1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission file number 0-16487
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INLAND RESOURCES INC.
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(Exact name of Registrant as specified in its charter)
Washington 91-1307042
--------------------------------- ----------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
410 17th Street, Suite 700, Denver, Colorado 80202
- -------------------------------------------- -----
(Address of Principal Executive Offices) (ZIP Code)
Registrant's Telephone Number, Including Area Code: (303) 893-0102
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(Former name, address and fiscal year, if changed,
since last report)
----------------------
Indicate by check mark whether the registrant (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 [X] No [ ]
Number of shares of common stock, par value $.001 per share, outstanding as of
August 1, 2001: 2,897,732
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PART 1. FINANCIAL INFORMATION
INLAND RESOURCES INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 AND DECEMBER 31, 2000
(In thousands)
<Table>
<Caption>
June 30, December 31,
2001 2000
----------- ------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 9 $ 848
Accounts receivable and accrued sales 5,269 5,284
Inventory 993 835
Other current assets 133 381
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Total current assets 6,404 7,348
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Property and equipment, at cost:
Oil and gas properties (successful efforts method) 194,720 183,959
Accumulated depletion, depreciation and amortization (39,019) (35,004)
--------- ---------
155,701 148,955
Other property and equipment, net 2,165 1,997
Other long-term assets 1,446 1,765
--------- ---------
Total assets $ 165,716 $ 160,065
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 4,023 $ 2,141
Accrued expenses 4,381 3,391
Fair market value of derivative instruments 941 --
--------- ---------
Total current liabilities 9,345 5,532
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Long-term debt 83,500 83,500
Commitments
Mandatorily redeemable preferred stock:
Series D stock, 10,757,747 shares issued and outstanding,
Liquidation preference of $80.7 million 71,156 68,273
Accrued preferred series D dividends 17,430 11,994
Series E stock, 121,973 shares issued and outstanding,
Liquidation preference of $12.2 million 9,585 9,120
Accrued preferred series E dividends 2,696 1,856
Stockholders' deficit:
Preferred Class A stock, par value $.001, 20,000,000 shares authorized,
Series D and Series E outstanding
Common stock, par value $.001; 25,000,000 shares authorized,
2,897,732 issued and outstanding 3 3
Additional paid-in capital 42,211 51,157
Comprehensive loss (749) --
Accumulated deficit (69,461) (71,370)
--------- ---------
Total stockholders' deficit (27,996) (20,210)
--------- ---------
Total liabilities and stockholders' deficit $ 165,716 $ 160,065
========= =========
</Table>
The accompanying notes are an integral part of the
consolidated financial statements
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INLAND RESOURCES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2001 AND 2000
(In thousands except earnings per share)
(Unaudited)
<Table>
<Caption>
Three months ended Six Months ended
June 30, June 30,
-------------------------- --------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Revenues:
Oil and gas sales $ 8,572 $ 7,027 $ 16,741 $ 13,085
Operating expenses:
Lease operating expenses 2,370 1,663 4,651 3,313
Production taxes 211 179 417 338
Exploration 30 30 61 59
Depletion, depreciation and amortization 2,301 1,951 4,315 3,739
General and administrative, net 276 326 1,304 699
----------- ----------- ----------- -----------
Total operating expenses 5,188 4,149 10,748 8,148
----------- ----------- ----------- -----------
Operating income 3,384 2,878 5,993 4,937
Interest expense (1,837) (2,015) (3,936) (4,018)
Unrealized derivative (loss) gain due to time value 153 -- (237) --
Interest and other income 20 (16) 44 5
----------- ----------- ----------- -----------
Net income before cumulative effect of change in
Accounting principle 1,720 847 1,864 924
Cumulative effect of change in accounting principle -- -- 45 --
----------- ----------- ----------- -----------
Net income $ 1,720 $ 847 $ 1,909 $ 924
Accrued preferred Series D dividends (2,718) (2,433) (5,436) (4,866)
Accrued preferred Series E dividends (420) (377) (840) (753)
Accretion of preferred Series D discount (1,305) (1,575) (2,883) (3,150)
Accretion of preferred Series E discount (210) (225) (465) (450)
----------- ----------- ----------- -----------
Net loss attributable to common stockholders $ (2,933) $ (3,763) $ (7,715) $ (8,295)
=========== =========== =========== ===========
Net income $ 1,720 $ 847 $ 1,909 $ 924
Comprehensive income from change in fair value of
derivative contracts -- -- 192 --
----------- ----------- ----------- -----------
$ 1,720 $ 847 $ 2,101 $ 924
=========== =========== =========== ===========
