SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period ___________________ to __________________
Commission file number 0-16487
----------
INLAND RESOURCES INC.
---------------------
(Exact name of small business issuer as specified in its charter)
Washington 91-1307042
- ----------------------------------------- ----------------
(State of incorporation or organization) (IRS Employer Identification No.)
475 17th Street, Suite 1500, Denver, Colorado 80202
- --------------------------------------------- ----------
(Address of principal executive offices) (ZIP Code)
Issuer's telephone number, including area code: (303) 292-0900
---------------
(Former name, address and fiscal year, if changed, since last report)
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Sections 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 XX No
----- -----
Number of shares of common stock, par value $.001 per share, outstanding as of
July 29, 1996: 5,461,925
---------
PART 1. FINANCIAL INFORMATION
INLAND RESOURCES INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995
June 30, December 31,
1996 1995
----------- -------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 4,846,747 $ 2,970,305
Accounts receivable and accrued sales 1,522,989 701,956
Inventory 856,817 417,665
Other current assets 446,263 19,338
----------- -------------
Total current assets 7,672,816 4,109,264
----------- -------------
Property and equipment, at cost:
Oil and gas properties (successful efforts method) 37,131,965 17,404,280
Accumulated depletion, depreciation and amortization (1,398,852) (585,590)
----------- -------------
35,733,113 16,818,690
Other property and equipment, net 748,076 593,106
Debt issue costs, net 389,974 401,803
----------- -------------
Total assets $ 44,543,979 $ 21,922,863
----------- -------------
----------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 3,229,243 $ 2,859,775
Current portion of long-term debt 600,000 48,021
Property reclamation costs, short-term 293,241 200,000
----------- -------------
Total current liabilities 4,122,484 3,107,796
----------- -------------
Long-term debt 16,454,213 4,436,225
Property reclamation costs, long-term 290,250 399,433
Stockholders' equity:
Preferred Class A stock, par value $.001; 20,000,000 shares
authorized, 100,983 and 106,850 shares of Series A issued
and outstanding; liquidation preference of $5,049,150 101 107
Additional paid-in capital - preferred 3,875,121 4,100,261
Common stock, par value $.001; 25,000,000 shares
authorized; issued and outstanding 5,461,925 and
4,092,800, respectively (see Note 4) 5,462 4,093
Additional paid-in capital - common 28,423,146 19,183,119
Accumulated deficit (8,626,798) (9,308,171)
----------- -------------
Total stockholders' equity 23,677,032 13,979,409
----------- -------------
Total liabilities and stockholders' equity $ 44,543,979 $ 21,922,863
----------- -------------
----------- -------------
The accompanying notes are an integral part of the financial statements
1
PART 1. FINANCIAL INFORMATION (CONTINUED)
INLAND RESOURCES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 1996 AND 1995
(Unaudited)
Three months ended Six months ended
June 30, June 30,
----------------------------- -----------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
Sales of oil and gas $2,552,714 $ 575,689 $ 3,244,696 $ 1,128,645
----------- ----------- ----------- -----------
Operating expenses:
Lease operating expenses 290,372 349,331 454,708 736,697
Production taxes 91,646 37,931 122,863 89,035
Exploration 3,422 2,665 13,203 14,592
Depletion, depreciation and amortization 690,233 257,044 885,262 510,709
General and administrative, net 394,800 473,354 671,544 779,785
----------- ----------- ----------- -----------
Total operating expenses 1,470,473 1,120,325 2,147,580 2,130,818
----------- ----------- ----------- -----------
Operating income (loss) 1,082,241 (544,636) 1,097,116 (1,002,173)
Interest expense (320,329) (245,502) (507,263) (421,408)
Other income, net 58,949 43,031 91,520 67,686
----------- ----------- ----------- -----------
Net income (loss) $ 820,861 $ (747,107) $ 681,373 $(1,355,895)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income (loss) per share - Primary $ 0.18 $ (0.26) $ 0.16 $ (0.47)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average common and common
equivalent shares outstanding - Primary 4,465,595 2,892,800 4,300,504 2,892,800
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income (loss) per share - Fully diluted $ 0.14 $ (0.26) $ 0.12 $ (0.47)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average common and common
equivalent shares outstanding - Fully diluted 5,681,227 2,892,800 5,516,135 2,892,800
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Dividends per share NONE NONE NONE NONE
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
The accompanying notes are an integral part of the consolidated financial
statements
2
PART 1. FINANCIAL INFORMATION (CONTINUED)
INLAND RESOURCES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1996 AND 1995
(Unaudited)
1996 1995
------------ ------------
Cash flows from operating activities:
Net income (loss) $ 681,373 $ (1,355,895)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Net cash used by discontinued operations (15,942) (157,980)
Depletion, depreciation and amortization 885,262 510,709
Amortization of debt issue costs and debt discount 42,229
Effect of changes in current assets and liabilities:
Accounts receivable and accrued sales (821,033) 707,571
Inventory (439,152) (16,653)
Other current assets (426,925) 43,236
Accounts payable and accrued expenses 369,468 (316,334)
------------ ------------
Net cash provided (used) by operating activities 275,280 (585,346)
------------ ------------
Cash flows from investing activities:
Development expenditures and equipment purchases (10,954,655) (2,770,748)
Change in restricted cash 160,658
------------ ------------
Net cash used by investing activities (10,954,655) (2,610,090)
------------ ------------
Cash flows from financing activities:
Proceeds from exercise of employee stock options 16,250
Proceeds from issuance of long-term debt 12,578,192 2,100,000
Payments of long-term debt (38,625) (79,778)
------------ ------------
Net cash provided by financing activities 12,555,817 2,020,222
------------ ------------
Net increase (decrease) in cash and cash equivalents 1,876,442 (1,175,214)
Cash and cash equivalents at beginning of period 2,970,305 1,691,156
------------ ------------
Cash and cash equivalents at end of period $ 4,846,747 $ 515,942
------------ ------------
------------ ------------
Noncash financing and investing activity:
Purchase of Farmout Inc. for common stock $ 9,000,000
------------
------------
Issuance of note payable for consulting services $ 87,500
------------
------------
Issuance of note payable for land purchase $ 203,000
------------
------------
The accompanying notes are an integral part of the consolidated financial
statements
3
PART 1. FINANCIAL INFORMATION (CONTINUED)
INLAND RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. COMPANY ORGANIZATION:
Inland Resources Inc. (the "Company") was incorporated on August 12,
1985 in the State of Washington for the purpose of acquiring, exploring and
developing interests in mining properties. In 1987 the Company developed a
leased property (the "Toiyabe Mine") and began production of gold and
silver. Operations at the Toiyabe Mine have included open-pit mining,
crushing, agglomerations, heap leaching and gold and silver recovery
processes. Since 1993, the Company's mining operations have been limited to
the final detoxification, reclamation and closure of the Toiyabe Mine in
compliance with Nevada and federal laws.
