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, 1997
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 August 1, 1997: 8,296,730
Transitional Small Business Disclosure Format
Yes xx No
-- --
PART 1. FINANCIAL INFORMATION
INLAND RESOURCES INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND DECEMBER 31, 1996
June 30, December 31,
1997 1996
----------- -----------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 3,426,550 $10,030,982
Accounts receivable and accrued sales 1,547,948 2,077,661
Inventory 2,197,215 862,229
Other current assets 434,110 242,022
----------- -----------
Total current assets 7,605,823 13,212,894
----------- -----------
Property and equipment, at cost:
Oil and gas properties (successful efforts
method) 62,540,650 46,832,811
Accumulated depletion, depreciation and
amortization (6,125,361) (3,834,517)
----------- -----------
56,415,289 42,998,294
Other property and equipment, net 990,782 779,161
Debt issue costs, net 193,809 338,262
----------- -----------
Total assets $65,205,703 $57,328,611
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 7,179,297 $ 4,236,734
Current portion of long-term debt 1,148,000
----------- -----------
Total current liabilities 7,179,297 5,384,734
----------- -----------
Long-term debt 26,187,150 19,972,014
Stockholders' equity:
Preferred Class A stock, par value $.001, 20,000,000
shares authorized; 1,000,000 shares of Series B
issued and outstanding, liquidation preference
of $12,400,000 1,000 1,000
Additional paid-in capital - preferred 9,999,000 9,999,000
Common stock, par value $.001; 25,000,000 shares
authorized; issued and outstanding 6,319,059 and
6,312,059, respectively 6,319 6,312
Additional paid-in capital - common 29,151,053 29,129,185
Accrued preferred Series B dividends 1,623,000 670,000
Accumulated deficit (8,941,116) (7,833,634)
----------- -----------
Total stockholders' equity 31,839,256 31,971,863
----------- -----------
Total liabilities and stockholders'
equity $65,205,703 $57,328,611
----------- -----------
----------- -----------
The accompanying notes are an integral part of
the consolidated 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, 1997 AND 1996
(Unaudited)
Three months ended Six months ended
June 30, June 30,
------------------------- --------------------------
1997 1996 1997 1996
---------- ----------- ----------- -----------
Revenues:
Sales of oil and gas $2,885,483 $ 2,552,714 $ 6,487,779 $ 3,244,696
---------- ----------- ----------- -----------
Operating expenses:
Lease operating expenses 620,104 290,372 1,220,925 454,708
Production taxes 55,574 91,646 279,247 122,863
Exploration 20,268 3,422 29,926 13,203
Depletion, depreciation and
amortization 1,220,802 690,233 2,414,844 885,262
General and administrative, net 380,918 394,800 841,244 671,544
---------- ----------- ----------- -----------
Total operating expenses 2,297,666 1,470,473 4,786,186 2,147,580
---------- ----------- ----------- -----------
Operating income 587,817 1,082,241 1,701,593 1,097,116
Interest expense (655,945) (320,329) (1,295,966) (507,263)
Other income, net 146,541 58,949 304,244 91,520
---------- ----------- ----------- -----------
Net income before extraordinary loss 78,413 820,861 709,871 681,373
Extraordinary loss on early
extinguishment of debt (864,353) (864,353)
---------- ----------- ----------- -----------
Net income (loss) $ (785,940) $ 820,861 $ (154,482) $ 681,373
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
Net income (loss) per share -
Primary
Before extraordinary loss $ 0.01 $ 0.18 $ 0.11 $ 0.16
Extraordinary loss $ (0.13) $ (0.13)
---------- ----------- ----------- -----------
Total $ (0.12) $ 0.18 $ (0.02) $ 0.16
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
Weighted average common and common
Equivalent shares outstanding -
Primary 6,726,563 4,465,595 6,715,515 4,300,504
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
Net income (loss) per share -
Fully diluted
Before extraordinary loss $ 0.01 $ 0.14 $ 0.08 $ 0.12
Extraordinary loss $ (0.13) $ (0.10)
