SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Date of Report (Date of earliest event reported): September 23, 1997
INLAND RESOURCES INC.
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(Exact name of registrant as specified in its charter)
Washington 0-16487 91-1307042
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(State of incorporation) (Commission File No.) (IRS Employer
Identification No.)
475 17TH STREET, SUITE 1500, DENVER, COLORADO 80202
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(Address of principal executive offices, including zip code)
(303) 292-0900
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(Registrant's telephone number, including area code)
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
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On September 30, 1997, Inland Resources Inc. (the "Company") acquired the
Utah assets (the "EREC Properties") of Equitable Resources Energy Company
("EREC") for $55.4 million in cash (subject to various post closing
adjustments). The EREC Properties consist of 279 gross (184 net) oil and gas
wells, 23,400 net undeveloped acres, water rights, a water transportation and
distribution system and a gas gathering system. The undeveloped acreage
provides the Company with approximately 585 additional drillsites in the
Monument Butte Field. The acquisition of the EREC Properties also included
operating rights to four approved water flood units (encompassing 142 of the
wells acquired).
Management believes that the EREC Properties have significant development
potential which will enable the Company to increase its cash flow from
operations and reserve base at a cost efficient rate due to the proximity of the
EREC Properties to the Company's existing properties. The EREC Properties are
geographically concentrated in proximity to the Company's properties in the
Monument Butte Field, thereby enabling the Company to operate the properties
without incurring significant incremental general and administrative expenses.
Of the 279 gross wells acquired, the Company already operated 48 of the wells
and EREC operated 227 of the wells so that the Company now operates 275 of the
wells.
The Company financed the acquisition of the EREC Properties with a portion
of the proceeds of a new credit facility with Trust Company of the West and TCW
Asset Management Company, in their capacities as noteholder and agent
(collectively "TCW").
ITEM 5. OTHER EVENTS.
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On September 30, 1997, the Company and its wholly owned subsidiary, Inland
Production Company ("IPC"), closed a Credit Agreement with TCW pursuant to which
TCW loaned IPC $75,000,000, and IPC used a portion of such proceeds to purchase
the EREC Properties. The loan from TCW is secured by a second lien on all
assets of IPC and is guaranteed by the Company.
The Company and IPC also closed a Credit Agreement on September 30, 1997
with ING (U.S.) Capital Corporation ("ING") providing IPC with a line of credit
equal to an initial borrowing base of $45,000,000. This loan is secured by a
first lien on all assets of IPC and is also guaranteed by the Company. IPC drew
down an initial $17.8 million under the Credit Agreement with ING which, when
combined with excess borrowings from TCW, were used to fund repayment in full of
its existing credit facility with Canadian Imperial Bank of Commerce.
The Credit Agreement with ING constitutes a revolving line of credit until
March 31, 1999, at which time it converts to a term loan payable in quarterly
installments through March 29, 2003, when the final installment is due and
payable in full. The quarterly installments are in the amount of $4,000,000 for
the first three quarters, $3,000,000 for the next four quarters, $2,500,000 for
the next four quarters, $2,250,000 for the next four quarters, and $2,000,000 on
March 29, 2003. The ING
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loan bears interest, at IPC's option, at either (i) the average prime rates
announced from time to time by The Chase Manhattan Bank, Citibank, N.A. and
Morgan Guaranty Trust Company of New York plus 0.5% per annum; or (ii) at the
LIBOR rate plus 1.75%.
