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 SEPTEMBER 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
November 1, 1996: 6,306,056
Traditional Small Business Disclosure Format:
Yes XX No
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PART 1. FINANCIAL INFORMATION
INLAND RESOURCES INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
September 30, December 31,
1996 1995
------------ ------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 13,782,838 $ 2,970,305
Accounts receivable and accrued sales 1,832,579 701,956
Inventory 704,272 417,665
Other current assets 399,279 19,338
------------ ------------
Total current assets 16,718,968 4,109,264
------------ ------------
Property and equipment, at cost:
Oil and gas properties (successful efforts method) 44,768,415 17,404,280
Accumulated depletion, depreciation and amortization (2,688,193) (585,590)
------------ ------------
42,080,222 16,818,690
Other property and equipment, net 782,241 593,106
Debt issue costs, net 370,980 401,803
------------ ------------
Total assets $ 59,952,411 $ 21,922,863
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 4,111,766 $ 2,859,775
Current portion of long-term debt 900,000 48,021
Property reclamation costs, short-term 511,446 200,000
------------ ------------
Total current liabilities 5,523,212 3,107,796
------------ ------------
Long-term debt 20,174,273 4,436,225
Deferred income taxes 600,000
Property reclamation costs, long-term 399,433
Stockholders' equity (see Notes 4,5,6):
Preferred Class A stock, par value $.001, 20,000,000 shares
authorized;
Series A: 0 and 106,850 shares issued and outstanding 107
Series B: 1,000,000 and 0 shares issued and outstanding,
liquidation preference of $12,400,000 1,000
Additional paid-in capital - preferred 9,999,000 4,100,261
Common stock, par value $.001; 25,000,000 shares
authorized; issued and outstanding 6,306,056 and
4,092,800, respectively 6,306 4,093
Additional paid-in capital - common 31,549,400 19,183,119
Accrued preferred Series B dividends 300,000
Accumulated deficit (8,200,780) (9,308,171)
------------ ------------
Total stockholders' equity 33,654,926 13,979,409
------------ ------------
Total liabilities and stockholders' equity $ 59,952,411 $ 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 NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
------------------------- -------------------------
1996 1995 1996 1995
---------- ---------- ---------- -----------
Revenues:
Sales of oil and gas $3,553,484 $ 464,647 $6,798,180 $ 1,593,292
Management fee 158,356 158,356
---------- ---------- ---------- -----------
Total revenues 3,553,484 623,003 6,798,180 1,751,648
---------- ---------- ---------- -----------
Operating expenses:
Lease operating expenses 432,765 145,003 887,473 881,700
Production taxes 141,551 26,619 264,414 115,654
Exploration 154,152 143,401 167,355 157,993
Depletion, depreciation and amortization 1,339,341 192,182 2,224,603 702,891
General and administrative, net 397,479 194,662 1,069,023 974,447
---------- ---------- ---------- -----------
Total operating expenses 2,465,288 701,867 4,612,868 2,832,685
---------- ---------- ---------- -----------
Operating income (loss) 1,088,196 (78,864) 2,185,312 (1,081,037)
Interest expense (515,908) (167,571) (1,023,171) (588,979)
Other income, net 153,730 29,376 245,250 97,062
Gain on sale of the Duchesne County Fields 850,000 850,000
---------- ---------- ---------- -----------
Net income (loss) $ 726,018 $ 632,941 $1,407,391 $ (722,954)
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
Net income (loss) per share - Primary $ 0.12 $ 0.22 $ 0.29 $ (0.25)
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
Weighted average common and common
equivalent shares outstanding - Primary 5,948,745 2,892,800 4,845,703 2,892,800
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
Net income (loss) per share - Fully diluted $ 0.10 $ 0.17 $ 0.23 $ (0.25)
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
Weighted average common and common
equivalent shares outstanding - Fully diluted 7,506,124 3,793,631 6,000,768 2,892,800
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
Dividends per common 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 NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
1996 1995
----------- -----------
Cash flows from operating activities:
Net income (loss) $ 1,407,391 $ (722,954)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Net cash used by discontinued operations (87,987) (209,725)
Depletion, depreciation and amortization 2,224,603 702,891
Gain on sale of the Duchesne County Fields (850,000)
Amortization of debt issue costs and debt discount 56,467
Effect of changes in current assets and liabilities:
Accounts receivable and accrued sales (1,130,623) 660,615
Inventory (286,607) 57,188
Other current assets (349,118) (33,814)
Accounts payable and accrued expenses 1,251,991 600,608
----------- -----------
Net cash provided by operating activities 3,086,117 204,809