---------- ----------- ----------- -----------
Total $ (0.12) $ 0.14 $ (0.02) $ 0.12
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
Weighted average common and common
equivalent shares outstanding -
Fully diluted 8,342,058 5,681,227 8,315,800 5,516,135
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
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, 1997 AND 1996
(Unaudited)
1997 1996
----------- ------------
Cash flows from operating activities:
Net income (loss) $ (154,482) $ 681,373
Adjustments to reconcile net income
(loss) to net cash provided by operating
activities:
Net cash used by discontinued operations (15,942)
Depletion, depreciation and amortization 2,414,844 885,262
Amortization of debt issue costs and
debt discount 140,400 42,229
Loss on early extinguishment of debt 864,353
Effect of changes in current assets and
liabilities:
Accounts receivable and accrued sales 529,713 (821,033)
Inventory (1,334,986) (439,152)
Other current assets (192,088) (426,925)
Accounts payable and accrued expenses 2,942,563 369,468
------------ ------------
Net cash provided by operating activities 5,210,317 275,280
------------ ------------
Cash flows from investing activities:
Acquisition of oil and gas properties (3,574,898)
Development expenditures and equipment
purchases (12,468,562) (10,954,655)
------------ ------------
Net cash used by investing activities (16,043,460) (10,954,655)
------------ ------------
Cash flows from financing activities:
Proceeds from exercise of employee stock
options 21,875 16,250
Proceeds from issuance of long-term debt 29,500,000 12,578,192
Payments of long-term debt (25,099,355) (38,625)
Debt issue costs (193,809)
------------ ------------
Net cash provided by financing activities 4,228,711 12,555,817
------------ ------------
Net increase (decrease) in cash and cash
equivalents (6,604,432) 1,876,442
Cash and cash equivalents at beginning of period 10,030,982 2,970,305
------------ ------------
Cash and cash equivalents at end of period $ 3,426,550 $ 4,846,747
------------ ------------
------------ ------------
Noncash financing and investing activity:
Purchase of Farmout Inc. for common stock $ 6,542,500
------------
------------
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") is an independent energy company with
substantially all of its property interests located in the Monument Butte
Field within the Uinta Basin of Northeastern Utah.
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,
1996.
3. DEBT REFINANCING:
On June 30, 1997, the Company entered into a $50 million Credit Agreement
with Canadian Imperial Bank of Commerce (the "CIBC Loan Agreement"). The
borrowing base under the facility is limited to the collateral value of
proved reserves as determined semiannually by the lender. The initial
borrowing base of $26 million was fully funded on June 30, 1997. The loan
proceeds, along with cash on hand, were used to retire the loan obligation
to Trust Company of the West ("TCW") and to purchase an override on the
Company's properties held by TCW. The CIBC Loan Agreement is interest only
until July 1, 1999 when the facility converts to a three year amortizing
term loan. Interest under the agreement is calculated, at the Company's
option, using either a base rate plus a spread of 0% to .875% or the
London interbank eurodollar rate ("LIBOR") plus a spread of 1% to 1.875%.
The spread percentage is determined based on the Company's borrowings
relative to its borrowing base. The CIBC Loan Agreement restricts the
payment of cash dividends, borrowings, sale of assets, loans to others,
investment and merger activity and hedging contracts without the prior
consent of the lender and requires the Company to maintain certain net
worth, interest coverage and working capital ratios. On June 30, 1997, the
Company's outstanding balance was $26 million accruing interest at a rate
of 9.375%. On July 7, 1997, the Company converted the interest method
under the CIBC Loan Agreement to the LIBOR option reducing the interest
rate to 7.5625%.