Effective March 1, 1993, the Company acquired an undivided 50% interest in
certain oil and gas leases and other assets located in the Uinta Basin in
Duchesne County, Utah (the "Duchesne County Fields"). Accordingly, the
Company's business emphasis changed from precious metals mining to oil and
gas development and production.
Effective September 21, 1994, the Company acquired all the outstanding
common and preferred stock of Lomax Exploration Company, now known as
Inland Production Company ("IPC"). IPC is also engaged primarily in oil and
gas development and production activities in the Uinta Basin area of
Northeastern Utah, in the oil and gas field known as the Monument Butte
Field. IPC operates as a wholly-owned subsidiary of the Company.
Effective July 1, 1995, the Company sold its undivided interest in the
Duchesne County Fields. As a result, the Company is now focused on the
development of the Monument Butte Field where the Company controls
operations for the majority of its holdings and has a significant
infrastructure in place to conduct secondary recovery water flood
operations.
2. BASIS OF PRESENTATION:
The preceding financial information has been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC") and, in the opinion of the Company, includes all normal
and recurring adjustments necessary for a fair statement of the results of
each period shown. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
SEC rules and regulations. Management believes the disclosures made are
adequate to ensure that the financial information is not misleading, and
suggests that these financial statements be read in conjunction with the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1995.
3. RECLASSIFICATIONS:
Certain amounts for 1995 have been reclassified to conform with the 1996
financial statement presentation. The reclassifications had no impact on
net loss or the accumulated deficit.
4
PART 1. FINANCIAL INFORMATION (CONTINUED)
INLAND RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. REVERSE STOCK SPLIT:
On May 22, 1996, the shareholders of the Company approved a 1-for-10
reverse stock split of the Company's common stock. The effect of the stock
split was to lower the authorized common shares from 100,000,000 to
10,000,000 shares and reduce outstanding common shares from 40,927,999 to
4,092,800 shares. The shareholders further approved an increase in the
number of post-split authorized shares from 10,000,000 to 25,000,000
shares. All earnings per share amounts and weighted average common and
common equivalent shares outstanding as reported on the Consolidated
Statement of Operations have been calculated based on post-reverse split
share amounts.
5. PURCHASE OF FARMOUT INC.:
Effective July 1, 1995, Randall D. Smith ("Smith"), the Company and IPC
entered into a Farmout Agreement pursuant to which IPC agreed to farmout to
Smith its interest in certain 40-acre drill sites and Smith agreed to drill
wells on such drill sites between July 1, 1995 and December 31, 1995.
Pursuant to the Farmout Agreement, 21 wells were drilled and funded by
Smith, 20 of which were producing wells and one of which was a
developmental dry hole.
Prior to June 1, 1996, Smith transferred a portion of his interests in the
farmout wells and the Farmout Agreement to two individuals (collectively,
with Smith, the "Farmout Stockholders"). The Farmout Stockholders
transferred all of said interests to Farmout Inc. prior to June 1, 1996.
On June 12, 1996, Smith Management Company, Inc., an affiliate of Smith,
Farmout Inc., the Farmout Stockholders, the Company and IPC entered into an
agreement pursuant to which the Farmout Stockholders transferred one
hundred percent (100%) of the outstanding capital stock of Farmout Inc. to
the Company in exchange for 1,309,880 shares of the Company's common stock.
Under the terms of the agreement, Inland will not issue or deliver the
common stock until January 2, 1997. Since no contingencies exist as to
their issuance, the 1,309,880 shares of common stock are considered
outstanding for purposes of reporting in the accompanying consolidated
financial statements of the Company. The purchase was valued at $9.0
million for accounting purposes. Farmout Inc. is a Utah corporation whose
assets include only the twenty producing farmout wells drilled and operated
by IPC during the period July 1, 1995 to May 31, 1996. Farmout Inc. had no
liabilities at the purchase date. Income tax liabilities arising prior to
June 12, 1996 are the responsibility of the Farmout Stockholders and income
tax liabilities from June 12, 1996 forward are the responsibility of the
Company. Smith and affiliated entities are collectively majority
shareholders of the Company. The acquisition of Farmout Inc. was accounted
for as a purchase, therefore, the assets and results of operations of
Farmout Inc. are included in the Company's consolidated financial
statements from the acquisition date forward. Farmout Inc. operates as a
wholly-owned subsidiary of the Company.
