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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 0-16487
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INLAND RESOURCES INC.
---------------------
(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 xx No
----- -----
Number of shares of common stock, par value $.001 per share, outstanding as
of August 6, 1999: 8,529,765
PART 1. FINANCIAL INFORMATION
INLAND RESOURCES INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998
(In thousands)
June 30, December 31,
1999 1998
------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 636 $ 1,627
Accounts receivable and accrued sales 5,523 5,682
Inventory 4,082 5,353
Other current assets 624 700
--------- ---------
Total current assets 10,865 13,362
--------- ---------
Property and equipment, at cost:
Oil and gas properties (successful efforts method) 180,950 180,538
Accumulated depletion, depreciation and amortization (26,817) (21,433)
--------- ---------
154,133 159,105
Other property and equipment, net 19,685 20,212
Other long-term assets 2,888 3,150
--------- ---------
Total assets $ 187,571 $ 195,829
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 6,830 $ 14,282
Accrued expenses 3,533 2,408
Current portion of long-term debt 148,830 141,709
--------- ---------
Total current liabilities 159,193 158,399
--------- ---------
Long-term debt 17,087 17,114
Other long-term liabilities 2,528 875
Mandatorily redeemable preferred Series C stock, 100,000
Shares issued and outstanding 9,568 9,568
Accrued preferred Series C stock dividends 2,044 1,534
Warrants outstanding 1,300 1,300
Stockholders' equity (Deficit):
Preferred Class A stock, par value $.001,
20,000,000 shares authorized
Common stock, par value $.001; 25,000,000 shares
authorized; issued and outstanding 8,529,765 9 9
Additional paid-in capital 42,758 42,758
Accumulated deficit (46,916) (35,728)
--------- ---------
Total stockholders' equity (deficit) (4,149) 7,039
--------- ---------
Total liabilities and stockholders' equity (deficit) $ 187,571 $ 195,829
--------- ---------
--------- ---------
The accompanying notes are an integral part of the consolidated
financial statements
1
PART 1. FINANCIAL INFORMATION (CONTINUED)
INLAND RESOURCES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH AND SIX-MONTH PERIODS
ENDED JUNE 30, 1999 AND 1998 (In
thousands except earnings per share)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
----------------------------- -----------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Revenues:
Sales of refined product $ 17,965 $ 18,434 $ 32,604 $ 35,238
Sales of crude oil and natural gas 1,725 3,319 4,068 8,596
--------- --------- --------- ---------
Total revenues 19,690 21,753 36,672 43,834
--------- --------- --------- ---------
Operating expenses:
Cost of refinery feedstock 11,866 12,656 22,014 27,605
Refinery operating expenses 2,423 2,176 4,913 3,954
Lease operating expenses 1,646 1,852 3,360 4,096
Production taxes 111 113 200 228
Exploration 28 30 64 91
Depletion, depreciation and amortization 2,763 2,730 6,147 5,318
General and administrative, net 1,091 840 1,821 1,789
--------- --------- --------- ---------
Total operating expenses 19,928 20,397 38,519 43,081
--------- --------- --------- ---------
Operating income (loss) (238) 1,356 (1,847) 753
Interest expense (4,561) (3,569) (9,004) (6,896)
Other income, net 137 77 173 137
--------- --------- --------- ---------
Net loss before extraordinary loss (4,662) (2,136) (10,678) (6,006)
Extraordinary loss on early extinguishment of debt (212) (212)
--------- --------- --------- ---------
Net loss (4,662) (2,348) (10,678) (6,218)
Preferred Series C accrued stock dividend (255) (278) (510) (528)
--------- --------- --------- ---------
Net loss available to common stockholders $ (4,917) $ (2,626) $ (11,188) $ (6,746)
--------- --------- --------- ---------
--------- --------- --------- ---------
Net loss per share - Basic and Diluted
Before extraordinary loss $ (0.58) $ (0.28) $ (1.31) $ (0.78)
Extraordinary loss $ (0.03) $ (0.03)
--------- --------- --------- ---------
Total $ (0.58) $ (0.31) $ (1.31) $ (0.81)
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average common shares outstanding 8,530 8,370 8,530 8,365
--------- --------- --------- ---------
--------- --------- --------- ---------
Dividends per common share NONE NONE NONE NONE
--------- --------- --------- ---------
--------- --------- --------- ---------
The accompanying notes are an integral part of the consolidated
financial statements
2
PART 1. FINANCIAL INFORMATION (CONTINUED)
INLAND RESOURCES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
(In thousands)
(Unaudited)
1999 1998
----------- ----------
Cash flows from operating activities:
Net loss $ (10,678) $ (6,218)
Adjustments to reconcile net loss to net cash
provided by (used by) operating activities:
Depletion, depreciation and amortization 6,147 5,318
Amortization of debt issue costs and debt discount 420 352
Interest converted to principal 3,732
Loss on early extinguishment of debt 212
Effect of changes in current assets and liabilities:
Accounts receivable 159 5,118
Inventory 1,271 (1,677)
Other assets 167 (295)
Accounts payable and accrued expenses (4,674) 3,574
---------- ---------
Net cash provided by (used by) operating activities (3,456) 6,384
---------- ---------
Cash flows from investing activities:
Development expenditures and equipment purchases (648) (22,263)
---------- ---------
Net cash used by investing activities (648) (22,263)
---------- ---------
Cash flows from financing activities:
Proceeds from sale of common stock 37
Proceeds from issuance of long-term debt 3,250 30,775
Payments of long-term debt (27) (12,997)
Debt issue costs (110) (788)
---------- ---------
Net cash provided by financing activities 3,113 17,027
---------- ---------
Net change in cash and cash equivalents (991) 1,148
Cash and cash equivalents at beginning of period 1,627 604
---------- ---------
Cash and cash equivalents at end of period $ 636 $ 1,752
---------- ---------
---------- ---------
The accompanying notes are an integral part of the consolidated
financial statements
3
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 oil and gas property interests located
in the Monument Butte Field within the Uinta Basin of Northeastern Utah.