The TCW loan is payable interest only, at a rate of 9.75% per annum,
quarterly until the earlier of December 31, 2003 or the date upon which the ING
loan is paid in full, at which time the TCW loan is payable in quarterly
installments of principal and interest over twelve quarterly installments, with
the principal installments equaling $6,250,000 for the first four quarters,
$8,750,000 for the fifth through eighth quarters and $3,750,000 for the ninth
through twelfth quarters. The Company also granted warrants to TCW in
connection with the TCW Credit Agreement to purchase 100,000 shares of common
stock (subject to anti-dilution adjustments) for an exercise price of $10.00 per
share (subject to anti-dilution adjustments) at any time after September 23,
2000 and before September 23, 2007. The Company also granted registration
rights in connection with such warrants. TCW is also entitled to additional
interest on $65,000,000 of the TCW loan in such amount that will yield to it a
12.5% internal rate of return on such principal amount, such payment to be made
concurrently with the final payment of all principal and interest on the TCW
loan. For purposes of this internal rate of return calculation, IPC is also
given credit for payment of a funding fee in the amount of 3% of the total loan
amount paid to TCW at the closing of the loan transaction. TCW may also elect
to "put" the warrant back to the Company upon payment in full of the TCW loan in
an amount which will cause TCW to achieve a 12.5% internal right of return on
the last $10,000,000 of the TCW loan.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
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INDEX TO FINANCIAL STATEMENTS
(A) STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES FOR CERTAIN OIL
AND GAS PROPERTIES
Report of Independent Public Accountants F-1
Statements of Revenues and Direct Operating Expenses for Certain Oil
and Gas Properties Acquired from Equitable Resources Energy Company
for the Six Months Ended June 30, 1997 and 1996 (Unaudited) and the
Years Ended December 31, 1996 and 1995 F-1
Notes to Statements of Revenues and Direct Operating Expenses for
Certain Oil and Gas Properties Acquired from Equitable Resources
Energy Company F-3
B) UNAUDITED PRO FORMA FINANCIAL INFORMATION
Introduction to Pro Forma Financial Information F-6
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Pro Forma Condensed Consolidated Balance Sheet as of
June 30, 1997 (Unaudited) F-7
Pro Forma Consolidated Statement of Operations for the Six-Month
Period Ended June 30, 1997 (Unaudited) F-8
Pro Forma Consolidated Statement of Operations for the
Year Ended December 31, 1996 (Unaudited) F-9
Notes to Unaudited Pro Forma Financial Statements F-10
C) EXHIBITS - The following exhibits are filed herewith:
4.1 Credit Agreement dated September 23, 1997 between IPC, the
Company, ING, as Agent, and Certain Financial Institutions,
as banks.
4.2 Credit Agreement dated September 23, 1997, among IPC, the
Company, Trust Company of the West, and TCW Asset Management
Company, in the capacities described therein.
4.3 Intercreditor Agreement dated September 23, 1997, between IPC,
TCW Asset Management Company, Trust Company of the West and ING.
4.4 Warrant Agreement by and between the Company and TCW Portfolio
No. 1555 DR V Sub-Custody Partnership, L.P. dated September 23,
1997.
4.5 Warrant issued by the Company pursuant to the Warrant Agreement
filed as Exhibit 4.4, dated September 23, 1997, representing
the right to purchase 100,000 shares of the Company's common
stock.
10.1 Agreement of Sale and Purchase dated July 24, 1997 between EREC
and IPC.
23.1 Consent of Arthur Andersen, LLP.
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SIGNATURES
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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 hereunto duly authorized.
October 13, 1997
INLAND RESOURCES INC.
By: \s\ Kyle R. Miller
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Kyle R. Miller, President and
Chief Executive Officer
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Inland Resources Inc.:
We have audited the accompanying statements of revenues and direct operating
expenses for certain of the oil and gas properties (the "Properties") of
Equitable Resources Energy Company ("Equitable") acquired by INLAND RESOURCES
INC. for each of the years ended December 31, 1996 and 1995. These financial
statements are the responsibility of Inland Resources Inc.'s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The statements of revenues and direct operating expenses for the Properties
acquired from Equitable were prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission as described in
Note 1, and are not intended to be a complete presentation of the Properties'
financial position, results of operations and cash flows.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the revenues and direct operating expenses for the
Properties acquired from Equitable for each of the years ended December 31, 1996
and 1995, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado,
August 15, 1997.
F-1
INLAND RESOURCES INC.