Basic and diluted net loss per share before cumulative
effect of change in accounting principle $ (1.01) $ (1.30) $ (2.68) $ (2.86)
Cumulative effect of change in accounting principle -- -- .02 --
----------- ----------- ----------- -----------
Basic and diluted net loss per share $ (1.01) $ (1.30) $ (2.66) $ (2.86)
=========== =========== =========== ===========
Basic and diluted weighted average common shares
outstanding 2,897,732 2,897,732 2,897,732 2,897,732
=========== =========== =========== ===========
Dividends per common share NONE NONE NONE NONE
=========== =========== =========== ===========
</Table>
The accompanying notes are an integral part of the
consolidated financial statements
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INLAND RESOURCES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2001 AND 2000
(In thousands)
(Unaudited)
<Table>
<Caption>
2001 2000
-------- --------
Cash flows from operating activities:
Net income $ 1,909 $ 924
Adjustments to reconcile net income to net cash
Provided (used) by operating activities:
Depletion, depreciation and amortization 4,315 3,739
Amortization of debt issue costs and debt discount 390 240
Loss on sale of assets -- 51
Noncash changes related to derivatives 192 --
Noncash employee compensation 678 --
Effect of changes in current assets and liabilities:
Accounts receivable 18 (1,214)
Inventory (159) (42)
Other assets 225 199
Accounts payable and accrued expenses 2,822 (2,162)
-------- --------
Net cash provided (used) by operating activities 10,390 1,735
-------- --------
Cash flows from investing activities:
Development expenditures and equipment purchases (11,229) (6,718)
-------- --------
Net cash used by investing activities (11,229) (6,718)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt -- 3,585
Payments of long-term debt -- (256)
-------- --------
Net cash provided by financing activities -- 3,329
-------- --------
Net cash and cash equivalents used by continuing operations (839) (1,654)
Net cash and cash equivalents provided by discontinued operations -- 1,667
Cash and cash equivalents at beginning of period 848 1,018
-------- --------
Cash and cash equivalents at end of period $ 9 $ 1,031
======== ========
</Table>
The accompanying notes are an integral part of the
consolidated financial statements
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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 producing and nonproducing oil and gas property
interests located in the Monument Butte Field within the Uinta Basin of
Northeastern Utah (the "Field").
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-K for the year ended December 31, 2000.
3. ACCOUNTING PRONOUNCEMENTS:
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS No. 133") was issued, which establishes
accounting and reporting standards for derivative instruments and hedging
activity. SFAS No. 133 requires recognition of all derivative instruments
on the balance sheet as either assets or liabilities and measurement of
fair value. Changes in the derivative's fair value will be recognized
currently in earnings unless specific hedge accounting criteria are met.
Gains and losses on derivative hedging instruments must be recorded in
either other comprehensive income or current earnings, depending on the
nature and designation of the instrument. The impact of adopting SFAS No.
133 on January 1, 2001 resulted in recording a current liability of
$1,927,000 and recording a cumulative effect of a change in accounting
principle as accumulated comprehensive loss in the equity section of
$1,972,000 and income recorded as a cumulative effect of a change in
accounting principle of $45,000. At June 30, 2001, the effect of SFAS No.
133 resulted in the Company adjusting its liability reflecting the fair
value of derivatives to $941,000 and accumulated other comprehensive loss
was adjusted to $749,000 for new derivative instruments obtained by the
Company in the second quarter of 2001. The Company recorded $153,000 to the
statement of operations to reflect the current nature of the existing
hedging instruments as of June 30, 2001.
In June 2001, SFAS No. 141 "Business Combination" and SFAS No. 142
"Goodwill and Other Intangible Assets" were issued, which requires all
business combinations to be accounted for using the purchase method and
changes the treatment of goodwill created in a business combination. The
adoption of these two statements is not expected to have an impact on the
Company.
Additionally, SFAS No. 143 "Accounting for Asset Retirement Obligations"
was issued in July 2001. This standard requires entities to record the fair
value of a liability for an asset retirement obligation in the period in
which it is incurred. When the liability is initially recorded, the entity
capitalizes the cost by increasing the carrying amount of the related
long-lived asset. The asset is then depreciated over the estimated useful
life. The present value of the retirement obligation is adjusted each
reporting period. The impact of adopting this statement on January 1, 2003
has not yet been determined by the Company.
