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, 1995
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 10, 1995: 40,927,999
PART 1. FINANCIAL INFORMATION
INLAND RESOURCES INC.
CONSOLIDATED BALANCE SHEETS
September 30, 1995 and December 31, 1994
September 30, December 31,
1995 1994
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 3,055,558 $ 1,691,156
Restricted cash 285,000 160,658
Accounts receivable 439,213 902,959
Account receivable from
related party 300,811
Inventory 504,002 835,691
Department of Energy contract 42,278 650,147
Other current assets 335,436 379,622
Total current assets 4,962,298 4,620,233
Property and equipment, at cost:
Oil and gas properties
(successful efforts method) 11,455,319 11,884,625
Gas and water transportation
facilities 147,833 646,507
Accumulated depletion,
depreciation and
amortization (463,387) (489,840)
11,139,765 12,041,292
Other property and
equipment, net 493,188 376,128
Total assets $ 16,595,251 $ 17,037,653
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and
accrued expenses $ 2,764,946 $ 2,407,179
Current portion of
long-term debt 607,500 1,965,157
Property reclamation costs,
short-term 323,945 300,000
Total current
liabilities 3,696,391 4,672,336
Long-term debt 3,698,009 2,157,842
Property reclamation costs,
long-term
283,670
Stockholders' equity:
Preferred Class A stock, par 107 107
value $.001; 20,000,000 shares
authorized, 106,850 shares
of Series A issued and
outstanding; liquidation
preference of $5,769,900
Additional paid-in capital
- preferred 3,672,861 3,672,861
Common stock, par value $.001;
100,000,000 shares authorized;
issued and outstanding
28,927,999 28,928 28,928
Additional paid-in capital
- common 13,168,591 13,168,591
Accumulated deficit (7,669,636) (6,946,682)
Total stockholders'
equity 9,200,851 9,923,805
Total liabilities and
stockholders' equity $ 16,595,251 $ 17,037,653
The accompanying notes are an integral part
of the financial statements
/TABLE
PART 1. FINANCIAL INFORMATION (Continued)
INLAND RESOURCES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three-month and nine-month periods
ended September 30, 1995 and 1994
(Unaudited)
Three-months ended Nine-months ended
September 30, September 30,
1995 1994 1995 1994
Revenues:
Sales of oil
and gas $ 464,647 $ 242,175 $ 1,593,292 $ 645,214
Management fee 158,356 158,356
Total revenues 623,003 242,175 1,751,648 645,214
Operating expenses:
Lease operating
expenses 145,003 187,018 881,700 524,623
Production taxes 26,619 28,734 115,654 77,384
Exploration 143,401 157,993
Depletion,
depreciation and
amortization 192,182 71,972 702,891 197,625
General and
administrative,
net 194,662 158,835 974,447 514,166
Total operating
expenses 701,867 446,559 2,832,685 1,313,798
Operating loss (78,864) (204,384) (1,081,037) (668,584)
Interest expense (167,571) (12,620) (588,979) (12,620)
Other income, net 29,376 1,790 97,062 6,122
Gain on sale of the
Duchesne County
Field 850,000 850,000
Net income (loss) $ 632,941 $ (215,214) $ (722,954)$ (675,082)
Net income (loss)
per share $ .02 $ (.01) $ (.025) $ (.04)
Weighted average
common shares
outstanding 28,927,999 16,655,111 28,927,999 15,324,212
Dividends per
share NONE NONE NONE NONE
The accompanying notes are an integral
part of the financial statements
/TABLE
PART 1. FINANCIAL INFORMATION (Continued)
INLAND RESOURCES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine-month periods ended September 30, 1995 and 1994
(Unaudited)
1995 1994
Cash flows from operating
activities:
Net loss $ (722,954) $ (675,082)
Adjustments to reconcile
net loss to net cash
provided (used) by
operating activities:
Net cash used by
discontinued operations (209,725) (422,943)
Depletion, depreciation
and amortization 702,891 197,625
(Gain) loss on disposal
of assets (850,000) 2,900
Effect of changes in
current assets and
liabilities:
Accounts receivable 660,615 (16,203)
Inventory 57,188 (16,047)
Other current assets (33,814) (76,388)
Accounts payable and
accrued expenses 600,608 330,238
Net cash provided (used) by
operating activities 204,809 (675,900)
Cash flows from investing activities:
Purchase of undeveloped
acreage (1,360,000)
Development expenditures
and equipment purchases (2,782,433) (783,712)
Change in restricted cash (124,342) (464,427)
Net proceeds from sale of
the Duchesne County Field 2,946,765
Net cash acquired in purchase
of Lomax Exploration Company 118,363
Net cash provided by
discontinued operations 220,862
Net cash used by investing
activities (1,320,010) (908,914)
Cash flows from financing activities:
Proceeds from issuance of
common stock 2,406,650
Proceeds from long-term debt 2,600,000 1,000,000
Payments of long-term debt (120,397)
Payment of related party
note payable (100,000)
Net cash provided by financing
activities 2,479,603 3,306,650
Net increase in cash and
cash equivalents 1,364,402 1,721,836
Cash and cash equivalents
at beginning of period 1,691,156 302,608
Cash and cash equivalents
at end of period $ 3,055,558 $ 2,024,444
Noncash financing activity:
Assumption of debt on sale
of Duchesne County Field $ 2,500,000
Issuance of note payable
for land purchase $ 203,000
The accompanying notes are an integral
part of the financial statements
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. Currently, the Company's mining operations are limited to the
final detoxification, reclamation and closure of the Toiyabe Mine in
compliance with Nevada and federal laws.
