic information received by them from another party hereto in connection with the transactions contemplated by this Agreement; provided, however, the foregoing shall not restrict necessary disclosures in compliance with requirements of any law, governmental order or regulation, the City Code or the rules of the London Stock Exchange. 10.2. Further Assurances. After the Mailing Date, the parties shall ------------------ execute, acknowledge and deliver or cause to be executed, acknowledged and delivered such instruments and take such other action including payment of monies as may be necessary or advisable to carry out their obligations under this Agreement and under any document, certificate or other instrument delivered pursuant hereto or required by law. If at any time subsequent to the Mailing Date, any party comes into possession of money or property belonging to another party, such money or property shall be promptly turned over to the party entitled thereto. 29 10.3. Offices. After the Offer becomes unconditional, the executive ------- offices of AROC shall be located in Tulsa, Oklahoma. 10.4. Warrants. On or prior to the Mailing Date, AROC Delaware shall -------- enter into warrant agreements with the holders of Alliance Warrants, on terms satisfactory to Alliance, providing that, after the Offer becomes unconditional, those warrants will represent the right to receive one AROC Delaware Share in lieu of each Alliance Ordinary Share that they currently represent the right to receive. 10.5. Convertible Shares. On or prior to the Mailing Date, AROC Delaware ------------------ shall enter into agreements with the holders of the Alliance Convertible Shares, on terms satisfactory to Alliance, providing that after the then outstanding Alliance Convertible Shares are tendered pursuant to the Offer and the Offer becomes unconditional, each then outstanding Alliance Convertible Share shall be exchanged for 0.5 AROC Delaware Shares and the right to receive additional AROC Delaware Shares on terms substantially similar to the terms of the Alliance Convertible Shares. 10.6. Convertible Loan Notes. On or prior to the Mailing Date, AROC ---------------------- Delaware shall enter into agreements with the holders of the Alliance Convertible Loan Notes, on terms satisfactory to Alliance, providing that after the Offer becomes unconditional, the then outstanding Alliance Convertible Loan Notes shall be exchanged for notes convertible into one AROC Delaware Share in lieu of each Alliance Ordinary Share that they currently represent the right to receive, on terms substantially similar to the terms of the Alliance Convertible Loan Notes. 10.7. AROC Delaware Capitalization. On or prior to the Mailing Date, AROC ---------------------------- Delaware shall revise its Certificate of Incorporation to provide that the authorized capital stock of AROC Delaware shall consist of 175,000,000 shares of common stock, par value $0.001 per share, 100 of which shall be issued and outstanding, and 10,000,000 shares of preferred stock, par value $0.001 per share, none of which shall be issued and outstanding. 10.8. Indemnification. --------------- (a) Alliance agrees to indemnify and hold harmless each officer and director of AROC (the "Indemnified Parties") from and against any and all losses, claims, damages, liabilities and expenses arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in (i) the documents referred to in Sections 2.1 and 2.2 (or any amendment or ------------ --- supplement to any of them) and (ii) any other document or correspondence prepared by or on behalf of Alliance and furnished to the AROC shareholders or Alliance shareholders pursuant to this Agreement, or arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or expenses arise out of or are based upon any untrue statement or omission or alleged untrue statement or omission which has been made therein or omitted therefrom in reliance upon and in conformity with information provided by AROC or the Indemnified Parties. (b) If any action, suit or proceeding shall be brought against any Indemnified Person in respect of which indemnity may be sought against Alliance pursuant to Section 10.8(a), the Indemnified Party shall promptly notify --------------- Alliance and Alliance shall assume the defense thereof, including the employment of counsel and payment of all fees and expenses. Alliance shall not settle 30 any such action, suit or proceeding without the prior written consent of the Indemnified Party unless such settlement includes an unconditional release of the Indemnified Party from all liability on claims that are the subject matter of such action, suit or proceeding. Alliance shall not be liable for any settlement of any such action, suit or proceeding effected without its written consent. 