----------- -----------
Cash flows from investing activities:
Development expenditures and equipment purchases (18,075,270) (4,142,433)
Change in restricted cash (124,342)
Net proceeds from sale of the Duchesne County Fields 2,946,765
----------- -----------
Net cash used by investing activities (18,075,270) (1,320,010)
----------- -----------
Cash flows from financing activities:
Proceeds from sale of stock 10,008,750
Redemption of Series A preferred stock (740,624)
Proceeds from issuance of long-term debt 16,584,993 2,600,000
Payments of long-term debt (51,433) (120,397)
----------- -----------
Net cash provided by financing activities 25,801,686 2,479,603
----------- -----------
Net increase in cash and cash equivalents 10,812,533 1,364,402
Cash and cash equivalents at beginning of period 2,970,305 1,691,156
----------- -----------
Cash and cash equivalents at end of period $13,782,838 $ 3,055,558
----------- -----------
----------- -----------
Noncash financing and investing activity:
Purchase of Farmout Inc. for common stock $9,600,000
-----------
-----------
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 income 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 Company's shareholders 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 $9.6
million for accounting purposes, including the recognition of $0.6 million
of deferred taxes. 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:
On July 31, 1996, the Company sold an affiliate of Smith 950,000 shares of
a newly designated series of preferred stock of the Company (the "Series B
Stock") which has 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 Stock. The Series B Stock was
issued by the Company for cash of $10 per share (an aggregate of $10.0
million). Concurrently with the closing of the sale and issuance of the
Series B Stock, the Company called for redemption its outstanding Series A
Convertible Preferred Stock (the "Series A Stock"). Each record holder of
Series A Stock had 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 Stock. Of the 99,318 Series A Stock shares outstanding, holders of
85,605 shares elected to convert their shares into 828,002 shares of Common
Stock. The remaining 13,713 shares of Series A Stock were redeemed for
$740,624.
The Series B Stock bears a dividend of 12% per annum on the Redemption
Price (defined below); has 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 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 Stock or creating another series of preferred stock
with rights equal to or greater than the rights of the Series B 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 liquidation, 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 Stock or Series B Stock, as applicable, and the additional
dilution related to the exercise of 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 build upon the profitability experienced in 1996 is to
increase oil and gas production through acquisition of leases and existing oil
and gas production in developed fields, and further developing such acquisitions
through development drilling, reworking existing wells and engaging in secondary
recovery enhancement operations. Increased production levels allow for more
efficient operations at the field level which in turn has a positive impact on
the Company's equivalent per barrel lifting costs. In addition, increased
production lowers general and administrative costs on a per equivalent barrel
basis since fixed general and administrative costs do not increase proportionate
to production. The Company also protects 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 fund
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 MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995:
OIL AND GAS SALES - Oil and gas sales during the third quarter of 1996
exceeded the previous year third quarter by approximately $3.1 million, or 665%.
The increase was attributable to increased oil and gas sales volumes and
increased average oil and gas sales prices as summarized below:
(OIL SALES IN BBLS, GAS SALES IN MCF) 1996 1995
- ------------------------------------- ---- ----
Oil sales - Monument Butte Field 164,669 28,054
Average oil price per barrel sold $ 19.92 $16.45
Gas sales - Monument Butte Field 291,971 18,468
Average gas price per Mcf sold $ 1.35 $ 0.80
7
PART 1. FINANCIAL INFORMATION (CONTINUED)
-----------------------------------------
INLAND RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
------
The increase in oil and gas sales volumes in the Monument Butte Field is
attributable to the Farmout Inc. purchase and the forty-seven new wells that
IPC drilled and put on production since September 30, 1995. Crude oil
accounted for 89% of total oil and gas sales during the third quarter of 1996
and 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
$122,000 during the third quarter of 1996 to recognize hedging contract
settlement losses and contract purchase cost amortization.