4. EARNINGS PER SHARE:
The Financial Accounting Standards Board issued Statement No. 128
"Earnings per Share" ("SFAS No. 128") effective for financial reports
issued subsequent to December 15, 1997. SFAS No. 128 replaces the
calculation of Primary EPS with a calculation called Basic EPS and
replaces Fully Diluted EPS with a calculation called Diluted EPS. The
following table shows the impact that adoption of the SFAS No. 128 as of
January 1, 1996 would have had on the Company's reported earnings per
share:
4
PART 1. FINANCIAL INFORMATION (Continued)
INLAND RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three months ended Six months ended
June 30, June 30,
-------------------- -------------------
1997 1996 1997 1996
------- ------ ------- -----
PRIMARY EPS AS REPORTED
Before extraordinary loss $ 0.01 $ 0.18 $ 0.11 $0.16
Extraordinary loss $(0.13) $(0.13)
------- ------ ------- -----
Total $(0.12) $ 0.18 $(0.02) $0.16
------- ------ ------- -----
------- ------ ------- -----
BASIC EPS
Before extraordinary loss $ 0.01 $ 0.19 $ 0.11 $0.16
Extraordinary loss $(0.13) $(0.13)
------- ------ ------- -----
Total $(0.12) $ 0.19 $(0.02) $0.16
------- ------ ------- -----
------- ------ ------- -----
FULLY DILUTED EPS AS REPORTED
Before extraordinary loss $ 0.01 $ 0.14 $ 0.08 $0.12
Extraordinary loss $(0.13) $(0.10)
------- ------ ------- -----
Total $(0.12) $ 0.14 $(0.02) $0.12
------- ------ ------- -----
------- ------ ------- -----
DILUTED EPS
Before extraordinary loss $ 0.01 $ 0.15 $ 0.08 $0.13
Extraordinary loss $(0.13) $(0.10)
------- ------ ------- -----
Total $(0.12) $ 0.15 $(0.02) $0.13
------- ------ ------- -----
------- ------ ------- -----
5. SUBSEQUENT EVENTS:
AGREEMENT TO PURCHASE ENSERCH ASSETS
On July 14, 1997, the Company entered into a Purchase and Sale Agreement
with Enserch Exploration, Inc. ("Enserch") to acquire all of Enserch's
property interests and related assets in the Monument Butte Field within
the Uinta Basin of Northeastern Utah. The purchase includes interest in
147 wells (40 net) including 52 wells operated by Enserch and 43 wells
already operated by the Company. The remaining nonoperated production is
comprised of 52 gross (2 net) wells. Also included in the purchase were
9,600 net undeveloped acres, water rights and a water transportation and
distribution system. A downpayment of 10% of the $10.1 million purchase
price was made on July 14, 1997 from cash on hand. The balance of $9.09
million, as adjusted for a March 31, 1997 effective date, will be made at
closing scheduled for August 15, 1997.
AGREEMENT TO PURCHASE REFINING ASSETS
On July 14, 1997, the Company entered into a Purchase and Sale Agreement
with Crysen Refining, Inc. and Sound Refining, Inc. (collectively
"Crysen") covering the purchase of two oil refineries and related assets;
one located in Salt Lake City, Utah and one located in Tacoma, Washington.
The purchase price of approximately $25 million includes the physical
plant and land, the crude oil and finished products inventory and net
receivable position of both refineries. The closing is scheduled for
September 30, 1997 and is subject to Inland performing extensive
environmental, financial and engineering due diligence and satisfaction of
other closing conditions. The Crysen refinery, located in Salt Lake City,
Utah, has a nominal capacity of 12,500 barrels of oil per day. The Sound
refinery, located in Tacoma, Washington, has a nominal capacity of 6,000
barrels of oil per day and is principally an asphalt processing facility.
The Company may consider assigning its right to acquire the Tacoma
facility to an unrelated purchaser prior to closing.
5
PART 1. FINANCIAL INFORMATION (Continued)
INLAND RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SALE OF PREFERRED STOCK
On July 21, 1997, the Company closed the sale of 100,000 shares of a newly
designated Series C Cumulative Convertible Preferred Stock (the "Series C
Stock") to an affiliate of Enron Corp. for cash of $10 million. Concurrently
with the issuance of the Series C Stock, the Company called for redemption
its outstanding Series B Convertible Preferred Stock (the "Series B Stock").
The holders of the Series B Stock waived redemption and instead elected to
convert their Series B Stock into 1,977,671 shares of Inland Common Stock.
The Series C Stock is initially convertible at any time by the holder into
8.333 shares of Inland Common Stock, an effective conversion price of $12.00
per share. The Series C Stock bears a dividend of 10% per annum. Accumulated
dividends may also be converted by the holder at the same ratio as the Series
C Stock. Subsequent to July 21, 2000, (the third anniversary), the Company
has the option to redeem for cash at par value ($100 per share) all
outstanding shares of Series C Stock plus accrued dividends. If not converted
by the holder or redeemed for cash by the Company prior to the later of (i)
July 21, 2005 (the eighth anniversary) or (ii) six months following maturity
of any high yield offering or long-term debt financing in the aggregate
amount of at least $25 million obtained after July 21, 1997, the Company must
redeem the Series C Stock and all accrued dividends for (i) cash or, at the
Company's election, (ii) Common Stock issued at 80% of the market price of
the Common Stock on the day of redemption.