The Company also operates a crude oil refinery located in Woods Cross, Utah
(the "Woods Cross Refinery"). The refinery has a processing capacity of
approximately 10,000 barrels per day and tankage capacity of 485,000
barrels.
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, 1998.
3. GOING CONCERN:
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as going concern. However, the low
oil price environment during 1998 and the first quarter of 1999
significantly impacted the Company's financial condition. The Company had a
working capital deficit of $148.3 million at June 30, 1999 and generated a
net loss of $10.7 million for the first six months of 1999 and $23.5
million during the year ended December 31, 1998. Principal amounts related
to the Company's long-term debt facilities contributed $148.8 million to
the working capital deficit. The Company's principal payment of $9.5
million originally due June 29, 1999 has been extended to August 13, 1999.
Based on current conditions, the Company will not be able to make this
payment as scheduled. In addition, at June 30, 1999 the Company was in
default of certain provisions of its credit agreements. As a result of the
items noted above, there is substantial doubt about the Company's ability
to continue as a going concern. The consolidated financial statements do
not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification
of liabilities that might result should the Company be unable to continue
as a going concern.
The Company is considering a number of strategies to cure its working
capital and liquidity issues. The Company is involved in advanced
negotiations to restructure its debt and equity, which may provide
financing to improve short-term liquidity and provide drilling capital,
although there is no assurance that the Company will be successful. Until a
capital restructuring is completed the Company does not plan to drill
additional wells. Instead, the Company will focus on its continuing efforts
to pressurize the Monument Butte Field through additional development of
its water injection infrastructure. The Company plans to convert 30 wells
to injection during 1999 while incurring net capital expenditures of
$700,000. The level of these and other capital expenditures is largely
discretionary, and the amount of funds devoted to any particular activity
may increase or decrease significantly depending on available
opportunities, capital availability and market conditions.
Other possible solutions the Company is considering include obtaining
additional modifications to its credit agreements, selling assets or
issuing additional debt. The Company believes its lenders will assist in
solving the Company's liquidity and working capital issues, although
management can not be assured that the Company will obtain modifications or
concessions from its lenders or raise the necessary capital from other
sources in the time frames required. As a result, the Company may have to
further slow or stop development of the Monument Butte Field and suspend
capital additions to the Woods Cross Refinery.
4
4. ACCOUNTING PRONOUNCEMENT:
The Financial Accounting Standards Board ("FASB") issued Statement No. 133
"Accounting for Derivative Instruments and Hedging Activities" originally
effective for fiscal years beginning after June 15, 1999. The Statement
requires companies to record derivative transactions on the balance sheet
as assets or liabilities, measured at fair value, and further defines
transactions that qualify for hedge accounting. The Company has not
assessed the impact this Statement may have on reported financial
information. In June 1999, the FASB issued Statement No. 137 "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133 - An Amendment of FASB No. 133".
Statement No. 137 delays the effective date of the requirements of
Statement No. 133 to all fiscal quarters of fiscal years beginning after
June 15, 2000.
5. INVENTORIES:
Inventories at June 30, 1999 and December 31, 1998 consist of the following
(in thousands):
June 30, December 31,
1999 1998
---------- ------------
Crude Oil $ 725 $ 827
Refined Product 2,148 2,910
Tubular goods 1,018 1,416
Materials and supplies 191 200
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Total $ 4,082 $ 5,353
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6. SEGMENT AND RELATED INFORMATION:
The Company operates in two segments; oil and gas exploration, development
and production operations ("E&P") in the Monument Butte Field in Utah and
crude oil refining in Woods Cross, Utah. Segment disclosures for the three
month and six month periods ended June 30, 1999 and 1998 are as follows (in
thousands).