11. Termination, Waiver and Amendment. --------------------------------- 11.1. Termination. This Agreement and the transactions contemplated ----------- herein may be terminated and abandoned at any time on or prior to the date on which the formal press announcement of the Offer pursuant to the City Code is made. (a) By mutual consent of AROC and Alliance; or (b) By Alliance if: (1) Any representation, warranty or covenant made herein for the benefit of Alliance or any certificate, schedule or document furnished to Alliance pursuant to this Agreement is untrue in any material respect (without regard to any materiality or knowledge qualifications or provisions contained in such representation, warranty or covenant) and such breach is not cured within ten (10) days of AROC's receipt of a notice from Alliance that such breach exists or has occurred; (2) AROC shall have defaulted in any material respect (without regard to any materiality qualifications or provisions contained in such representation, warranty or covenant) in performance of any material obligation under this Agreement and such breach is not cured within ten (10) days of AROC's receipt of a notice from Alliance that such breach exists or has occurred; or (3) Consummation of the transactions contemplated by this Agreement would violate any nonappealable final order, decree or judgment of any court or governmental body having competent jurisdiction; or (c) By AROC if: (1) Any representation, warranty or covenant made herein for the benefit of AROC or any certificate, schedule or document furnished to AROC pursuant to this Agreement is untrue in any material respect (without regard to any materiality or knowledge qualifications or provisions contained in such representation, warranty or covenant) and such breach is not cured within ten (10) days of Alliance's receipt of a notice from AROC that such breach exists or has occurred; (2) Alliance shall have defaulted in any material respect (without regard to any materiality qualifications or provisions contained in such representation, warranty or covenant) in performance of any material obligation under this Agreement and such breach is not cured within ten (10) days of Alliance's receipt of a notice from AROC that such breach exists or has occurred; or 31 (3) Consummation of the transactions contemplated by this Agreement would violate any nonappealable final order, decree or judgment of any court or governmental body having competent jurisdiction; or (d) By AROC in its sole discretion within seven calendar days after its receipt of the Alliance Disclosure Schedule or by Alliance in its sole discretion within seven calendar days after its receipt of the AROC Disclosure Schedule; or (e) By either party if the Mailing Date does not occur on or before December 31, 1999 (or such later date as may be mutually agreed upon by the parties hereto), and such party has complied with the provisions of Section 6.5 ----------- or Section 7.5, as the case may be. ----------- 11.2. Manner of Exercise. In the event of termination and abandonment by ------------------ Alliance or AROC, or both, authorized by Section 11.1, written notice thereof ------------ shall forthwith be given to the other parties and this Agreement shall terminate and the transactions contemplated hereunder shall be abandoned without further action by the parties. 11.3. Effect of Termination. In the event of the termination and --------------------- abandonment authorized by Section 11.1, then, this Agreement shall become void ------------ and have no effect, without any liability on the part of any of the parties or their directors or officers or stockholders in respect of this Agreement and the transactions contemplated hereby, except for the confidentiality obligation of Section 10.1 and this Section 11.3. - ------------ ------------ 12. Miscellaneous. ------------- 12.1. Survival. Except for Sections 2.1 through 2.3 and this Article 12, -------- ------------ --- ---------- the representations, warranties, covenants and agreements of the parties to this Agreement shall not survive after the Offer becomes unconditional and shall thereafter be of no further force and effect for any purpose. 12.2. Expenses. Except as otherwise provided herein, the parties shall -------- each pay their own expenses and costs in connection with this Agreement and the transactions contemplated hereby. 12.3. Press Releases. Subject to the requirements of law, regulatory -------------- bodies, the City Code and the rules of the London Stock Exchange, no party shall make any public announcement or press release with respect to this transaction without first consulting with the other parties and giving such parties the opportunity to review and comment thereon. 12.4. Binding Effect. This Agreement and all of the provisions hereof -------------- shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any party without the prior written consent of the others. Nothing contained herein, express or implied, is intended to confer on any person other than the parties hereto or their respective successors and permitted assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement. 