The Company must also redeem the Series C Stock if (a) the Company enters
into any new line of business (other than exploration, development and
production of oil and gas) and holders of Series C Stock elect to be redeemed
prior to the Company commencing such new line of business (closing on the
purchase of the Crysen refining assets is considered to be an entry into a
new line of business), or (b) the Company proposes to enter into a merger,
consolidation or share exchange pursuant to which holders of Common Stock
would receive cash or other property (rather than stock in the surviving
company) in a per share amount less than the effective conversion price for
the Series C Stock (which is initially $12 per share). The Series C Stock
votes with common stockholders on all matters based on the number of shares
of Inland Common Stock the Series C Stock is convertible into; except for the
approval of amendments to the Series C Stock, the authorization of any other
series of preferred stock having equal or greater rights, and the approval of
any merger, consolidation or share exchange involving the Company unless the
holder of the Series C Stock receives equivalent stock with equivalent
rights. In these instances, the Series C Stock votes as a separate class. The
Series C Stock also carries anti-dilution protection, rights to demand
registration at the Company's expense and a liquidation preference equal to
par value of all outstanding shares plus accrued dividends.
AGREEMENT TO PURCHASE EREC ASSETS
On July 25, 1997, the Company entered into an Agreement of Sale and Purchase
with Equitable Resources Energy Company ("EREC") to acquire all of EREC's
property interests and related assets in the Monument Butte Field within the
Uinta Basin of Northeastern Utah. The purchase includes interest in 279 wells
(185 net) including 227 wells operated by EREC and 6 wells already operated
by the Company. The remaining nonoperated production is comprised of 52 gross
(4 net) wells. Also included in the purchase were 23,400 net undeveloped
acres, water rights, a water transportation and distribution system and a gas
gathering and processing system. A downpayment of 10% of the approximately
$53 million purchase price was made on July 25, 1997 from cash on hand. The
balance of $48 million, as adjusted for an April 1, 1997 effective date, will
be made at closing which is scheduled for September 30, 1997, subject to
completion of due diligence and satisfaction of various closing conditions.
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:
RESULTS OF OPERATIONS:
THREE MONTH PERIODS ENDED JUNE 30, 1997 AND 1996:
OIL AND GAS SALES - Oil and gas sales during the second quarter of 1997
exceeded the previous year second quarter by $333,000, or 13%. The increase
was attributable to increased oil and gas sales volumes as the Company
drilled and completed a total of 60 wells during the twelve months ending
June 30, 1997 and acquired 20 producing properties on June 12, 1996 through
the purchase of Farmout Inc. Although production increased 35% on a barrel of
oil equivalent ("BOE") basis, the sales increase was only 13% due primarily
to an 18% decrease in the average price received for crude oil production
from $20.01 during the second quarter of 1996 to $16.47 during the same
period in 1997.
As further discussed in "Liquidity and Capital Resources" below, the Company
has entered into price protection agreements to hedge against 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
$37,000 and $168,000 during the second quarters of 1997 and 1996,
respectively, to recognize hedging contract settlement losses and contract
purchase cost amortization.
LEASE OPERATING EXPENSES - Lease operating expense per BOE sold was
$3.09 during the second quarter of 1997, slightly up from the $3.02
experienced during the first quarter of 1997. The Company's operating expense
rate per BOE was $2.31 during the year ended December 31, 1996 and $1.95
during the second quarter of 1996. The Company expects to improve upon its
1997 operating expense rate per BOE sold by continuing its aggressive
development program and performing a smooth operational integration of the
announced acquisitions subsequent to each of their closings. The development
activity and acquisitions should have the effect of increasing sales volumes
and creating more efficient field operations thereby allowing a wider
allocation of operating costs in relation to incremental operating costs
incurred.
PRODUCTION TAXES - Production tax expense consists of estimates of the
companies yearly effective tax rate for Utah state severance tax and
production ad valorem tax. Changes in sales prices, tax rates, tax exemptions
and the timing, location and results of drilling activities can all affect
the Company's actual effective tax rate. During the second quarter, the
Company revised its estimate of its yearly effective production tax rate from
6.0%, as recorded during the first quarter, to 4.2%. The adjustment caused
the second quarter 1997 production tax expense to equal 1.9% of oil and gas
sales. The estimated effective production tax rate recorded during the second
quarter of 1996 was 3.4%.
EXPLORATION - Exploration expense represents the Company's share of
costs to retain unproved acreage.
DEPLETION, DEPRECIATION AND AMORTIZATION - The increase in depletion,
depreciation and amortization resulted from increased sales volumes and an
increased depletion rate. 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
$5.65 per BOE sold during the second quarter of 1997 compared to $4.36 per
BOE sold during the second quarter of 1996.