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STATEMENTS OF REVENUES AND DIRECT
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OPERATING EXPENSES FOR CERTAIN OIL AND GAS PROPERTIES
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ACQUIRED FROM EQUITABLE RESOURCES ENERGY COMPANY FOR THE
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SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED) AND
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THE YEARS ENDED DECEMBER 31, 1996 AND 1995
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Six Months Ended Years Ended
June 30, December 31,
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(Unaudited)
1997 1996 1996 1995
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(In thousands)
OIL AND GAS REVENUES $2,965 $4,015 $8,479 $7,245
DIRECT OIL AND GAS OPERATING EXPENSES:
Production taxes 65 89 175 163
Lease operating expense 1,436 926 1,970 1,892
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1,501 1,015 2,145 2,055
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REVENUES IN EXCESS OF DIRECT
OPERATING EXPENSES $1,464 $3,000 $6,334 $5,190
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The accompanying notes are an integral part of these statements.
F-2
INLAND RESOURCES INC.
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NOTES TO STATEMENTS OF REVENUES AND DIRECT OPERATING
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EXPENSES FOR CERTAIN OIL AND GAS PROPERTIES
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ACQUIRED FROM EQUITABLE RESOURCES ENERGY COMPANY FOR THE
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SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED) AND
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THE YEARS ENDED DECEMBER 31, 1996 AND 1995
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(1) BASIS OF PRESENTATION
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On September 30, 1997, Inland Resources Inc. (the "Company") acquired all
rights, title and interest in certain oil and gas properties (the "Properties")
as described in the Agreement of Sale and Purchase between the Company and
Equitable Resources Energy Company ("Equitable"). The acquisition had an
effective date of April 1, 1997. The Properties acquired by the Company consist
of oil and gas interests in approximately 300 properties and the associated
facilities located in the Uinta Basin of North-eastern Utah.
The accompanying Statements of Revenues and Direct Operating Expenses were
derived from the historical accounting records maintained by Equitable. The
statements have been prepared on the accrual basis of accounting. The
statements do not include depreciation, depletion and amortization, general and
administrative, income tax or interest expense as these costs may not be
comparable to the expenses expected to be incurred in the future. The revenues
and direct operating expenses for the periods presented are also not necessarily
indicative of results to be expected in the future.
(2) UNAUDITED INTERIM FINANCIAL INFORMATION
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The accompanying financial information for the six-month periods ended June 30,
1997 and 1996 is unaudited but reflects, in the opinion of the Company's
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the oil and gas revenues and direct oil and gas
operating expenses of the Properties for such periods. The oil and gas revenues
and direct oil and gas operating expenses for such interim periods are not
necessarily indicative of results to be expected for the full year.
F-3
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(3) SUMMARY OIL AND GAS RESERVE INFORMATION (UNAUDITED)
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Supplemental oil and gas reserve information related to the Properties is
presented in accordance with Statement of Financial Accounting Standards No. 69,
"Disclosures about Oil and Gas Producing Activities." Net proved oil and gas
reserves of the Properties as of December 31, 1996 and 1995 were estimated by
Netherland, Sewell & Associates, independent petroleum engineering consultants.
The following tables set forth information for the years ended December 31, 1996
and 1995, with respect to changes in the Properties' proved reserves.
Quantities of natural gas are expressed in terms of thousand cubic feet (mcf)
and oil in barrels (bbls).
Years Ended December 31,
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1996 1995
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(In thousands)
Oil Gas Oil Gas
BBLS MCF BBLS MCF
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Total proved reserves:
Beginning of year 5,588 2,890 4,049 2,840
Production (412) (387) (389) (275)
Revisions of previous
estimates (240) 80 110 (733)
Extensions, discoveries
and other additions 1,224 - 1,818 1,058
Purchase of reserves
in place 25 79 - -
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End of year 6,185 2,662 5,588 2,890
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Proved developed reserves:
Beginning of year 4,330 2,541 4,049 2,840
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End of year 6,185 2,662 4,330 2,541
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No proved undeveloped reserves have been shown as of December 31, 1996, as the
Company's future drilling plans are not necessarily indicative of Equitable's.