4. SOLVation INC. FINANCING AND RESTRUCTURING:
On August 2, 2001, the Company closed two subordinated debt transactions
totaling $10 million in aggregate with SOLVation Inc. ("SOLVation"), a
company affiliated with Smith Management LLC, and entered into other
restructuring transactions as described below. The Company issued a $5
million unsecured senior subordinated note to SOLVation due July 1, 2007.
The interest rate is 11% per annum compounded quarterly. The interest
payment is payable in arrears in cash subject to the approval from the
senior bank group and accumulates if not paid in cash. The Company is not
required to make any principal payments prior to the
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July 1, 2007 maturity date. However, the Company is required to make
payments of principal and interest in the same amounts as any principal
payment or interest payments on the TCW subordinated debt (described
below). Prior to the July 1, 2007 maturity date, subject to the bank
subordination agreement, the Company may prepay the senior subordinated
note in whole or in part with no penalty.
The Company also issued a second $5 million unsecured junior subordinated
note to SOLVation. The interest rate is 11% per annum compounded quarterly.
The maturity date is the earlier of (i) 120 days after payment in full of
the TCW subordinated debt or (ii) March 31, 2010. The interest payment is
payable in arrears in cash subject to the approval from the senior bank
group and accumulates if not paid in cash. The Company is not required to
make any principal payments prior to the March 31, 2010 maturity date.
Prior to the March 31, 2010 maturity date, subject to both bank and
subordination agreements, the Company may prepay the junior subordinated
note in whole or in part with no penalty.
In conjunction with the issuance of the two subordinated notes, the Series
D Preferred and Series E Preferred stock held by Inland Holdings LLC, a
company controlled by TCW Asset Management Company ("TCW") were exchanged
for an unsecured subordinated note due September 30, 2009 and $2 million in
cash from the Company. The note amount was for $98,968,964 that represented
the face value plus accrued dividends of the Series D Preferred stock as of
August 2, 2001. The interest rate is 11% per annum compounded quarterly.
The interest payment shall be payable in arrears in cash subject to the
approval from the senior bank group and accumulates if not paid in cash.
Interest payments will be made quarterly, commencing on the earlier of
September 30, 2005 or the end of the first calendar quarter after the
senior bank debt has been reduced to $40 million or less, subject to both
bank and senior subordination agreements. Beginning the earlier of two
years prior to the maturity date or the first December 30 after the
repayment in full of the senior bank debt, subject to both bank and senior
subordination agreements, the Company will make equal annual principal
payments of one third of the aggregate principal amount of the subordinated
note. Any unpaid principal or interest amounts are due in full on the
September 30, 2009 maturity date. Prior to the September 30, 2009 maturity
date, subject to both bank and senior subordination agreements, the Company
may prepay the TCW subordinated note in whole or in part with no penalty.
As a result of the exchange, both the Series D and Series E Preferred stock
were retired by the Company. The $8 million remaining proceeds will be used
as working capital.
As part of this restructuring, TCW also sold to Hampton 1,455,390 shares of
their common stock in the Company (consequently, Hampton now controls
approximately 80% of the issued and outstanding shares of the Company)
terminated any existing option rights to the Company's common stock, and
relinquished the right to elect four persons to the Company's Board of
Directors. However, TCW has the right to nominate one person to the
Company's Board. Remaining board members will be nominated by the Company's
shareholders. As long as Hampton or its affiliates own at least a majority
of the common stock of the Company, Hampton has agreed with TCW that
Hampton will have the right to appoint at least two members to the board.
The combination of the repurchase of the Series E Preferred stock and the
exchange of the Series D Preferred stock resulted in the Company decreasing
its stockholders' deficit by $754,000.
5. FORTIS CREDIT AGREEMENT:
On September 21, 1999, the Company entered into the Fortis Credit Agreement
which was further amended on January 31, 2000, March 20, 2000, September
30, 2000, November 14, 2000, March 29, 2001 and on August 2, 2001. The
outstanding principal balance at June 30, 2001 was $83.5 million. All
borrowings under the Fortis Credit Agreement are due on June 30, 2007, or
potentially earlier if the borrowing base is determined to be insufficient.