In March 1993, the Company's business emphasis changed from precious
metals mining to oil and gas development and production when the Company
acquired an undivided 50% interest in certain oil and gas leases in the
Uinta Basin located in Duchesne County, Utah, and an undivided 50%
interest in various tangible oil and gas assets (collectively called the
"Duchesne County Field"). The Duchesne County Field was sold effective July
1, 1995 (see Footnote 4).
On September 21, 1994, the Company acquired all the outstanding common and
preferred stock of Lomax Exploration Company. Effective July 1, 1995, the
name of Lomax Exploration Company was changed to 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
(collectively called the "Monument Butte Field"). The acquisition was
accounted for as a purchase, therefore, the net assets and results of
operations of IPC are included in the Company's consolidated financial
statements from the acquisition date forward. IPC operates as a wholly-owned
subsidiary of the Company.
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,
1994.
3. ACCOUNTING FOR LONG-LIVED ASSETS:
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets ("SFAS No. 121") which the Company will be required to
adopt during the first quarter of 1996. Currently, the Company does not
expect the adoption of SFAS No. 121 to have any material impact on the
Company's consolidated financial statements.
4. SALE OF DUCHESNE COUNTY FIELD:
On September 19, 1995, the Company sold the Duchesne County Field to
Petroglyph Gas Partners, L.P. ("PGP"). The purchase price paid by PGP was
$3 million in cash, less approximately $50,000 in closing adjustments, plus
the assumption by PGP of the Company's $2.5 million liability under its
Loan Agreement, dated August 24, 1994 (the "Inland Loan Agreement"), with
Joint Energy Development Investments Limited Partnership ("JEDI"). JEDI
consented to the sale and the assumption of the Inland Loan Agreement by
PGP relieving the Company of any further obligation under the Inland Loan
Agreement. Under the terms of the sale, PGP also assigned to Inland its
undivided interest in 8,277 gross acres of oil and gas leases in Duchesne
County, Utah known as the Ashley Federal Unit bringing the Company's total
working interest to 76% in the unit. In addition, the Company assigned to
PGP its price protection agreement, dated August 24, 1994, which hedged
crude oil production over a four year period beginning January 1996 in
monthly amounts ranging from 8,500 barrels to 13,250 barrels. The effective
date of the transaction was July 1, 1995.
5. PURCHASE OF FEDERAL OIL AND GAS LEASES:
On September 25, 1995, the Company purchased 6,200 gross acres (5,861 net
acres) of Federal leases (the "Federal Leases") located in Duchesne and
Uintah County, Utah. The Federal Leases have ten year primary terms and
provide for annual rentals of $2 per acre and a royalty rate of 12.5%. A
downpayment of $1.36 million was made on September 25, 1995 and is
reflected as a component of Oil and gas properties on the accompanying
September 30, 1995 Consolidated Balance Sheet. The balance due of $5.8
million was paid using proceeds from a $6 million private sale of equity to
a significant stockholder on November 6, 1995.