F-4
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Information with respect to the Properties' estimated discounted future net cash
flows for the years ended December 31, 1996 and 1995 is as follows:
Years Ended
December 31,
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1996 1995
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(In thousands)
Future cash flows $124,040 $105,893
Future production costs (47,639) (41,088)
Future development costs (525) (3,948)
Future income tax expense (25,853) (20,732)
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Future net cash flows 50,023 40,125
10% annual discount (20,050) (15,747)
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Discounted future net cash flows $ 29,973 $ 24,378
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As of December 31, 1996 and 1995, the oil and gas prices used in determination
of future cash flows were $18.58 and $3.34, and $18.24 and $1.46 per barrel and
mcf, respectively. Subsequent to December 31, 1996, actual prices for oil and
gas have declined due to market conditions.
Principal changes in the Properties' estimated discounted future net cash flows
for the years ended December 31, 1996 and 1995 are as follows:
Years Ended
December 31,
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1996 1995
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(In thousands)
Beginning of year $24,378 $21,843
Oil and gas sales, net of production costs (6,334) (5,190)
Net change in prices and production costs 5,075 786
Extensions and discoveries, less related costs 6,473 10,866
Purchases of reserves in place, net 251 -
Change in estimated development costs (170) (3,718)
Current year exploration and development costs 3,600 -
Revision of previous quantity estimates (1,383) (92)
Accretion of discount 3,697 3,309
Net change in income taxes (2,906) (1,346)
Changes in production rates and other (2,708) (2,080)
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End of year $29,973 $24,378
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F-5
Inland Resources Inc.
Introduction to Pro Forma Financial Information
The following unaudited pro forma financial statements are presented to
show the pro forma effect of the acquisition of oil and gas properties pursuant
to an agreement consummated September 30, 1997 between Inland Resources Inc.
("Inland") and Equitable Resources Energy Company ("EREC"). The unaudited Pro
Forma Consolidated Statements of Income for the twelve months ended December 31,
1996, and for the six months ended June 30, 1997, are as if the acquisition had
occurred on January 1, 1996 and January 1, 1997, respectively. The Pro Forma
Condensed Consolidated Balance Sheet is based on the assumption the transaction
was completed on June 30, 1997. The transaction is reported using the purchase
method of accounting.
Inland's unaudited historical interim financial statements have been
prepared pursuant to the rules and regulations of the SEC and, in the opinion of
the Company, include all adjustments necessary for a fair statement of the
results of each period shown. The financial information presented is not
intended to reflect all financial information customarily reported under
generally accepted accounting principles. The pro forma adjustments included in
the accompanying Pro Forma Consolidated Statements of Operations are based on
assumptions and estimates and are not necessarily indicative of the results of
operations of the Company as they may be in the future or as they may have been
had the transaction actually occurred on January 1, 1996, January 1, 1997 or
June 30, 1997, as applicable.
F-6
Inland Resources Inc.
Pro Forma Condensed Consolidated Balance Sheet
June 30, 1997
(in thousands)
(Unaudited)
Assets: Historical Acquisition Pro Forma
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Cash and cash equivalents $ 3,427 $ 3,427
Accounts receivable and accrued sales 1,548 1,548
Inventory 2,197 2,197
Other current assets 434 434
Oil and gas properties 56,415 $53,100 109,515
Other long-term assets 1,185 4,600 5,785
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Total assets $65,206 $57,700 $122,906
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Liabilities and Stockholders' Equity:
Current liabilities $ 7,180 $ 7,180
Long-term debt 26,187 $57,700 83,887
Stockholders' equity 31,839 31,839
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Total liab. and stockholders'
equity $65,206 $57,700 $122,906
========== =========== =========
See the accompanying notes to unaudited pro forma
consolidated financial information
F-7
Inland Resources Inc.