7
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 $14,000 on a net basis between quarters. General and administrative
expense is reported net of operator fees and reimbursements which were
$684,000 and $481,000 during the second quarters of 1997 and 1996,
respectively. Gross general and administrative expense was $1,065,000 in 1997
and $876,000 in 1996. The increase in expense and reimbursements is primarily
a function of the level of operated field activity. During the second quarter
of 1997, the Company operated 85 more wells than it did at April 1, 1996. In
addition, the Company now maintains and continues to expand its gas gathering
and water delivery infrastructures.
INTEREST EXPENSE - Borrowings during the second quarters of 1997 and
1996 were recorded at an effective interest rate of 11%. The increase in
expense during the second quarter of 1997 was due to an increase in the
average amount of borrowings outstanding during the period.
OTHER INCOME - Other income represents interest earned on the investment
of surplus cash balances.
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT - On June 30, 1997,
the Company refinanced an existing obligation to Trust Company of the West.
Unamortized debt issue costs of $290,862 and an unamortized loan discount of
$573,491 were written off as an extraordinary loss.
INCOME TAXES - During 1997 and 1996, no income tax provision or benefit
was recognized due to net operating losses incurred and the reversal and
recording of a full valuation allowance.
SIX MONTH PERIODS ENDED JUNE 30, 1997 AND 1996:
OIL AND GAS SALES - Oil and gas sales during the first half of 1997
exceeded the previous year initial six months by $3,243,000, or 100%. The
increase was attributable to increased oil and gas sales volumes as the
Company drilled and completed a total of 60 wells during the twelve months
ending June 30, 1997 and acquired 20 producing properties on June 12, 1996
through the purchase of Farmout Inc. Although production increased 108% on a
barrel of oil equivalent ("BOE") basis, the sales increase was 100% due
primarily to an 8% decrease in the average price received for crude oil
production from $19.62 during the first half of 1996 to $17.96 during the
same period in 1997. Oil and gas sales were decreased by $143,000 and
$230,000 during the first half of 1997 and 1996, respectively, to recognize
hedging contract settlement losses and contract purchase cost amortization.
LEASE OPERATING EXPENSES - Lease operating expense per BOE sold was
$3.06 during the first six months of 1997. The Company experienced a rate of
$2.31 per BOE during the year ended December 31, 1996 and $2.38 per BOE
during the initial six months of 1996. The Company expects to improve upon
its 1997 operating expense rate per BOE sold by continuing its aggressive
development program and performing a smooth operational integration of the
announced acquisitions subsequent to each of their closings. The development
activity and acquisitions should have the effect of increasing sales volumes
and creating more efficient field operations thereby allowing a wider
allocation of operating costs in relation to incremental operating costs
incurred.
PRODUCTION TAXES - Production tax expense consists of estimates of the
companies yearly effective tax rate for Utah state severance tax and
production ad valorem tax. Changes in sales prices, tax rates, tax exemptions
and the timing, location and results of drilling activities can all affect
the Company's actual effective tax rate. The Company's estimate of its yearly
effective production tax rate is 4.2% for 1997. The estimated effective
production tax rate recorded during the first half of 1996 was 3.4%.
8
PART 1. FINANCIAL INFORMATION (Continued)
INLAND RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
-----
EXPLORATION - Exploration expense represents the Company's share of
costs to retain unproved acreage.
DEPLETION, DEPRECIATION AND AMORTIZATION - The increase in depletion,
depreciation and amortization resulted from increased sales volumes and an
increased depletion rate. 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
$5.65 per BOE sold during the initial six months of 1997 compared to $4.25
per BOE sold during the same period in 1996.
GENERAL AND ADMINISTRATIVE, NET - General and administrative expense
increased $170,000 on a net basis between quarters. General and
administrative expense is reported net of operator fees and reimbursements
which were $1,196,000 and $877,000 during the six month periods ended June
30, 1997 and 1996, respectively. Gross general and administrative expense was
$2,037,000 in 1997 and $1,549,000 in 1996. The increase in expense and
reimbursements is primarily a function of the level of operated field
activity. During the second quarter of 1997, the Company operated 100 more
wells than it did at January 1, 1996. In addition, the Company now maintains
and continues to expand its gas gathering and water delivery infrastructures.
INTEREST EXPENSE - Borrowings during 1997 and 1996 were recorded at an
effective interest rate of 11%. The increase in expense during 1997 was due
to an increase in the average amount of outstanding borrowings.
OTHER INCOME - Other income represents interest earned on the investment
of surplus cash balances.