5
PART 1. FINANCIAL INFORMATION (CONTINUED)
INLAND RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. PREFERRED STOCK:
The Company has entered into an agreement to sell to an affiliate of Smith
950,000 shares of a newly designated series of preferred stock of the
Company (the "Series B Preferred Stock") which will have 1,000,000 shares
designated in the series. A director of the Company who is also a Vice
President of Smith Management Company, Inc., entered into a similar
agreement with the Company pursuant to which he agreed to purchase the
remaining 50,000 shares of Series B Preferred Stock. The Series B Preferred
Stock is to be issued by the Company for cash of $10 per share (an
aggregate of $10.0 million) at a closing to take place on July 31, 1996.
Concurrently with the closing of the sale and issuance of the Series B
Preferred Stock, the Company intends to call for redemption its outstanding
Series A Convertible Preferred Stock. Upon receipt of notice of redemption,
each holder of Series A Convertible Preferred Stock will have the right to
elect to receive either (i) cash in the amount of $54.00, or (ii) 9.6726
shares of Common Stock, for each share of Series A Convertible Preferred
Stock held of record by such holder. Each holder of Series A Convertible
Preferred Stock will have 15 days after notice of redemption has been
delivered by the Company to decide whether to elect to receive cash or
Common Stock. To the extent holders of Series A Convertible Preferred Stock
elect to receive cash, the Company intends to use a portion of the proceeds
from the sale of the Series B Preferred Stock to pay such holders of Series
A Convertible Preferred Stock.
The Series B Preferred Stock will bear a dividend of 12% per annum on the
Redemption Price (defined below); will have a liquidation preference over
Common Stock equal to $10.00 per share plus any accumulated and unpaid
dividends; is redeemable at a "Redemption Price" equal to $10.00 per share,
plus accumulated and unpaid dividends; is convertible at a "conversion
price" of $6.27 per share (divided into the Redemption Price) subject to
certain anti-dilution adjustments; and is entitled to one vote per share of
Series B Preferred Stock on all matters submitted to the stockholders of
the Company and will vote with the Common Stock as one voting group or
class, and not as a separate voting group or class, except where required
by law or except with regard to various amendments to the Company's
Articles of Incorporation affecting the Series B Preferred Stock or
creating another series of preferred stock with rights equal to or greater
than the rights of the Series B Preferred Stock. In addition, if at any
time prior to July 31, 1998, (i) the Company sells all or substantially all
of its assets other than in the ordinary course of business, (ii) the
Company merges or consolidates with or into another person, (iii) a change
of control of the Company occurs or (iv) the Company is liquidated or
dissolved, the holders of Series B Preferred Stock will be entitled to a
full two years of accumulated dividends in calculating amounts payable upon
redemption or the number of shares of Common Stock issuable upon
conversion, as the case may be.
7. EARNINGS PER SHARE:
The computation of earnings per common and common equivalent share is based
upon the weighted average number of common shares outstanding during the
period plus the dilutive effect of shares issuable from the exercise of
stock options and warrants less the number of treasury shares assumed to be
purchased using the average market price for the period. The fully diluted
per share computation reflects additional dilution assuming full conversion
of the Series A Convertible Preferred Stock and the additional dilution
related to the exercise stock options and warrants less the number of
treasury shares assumed to be purchased using the market price at the end
of the period.
6
PART 1. FINANCIAL INFORMATION (CONTINUED)
INLAND RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION:
GENERAL:
Effective March 1, 1993, the Company acquired an undivided 50% interest in the
Duchesne County Fields. This purchase changed the Company's business emphasis
from precious metals mining to oil and gas development and production. Effective
September 21, 1994, the Company further increased its oil and gas holdings by
acquiring all the outstanding common and preferred stock of IPC, a company with
significant oil and gas development and production activities in the Monument
Butte Field of Northeastern Utah. Effective July 1, 1995, the Company sold its
undivided interest in the Duchesne County Fields. As a result, the Company is
now focused on the development of the Monument Butte Field where the Company
controls operations for the majority of its holdings and has a significant
infrastructure in place to conduct secondary recovery water flood operations. On
June 12, 1996, the Company further increased its holdings in the Monument Butte
Field by acquiring Farmout Inc.; a company with twenty producing wells in the
Monument Butte Field.
The Company's strategy to continue the profitability experienced in the second
quarter of 1996 is to increase oil and gas production through acquisition of
existing oil and gas production in developed fields, and further developing such
existing production through development drilling, reworking existing wells and
engaging in secondary recovery enhancement operations. Increased production
levels has allowed for more efficient operations at the field level which in
turn has had a positive impact on the Company's equivalent per barrel lifting
costs. In addition, general and administrative costs have decreased in relation
to production since these costs are generally fixed in nature and thereby do not
increase proportionate to production. The Company also intends to continue to
protect the price it receives for a portion of its oil production by entering
into hedging arrangements. The ultimate success of the Company's plan to
continue to operate profitably is primarily dependent on locating and
purchasing properties on terms acceptable to the Company, continuing to secure
sufficient capital to acquire target properties and conduct extensive
development and secondary recovery operations, then successfully implementing
development and secondary recovery plans.
The Company does not generally intend to pursue exploratory drilling in
undeveloped oil and gas properties due to the industry's relatively high
historical failure rate relating to exploratory drilling and the resulting
higher associated finding costs. However, from time to time the Company may for
various reasons determine to drill exploratory wells in certain areas considered
strategic by the Company.
RESULTS OF OPERATIONS:
THREE MONTHS ENDED JUNE 30, 1996 AND 1995:
CONTINUING OPERATIONS. The Company sold the Duchesne County Fields effective
July 1, 1995. Accordingly, the results of operations for the second quarter of
1996 does not include any activity from the Duchesne County Fields while the
results of operations for the second quarter of 1995 includes three full months
of activity. In addition, the Company acquired Farmout Inc. June 12, 1996.
The results of operations of Farmout Inc. are consolidated as a component
of the Company's results of operations from the purchase date forward.