6. RELATED PARTY TRANSACTION:
Effective July 1, 1995, the Company entered into a Farmout Agreement (the
"Farmout") with a significant stockholder ("Farmee"). The Farmout covers the
period through the end of 1995 and allocates up to $6,600,000 for the
drilling and completion of wells in the Monument Butte Field. Under terms
of the Farmout, the interest in each drillsite assigned to the Farmee
reverts to the Company after Payout. Payout is defined on a lease basis as
the point in time when the Farmee has recovered through production
proceeds, net of production taxes, 100% of the cost to drill, complete and
operate the well or wells on the affected lease plus a 22% rate of return.
The Farmee is also required to pay the Company a management fee of $25,000
per well, proportionately reduced to the Farmee's interest and net of COPAS
drilling overhead charges, to reimburse the Company for land, geological,
engineering and accounting services. The agreement may be terminated at any
time by either party. The accompanying financial statements as of September
30, 1995 include accounts receivable of $300,811 due from the related party
and management fee revenue of $158,356 related to the initial nine wells
drilled under the Farmout.
ITEM 2. Management's Discussion and Analysis or Plan of Operation:
GENERAL:
The Company's business emphasis since the Duchesne County Field purchase in
March 1993 has been oil and gas development and production. The Company's
mining operations are limited to final detoxification, reclamation and closure
of the Toiyabe Mine.
Effective September 21, 1994, the Company acquired all the outstanding common
and preferred stock of IPC. IPC is engaged primarily in oil and gas
development and production activities in the Monument Butte Field. At the
acquisition date, IPC owned varying working interests in 62 wells of which the
majority were operated and located adjacent to the Duchesne County Field.
IPC's property interest included 8,508 net acres of oil and gas leases in Utah
and 8,847 net acres of mostly undeveloped leasehold in Wyoming. The IPC
acquisition was accounted for as a purchase, therefore, the net assets and
results of operations of IPC are included in the Company's consolidated
financial statements from the acquisition date forward. IPC operates as a
wholly-owned subsidiary of the Company.
Effective July 1, 1995, the Company sold its undivided interest in the
Duchesne County Field. 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 water flood operations. On September 25, 1995, the Company further
increased its position in the Monument Butte Field by purchasing 6,200 gross
acres (5,861 net acres) of Federal Leases which are primarily located
immediately East of the Monument Butte Green River "D" Unit.
Inland's strategy for achieving profitability is to increase oil and gas
reserves and production through acquisition of existing oil and gas production
in developed fields, and further developing such existing production through
development drilling, reworking existing wells and engaging in secondary
recovery enhancement operations. Increased production levels are expected to
increase operational efficiencies at the field level which in turn should have
a positive impact on the Company's equivalent per barrel lifting costs. In
addition, general and administrative costs are expected to decrease in
relation to production since these costs are generally fixed in nature and
thereby do not increase proportionate to production. The Company also has
protected 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 achieve profitability is dependent on conducting extensive development and
secondary recovery operations on existing properties, locating new properties
with acceptable terms and continuing to secure sufficient capital to acquire
and develop target properties.
The Company does not generally intend to pursue exploratory drilling in
undeveloped oil and gas properties due to the industry's relatively high
historical failure rate relating to exploratory drilling and the resulting
higher associated finding costs. However, from time to time the Company may
for various reasons determine to drill exploratory wells in certain areas
considered strategic by the Company.
RESULTS OF OPERATIONS:
Three Months Ended September 30, 1995 and 1994:
Continuing OperationsContinuing Operations :
The Company acquired IPC effective September 21, 1994 and sold the Duchesne
County Field effective July 1, 1995. Accordingly, the results of operations
for the third quarter of 1995 includes three months of activity for IPC and no
activity relating to the Duchesne County Field, while the results of
operations for the third quarter of 1994 includes 10 days of IPC activity and
a full three months of operations for the Duchesne County Field.
Sales of oil and gas during the third quarter of 1995 exceeded the previous
year third quarter by $222,000 due to the full quarter of IPC sales offset by
the loss of revenues from the Duchesne County Field. Monthly oil sales volumes
increased to an average of 9,350 barrels ("Bbls") in the third quarter of 1995
(all IPC) from 2,600 Bbls in 1994 (substantially all from the Duchesne County
Field). Offsetting the oil volume increase was a decrease to the average price
received for oil production from approximately $18.10 Bbl during 1994 to
approximately $16.45 Bbl during 1995. Monthly natural gas volumes decreased
12,000 thousand cubic feet ("Mcf") to 3,500 Mcf between comparable three month
periods. The decrease is related entirely to the sale of the Duchesne County
Field where the majority of the Company's gas volumes were produced. During
the third quarter of 1995, gas sales accounted for less than 2% of total oil
and gas sales.