LEASE OPERATING EXPENSES - Lease operating expense per barrel of oil
equivalent ("BOE") sold decreased from $4.66 during the third quarter of 1995
to $2.03 during the third quarter of 1996. This reduction is primarily
attributable to increased sales volumes that allow for wider allocation of
operating costs. 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 during the start-up phase than if the Company would capitalize
and deplete these costs as part of secondary recovery enhancement projects.
Of the Company's six water flood projects, five are in the start-up phase.
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 third
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 5.7% during the third quarter of 1995 to 3.8% during 1996. The
percentage decrease results from an increase in sales from newly drilled
wells which are exempt from Utah state severance tax during their initial six
months of production.
EXPLORATION - Exploration expense represents the Company's share of
costs to retain unproved acreage. In addition, during the third quarter of
both 1996 and 1995 the Company drilled an uneconomic exploration well.
DEPLETION, DEPRECIATION AND AMORTIZATION - The increase in depletion,
depreciation and amortization resulted from 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 $5.96 per BOE sold during the third quarter of
1996 compared to $5.75 per BOE sold during the third quarter of 1995.
8
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
increased $203,000 on a net basis between quarters. General and
administrative expense is reported net of operator fees and reimbursements
which were $512,000 and $295,000 during the third quarters of 1996 and 1995,
respectively. The increase in reimbursements is primarily a function of the
level of operated drilling activity. During the third quarter of 1996, the
Company operated the drilling of 17 wells while in the same period of 1995
the Company operated the drilling of 12 wells. Gross general and
administrative expense increased from $489,000 in 1995 to $909,000 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 September 30, 1996. The remaining
increase is associated with the cost of operating with a larger employee base.
INTEREST EXPENSE - Borrowings during the third quarter of 1996 averaged
approximately $18.7 million at an average effective interest rate of 11.0%.
Borrowings during the third quarter of 1995 averaged approximately $4.0
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 represents interest earned on the investment
of surplus cash balances.
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995:
GENERAL - The Company sold the Duchesne County Fields effective July 1, 1995.
Accordingly, the results of operations for the nine months ended September
30, 1996 does not include any activity from the Duchesne County Fields while
the results of operations for the same period in 1995 includes six full
months of activity.
OIL AND GAS SALES - Oil and gas sales during the initial nine months of
1996 exceeded the comparable period in 1995 by approximately $5.2 million, or
326%. The increase was attributable to increased oil and gas sales and
increased average oil sales prices as summarized below:
(Oil sales in Bbls, gas sales in Mcf) 1996 1995
------------------------------------ ------- ------
Oil sales - Monument Butte Field 334,067 64,952
Oil sales - Duchesne County Fields - 22,116
------- ------
Total oil sales 334,067 87,068
------- ------
Average oil price per barrel sold $19.77 $17.00
Gas sales - Monument Butte Field 424,309 31,926
Gas sales - Duchesne County Fields - 55,097
------- ------
Total gas sales 424,309 87,023
------- ------
Average gas price per Mcf sold $1.29 $1.30
The increase in oil and gas sales volumes in the Monument Butte Field is
attributable to the Farmout Inc. purchase and the forty-seven new wells that
IPC drilled and put on production since September 30, 1995. Oil and gas sales
were decreased by $352,000 and $5,400 during 1996 and 1995, respectively, due
to the recognition of hedging contract settlement losses and contract
purchase cost amortization.
9
PART 1. FINANCIAL INFORMATION (CONTINUED)
-----------------------------------------
INLAND RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
------
LEASE OPERATING EXPENSES - Lease operating expense per barrel of oil
equivalent ("BOE") sold decreased from $8.68 during the first nine months of
1995 to $2.19 during the same period in 1996. This reduction is primarily
attributable to increased sales volumes that allow for wider allocation of
operating costs. The sale of the Duchesne County Fields has also contributed
to the reduction of lease operating expenses.
1996 1995
-------- --------
MONUMENT BUTTE FIELD
Lease operating expense $887,473 $478,145
Lease operating expense per BOE $ 2.19 $ 6.80
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 125,000 Mcf and 40,500 Mcf during the first nine
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 7.3% during 1995 to 3.7% 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. In addition, during the third quarter of
both 1996 and 1995 the Company drilled an uneconomic exploration well.