7
PART 1. FINANCIAL INFORMATION (CONTINUED)
INLAND RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OIL AND GAS SALES - Oil and gas sales during the second quarter of 1996
exceeded the previous year second quarter by approximately $2.0 million, or
343%. The increase was attributable to increased oil sales volumes in the
Monument Butte Field and increased average oil sales prices as summarized below:
(Oil sales in Bbls, gas sales in Mcf) 1996 1995
-------- --------
Oil sales - Monument Butte Field 128,882 19,983
Oil sales - Duchesne County Fields -- 10,215
-------- --------
Total oil sales 128,882 30,198
-------- --------
Average oil price per barrel sold $ 20.01 $ 17.79
Gas sales - Monument Butte Field 121,593 8,001
Gas sales - Duchesne County Fields -- 20,283
-------- --------
Total gas sales 121,593 28,284
-------- --------
Average gas price per Mcf sold $ 1.16 $ 1.49
The increased oil and gas sales volumes in the Monument Butte Field are
attributable to the thirty-one new wells that IPC drilled and put on production
during the first half of 1996. Oil sales as a percentage of total oil and gas
sales increased from 93% during the second quarter of 1995 to 95% in 1996. Crude
oil is expected to continue as the predominant product produced from the
Monument Butte Field.
As further discussed in "Liquidity and Capital Resources" below, the Company has
entered into price protection agreements to hedge against the volatility in
crude oil prices. Although hedging activities do not affect the Company's actual
sales price for crude oil in the field, the financial impact of hedging
transactions is reported as an adjustment to crude oil revenue in the period in
which the related oil is sold. Oil and gas sales were decreased by $168,000
and $7,700 during the second quarters of 1996 and 1995, respectively, due to
the recognition of hedging contract settlement losses and contract purchase
cost amortization.
LEASE OPERATING EXPENSES - Lease operating expense decreased $59,000, or
17%, between periods. Lease operating expense per barrel of oil equivalent
("BOE") sold decreased from $10.00 during the second quarter of 1995 to $1.95
during the second quarter of 1996. This reduction is primarily attributable to
increased sales volumes that allow for wider allocation of fixed operating
costs. The sale of the Duchesne County Fields has also positively contributed to
the reduction of lease operating expenses per BOE sold.
1996 1995
--------- ---------
MONUMENT BUTTE FIELD
Lease operating expense $ 290,372 $ 156,606
Lease operating expense per BOE $ 1.95 $ 7.35
DUCHESNE COUNTY FIELDS
Lease operating expense $ 192,725
Lease operating expense per BOE $ 14.18
8
PART 1. FINANCIAL INFORMATION (CONTINUED)
INLAND RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company's policy is to expense the costs of water injection operations
during the start-up phase of secondary recovery water flood operations. These
expenses include the costs of purchasing water and operating water source wells,
water injection wells and water injection stations. As a result of this policy,
the Company's per barrel lifting costs will be higher than if the Company would
capitalize and deplete these costs as part of secondary recovery enhancement
projects.
Lease operating expense in the Monument Butte Field benefits from certain of the
Company's gas transportation contracts. Under the terms of the applicable
contracts, the Company is allowed to use natural gas produced from the Monument
Butte, Gilsonite and Boundary Units to power field operations throughout the
Monument Butte Field. As a result of this provision, the Company does not
recognize lease operating expense for natural gas used as lease fuel since their
is no charge to the Company for such usage and, if sold, the related gas
proceeds would not inure to the benefit of the Company. The Company estimates
the amount of natural gas used as lease fuel, net to the Company's interest, was
50,000 Mcf and 13,500 Mcf during the second quarters of 1996 and 1995,
respectively. The Company does not intend to renew these contracts when they
expire on October 31, 1997. After expiration of the contracts, natural gas
production from these areas will be the property of the Company causing natural
gas used as lease fuel to have a direct impact on the Company's natural gas
sales.
PRODUCTION TAXES - Production taxes as a percentage of sales decreased from
6.5% during the second quarter of 1995 to 3.4% during 1996. The decrease was
caused by the sale of the Duchesne County Fields where the effective production
tax rate was 12.6%. The higher tax rate for the Duchesne County Fields is due to
their location on the Reservation of the Ute Indian Tribe where an additional
Ute Indian severance tax is imposed. In addition, new wells drilled by the
Company in Utah are allowed a six month exemption from state severance taxes.
EXPLORATION - Exploration expense represents the Company's share of costs
to retain unproved acreage.
DEPLETION, DEPRECIATION AND AMORTIZATION - The decrease in depletion,
depreciation and amortization resulted from a decreased average depletion rate
offset by increased sales volumes. Depletion, which is based on the units-of-
production method, comprises the majority of the total charge. The depletion
rate is a function of capitalized costs and related underlying reserves in the
periods presented. The Company's average depletion rate was $4.36 per BOE sold
during the second quarter of 1996 compared to $6.25 per BOE sold during the
second quarter of 1995. The decreased rate was due to the sale of the Duchesne
County Fields and the positive impact that the Company's recent drilling
activities combined with lower lease operating expenses had on total proved
reserves of the Company. After accounting for the Farmout Inc. purchase, the
Company's depletion rate for the third quarter of 1996 will be $4.87 per BOE.
GENERAL AND ADMINISTRATIVE, NET - General and administrative expense
decreased $78,500 or 17% on a net basis between quarters. General and
administrative expense is reported net of operator fees and reimbursements which
were $481,000 and $238,000 during the second quarter of 1996 and 1995,
respectively. The increase in reimbursements is primarily a function of the
level of operated drilling activity. During the second quarter of 1996, the
Company operated the drilling of 20 wells while in the same period of 1995 the
Company operated the drilling of only four wells. Gross general and
administrative expense increased from $711,000 in 1995 to $876,000 in 1996. The
increase is related to increased salaries, payroll taxes and employee benefits
as the Company's employee base grew from twenty-two employees at January 1, 1995
to forty-six employees at June 30, 1996. The increase in employees was required
to control the increased level of operated drilling activity during the last
half of 1995 and into 1996. The remaining increase is associated with the cost
of operating with a larger employee base.