Management fees are earned each time a well included in the Farmout reaches
total depth. During the third quarter of 1995, nine wells reached total depth.
Management fees are calculated as $25,000 per well, proportionately reduced to
the Company's interest and net of COPAS drilling overhead charges. No similar
arrangement existed in 1994.
Lease operating expenses decreased $42,000 or 22% between third quarters while
sales increased 92% between the same periods. The significant change was
caused by the sale of the nonoperated Duchesne County Field and the continued
focus on lowering lease operating expenses on the Company's remaining
properties, the large majority of which are operated. Lease operating expense
per barrel of oil equivalent ("BOE") within the Duchesne County Field averaged
in excess of $12.50 per BOE during the third quarter of 1994. Lifting costs
during the third quarter of 1995, which did not suffer any operating charges
from the Duchesne County Field, averaged $4.90 per BOE.
Production taxes as a percentage of sales decreased from 11.9% to 5.7%. This
decrease is due to the sale of the Duchesne County Field which, in addition to
state production taxes, was subject to severance taxes imposed by the Ute
Indian
Tribe.
Exploration expense in 1995 represents the Company's share of costs to retain
unproved acreage and costs related to one uneconomic exploration well drilled
during the third quarter of 1995. The exploration well had the benefit of
saving a 1,286 gross acre (779 net acre) lease for two years.
Depletion, depreciation and amortization increased consistent with the
increased sales volumes between periods.
General and administrative expenses increased approximately $36,000 between
periods. The majority of the general and administrative increase is related to
salaries, payroll taxes and employee benefits as the Company's employee base
grew from seven employees during the majority of the third quarter of 1994 to
twenty-five employees at September 30, 1995. The increase in employees was
required since the Company became an operator of properties through the merger
with IPC and to administer the 1995 drilling program. The remaining increase
is associated with the cost of operating with a larger employee base such as
additional travel, supplies and utilities expense.
Interest expense represents the financing cost of borrowings under IPC's loan
agreement with JEDI (the "IPC Loan Agreement") which totaled $4 million at
September 30, 1995. Only a small amount of debt was outstanding during the
third quarter of 1994.
Other income in 1995 primarily represents interest earned on the investment of
surplus cash balances and certain oil trading income.
Discontinued Operations:Discontinued Operations
The Company considers all mining activities to be discontinued operations.
Since March 1994, the Company's only mining activity has been the Toiyabe
Mine. Reclamation activities at the Toiyabe Mine during 1994 concentrated on
the detoxification of leach pad #1 which, based on sampling results, appears
to be approaching the toxicity guidelines as established in the reclamation
plan. The focus of reclamation activities in 1995 has been the detoxification
of leach pad #2 using procedures similar to those performed on leach pad #1 in
the previous year.
During the third quarters of 1995 and 1994, the Company incurred net
reclamation costs of $52,000 and $93,500, respectively. Since operating
procedures were similar in each year on different pads, the cost differential
is attributed to variable expenses such as supplies, repairs, etc. offset by
incidental mineral recoveries. In each period, reclamation costs were charged
against the reclamation reserve and, therefore, did not impact the
Consolidated Statement of Operations. Based on factors known or anticipated at
September 30, 1995, the Company believes that the reclamation reserve of
$324,000 will be sufficient to fully reclaim the Toiyabe Mine in compliance
with established environmental standards.
Nine Months Ended September 30, 1995 and 1994:
Continuing OperationsContinuing Operations :
The Company acquired IPC effective September 21, 1994 and sold the Duchesne
County Field effective July 1, 1995. Accordingly, the results of operations
for the first nine months of 1995 includes nine months of IPC activity and six
months of activity from the Duchesne County Field, while the results of
operations for the first nine months of 1994 includes only 10 days of IPC
activity and a full nine months of activity from the Duchesne County Field.
Sales the first nine months of 1995 exceeded the same period in the previous
year by $948,000 due to the IPC sales offset by three less months of Duchesne
County Field sales. Monthly consolidated sales volumes increased to an average
of 9,700 Bbls of oil and 9,700 Mcf of natural gas from 2,600 Bbls and 15,100
Mcf in 1994. In addition, the average price received for oil production
increased from $16.20 Bbl during 1994 to $17.00 Bbl during 1995. Natural gas
prices fell from an average price of $1.85 Mcf in 1994 to $1.30 Mcf during
1995.