The revolving termination date is June 30, 2004 at which time the loan
converts into a term loan payable in twelve (12) equal quarterly
installments of principal, with accrued interest, beginning September 30,
2004. The borrowing base is calculated as the collateral value of proved
reserves and is subject to redetermination on or before March 31, 2002 and
with subsequent determinations to be made on each subsequent October 1 and
April 1. Upon redetermination, if the borrowing base is lower than the
outstanding principal balance then drawn, the Company must immediately pay
the difference. Interest accrues, at the Company's option, at either (i) 2%
above the prime rate or (ii) at various rates above the LIBOR rate. The
LIBOR rates will be determined by the senior debt to EBITDA ratios starting
August 2, 2001. If the senior debt to EBITDA ratio is greater than 4.00 to
1.00, the rate is 3.25% above the
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LIBOR rate; if the senior debt to EBITDA ratio is equal or less than 4.00
to 1.00 but greater than 3.00 to 1.00, the rate is 2.75% above the LIBOR
rate; if the senior debt to EBITDA ratio is less than 3.00 to 1.00 the rate
is 2.25% above the LIBOR rate. At June 30, 2001, all amounts were borrowed
under the LIBOR option at an interest rate of 8.04% through August 27,
2001. The Fortis Credit Agreement has covenants that restrict the payment
of cash dividends, borrowings, sale of assets, loans to others,
investments, merger activity and hedging contracts without the prior
consent of the lenders and requires the Company to maintain certain net
worth, interest coverage, debt coverage and working capital ratios. The
Company was in violation of its working capital covenant at June 30, 2001
and received a waiver from the banks of this covenant violation. The Fortis
Credit Agreement is secured by a first lien on substantially all assets of
the Company.
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INLAND RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation:
RESULTS OF OPERATIONS:
Three Month Periods Ended June 30, 2001 and 2000:
Oil and Gas Sales. Crude oil and natural gas sales for the quarter
ended June 30, 2001 increased $1.5 million, or 21% from the previous year. As
shown in the table below, higher crude oil and gas volumes and higher average
natural gas prices caused the higher variance. Crude oil sales as a percentage
of total oil and gas sales were 77% and 84% in the second quarter of 2001 and
2000, respectively. Crude oil will continue to be the predominant product
produced from the Field.
The Company has entered into crude oil price protection agreements to reduce its
exposure to market price fluctuations. 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. Crude oil sales were decreased
by $1.1 million and $1.2 million during the second quarters of 2001 and 2000,
respectively, to recognize hedging contract settlement losses. See Item 3
"Quantitative and Qualitative Disclosures About Market Risk."
<Table>
<Caption>
Quarter Ended June 30, 2001 Quarter Ended June 30, 2000
-------------------------------------- --------------------------------------
Net Volume Average Sales Net Volume Average Sales
(Bbls or Mcfs) Price (in 000's) (Bbls or Mcfs) Price (in 000's)
-------------- ------- ---------- -------------- ------- ----------
Crude Oil Sales 303,922 $24.34 $ 7,396 274,632 $25.14 $ 6,905
Natural Gas Sales 666,102 $ 3.35 2,230 586,354 $ 2.23 1,309
Hedging loss (1,054) (1,187)
------- -------
Total $ 8,572 $ 7,027
======= =======
</Table>
Lease Operating Expenses. Lease operating expense for the quarter ended
June 30, 2001 increased $707,000, or 43% from the previous year second quarter.
Lease operating expense per BOE increased from $4.47 per BOE sold in the second
quarter of 2000 to $5.71 in 2001. The increase in lease operating expenses is
due to substantially higher costs of materials and labor, due to increased
demand for products, services and employees in the Monument Butte region and
neighboring areas.
Production Taxes. Production taxes as a percentage of sales were
consistent at 2.2% during the second quarter of 2001 and 2000. Production tax
expense consists of estimates of the Company's 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.
Exploration. Exploration expense represents the Company's cost to
retain unproved acreage.
Depletion, Depreciation and Amortization. Depletion, depreciation and
amortization for the quarter ended June 30, 2001 increased 18%, or $350,000,
from the previous year second quarter. The increase resulted from increased
sales volumes and a higher average 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 proved
reserves in the periods presented. The Company's depletion rate was $5.12 per
BOE sold during the second quarter of 2001 compared to $4.86 per BOE sold during
the second quarter of 2000.
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General and Administrative, Net. General and administrative expense for
the quarter ended June 30, 2001 decreased $50,000 from the previous year second
quarter. The lower net general and administrative expenses for the second
quarter of 2001 reflects an increase in labor and other expenses of $448,000
that is offset by an increase in operator fees and reimbursements of $498,000
from the previous year second quarter. The total of operator fees and
reimbursements were $1.86 million and $1.35 million during the second quarters
of 2001 and 2000, respectively.
Interest Expense. Interest expense for the quarter ended June 30, 2001
decreased $178,000 from the previous year second quarter. The decrease resulted
from a decrease in the effective interest rate during the second quarter of
2001. Borrowings during the second quarter of 2001 and 2000 were recorded at
effective interest rates of 8.2% and 9.2%, respectively.