9
PART 1. FINANCIAL INFORMATION (CONTINUED)
INLAND RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
INTEREST EXPENSE - Borrowings during the second quarter of 1996 averaged
approximately $13.3 million at an average effective interest rate of 11.0%.
Borrowings during the second quarter of 1995 averaged approximately $5.8 million
at an average effective interest rate of 17.0%. The change in the effective
interest rate resulted from the debt refinancing performed on November 29, 1995
as further explained in "Liquidity and Capital Resources", below.
OTHER INCOME - Other income in the first quarter of 1996 and 1995 primarily
represents interest earned on the investment of surplus cash balances.
INCOME TAXES - No income tax provision or benefit has been recognized due
to past net operating losses incurred and the recording of a full valuation
allowance. The Company expects to begin recognizing deferred income tax expense
during the third quarter of 1996 due to the deferred tax impact of the Farmout
Inc. purchase.
SIX MONTHS ENDED JUNE 30, 1996 AND 1995:
CONTINUING OPERATIONS. The Company sold the Duchesne County Fields effective
July 1, 1995. Accordingly, the results of operations for the first half of 1996
does not include any activity from the Duchesne County Fields while the results
of operations for the first half of 1995 includes six full months of activity.
In addition, the Company acquired Farmout Inc. June 12, 1996. The results
of operations of Farmout Inc. are consolidated as a component of the
Company's results of operations from the purchase date forward.
OIL AND GAS SALES - Oil and gas sales during the first half of 1996
exceeded the comparable period in the previous year by approximately $2.1
million, or 187%. The increase was attributable to increased oil sales volumes
in the Monument Butte Field and increased average oil sales prices as summarized
below:
(Oil sales in Bbls, gas sales in Mcf) 1996 1995
------------------------------------- ------- -------
Oil sales - Monument Butte Field 169,398 36,898
Oil sales - Duchesne County Fields -- 22,116
------- -------
Total oil sales 169,398 59,014
------- -------
Average oil price per barrel sold $19.62 $ 17.37
Gas sales - Monument Butte Field 132,338 13,458
Gas sales - Duchesne County Fields -- 55,097
------- -------
Total gas sales 132,338 68,555
------- -------
Average gas price per Mcf sold $ 1.14 $ 1.36
The increased oil and gas sales volumes in the Monument Butte Field are
attributable to the thirty-one new wells that IPC drilled and put on production
during the first half of 1996. Oil and gas sales were decreased by $230,000 and
$7,700 during the first half of 1996 and 1995, respectively, due to the
recognition of hedging contract settlement losses and contract purchase cost
amortization.
10
PART 1. FINANCIAL INFORMATION (CONTINUED)
INLAND RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
LEASE OPERATING EXPENSES - Lease operating expense decreased $282,000, or
38%, between six-month periods. Lease operating expense per barrel of oil
equivalent ("BOE") sold decreased from $10.46 during the first six months of
1995 to $2.38 during the same period in 1996. This reduction is primarily
attributable to increased sales volumes that allow for wider allocation of fixed
operating costs. The sale of the Duchesne County Fields has also positively
contributed to the reduction of lease operating expenses.
1996 1995
--------- ----------
MONUMENT BUTTE FIELD
Lease operating expense $ 454,708 $ 333,142
Lease operating expense per BOE $ 2.38 $ 8.51
DUCHESNE COUNTY FIELDS
Lease operating expense $ 403,555
Lease operating expense per BOE $12.89
As previously discussed, lease operating expense in the Monument Butte Field
benefits from certain of the Company's gas transportation contracts. The Company
estimates the amount of natural gas used as lease fuel, net to the Company's
interest, was 75,000 Mcf and 27,000 Mcf during the first six months of 1996 and
1995, respectively. Until October 1997, this usage will not lower the Company's
share of gas sales and will not impact lease operating expense.
PRODUCTION TAXES - Production taxes as a percentage of sales decreased from
7.8% during the first half of 1995 to 3.4% during 1996. The decrease was caused
by the sale of the Duchesne County Fields where the effective production tax
rate was 12.6%. The higher tax rate for the Duchesne County Fields is due to
their location on the Reservation of the Ute Indian Tribe where an additional
Ute Indian severance tax is imposed. In addition, new wells drilled by the
Company in Utah are allowed a six month exemption from state severance taxes.
EXPLORATION - Exploration expense represents the Company's share of costs
to retain unproved acreage.
DEPLETION, DEPRECIATION AND AMORTIZATION - The decrease in depletion,
depreciation and amortization resulted from a decreased average depletion rate
offset by increased sales volumes. Depletion, which is based on the units-of-
production method, comprises the majority of the total charge. The depletion
rate is a function of capitalized costs and related underlying reserves in the
periods presented. The Company adjusts its depletion rate quarterly based on in-
house total proved reserve estimates. The Company's average depletion rate was
$4.25 per BOE sold year-to-date in 1996 compared to $6.25 per BOE sold in 1995.
The decreased rate was due to the sale of the Duchesne County Fields and the
positive impact that the Company's recent drilling activities combined with
lower lease operating expenses had on total proved reserves of the Company.
After accounting for the Farmout Inc. purchase, the Company's depletion rate for
the third quarter of 1996 will be $4.87 per BOE.