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT - On June 30, 1997,
the Company refinanced an existing obligation to Trust Company of the West.
Unamortized debt issue costs of $290,862 and an unamortized loan discount of
$573,491 were written off as an extraordinary loss.
INCOME TAXES - During 1997 and 1996, no income tax provision or benefit
was recognized due to net operating losses incurred and the reversal and
recording of a full valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
DEBT REFINANCING - On June 30, 1997, the Company entered into a $50
million Credit Agreement with Canadian Imperial Bank of Commerce (the "CIBC
Loan Agreement). The borrowing base under the facility is limited to the
collateral value of proved reserves as determined semiannually by the lender.
The initial borrowing base of $26 million was fully funded on June 30, 1997.
The loan proceeds, along with cash on hand, were used to retire the $24.45
million loan obligation due to Trust Company of the West ("TCW") and to
purchase an override for $3.57 million on the Company's properties held by
TCW. The CIBC Loan Agreement is interest only until July 1, 1999 when the
facility converts to a three year amortizing term loan. Interest under the
agreement is calculated, at the Company's option, using either a base rate
plus a spread of 0% to .875% or the London interbank eurodollar rate
("LIBOR") plus a spread of 1% to 1.875%. The spread percentage is determined
based on the Company's borrowings relative to its borrowing base. The CIBC
Loan Agreement restricts the payment of cash dividends, borrowings, sale of
assets, loans to others, investment and merger activity and hedging contracts
without the prior consent of the lender and requires the Company to maintain
certain net worth, interest coverage and working capital ratios. On June 30,
1997, the Company's outstanding balance was $26 million accruing interest at
a rate of 9.375%. On July 7, 1997, the Company converted the interest method
under the CIBC Loan Agreement to the LIBOR option reducing the interest rate
to 7.5625%.
9
PART 1. FINANCIAL INFORMATION (Continued)
INLAND RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
------
WORKING CAPITAL AND CASH HOLDINGS - In addition to the activity noted
above, during the initial six months of 1997, the Company borrowed its
remaining loan availability of $3.5 million under the TCW Loan Agreement,
generated $4.1 million of cash from operations and increased accounts payable
and accrued expenses by $2.9 million. The Company used these cash sources and
cash on hand to finance the drilling and completion of 31 wells, fund the
Company's principal and interest obligation under the TCW Loan Agreement and
purchase an inventory of drilling supplies. The effect of all transactions
and operations performed through June 30, 1997 was a net cash outflow of $6.6
million causing the Company's cash balance to decrease to $3.4 million, and
the Company's net working capital position to decrease to $427,000, at June
30, 1997.
TRANSACTIONS SUBSEQUENT TO JUNE 30, 1997 - On July 14, 1997, the Company
entered into a Purchase and Sale Agreement with Enserch Exploration, Inc.
("Enserch") to acquire all of Enserch's property interests and related assets
in the Monument Butte Field within the Uinta Basin of Northeastern Utah. A
downpayment of 10% of the $10.1 million purchase price was made on July 14,
1997 from cash on hand. The balance of $9.09 million, as adjusted for a March
31, 1997 effective date, will be made at closing scheduled for August 15,
1997.
On July 21, 1997, Inland closed the sale and issuance of 100,000 shares of a
newly designated Series C Cumulative Convertible Preferred Stock (the "Series
C Stock") to an affiliate of Enron Corp. The net proceeds to the Company
after payment of closing fees was $9.6 million. The proceeds were used to
fund the downpayment of the EREC acquisition (discussed below) and for
working capital purposes.
On July 25, 1997, the Company entered into an Agreement of Sale and Purchase
with Equitable Resources Energy Company ("EREC") to acquire all of EREC's
property interests and related assets in the Monument Butte Field within the
Uinta Basin of Northeastern Utah. A downpayment of 10% of the approximately
$53 million purchase price was made on July 14, 1997 from cash on hand. The
balance of $48 million, as adjusted for an April 1, 1997 effective date, will
be made at closing which is scheduled for September 30, 1997.
In addition to the above transactions, the Company also entered into a
Purchase and Sale Agreement with Crysen Refining, Inc. and Sound Refining,
Inc. (collectively "Crysen"). No downpayment was required at the time of
entering into the agreement. The estimated purchase price of $25 million
includes the physical plant and land for two oil refineries, their crude oil
and finished products inventory and their net receivable positions. The
Company is required to perform due diligence procedures by September 10, 1997
and make a nonrefundable earnest money deposit of $250,000. The balance of
the acquisition cost is due at closing scheduled for September 30, 1997.