Other Income. Other income primarily represents interest earned on cash
balances.
Income Taxes. During the second quarter of 2001 and 2000, no income tax
provision or benefit was recognized due to net operating losses incurred and the
establishment of a full valuation allowance.
Accrued Preferred Series D Stock Dividends. The Company's Preferred
Series D Stock accrues dividends at 11.25% compounded quarterly. As discussed
under Note 3 to the Consolidated Financial Statements, the Company's Preferred
Series D Stock was cancelled in exchange for the TCW subordinated notes in
August 2, 2001.
Accrued Preferred Series E Stock Dividends. The Company's Preferred
Series E Stock accrues dividends at 11.5% compounded quarterly. As discussed
under Note 3 to the Consolidated Financial Statements, the Company's Preferred
Series E Stock was retired and cancelled for $2 million by the Company on August
2, 2001.
Accretion of Preferred Series D Stock Discount. The Company's Preferred
Series D Stock was initially recorded on the financial statements at a discount
of $20.2 million and is being accreted to face value ($80.7 million) over the
original minimum mandatory redemption period which started on April 1, 2002 and
ended on April 1, 2004. As discussed under Note 3 to the Consolidated Financial
Statements, the Company's Preferred Series D Stock was cancelled in exchange for
TCW subordinated notes in August 2, 2001.
Accretion of Preferred Series E Stock Discount. The Company's Preferred
Series E Stock was initially recorded on the financial statements at a discount
of $4.2 million and is being accreted to face value ($12.2 million) over the
period to the original minimum mandatory redemption date of April 1, 2004. As
discussed under Note 3 to the Consolidated Financial Statements, the Company's
Preferred Series E Stock was retired and cancelled for $2 million by the Company
on August 2, 2001.
Six Month Periods Ended June 30, 2001 and 2000:
Oil and Gas Sales. Crude oil and natural gas sales for the six months
ended June 30, 2001 increased $3.7 million, or 27.9% from the previous year. As
shown in the table below, higher crude oil and gas sales volumes and average
natural gas prices caused the higher variance. The Company averaged 5,063
barrels and 4,141 of gross crude oil sales per day during the first six months
of years 2001 and 2000, respectively. The higher gross crude oil sales reflect
the continued drilling program in the Field. Crude oil sales as a percentage of
total oil and gas sales were 76% and 86% during the initial six months of 2001
and 2000, respectively. Crude oil will continue to be the predominant product
produced from the Field.
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. Crude oil sales were decreased by $2.3
million for both the first six months of 2001 and 2000, to
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recognize hedging contract settlement losses. See Item 3 "Quantitative and
Qualitative Disclosures About Market Risk."
<Table>
<Caption>
Quarter Ended June 30, 2001 Quarter Ended June 30, 2000
-------------------------------------- --------------------------------------
Net Volume Average Sales Net Volume Average Sales
(Bbls or Mcfs) Price (in 000's) (Bbls or Mcfs) Price (in 000's)
-------------- ------- ---------- -------------- ------- ----------
Crude Oil Sales 587,412 $24.65 $14,480 522,993 $25.20 $13,180
Natural Gas Sales 1,149,164 $ 3.96 4,552 1,118,189 $ 1.99 2,224
Hedging Loss (2,291) (2,319)
------- -------
Total $16,741 $13,085
======= =======
</Table>
Lease Operating Expenses. Lease operating expenses for the six months
of year 2001 increased $1.3 million or 40.4% from the previous year period. The
increase in lease operating expenses are due to substantially higher labor
costs, overhead fees and other Field operating expenses such as repairs and
maintenance and fuel. Lease operating expenses per BOE increased from $4.67 per
BOE sold in the first half of 2000 to $5.97 in 2001. The increase on a BOE basis
is primarily due to the increase lease operating expenses as described above.
The Company expects the 2001 operating expense rate per BOE sold to stay at the
actual average for the six month period due to pressures of higher labor costs
of the increased drilling activity in the Field.
Production Taxes. Production taxes as a percentage of sales were
consistent at 2.2% during the initial six months of 2001 and 2000. Production
tax expense consists of estimates of the Company's 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.
Exploration. Exploration expense represents the Company's cost to
retain unproved acreage.
Depletion, Depreciation and Amortization. Depletion, depreciation and
amortization for the six-month period ended June 30, 2001 increased 15%, or
$576,000, from the comparable previous year period. The increase resulted from
increased sales volumes and a higher average 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 proved reserves in the periods presented. The Company's depletion
rate was $5.12 per BOE sold during the initial six months of 2001 compared to an
average of $4.86 per BOE sold during the same period in 2000.