11
PART 1. FINANCIAL INFORMATION (CONTINUED)
INLAND RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL AND ADMINISTRATIVE, NET - General and administrative expense
decreased $108,000 or 14% on a net basis between quarters. General and
administrative expense is reported net of operator fees and reimbursements which
were $877,000 and $463,000 during the six-month periods of 1996 and 1995,
respectively. The increase in reimbursements is primarily a function of the
level of operated drilling activity. During 1996, the Company operated the
drilling of 36 wells while in the same period of 1995 the Company operated the
drilling of only seven wells. Gross general and administrative expense increased
from $1,243,000 in 1995 to $1,548,000 in 1996. The increase is related to
increased salaries, payroll taxes and employee benefits as the Company's
employee base grew from twenty-two employees at January 1, 1995 to forty-six
employees at June 30, 1996. The increase in employees was required to control
the increased level of operated drilling activity during the last half of 1995
and into 1996. The remaining increase is associated with the cost of operating
with a larger employee base.
INTEREST EXPENSE - Borrowings during 1996 have averaged approximately $10.3
million at an average effective interest rate of 11.0%. Borrowings during 1995
averaged approximately $5.2 million at an average effective interest rate of
16.3%. The change in the effective interest rate resulted from the debt
refinancing performed on November 29, 1995 as further explained in "Liquidity
and Capital Resources", below.
OTHER INCOME - Other income in 1996 and 1995 primarily represents interest
earned on the investment of surplus cash balances.
INCOME TAXES - No income tax provision or benefit has been recognized due
to past net operating losses incurred and the recording of a full valuation
allowance. The Company expects to begin recognizing deferred income tax expense
during the third quarter of 1996 due to the deferred tax impact of the Farmout
Inc. purchase.
DISCONTINUED OPERATIONS. The Company classifies all mining operations as
discontinued operations. The only mining operation remaining is ongoing
reclamation activities at the Toiyabe Mine located near Crescent Valley, Nevada.
Since July 1992, reclamation activities have focused on rinsing the leach pads
with fresh water and recycled leaching solution. The goal of the rinsing
activity is to reduce concentrations of certain constituents to state drinking
water standards and to achieve "stabilization" of certain other elements, such
that their concentration would not be lowered with further rinsing. Based upon
ongoing testing results, the Company believes it has achieved its rinsing goals.
As a result, 1996 operations have focused on evaporation of all solutions
remaining in the contained circulation system, the submission of a Final Closure
Report to the Nevada Department of Environmental Protection (the "NDEP") and
certain other reclamation tasks. Assuming that the NDEP agrees Toiyabe's leach
pads are stabilized and that the Company's method to treat future stormwater
infiltration into the leach pads is sufficient, among other items, the Company
could be in a post-closure monitoring mode at the Toiyabe Mine by October 1997.
Based on the foregoing assumptions, the Company has established a reserve for
reclamation activities of $583,000 at June 30, 1996. Although the ultimate
future reclamation cost is dependent upon certain events which cannot be
precisely predicted, the Company believes that based on factors presently
known or anticipated, the current reserve will be adequate to fully reclaim
the Toiyabe Mine in compliance with Nevada and federal laws. However, should
unforeseen circumstances arise that that cause the closure timetable to be
delayed or additional labor, material and holding costs to be incurred,
future reclamation exposure could exceed $583,000.
12
PART 1. FINANCIAL INFORMATION (CONTINUED)
INLAND RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
LIQUIDITY AND CAPITAL RESOURCES:
TCW LOAN AGREEMENT - On November 29, 1995, the Company entered into a Credit
Agreement (the "TCW Loan Agreement") with Trust Company of the West and
affiliated entities (collectively "TCW"), which provides a recourse loan
facility to the Company of up to $25.0 million for the development of the
Monument Butte Field. The TCW Loan Agreement bears interest at 10% per annum
payable quarterly. Commencing in March 1997, minimum payments of principal are
required in the following amounts per quarter: $275,000 in 1997, $550,000 in
1998, $1,300,000 in 1999, $1,400,000 in 2000, $1,200,000 in 2001, $750,000 in
2002, $425,000 in 2003, and $350,000 in 2004. Additional principal payments may
be due in certain circumstances out of excess cash flow, as defined in the TCW
Loan Agreement. The Company also granted TCW an initial 7% overriding royalty
interest, proportionately reduced by the Company's working interest in the oil
and gas properties, which continues until TCW earns a 16% rate of return at
which time it reduces to 3%, proportionately reduced by the Company's interest
in the oil and gas properties, until TCW earns a 22% rate of return. The TCW
Loan Agreement also subjects the Company to penalties on the overriding royalty
interests to achieve a 16% and 22% rate of return if the loan is prepaid prior
to November 29, 1997. The Company is required to meet certain minimum ratios, is
subject to covenants not to engage in various activities without TCW's prior
consent, and may not pay any dividends or make any other distributions without
TCW's prior written consent. The agreement also contains a provision that if any
material adverse change occurs in the Company's financial condition that is not
remedied within 60 days, TCW has the right to declare the Company in default.
The TCW Loan Agreement is collateralized by the Company's interest in
substantially all of its oil and gas and other properties.
During the first half of 1996, the Company borrowed an additional $12.5 million
under the TCW Loan Agreement increasing total advanced funds to $17.5 million at
June 30, 1996. The additional $12.5 million was used to drill and complete 36
gross (34 net) development wells within the Monument Butte Field and further
expand the water delivery and gas gathering infrastructure. The Company intends
on drilling an additional 40 gross (36 net) wells in 1996 with the remaining
availability under the TCW Loan Agreement, cash on hand and cash generated from
future operations. Approximately eight of the newly drilled wells are expected
to be converted to water injection during 1996 depending on connectivity with
surrounding wells, sand porosity, sand permeability and overall injection
patterns. Development will also include the conversion of existing producing
wells to water injection wells, the expansion of the water delivery
infrastructure and the expansion of the gas gathering infrastructure, among
other things. Based on results to date, the Company believes it will be able to
meet the terms of the TCW Loan Agreement and advance the entire $7.5 million of
remaining availability by September 30, 1996. Should the Company experience
unfavorable drilling results, it is possible the Company may not be able to draw
down the remaining $7.5 million. Although less borrowings could potentially slow
the development of the Company's properties in the Monument Butte Field and
associated cash flow, the Company believes it will be able to meet all of its
financial obligations during the next year. Through July 29, 1996, the Company
had borrowed $19.0 million under the TCW Loan Agreement.