Lease operating expenses increased $357,000 between periods primarily due to
the IPC operations in 1995 offset by three months less of Duchesne County
Field expenses. As explained more thoroughly in the previous analysis for the
three month period ended September 30, 1995, the Company sold the nonoperated
Duchesne County Field and continues to focus on lowering lifting costs on
operated properties. Lease operating expense per BOE decreased from $12.27 for
the year ended December 31, 1994 to $10.25 for the six month period ended June
30, 1995 to $4.90 for the three month period ended September 30, 1995.
The increase in production taxes and depletion, depreciation and amortization
between periods is consistent with the increased sales volumes in 1995.
Exploration expense in 1995 represents the Company's share of costs to retain
unproved acreage and costs related to one uneconomic exploration well drilled
during the third quarter of 1995. The exploration well had the benefit of
saving a 1,286 gross acre (779 net acre) lease for two years.
General and administrative expenses increased approximately $460,000 between
periods. After removing a one-time severance accrual charge of $142,000, the
increase was $318,000 between periods. The majority of the general and
administrative increase is related to salaries, payroll taxes and employee
benefits as the Company's employee base grew from seven employees at the IPC
merger date to twenty-five employees at September 30, 1995. The increase in
employees was required since the Company became an operator of properties
through the merger with IPC and to administer the 1995 drilling program. The
remaining increase is associated with the cost of operating with a larger
employee base such as additional travel, supplies and utilities expense.
Interest expense represents the financing cost of borrowings in 1995 under the
Inland Loan Agreement, IPC Loan Agreement and other debt assumed during the
merger with IPC. Only a small amount of debt was outstanding during the
initial nine months of 1994.
Other income in 1995 primarily represents interest earned on the investment of
surplus cash balances and certain oil trading income.
Discontinued Operations:Discontinued Operations
The Company considers all mining activities to be discontinued operations.
During the first quarter of 1994, the Company sold an undeveloped mining
property for $222,500. Since March 1994, the Company's only mining activity
has been the Toiyabe Mine. Reclamation activities at the Toiyabe Mine during
1994 concentrated on the detoxification of leach pad #1 which, based on
sampling results, appears to be approaching the toxicity guidelines as
established in the reclamation plan. The focus of reclamation activities in
1995 has been the detoxification of leach pad #2 using procedures similar to
those performed on leach pad #1 in the previous year.
During the initial nine months of 1995 and 1994, the Company incurred net
reclamation costs of $210,000 and $230,000, respectively. Since operating
procedures were similar in each year on different pads, the cost differential
is attributable to variable expenses such as supplies, repairs, etc. offset by
incidental mineral recoveries. In each period, reclamation costs were charged
against the reclamation reserve and, therefore, did not impact the
Consolidated Statement of Operations. Based on factors known or anticipated at
September 30, 1995, the Company believes that the reclamation reserve of
$324,000 will be sufficient to fully reclaim the Toiyabe Mine in compliance
with established environmental standards.
LIQUIDITY AND CAPITAL RESOURCES:
During the initial nine months of 1995, the Company's unrestricted cash and
cash equivalents increased $1,364,000 to $3,056,000 and working capital
increased by $1,318,000 to $1,266,000. The positive change was the result of
the Duchesne County Field sale. Under the terms of the sale, the Company
received $2.95 million in unrestricted cash at closing on September 19, 1995.
In addition, PGP assumed the $2.5 million outstanding under the Inland Loan
Agreement, of which $1.8 million was outstanding as a current liability at
December 31, 1994 thereby negatively affecting working capital at that date.
On September 25, 1995, the Company was the winning bidder for the Federal
Leases and paid a $1.36 million downpayment using unrestricted cash. The
balance due for the Federal Leases of $5.8 million was paid on November 6,
1995 using proceeds from a $6 million private equity placement which closed on
November 6, 1995.
Outside of the Duchesne County Field sale, the only other significant
unrestricted cash sources in 1995 were $608,000 of receipts under the contract
with the Department of Energy ("DOE") and $158,000 of management fees earned
under the Farmout. Other significant unrestricted cash uses during 1995
included reclamation activities at the Toiyabe Mine site of $210,000,
principal payments on long-term debt of $120,000, payment of general and
administrative expenses of $852,000 (net of overhead reimbursements) and
payment of $375,000 to the IPC restricted account to cover minimum net cash
flow deficiencies under the IPC Loan Agreement.