General and Administrative, Net. General and administrative expense for
the six months ended June 30, 2001 increased $605,000 from the comparable
previous year period. General and administrative expense is reported net of
operator fees and reimbursements which were $3.4 million and $2.7 million during
the initial six months of 2001 and 2000, respectively. Gross general and
administrative expense was $4.7 million during the first half of 2001 and $3.4
million during the first half of 2000. The higher gross general and
administrative expenses of $1.3 million are primarily due to non-cash employee
compensation of $678,000 and increased corporate salary and benefit expenses of
$476,000 for the six months ended June 30, 2001 from the comparable previous
year period.
Interest Expense. Interest expense for the six-month period ended June
30, 2001 decreased $82,000 from the comparable prior year period. The primary
reason for the decrease resulted from a decrease in the effective interest rates
offset by higher level of senior debt outstanding for the six-month period ended
June 30, 2001 from the comparable prior year period. Borrowings during the first
half of 2001 and 2000 were recorded at an effective interest rate of 8.5% and
9.85%, respectively.
Other Income. Other income primarily represents interest earned on cash
balances.
Income Taxes. During the first half of 2001 and 2000, no income tax
provision or benefit was recognized due to net operating losses incurred and the
reversal and recording of a full valuation allowance.
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Accrued Preferred Series D Stock Dividends. Inland's Preferred Series D
Stock accrues dividends at 11.25% compounded quarterly. As discussed under Note
3 to the Consolidated Financial Statements, the Company's Preferred Series D
Stock was cancelled in exchange for TCW subordinated notes in August 2, 2001.
Accrued Preferred Series E Stock Dividends. Inland's Preferred Series E
Stock accrues dividends at 11.5% compounded quarterly. As discussed under Note 3
to the Consolidated Financial Statements, the Company's Preferred Series E Stock
was retired and cancelled for $2 million by the Company on August 2, 2001.
Accretion of Preferred Series D Stock Discount. Inland's Preferred
Series D Stock was initially recorded on the financial statements at a discount
of $20.2 million in September 1999 and is being accreted to face value ($80.7
million) over the original minimum mandatory redemption period which started on
October 1, 2001 and ended on October 1, 2003. As discussed under Note 3 to the
Consolidated Financial Statements, the Company's Preferred Series D Stock was
cancelled in exchange for TCW subordinated notes in August 2, 2001.
Accretion of Preferred Series E Stock Discount. Inland's Preferred
Series E Stock was initially recorded on the financial statements at a discount
of $4.2 million in September 1999 and is being accreted to face value ($12.2
million) over the period to the original minimum mandatory redemption date of
October 1, 2003. As discussed under Note 3 to the Consolidated Financial
Statements, the Company's Preferred Series E Stock was retired and cancelled for
$2 million by the Company on August 2, 2001.
LIQUIDITY AND CAPITAL RESOURCES
FORTIS CREDIT AND SUBORDINATED DEBT AGREEMENTS
Effective September 21, 1999, the Company entered into the Fortis
Credit Agreement with the senior bank group, the current members of which are
Fortis Capital Corp. and U.S. Bank National Association. At June 30, 2001, the
Company had advanced all funds under its current borrowing base of $83.5
million. The borrowing base is calculated as the collateral value of proved
reserves and is subject to redetermination on or before March 31, 2002 and with
subsequent determinations to be made on each subsequent October 1 and April 1.
If the borrowing base is lower than the outstanding principal balance then
drawn, the Company must immediately pay the difference.
On August 2, 2001, the Company closed two subordinated debt
transactions totaling $10 million with SOLVation. The Company used $2 million of
the $10 million proceeds before financing costs and expenses to purchase and
retire the Series E Preferred stock, and will use the remaining $8 million as
working capital. The Company estimates the SOLVation financing costs and
expenses to be approximately $1.2 million.
The Company issued a $5 million unsecured senior subordinated note to
SOLVation due July 1, 2007. The interest payment is payable in arrears in cash
subject to the approval from the senior bank group. The Company is not required
to make any principal payments prior to the July 1, 2007 maturity date. However,
the Company is required to make payments of principal and interest in the same
amounts as any principal payment or interest payments on the TCW subordinated
debt. The Company also issued another $5 million unsecured junior subordinated
note to SOLVation. The maturity date is the earlier of (i) 120 days after
payment in full of the TCW subordinated debt or (ii) March 31, 2010. The
interest payment shall be payable in arrears in cash subject to the approval
from the senior bank group and accumulates if not paid in cash. The Company is
not required to make any principal payments prior to the March 31, 2010 maturity
date.