13
PART 1. FINANCIAL INFORMATION (CONTINUED)
INLAND RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
WORKING CAPITAL AND CASH HOLDINGS - The Company increased its cash position
by $1,876,000 and its working capital position by $2,549,000 during the first
half of 1996. The Company's working capital and cash positions are primarily
dependent on the timing of advances under the TCW Loan Agreement and payment of
drilling obligations. The Company is required to cover reclamation costs of the
Toiyabe Mine, net general and administrative expenses, lease operating expenses,
production taxes, undeveloped acreage holding costs and discretionary capital
expenditures out of cash generated from operations and its current cash
holdings. The Company believes that cash sources and holdings will be sufficient
to cover such costs and meet its working capital needs throughout 1997.
On July 31, 1996, the Company expects to further increase its cash and working
capital position by closing on a $10.0 million private placement of equity. The
Company has entered into an agreement to sell to an affiliate of Smith
Management Company, Inc. 950,000 shares of a newly designated Series B Preferred
Stock which will have 1,000,000 shares designated in the series. A director of
the Company, who is also a Vice President of Smith Management Company, Inc.,
entered into a similar agreement pursuant to which he agreed to purchase the
remaining 50,000 shares of Series B Preferred Stock. The Series B Preferred
Stock is to be issued by the Company for cash of $10 per share (an aggregate of
$10.0 million) at a closing to take place on July 31, 1996. Concurrently with
the closing of the issuance and sale of the Series B Preferred Stock, the
Company intends to call for redemption its outstanding Series A Convertible
Preferred Stock. Upon receipt of notice of redemption, each holder of Series A
Convertible Preferred Stock will have the right to elect to receive either (i)
cash in the amount of $54.00, or (ii) 9.6726 shares of Common Stock, for each
share of Series A Convertible Preferred Stock held of record by such holder.
Each holder of Series A Convertible Preferred Stock will have 15 days after
notice of redemption has been delivered by the Company to decide whether to
elect to receive cash or Common Stock. To the extent holders of Series A
Convertible Preferred Stock elect to receive cash, the Company intends to use a
portion of the proceeds from the sale of the Series B Preferred Stock to pay
such holders of Series A Convertible Preferred Stock.
The Series B Preferred Stock will bear a dividend of 12% per annum on the
Redemption Price (defined below); will have a liquidation preference over Common
Stock equal to $10.00 per share plus any accumulated and unpaid dividends; is
redeemable at a "Redemption Price" equal to $10.00 per share, plus accumulated
and unpaid dividends; is convertible at a "conversion price" of $6.27 per share
(divided into the Redemption Price) subject to certain anti-dilution
adjustments; and is entitled to one vote per share of Series B Preferred Stock
on all matters submitted to the stockholders of the Company and will vote with
the Common Stock as one voting group or class, and not as a separate voting
group or class, except where required by law or except with regard to various
amendments to the Company's Articles of Incorporation affecting the Series B
Preferred Stock or creating another series of preferred stock with rights equal
to or greater than the rights of the Series B Preferred Stock. In addition, if
at any time prior to July 31, 1998, (i) the Company sells all or substantially
all of its assets other than in the ordinary course of business, (ii) the
Company merges or consolidates with or into another person, (iii) a change of
control of the Company occurs or (iv) the Company is liquidated or dissolved,
the holders of Series B Preferred Stock will be entitled to a full two years of
accumulated dividends in calculating amounts payable upon redemption or the
number of shares of Common Stock issuable upon conversion, as the case may be.
The Company has agreed to register the shares of Common Stock issuable upon
conversion of the Series B Preferred Stock and to pay all expenses of such
registration.
14
PART 1. FINANCIAL INFORMATION (CONTINUED)
INLAND RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
HEDGING ACTIVITY - The Company has entered into price protection agreements
to hedge against the volatility in crude oil prices and to help insure the
repayment of indebtedness. The Company has a hedge in place with Enron Capital
and Trade Resources Corp. (an affiliate of Enron Corp.) (the "Enron Hedge") to
hedge crude oil production over a five year period beginning January 1, 1996 in
monthly amounts escalating from 8,500 Bbls in January 1996 to 14,000 Bbls in
December 2000. The hedge is structured as a cost free collar whereby if the
average monthly price (based on NYMEX Light Sweet Crude Oil Futures Contracts)
(the "Average Price") is between $18.00 and $20.55 per barrel, no payment is due
under the contract. If the Average Price is less than $18.00, the Company is
paid the difference between $18.00 and the Average Price, multiplied by the
barrels of crude oil hedged that month. Similarly, should the Average Price
exceed $20.55 per barrel, the Company is required to pay the difference between
$20.55 and the Average Price, multiplied by the barrels of crude oil hedged that
month. Since hedged quantities are based on expected future development in the
Monument Butte Field and because hedging activities do not affect the actual
sales price for the Company's crude oil, there exists risk to the Company's
financial position and results of operations should the Average Price rise
significantly above the ceiling prices of $18.20 and $20.55, respectively, and
development activities not produce the expected results or progress on a slower
than expected timetable. The Company is aware of and continually evaluates this
financial risk and has the ability to enter into commodity contracts to mitigate
potential financial loss should risk factors begin to materialize.