12.5. Severability. Any provision of this Agreement that is prohibited or ------------ unenforceable in any jurisdiction shall, in such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or 32 unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 12.6. Notices. Any notice, request, instructions or other document to be ------- given hereunder to any party shall be in writing, sent by facsimile transmission or delivered personally or by courier or sent by certified mail, postage prepaid, as follows: If to AROC (prior to the completion of the Offer): American Rivers Oil Company 700 East 9/th/ Avenue Denver, Colorado 80203 Attn: Karlton Terry, President FAX: (303)832-2404 If to Alliance (prior to completion of the Offer): Alliance Resources PLC 4200 East Skelly Drive Suite 1000 Tulsa, Oklahoma 74135 Attn: John A. Keenan, Managing Director FAX: (918) 494-4918 Any party may change its address for purposes of this Section by giving written notice of such change of address to the other parties in the manner herein provided for giving notice. Any notice or communication hereunder shall be deemed to have been given when (i) deposited in the United States mail, if by certified mail, and (ii) received, if delivered personally or by courier or facsimile transmission. 12.7. Entire Agreement. This Agreement (including the instruments between ---------------- the parties referred to herein and any waivers delivered pursuant hereto) constitutes the entire agreement among the parties and supersedes all other prior agreements and understandings, both written and oral, among the parties, or any of them, with respect to the subject matter hereof. The exhibits and schedules are a part of this Agreement as if fully set forth herein. All references to articles, sections, subsections, paragraphs, clauses, exhibits and schedules shall be deemed references to such part of this Agreement, unless the context shall otherwise require. 12.8. Amendments; Waivers. No supplement, modification, or amendment of ------------------- this Agreement or waiver of any provision of this Agreement will be binding unless executed in writing by, or on behalf of, all parties to this Agreement. No waiver of any of the provisions of this Agreement will be deemed or will constitute a waiver of any other provision of this Agreement (regardless of whether similar), nor will any such waiver constitute a continuing waiver unless otherwise expressly provided. 12.9. Headings. Descriptive headings contained herein are for convenience -------- of reference only and shall not affect the meaning or interpretation hereof. 33 12.10. Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which shall be deemed to be an original but all of which together shall constitute but one agreement. 12.11. Specific Performance. The parties hereto agree that irreparable -------------------- damage would occur if any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provision hereof in any court of the United States or any state having jurisdiction, in addition to any other remedy to which they are entitled at law or in equity. 12.12. GOVERNING LAW. THIS AGREEMENT AND THE LEGAL RELATIONS AMONG THE ------------- PARTIES HERETO SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF OKLAHOMA APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED IN THAT STATE, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES. 12.13. Schedules. Any item disclosed by any party in the its Disclosure --------- Schedule for one purpose and in response to a specific section of this Agreement shall not be deemed disclosed for any other purpose and in response to any other section of the Agreement unless specifically so stated. 12.14. Time of Essence. Time is of the essence of the parties' obligations --------------- to consummate the transactions contemplated by this Agreement on the Mailing Date. 12.15. Best Efforts. No provision of this Agreement calling for a party to ------------ use its best efforts or reasonable efforts shall be construed so as to require such party to incur out-of-pocket expenditures other than expenditures normally incurred in transactions similar to the Offer or to take any step that would not be commercially reasonable, in light of all of the circumstances. [Remainder of page intentionally left blank] 34 EXECUTED as of the day and year first above written. AROC: AMERICAN RIVERS OIL COMPANY By: ------------------------------------------- Name: Karlton Terry Title: President AROC Delaware: AMERICAN RIVERS OIL COMPANY By: ------------------------------------------- Name: Karlton Terry Title: President Alliance: ALLIANCE RESOURCES PLC By: ------------------------------------------- Name: John A. Keenan Title: Managing Director 35 EX-22.1 9 SUBSIDIARIES Exhibit 22.1 PRINCIPAL SUBSIDIARIES Place of Subsidiary Registration - ---------- ------------ Difco Limited England Alliance Resources (Delaware), Inc. Delaware LaTex Resources, Inc. Delaware LaTex Petroleum Corporation Delaware Germany Oil Company Delaware Alliance Resources Group, Inc. Delaware Alliance Resources (USA), Inc. Delaware Source Petroleum, Inc. Delaware -----END PRIVACY-ENHANCED MESSAGE-----