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In conjunction with the issuance of the two subordinated notes, the
Series D Preferred and Series E Preferred stock held by TCW were exchanged for
an unsecured subordinated note due September 30, 2009 and $2 million in cash
from the Company. The note amount was for $98,968,964 that represented the face
value plus accrued dividends of the Series D Preferred stock as of August 2,
2001. The interest payment is payable in arrears in cash subject to the approval
from the senior bank group and accumulates if not paid in cash. Interest
payments will be made quarterly, commencing on the earlier of September 30, 2005
or the end of the first calendar quarter after the senior bank debt has been
reduced to $40 million or less, subject to both bank and senior subordination
agreements. Beginning the earlier of two years prior to the maturity date or the
first December 30 after the repayment in full of the senior bank debt, subject
to both bank and senior subordination agreements, the Company will make equal
annual principal payments of one third of the aggregate principal amount of the
subordinated note. Any unpaid principal or interest amounts are due in full on
the September 30, 2009 maturity date.
The Fortis Credit Agreement with the senior bank group was amended to
change the maturity date to June 30, 2007 from April 1, 2002, or potentially
earlier if the borrowing base is determined to be insufficient. Interest accrues
under the Fortis Credit Agreement, at the Company's option, at either (i) 2%
above the prime rate or (ii) at various rates above the LIBOR rate. The LIBOR
rates will be determined by the senior debt to EBITDA ratios starting August 2,
2001. If the senior debt to EBITDA ratio is greater than 4.00 to 1.00, the rate
is 3.25% above the LIBOR rate; if the senior debt to EBITDA ratio is equal to or
less than 4.00 to 1.00 but greater than 3.00 to 1.00, the rate is 2.75% above
the LIBOR rate; if the senior debt to EBITDA ratio is less than 3.00 to 1.00,
the rate is 2.25% above the LIBOR rate. As of June 30, 2001, all amounts were
borrowed under the LIBOR option at an interest rate of 8.04% through August 27,
2001. The revolving termination date is June 30, 2004 at which time the loan
converts into a term loan payable in 12 equal quarterly installments of
principal, with accrued interest, beginning September 30, 2004. The Fortis
Credit Agreement has covenants that restrict the payment of cash dividends,
borrowings, sale of assets, loans to others, investments, merger activity and
hedging contracts without the prior consent of the lenders and requires the
Company to maintain certain net worth, interest coverage and working capital
ratios. The Company was in violation of its working capital covenant at June 30,
2001 and received a waiver of this covenant violation from the banks. The Fortis
Credit Agreement is secured by a first lien on substantially all assets of the
Company.
CASH FLOW AND CAPITAL PROJECTS
During the first six months of 2001, the Company used its cash from
operations of $10.4 million to continue development of the Field ($11.2 million)
and to service interest on borrowings ($3.9 million). Field development in the
first six months of 2001 consisted of drilling 24 wells, completing 17 capital
workover projects and converting 14 wells to water injection along with the
continued extension of the gas gathering and water delivery infrastructures.
The Company's net capital budget for development of the Field in year
2001 is $25.0 million. The Company plans to drill between 55 to 60 wells and
convert 50 wells to water injection. Based upon the SOLVation financing, the
Company believes that cash on hand along with future cash to be generated from
operations will be sufficient to implement its development plans for the next
year and service debt. The level of capital expenditures is largely
discretionary, and the amount of funds devoted to any particular activity may
increase or decrease significantly depending on available opportunities,
commodity prices, operating cash flows and development results, among other
items.
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 results of operations during
2000. However, the Company's costs and expenses have been significantly
increased for 2001 from the 2000 year due to higher labor and third party
contract costs.
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FORWARD LOOKING STATEMENTS
Certain statements in this report, including statements of the Company's and
management's expectation, intentions, plans and beliefs, including those
contained in or implied by Management's Discussion and Analysis of Financial
Condition and Results of Operations and the Notes to Consolidated Financial
Statements, are forward-looking statements, within the meaning of Section 21E of
the Securities Exchange Act of 1934, that are subject to certain events, risk
and uncertainties that may be outside the Company's control. These
forward-looking statements include statements of management's plans and
objectives for the Company's future operations and statements of future economic
performance, information regarding drilling schedules, expected or planned
production or transportation capacity, future production levels of fields,
marketing of crude oil and natural gas, the Company's capital budget and future
capital requirements, credit facilities, the Company's meeting its future
capital needs, the Company's realization of its deferred tax assets, the level
of future expenditures for environmental costs and the outcome of regulatory and
litigation matters, and the assumptions described in this report underlying such
forward-looking statements. Actual results and developments could differ
materially from those expressed in or implied by such statements due to a number
of factors, including, without limitation, those described in the context of
such forward-looking statements, fluctuations in the price of crude oil and
natural gas, the success rate of exploration efforts, timeliness of development
activities, risk incident to the drilling and completion for oil and gas wells,
future production and development costs, the strength and financial resources of
the Company's competitors, the Company's ability to find and retain skilled
personnel, climatic conditions, the results of financing efforts, the political
and economic climate in which the Company conducts operations and the risk
factors described from time to time in the Company's other documents and reports
filed with the SEC.