In order to further protect the price the Company receives for crude oil
production, on January 18, 1996 the Company entered into three additional
contracts with Enron Capital and Trade Resources Corp. The effect of two of the
contracts was to lower the floor under the Enron Hedge from $18.00 to $16.50
during the eleven month period from February 1996 to December 31, 1996. The
Company received $52,400 as a result of this restructuring. Under the third
contract, the Company purchased for $149,000 an additional 257,000 put options
with a strike price of $16.50 covering the period February 1996 through December
1996 in monthly amounts escalating from 10,000 barrels to 35,000 during the
contract period. On July 8, 1996, the Company purchased for $133,200 an
additional 720,000 put options with a strike price of $15.00 covering the period
January 1997 through December 1997 which settles in monthly amounts of 60,000
barrels during the contract period. The net cost of these additional contracts
and the monthly settlement net gain or loss will be included as an adjustment
to crude oil revenue in the period the related oil is sold.
ACQUISITION FINANCING - The Company continues to aggressively seek other
opportunities to acquire existing oil and gas production in developed fields.
The Company will attempt to finance such acquisitions through (i) seller
financing, whenever possible; (ii) joint operating agreements with industry
partners where the Company may sell part of its position to provide acquisition
and development funds; (iii) sales of equity or debt of the Company; or (iv)
traditional bank lines of credit, although the Company currently has no existing
bank lines of credit or arrangements with any bank to loan funds.
ENVIRONMENTAL DISCUSSION - The Company is subject to numerous federal and
state laws and regulations relating to environmental matters. Increasing focus
on environmental issues nationally has lead the Company to continue to evaluate
its responsibilities to the environment. The Company believes it is in
compliance in all material respects with applicable federal, state and local
environmental regulations. There are no environmental proceedings pending
against the Company. At June 30, 1996, the Company had recognized a liability of
$583,000 to cover the future costs of reclaiming the Toiyabe Mine.
FORWARD LOOKING STATEMENTS - Certain statements included in this
Management's Discussion and Analysis are forward looking statements that
predict the future development of the Company. The realization of these
predictions will be subject to a number of variable contingencies, and there
is no assurance that they will occur in the time frame proposed. The risks
associated with the potential actualization of the Company's plans include;
contractor delays, regulatory approvals, the availability and cost of
financing, to name a few.
15
PART II. OTHER INFORMATION
INLAND RESOURCES INC.
Items 1, 2, 3 and 5 are omitted from this report as inapplicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
On May 22, 1996, the Company held its Annual Meeting of Stockholders. During
this meeting, the stockholders voted on the following items:
(1) The holders of Common Stock voted on the election of four members, and
the holders of Series A Preferred Stock voted on the election of three members,
of the Board of Directors to serve until the 1997 annual meeting of stockholders
or until their respective successors are duly elected and qualified;
Item (1) was approved by an affirmative vote of approximately 81% of the total
outstanding shares of Common Stock and 86% of the total outstanding shares of
Series A Preferred Stock, respectively.
(2) To consider and act upon a unified proposal (the "Proposal") to
approve (i) an amendment to the Company's Articles of Incorporation ("Articles")
to decrease the number of shares of Common Stock from 100,000,000 shares to
10,000,000 shares (without affecting par value), (ii) a 1-for-10 reverse stock
split of the presently issued and outstanding shares of Common Stock, and (iii)
an amendment to the Company's Articles, following the effective date of the
reverse split, to increase the post-split number of authorized shares of Common
Stock from 10,000,000 shares to 25,000,000 shares (without affecting par value).
Only the holders of outstanding shares of Common Stock were entitled to consider
and vote upon the Proposal;
Item (2) was approved with 33,181,784 shares voting For the item, 377,973 shares
voting Against, and 45,000 shares Abstaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Quarterly Report on
Form 10-QSB.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- -------- ----------------------
3.1 Amended and Restated Articles of Incorporation, as amended
through July 31, 1996.*
3.2 Bylaws of the Company (filed as Exhibit 3.2 to the Company's
Registration Statement of Form S-18, Registration No. 33-11870-F,
and incorporated herein by reference).
3.2.1 Amendment to Article IV, Section 1 of the Bylaws of the
Company adopted February 23, 1993 (filed as Exhibit 3.2.1 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1992, and incorporated herein by reference).
3.2.2 Amendment to the Bylaws of the Company adopted April 8, 1994
(filed as Exhibit 3.2.2 to the Company's Registration Statement
of Form S-4, Registration No. 33-80392, and incorporated herein
by reference).
3.2.3 Amendment to the Bylaws of the Company adopted April 27,
1994 (filed as Exhibit 3.2.3 to the Company's Registration
Statement of Form S-4, Registration No. 33-80392, and
incorporated herein by reference).
16
PART II. OTHER INFORMATION (CONTINUED)
INLAND RESOURCES INC.
10.1 "Automatic Adjustment to Number of Shares Covered by Amended
1988 Option Plan" executed effective June 3, 1996.*
10.2 Employment Agreement between the Company and Kyle R. Miller
dated June 1, 1996.*
10.3 Employment Agreement between the Company and Bill I.
Pennington dated June 1, 1996.*
10.4 Employment Agreement between the Company and John E. Dyer
dated June 1, 1996.*
27.1 Financial Data Schedule required by Item 601 of Regulation
S-B.
______________________
* Filed herewith.
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K dated June 25, 1996,
reporting an event dated June 12, 1996, which Form 8-K covered the
following items:
Item 2 - Acquisition or Disposition of Assets
Item 5 - Other Events
Item 7 - Financial Statements and Exhibits
17
INLAND RESOURCES INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INLAND RESOURCES INC.
(Registrant)
Date: July 29, 1996 By: /s/ Kyle R. Miller
------------- ---------------------------
Kyle R. Miller
Chief Executive Officer
Date: July 29, 1996 By: /s/ Michael J. Stevens
------------- ---------------------------
Michael J. Stevens
Controller (Principal Accounting
Officer)
18