Depending on the outcome of the due diligence procedures and other factors,
the Company may also require additional capital to upgrade the Salt Lake City
refinery. The estimated cost of the facility upgrade, if performed, is
currently unknown. The Company may consider assigning its right to acquire
the Tacoma facility to an unrelated purchaser prior to closing.
10
PART 1. FINANCIAL INFORMATION (Continued)
INLAND RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
------
In summary, using approximate dollar amounts in all cases, the Company
requires $9 million to close the Enserch acquisition on August 15, 1997, $48
million to close the EREC acquisition on September 30, 1997, $25 million to
close the Crysen acquisition on September 30, 1997, $16 million to complete
its 1997 development drilling program in the Monument Butte Field and, if
determined appropriate, additional capital to upgrade the Crysen facility.
The Company anticipates entering into an amendment to the CIBC Loan Agreement
that will (i) increase the borrowing base by $6 million for the Enserch
acquisition at closing scheduled for August 15, 1997 (the "Traunche A Loan")
(ii) establish a $3 million twelve month non-conforming term loan to be
funded at the Enserch closing (the "Traunche B Loan"). The Traunche A Loan is
expected to conform to the terms originally established in the CIBC Loan
Agreement. The Traunche B Loan is expected to carry the exact same terms as
the Traunche A Loan except (i) interest will be calculated at LIBOR plus
3.25% for the initial 90 days after closing; the interest rate would then
increase 0.50% on the 91st day and every 90 days thereafter until maturity
(ii) a 1% fee would be due upon each extension of additional availability
(iii) maturity would be the earlier of August 15, 1998 or the effective date
of any new debt or equity offering in excess of $1 million. The combination
of the Traunche A Loan and Traunche B Loan would provide the Company with
sufficient capital to fund the Enserch acquisition. However, there is no
assurance that the Company will be able to close and fund this amendment to
the CIBC Loan Agreement or raise sufficient capital from other sources. As a
result, the Company may have to forgo the acquisition of the Enserch assets,
and, although unlikely, it is possible the Company could forfeit the
downpayment already made.
In addition, the Company is engaged in discussions and negotiations with
other lending sources to provide loans to be used to fund the acquisitions of
Crysen and EREC, repay the Traunche B Loan (if advanced), provide capital for
the continued development of the Monument Butte Field and, if determined to
be economically feasible, provide capital for any necessary upgrade of the
Crysen refinery. There is no assurance that the Company will be able to raise
sufficient capital through these sources to fund any of the contemplated uses
of proceeds. As a result, the Company may have to forgo the purchase of the
Crysen facility, forgo the purchase of the EREC assets, and, although
unlikely, forfeit the downpayment already made, slow development of the
Monument Butte Field and comply with the terms of the Traunche B Loan for a
period longer than originally anticipated.
CRUDE OIL HEDGING ACTIVITIES - The Company has a hedge in place with
Enron Capital and Trade Resources Corp. (the "Enron Hedge") that hedges 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, 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 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 barrels of crude oil hedged that month. On
January 1, 1997, the Company paid $34,170 to enter into a contract with Koch
Gas Services Company ("Koch") that exactly offsets the effect of the Enron
Hedge during the period January 1998 through December 2000. The combination
of the two contracts limits the Company's remaining exposure under the Enron
Hedge to the settlements during the period January 1997 through December 1997
at 10,900 barrels per month. In an effort to limit its downside exposure, on
July 8, 1996, the Company purchased from Koch 720,000 put options for
$133,200 with a strike price of $15.00. The contract settles in monthly
amounts of 60,000 put options during the period January 1997 to December
1997. The Company has also purchased for $33,000 from Enron 300,000 put
options with a strike price of $16.00 that settle in monthly amounts of
100,000 put options during the period January through March 1998.
11
PART 1. FINANCIAL INFORMATION (Continued)
INLAND RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
------
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
of the fair market value of oil in a particular field) less a deduction of
approximately $0.85 to $1.00 per barrel for oil quality adjustments. 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 has been conducting discussions with each refinery to inform them of
the outlook for Black Wax production in this region and has entered into an
agreement to purchase the assets of Crysen to provide a captured refining
source for its Black Wax crude oil, if determined to be desirable. Until the
Crysen acquisition is completed, or some other arrangement is reached, there
will continue to be short-term downward pressure on Black Wax pricing. If the
Company fails to close on the acquisition of Crysen, the Company expects to
negotiate a long-term marketing arrangement or some other agreement that will
be beneficial to the Company, although there can be no assurance it will be
able to do so.