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PART 1. FINANCIAL INFORMATION (CONTINUED)
INLAND RESOURCES INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
------
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk:
Market risk generally represents the risk that losses may occur in the value of
financial instruments as a result of movements in interest rates, foreign
currency exchange rates and commodity prices.
Interest Rate Risk. The Company is exposed to market risk due to the
floating interest rate under the Fortis Credit Agreement. See Item 2. -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources." All borrowings under the Fortis
Credit Agreement are due and payable in 12 equal quarterly installments of
principal with accrued interest, beginning September 30, 2004. As of June 30,
2001, the Fortis Credit Agreement had a principal balance of $83.5 million
locked in at an interest rate of 8.04% through August 27, 2001. Assuming the
principal is paid according to the terms of the loan, an increase in interest
rates could result in an increase in interest expense on the existing principal
balance for the remaining term of the loan, as shown by the following chart:
<Table>
<Caption>
Increase in Interest Expense Without Hedge
------------------------------------------
1% increase in 2% increase in interest
interest rates rates
-------------- -----------------------
July 1, 2001 through
December 31, 2001 $278,000 $ 557,000
Year 2002 $835,000 $1,670,000
Year 2003 $835,000 $1,670,000
Year 2004 $818,000 $1,635,000
Year 2005 $591,000 $1,183,000
Year 2006 $313,000 $ 626,000
January 1, 2007 through
June 30, 2007 $157,000 $ 313,000
</Table>
Commodity Risks. The Company hedges a portion of its crude oil
production to reduce its exposure to market price fluctuations. The Company uses
various financial instruments whereby monthly settlements are based on
differences between the prices specified in the instruments and the settlement
prices of certain futures contracts quoted on the NYMEX index. Gains or losses
on hedging activities are recognized as an adjustment to crude oil sales in the
period in which the hedged production is sold.
The Company has entered into various contracts in the form of swaps or collars
to hedge crude oil production during calendar years 2001, 2002 and 2003. The
potential gains or (losses) on these contracts subsequent to June 30, 2001 based
on a hypothetical average market price of equivalent product are as follows:
<Table>
<Caption>
Average NYMEX Per Barrel Market Price for the Contract Period
------------------------------------------------------------------------------------
$20.00 $22.00 $24.00 $26.00 $28.00 $30.00
----------- ----------- ----------- ----------- ----------- -----------
July-December 2001 $ 1,374,000 $ 774,000 $ (91,000) $ (807,000) $(1,700,000) $(2,660,000)
Year 2002 $ 4,250,000 $ 2,330,000 $ 590,000 $(1,081,000 $(2,970,000) $(4,890,000)
Year 2003 $ 1,394,000 $ 494,000 $ (407,000) $(1,307,000) $(2,207,000) $(3,107,000)
</Table>
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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.
The following documents are filed as part of this Quarterly Report on Form 10-Q.
<Table>
<Caption>
Exhibit
Number Description of Exhibits
- ------- -----------------------
3.1 Amended and Restated Articles of Incorporation, as amended
through December 14, 1999 (filed as Exhibit 3.1 to Inland's
Current Report on Form 8-K dated September 21, 1999, and
incorporated herein by reference).
3.2 Amended and Restated Bylaws of the Company through August 2,
2002 (filed as Exhibit 3.1 to the Company's Current Report on
Form 8-K dated August 2, 2001, and incorporated herein by
reference).
</Table>
- ---------
(b) Reports on Form 8-K:
None.
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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: 8/9/01 By: /s/ MARC MACALUSO
--------------------- ---------------------------------
Marc MacAluso
Chief Executive Officer and Chief
Operating Officer
Date: 8/9/01 By: /s/ BILL I. PENNINGTON
--------------------- ---------------------------------
Bill I. Pennington
Chief Financial Officer, Secretary
and Treasurer
(Principal Accounting Officer)
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