On September 21, 1994, the Company entered into the IPC Loan Agreement with
JEDI, an affiliate of Enron Corp., to provide nonrecourse financing for the
development of the Monument Butte Field. The production loan portion of the
facility includes the initial $1.5 million of borrowings and bears interest at
prime plus 1.5%. The development loan portion includes the next $3.5 million
of advances beyond the initial $1.5 million production loan for a maximum
combined commitment of $5.0 million. The development loan portion of the
facility bears interest at prime plus 4% plus an equity yield enhancement in
the form of an 8.5% overriding royalty interest, proportionately reduced by
the Company's interest in the oil and gas properties, commencing January 28,
1996 and continuing until the internal rate of return to JEDI equals 19% on
the development loan. Each advance is also subject to a 1% loan commitment
fee. Interest only is payable until December 31, 1995. After that point, the
outstanding balance will be scheduled over 60 monthly installments of
principal and interest. The Company is required to meet certain minimum
ratios, generate or contribute agreed upon levels of monthly net cash flow and
maintain a commodity price hedging agreement. The IPC Loan Agreement is
collateralized by the Company's interest in the Monument Butte Field. At
September 30, 1995, the Company had borrowed $4.0 million under the IPC Loan
Agreement.
Substantially all oil and gas properties of the Company are mortgaged under
the IPC Loan Agreement. Under that agreement, the loan proceeds and net cash
flows (generally defined as production revenue less production taxes and lease
operating costs) from mortgaged properties are required to be maintained in a
segregated account and are not available for general corporate purposes. Funds
in the segregated account may be used for project costs and to make principal
and interest payments as they become due. During 1995, the Company borrowed
$1,900,000 under the IPC Loan Agreement and further developed the Monument
Butte Field. Development expenditures included the drilling cost of five
development wells, four exploratory wells and one water injection well. At
September 30, 1995, $285,000 of cash was restricted for use under the IPC Loan
Agreement.
As a result of the restrictions on borrowings under the IPC Loan Agreement,
the Company is required to cover the net reclamation costs of the Toiyabe
Mine, net general and administrative expenses, capital expenditures on
non-mortgaged properties and contributions to cover minimum net cash flow
deficiencies under the IPC Loan Agreement out of its unrestricted cash
holdings and management fees earned under the Farmout. As noted above, on
November 6, 1995, the Company sold $6 million of equity and paid the balance
due of $5.8 million on the Federal Leases yielding a net increase to
unrestricted cash of $200,000. The Company believes that unrestricted cash
holdings and sources will be sufficient to cover unrestricted cash uses
throughout 1995 and 1996.
Effective July 1, 1995, the Company entered into a Farmout Agreement covering
the period through the end of 1995 that allocates up to $6,600,000 for the
drilling and completion of wells in the Monument Butte Field. Under terms of
the Farmout, the interest in each drillsite assigned to the Farmee reverts to
the Company after Payout. Payout is defined on a lease basis as the point in
time when the Farmee has recovered through production proceeds, net of
production taxes, 100% of the cost to drill, complete and operate the well or
wells on the affected lease plus a 22% rate of return. The Farmee is also
required to pay the Company a management fee of $25,000 per well,
proportionately reduced to the Farmee's interest and net of COPAS drilling
overhead charges, to reimburse the Company for land, geological, engineering
and accounting services. The agreement may be terminated at any time by either
party. Through September 30, 1995, the Company had drilled nine wells under
the Farmout and anticipates drilling an additional fourteen wells during the
fourth quarter of 1995.
The IPC Loan Agreement requires the Company to maintain price protection
agreements to help insure the repayment of indebtedness. In satisfaction of
this requirement, on November 22, 1994 the Company entered into a commodity
contract with JEDI, through its affiliate Enron Risk Management Services Corp.
Under terms of the contract, the Company hedged 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 was
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 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. Since the
hedged quantities are based on expected future development in the Monument
Butte Field and because hedging activities do not affect the actual sales
price for the Company's crude oil, there exists risk to the Company's
financial position and results of operations should the Average Price rise
significantly above the ceiling price of $20.55 and development activities not
produce the expected results or progress on a slower than expected timetable.
The Company is aware of and continually evaluates this financial risk and has
the ability to enter into commodity contracts to mitigate potential financial
loss should risk factors begin to materialize.