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.
ENVIRONMENTAL MATTERS - 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. During 1996, the Vernal,
Utah office of the Bureau of Land Management ("BLM") undertook the
preparation of an Environmental Assessment ("EA") relating to certain lands
within the Monument Butte Field. Due to this process, the Company reduced its
activities on these lands during the last six months of 1996 and January 1997
pending issuance of the EA by the BLM. The formal Record of Decision relating
to the EA was issued by the BLM on February 3, 1997. The Company believes it
will be able to comply with the Record of Decision without causing a material
impact on its future drilling plans in the Monument Butte Field.
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.
INFLATION AND CHANGES IN PRICES
The Company's revenues and the value of its oil and gas properties have
been and will be affected by changes in oil and gas prices. The Company's
ability to borrow from traditional lending sources and to obtain additional
capital on attractive terms is also substantially dependent on oil and gas
prices. Oil and gas prices are subject to significant seasonal and other
fluctuations that are beyond the Company's ability to control or predict.
Although certain of the Company's costs and expenses are affected by the
level of inflation, inflation did not have a significant effect on the
Company's result of operations during 1997 or 1996.
12
PART 1. FINANCIAL INFORMATION (Continued)
INLAND RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
------
FORWARD LOOKING STATEMENTS
Certain statements included in this Management's Discussion and Analysis
or Plan of Operation 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,
the availability and cost of financing, the availability of materials, and
regulatory approvals, to name a few.
13
PART II. OTHER INFORMATION (Continued)
INLAND RESOURCES INC.
-----
Items 1, 3 and 5 are omitted from this report as inapplicable.
ITEM 2. CHANGES IN SECURITIES.
The Company accrued for issuance 47,847 shares of common stock dividends
related to its Series B Stock during each of the first two quarters of the
year. The Company relied on the exemption provided by Section 4 (2) of the
Securities Act of 1933, as amended.
As previously discussed in Items 1 and 2, the Company issued 100,000 shares
of Series C Stock for gross proceeds of $10 million ($9.6 million net of
closing fees) on July 21, 1997, and in connection therewith called its Series
B Stock for redemption, but the holders of Series B Stock waived redemption
and instead elected to convert their Series B Stock into 1,977,671 shares of
Common Stock. The Company relied on the exemption provided by Section 4 (2)
of the Securities Act of 1933, as amended, for the issuance of the Series C
Stock and the issuance of the Common Stock upon conversion of the Series B
Stock.
The general provisions of the Series C Stock, and the effects on the holders
of Common Stock, are discussed in items 1 and 2 and reference is hereby made
to such discussion.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
On April 30, 1997, the Company held its Annual Meeting of Stockholders.
During this meeting, the stockholders voted on the following items:
(1) The holders of Common Stock and Series B Preferred Stock voted on
the election of five members to the Board of Directors to serve until the
1998 annual meeting of stockholders or until their respective successors are
duly elected and qualified;
Item (1) was approved by an affirmative vote of approximately 71% of the
total outstanding shares of Common Stock and Series B Preferred Stock.
(2) To consider and act upon a proposal (the "Proposal") to approve the
1997 Stock Option Plan under which the Company would reserve 500,000 shares
of Common Stock for issuance to key employees, directors, and consultants of
the Company.
Item (2) was approved with 4,620,534 shares voting For the item, 30,704
shares voting Against, and 9,403 shares Abstaining.
14
PART II. OTHER INFORMATION
INLAND RESOURCES INC.
-----
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 21, 1997. *
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).
4.1 Credit Agreement between the Company and Canadian Imperial Bank of
Commerce dated June 30, 1997 (exclusive of all exhibits and schedules).*
10.1 Securities Purchase Agreement dated July 21, 1997 between the Company
and Joint Energy Investments Development Limited Partnership. *
10.2 Registration Rights Agreement dated July 21, 1997 between the Company
and Joint Energy Investments Development Limited Partnership.*
27.1 Financial Data Schedule required by Item 601 of Regulation S-B.*
- ----------------------
* Filed herewith.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter.
15
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: August 14 , 1997 By: /s/ Kyle R. Miller
------------------------------------
Kyle R. Miller
Chief Executive Officer
Date: August 14, 1997 By: /s/ Michael J. Stevens
------------------------------------
Michael J. Stevens
Vice President - Accounting and
Administration
(Principal Accounting Officer)
16