DEPLETION, DEPRECIATION AND AMORTIZATION - The increase in depletion,
depreciation and amortization resulted from 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 $5.19 per BOE sold year-to-date in 1996 compared
to $6.00 per BOE sold in 1995. The decreased rate was due to the sale of the
Duchesne County Fields.
GENERAL AND ADMINISTRATIVE, NET - General and administrative expense
increased $94,500 or 9.7% between nine month periods. General and
administrative expense is reported net of operator fees and reimbursements
which were $1,389,000 and $758,000 during the nine 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 52 wells while in the same period of 1995 the Company
operated the drilling of only 19 wells. Gross general and administrative
expense increased from $1,732,000 in 1995 to $2,457,000 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 September 30, 1996. The remaining increase is
associated with the cost of operating with a larger employee base.
10
PART 1. FINANCIAL INFORMATION (CONTINUED)
INLAND RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
----------
INTEREST EXPENSE - Borrowings during 1996 have averaged approximately $12.4
million at an average effective interest rate of 11.0%. Borrowings during 1995
averaged approximately $4.8 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 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 to record deferred income tax expense
during the fourth quarter of 1996.
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
filtration through 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 current
reserve for reclamation activities of $511,000 at September 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 $511,000.
On September 12, 1996, the Company entered into an Option Agreement with Placer
Dome U.S. Inc. ("PDUS") whereby PDUS has the option, until December 11, 1996, to
purchase all of the Company's mining claims and property rights in the Toiyabe
Mine area. If PDUS elects to exercise their option under the Option Agreement,
the Company will pay PDUS $240,000 to assume all past, present and future
environmental and reclamation liabilities associated with the Toiyabe Mine,
whether known or unknown at the time of delivery of title. In order for the
Company to achieve this level of release of environmental responsibility, the
Company has allowed PDUS to perform environmental due diligence on the property
in the form of water quality drill testing. At the time of filing this Form
10-QSB, PDUS had completed the drilling portion of the water quality drill
testing and was awaiting chemical analysis of samples taken from each water
zone encountered.
11
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 substantially all the Company's
interest in its oil and gas and other properties.
During the first nine months of 1996, the Company borrowed $16.5 million under
the TCW Loan Agreement increasing total advanced funds to $21.5 million at
September 30, 1996. The additional $16.5 million was used to drill and complete
52 gross (47 net) wells within the Monument Butte Field and further expand the
water delivery and gas gathering infrastructures. The Company intends on
drilling an additional 15 gross (13 net) wells in 1996 with the remaining
availability under the TCW Loan Agreement and cash on hand. 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 remaining availability of $3.5 million by December 31, 1996.
WORKING CAPITAL AND CASH HOLDINGS - During the third quarter the Company
increased its cash holdings by $8.9 million and working capital by $7.6 million.
The increases were caused by the Company's sale of $10.0 million of preferred
Series B Stock which closed on July 31, 1996. The timing of advances under the
TCW Loan Agreement and payment of drilling obligations also impact the Company's
cash and working capital positions. 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,
discretionary capital expenditures and principal and interest payments 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 payments and meet its working capital needs throughout 1997.
12
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.
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 amortized cost of these additional
contracts and the monthly settlement net gain or loss is included as an
adjustment to crude oil revenue in the period the related oil is sold.
MARKETS - The availability of a ready market and the prices obtained for
the Company's oil and gas depend on many factors beyond the Company's
control, including the extent of domestic production, imports of oil and gas,
the proximity and capacity of oil and natural gas pipelines and other
transportation facilities, fluctuating demands for oil and gas, the marketing
of competitive fuels, and the effects of governmental regulation of oil and
gas production and sales. Crude oil produced from the Monument Butte Field is
called "Black Wax" and is sold at the posted field price (an industry term
for the fair market value of oil in a particular field) less a deduction of
approximately $.85 to a $1.00 per barrel for oil quality adjustments. The
posted field price for the Monument Butte Field has ranged from $17.50 to
$22.79 per barrel during the first nine months of 1996. As the quantity of
Black Wax produced within the Monument Butte Field grows, physical limitations
within the regional refineries, located in Salt Lake City, Utah, will limit
the amount of Black Wax that can be processed. The Company is conducting
discussions with each refinery to inform them of the outlook for Black Wax
production in this region such that they can propose solutions to existing
plant configurations. While the outcome of these talks is unknown, the
Company expects to negotiate a long-term marketing arrangement that will be
beneficial to the Company. Until such an arrangement is reached and the
refinery modifications are accomplished, there may be short-term downward
pressure on Black Wax pricing.