The Company has also entered into similarly structured commodity contracts on
August 4, 1994 and January 18, 1995 which cover the period ending December 31,
1995. These contracts hedge an aggregate 6,000 Bbls of oil each month with a
"cost-free" range from $17.00 to $20.00 per Bbl. Because recent net
production has averaged in excess of 6,000 Bbls per month and because the
actual average sales price of oil in the field has approximated the Average
Price in the contract, these contracts do not currently subject the Company to
significant financial exposure. The Company recognized a hedging loss of
$5,400 during the first nine months of 1995 under these contracts.
On October 26, 1995, the Company agreed to terms with TCW Asset Management
Company ("TCW") to provide the Company with $25 million in senior secured
debt. Upon closing, the Company will use proceeds to retire the $4 million
outstanding under the IPC Loan Agreement and to fund capital expenditures for
the development of the Monument Butte Field throughout 1996. The loan will be
collateralized by the Company's interest in the Monument Butte Field and other
assets. Borrowings will be subject to a collateral coverage ratio based on the
amount of indebtedness that can be supported by proved oil and gas properties
plus the value of certain undeveloped acreage and working capital. The
facility bears interest at 10% per annum plus an equity yield enhancement in
the form of a 7% overriding royalty interest, proportionately reduced by the
Company's interest in the oil and gas properties, continuing until the
internal rate of return to TCW equals 16% at which time the overriding royalty
reverts to 3%, as proportionately reduced, until the internal rate of return
to TCW equals 22%. After TCW has achieved a 22% rate of return, the overriding
royalty interest reverts to the Company. Interest only is payable quarterly
until March 31, 1997 at which time the balance will be amortized on a
quarterly basis over the eight years ending December 31, 2004. The Company
anticipates closing on this transaction before the end of November 1995.
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.
The Company is subject to numerous federal and state laws and regulations
relating to environmental matters. Increasing focus on environmental issues
nationally has lead the Company to continue to evaluate its responsibilities
to the environment. The Company believes it is in compliance in all material
respects with applicable federal, state and local environmental regulations.
There are no environmental proceedings pending against the Company. At
September 30, 1995, the Company had recognized a liability of $324,000 to
cover the future costs of reclaiming the Toiyabe Mine.
PART II. OTHER INFORMATION
INLAND RESOURCES INC.
Items 1, 2, 3, 4 and 5 are omitted from this report as inapplicable.
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 Articles of Incorporation, as amended through May 5, 1993
(filed as Exhibit 3.1 to the Company's Registration Statement on
Form S-18, Registration No. 33-11870-F, and incorporated herein by
reference).
3.1.1 Articles of Amendment to Articles of Incorporation dated
May 6, 1993 (filed as Exhibit 3.1.1 to the Company's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1993, and
incorporated herein by reference).
3.1.2 Articles of Amendment to Articles of Incorporation dated
August 16, 1994 designating a series of stock (filed as Exhibit
3.1.2 to the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1994, and incorporated herein by reference).
3.1.3 Articles of Amendment to Articles of Incorporation filed
with Secretary of State of Washington on August 30, 1994 (filed as
Exhibit 3.1.3 to the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1994, and incorporated herein
by reference).
3.1.4 Articles of Correction to Articles of Amendment dated
August 31, 1994 (filed as Exhibit 3.1.4 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1994,
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).
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).
10.1 First Amendment to Warrant Agreement between Kyle R.
Miller and the Company, dated October 19, 1995. *
27.1 Financial Data Schedule required by Item 601 of Regulation
S-B.*
* Filed herewith.
PART II. OTHER INFORMATION
INLAND RESOURCES INC.
Item 6. Exhibits and Reports on Form 8-K (Continued).
(b) Reports on Form 8-K:
(i) Item 2 - Acquisition or Disposition of Assets, filed
September 19, 1995
Item 7 - Financial Statements and Exhibits, filed
September 19, 1995
Pro Forma Consolidated Balance Sheet as of June 30,
1995
Pro Forma Consolidated Income Statement for six months
ended June 30, 1995
Pro Forma Consolidated Income Statement for the year
ended Dec. 31, 1994
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 13, 1995
By: /s/ Kyle R. Miller
Kyle R. Miller
Chief Executive Officer
Date: November 13, 1995 By: /s/ Michael J. Stevens
Michael J. Stevens
Controller (Principal Accounting
Officer)
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