Pro Forma Consolidated Statement of Operations
for the Six-Month Period ended June 30, 1997
(in thousands)
(Unaudited)
Historical Acquisition Pro Forma
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Sales of oil and gas $ 6,488 $ 2,965 (A) $ 9,453
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Operating expenses:
Operating costs 1,500 1,501 (A) 3,001
Exploration 30 30
Depletion, depreciation, and 2,415 1,036 (B) 3,451
amortization
General and administrative, net 841 (C) 841
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Total operating expenses 4,786 2,537 7,323
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Operating income 1,702 428 2,130
Interest expense (1,296) (3,173)(D) (4,469)
Other income, net 304 304
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Net income from continuing operations $ 710 $(2,745) $(2,035)
========== =========== =========
PRIMARY EARNINGS PER SHARE
EPS from continuing operations $0.11 $(0.30)
Weighted average shares outstanding 6,715 6,715
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FULLY DILUTED EARNINGS PER SHARE
EPS from continuing operations $0.08 $(0.30)
Weighted average shares outstanding 8,316 8,316
========== =========
See the accompanying notes to unaudited pro forma
consolidated financial information
F-8
Inland Resources Inc.
Pro Forma Consolidated Statement of Operations
for the year ended December 31, 1996
(in thousands)
(Unaudited)
Historical Acquisition Pro Forma
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Sales of oil and gas $10,704 $ 8,479 (A) $19,183
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Operating expenses:
Operating costs 2,045 2,145 (A) 4,190
Exploration 167 167
Depletion, depreciation and amortization 3,428 1,908 (B) 5,336
General and administrative, net 1,670 (C) 1,670
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Total operating expenses 7,310 4,053 11,363
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Operating income 3,394 4,426 7,820
Interest expense (1,633) (6,347)(D) (7,980)
Other income, net 413 413
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Net income from continuing operations $ 2,174 $(1,921) $ 253
========== =========== =========
PRIMARY EARNINGS PER SHARE
EPS from continuing operations $0.37 $0.05
Weighted average shares outstanding 5,276 5,276
========== =========
FULLY DILUTED EARNINGS PER SHARE
EPS from continuing operations $0.29 $0.04
Weighted average shares outstanding 6,651 6,651
========== =========
See the accompanying notes to unaudited pro forma
consolidated financial information
F-9
Inland Resources Inc.
Notes to Unaudited Pro Forma Financial Statements
1. Basis of Presentation:
----------------------
The unaudited Pro Forma Consolidated Statements of Operations are based on
Inland's audited financial statements and the audited statement of revenues
and direct operating expenses of certain oil and gas properties of EREC for
the year ended December 31, 1996 and on Inland's unaudited financial
statements and on the unaudited statement of revenues and direct operating
expenses for certain oil and gas properties acquired from EREC for the six
months ended June 30, 1997, and upon the adjustments and assumptions
described below.
2. Pro Forma Adjustments:
----------------------
The unaudited pro forma statements of income reflect the following
adjustments:
A. Sales of oil and gas and operating costs were adjusted based on the
audited statement of revenues and direct operating expenses for the
year ended December 31, 1996 and from the unaudited statement of
revenues and direct operating expenses for the six months ended June
30, 1997.
B. Depletion, depreciation and amortization is adjusted based on Inland's
July 1, 1997 in-house reserve report for the acquired EREC properties
and the portion of the purchase price allocated to proved properties.
C. The unaudited Pro Forma Consolidated Statements of Operations do not
include any adjustment for net general and administrative expense
since the increase to gross general and administrative expense related
to the acquisition is offset by COPAS producing overhead
reimbursements on the operated properties acquired.
D. Interest expense is adjusted using Inland's blended cost of capital to
finance the transaction.
E. The Pro Forma Condensed Consolidated Balance Sheet includes
adjustments to reflect the purchase of the EREC oil and gas and other
assets for $55.5 million using funds provided by new issues of long-
term debt. The purchase price allocation includes payment for oil and
gas assets, a long-term receivable of $2.4 million and debt issue
costs of $2.2 million.
F-10