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.
13
PART 1. FINANCIAL INFORMATION (CONTINUED)
INLAND RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
----------
ENVIRONMENTAL DISCUSSION - The Company is subject to numerous federal and
state laws and regulations relating to environmental matters. These laws and
regulations require the acquisition of a permit before drilling commences,
restrict the types, quantities and concentration of various substances that can
be released into the environment in connection with drilling and production
activities, limit or prohibit drilling activities on certain lands lying within
wilderness, wetlands and other protected areas, and impose substantial
liabilities for pollution. Increasing focus on environmental issues nationally
has lead the Company to continue to evaluate its responsibilities to the
environment. Currently, the Vernal, Utah office of the Bureau of Land Management
("BLM") is preparing an Environmental Assessment ("EA") relating to certain
lands within the Monument Butte Field. Due to this process, the Company has
reduced its activities on these lands until the EA is approved by the BLM. The
Company currently employs one drilling rig on a full time basis. The Company
anticipates the EA to be approved in the fourth quarter of 1996. Although the
impact on future drilling is not certain, the Company expects to employ two
drilling rigs on a full time basis by the first quarter of 1997. 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 September 30, 1996, the Company has
recognized a liability of $511,000 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 is 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.
14
PART II. OTHER INFORMATION
INLAND RESOURCES INC.
------
Items 1, 3, 4 and 5 are omitted from this report as inapplicable.
ITEM 2. CHANGES IN SECURITIES
SALE OF SERIES B PREFERRED STOCK - On July 31, 1996, the Company sold
a newly designated series of preferred stock of the Company (the
"Series B Stock") which has 1,000,000 shares designated in the
series. The Series B Stock was issued by the Company for cash of $10
per share (an aggregate of $10.0 million). Concurrently with the
closing of the sale and issuance of the Series B Stock, the Company
called for redemption its outstanding Series A Convertible Preferred
Stock (the "Series A Stock"). Each record holder of Series A Stock
had 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 Stock. Of the 99,318 Series A Stock shares outstanding,
holders of 85,605 shares elected to convert their shares into 828,002
shares of Common Stock. The remaining 13,713 shares of Series A Stock
were redeemed for $740,624.
The Series B Stock bears a dividend of 12% per annum on the
Redemption Price (defined below); has 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 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 Stock or creating another series
of preferred stock with rights equal to or greater than the rights of
the Series B 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 liquidation, redemption or the number of shares of
Common Stock issuable upon conversion, as the case may be. Dividends
under the Series B Preferred Stock accrue at the rate of 12% until
declared by the Board of Directors. Although no dividend declaration
has been made by the Board of Directors, $300,000 of dividends have
accrued through September 30, 1996.
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. (filed as Exhibit 3.1 to the Company's Form 10-QSB
for the quarter ended June 30, 1996, and incorporated herein by
reference).
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).
15
PART II. OTHER INFORMATION
INLAND RESOURCES INC.
------
Exhibit
Number Description of Exhibits (cont.)
- ------- -------------------------------
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).
4.1 First Amendment to Credit Agreement between the Company, IPC, and
Trust Company of the West and various affiliated entities dated as
of June 12, 1996 (exclusive of all exhibits).*
10.1 Warrant Certificate between the Company and Kyle R. Miller dated
May 22, 1996.*
10.2 Warrant Certificate between the Company and John E. Dyer dated
May 22, 1996.*
10.3 Warrant Certificate between the Company and Bill I. Pennington dated
May 22, 1996.*
10.4 Agreement - Option to Purchase Inland's Toiyabe Property, Lander
County, Nevada (without exhibits).*
10.5 Swap Agreement dated July 8, 1996 between Inland Production Company
and Koch Gas Services Company.*
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 report on Form 8-K dated October 4, 1996, under
Item 4, reporting a Change in Registrant's Certifying Accountant.
16
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: November 11, 1996 By: /s/ Kyle R. Miller
----------------- -----------------------
Kyle R. Miller
Chief Executive Officer
Date: November 11, 1996 By: /s/ Michael J. Stevens
----------------- -----------------------
Michael J. Stevens
Controller (Principal
Accounting Officer)
17