Six Months Ended June 30, 1999
-----------------------------------------------------------
E&P Refinery Eliminations Total
----------- ----------- ------------ -----------
Revenues from external customers $ 4,068 $ 32,604 $ - $ 36,672
Intercompany revenue transactions 4,347 - (4,347) -
Interest income and other 503 145 (475) 173
Interest expense 8,996 483 (475) 9,004
Lease operating and production taxes 3,560 - - 3,560
Depreciation, depletion and amort. 5,715 432 - 6,147
Net income (loss) (10,424) (254) (10,678)
Capital additions 453 195 - 648
Six Months Ended June 30, 1998
-----------------------------------------------------------
E&P Refinery Eliminations Total
----------- ----------- ------------ -----------
Revenues from external customers $ 8,596 $ 35,238 $ - $ 43,834
Intercompany revenue transactions 1,880 - (1,880) -
Interest income and other 136 80 (79) 137
Interest expense 6,511 464 (79) 6,896
Lease operating and production taxes 4,324 - - 4,324
Depreciation, depletion and amort. 4,958 360 - 5,318
Net income (loss) (6,111) (107) (6,218)
Capital additions 20,989 1,274 - 22,263
Balance Sheet
-----------------------------------------------------------
E&P Refinery Eliminations Total
----------- ----------- ------------ -----------
Total assets at June 30, 1999 $ 176,361 $ 26,545 $ (15,335) $187,571
Total assets at December 31, 1998 $ 183,389 $ 27,222 $ (14,782) $195,829
5
Three Months Ended June 30, 1999
-----------------------------------------------------------
E&P Refinery Eliminations Total
----------- ----------- ------------ -----------
Revenues from external customers $ 1,725 $ 17,965 $ - $ 19,690
Intercompany revenue transactions 2,656 - (2,656) -
Interest income and other 237 133 (233) 137
Interest expense 4,559 235 (233) 4,561
Lease operating and production taxes 1,757 - - 1,757
Depreciation, depletion and amort. 2,547 216 - 2,763
Net income (loss) (4,952) 291 (4,661)
Capital additions 358 147 - 505
Three Months Ended June 30, 1998
-----------------------------------------------------------
E&P Refinery Eliminations Total
----------- ----------- ------------ -----------
Revenues from external customers $ 3,319 $ 18,434 $ - $ 21,753
Intercompany revenue transactions 1,880 - (1,880) -
Interest income and other 121 35 (79) 77
Interest expense 3,379 269 (79) 3,569
Lease operating and production taxes 1,965 - - 1,965
Depreciation, depletion and amort. 2,550 180 - 2,730
Net income (loss) (2,965) 616 (2,349)
Capital additions 10,140 774 - 10,914
6
PART 1. FINANCIAL INFORMATION (CONTINUED)
INLAND RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION:
RESULTS OF OPERATIONS:
THREE MONTH PERIODS ENDED JUNE 30, 1999 AND 1998:
REFINED PRODUCTS SALES. The Company averaged refined product sales
of 8,400 barrels per day from the Woods Cross Refinery during the second
quarter of 1999, of which 54% represented gasoline and diesel products. This
is a decrease of 100 barrels per day when compared to the second quarter of
1998. Although volumes sold remained relatively flat between years, sales
decreased $469,000 due to a decline in the average price received for the
Company's refined product slate. The price decrease was due to general market
conditions in the Salt Lake City region.
OIL AND GAS SALES. The Company eliminated in consolidation $2.7
million and $1.9 million of crude oil sales made between its production
operations and the Woods Cross Refinery during the second quarters of 1999
and 1998, respectively. Prior to considering intercompany eliminations and
hedging activities, crude oil and natural gas sales changed less than 1%
between the second quarters of each year. The small change in revenues was
the net effect of an 11% decline in the Company's BOE production offset by an
increase in crude oil prices. Crude oil prices increased 30% from an average
of $10.11 per barrel during the second quarter of 1998 to $13.16 during the
second quarter of 1999. Approximately 75% of the Company's revenues are
derived from crude oil sales.
As further discussed in "Liquidity and Capital Resources" below, the Company
has entered into price protection agreements to hedge against volatility in
crude oil prices. Although hedging activities do not affect the Company's
actual sales price for crude oil in the field, the financial impact of
hedging transactions is reported as an adjustment to crude oil revenue in the
period in which the related oil is sold. Oil and gas sales were decreased by
$812,000 and increased by $31,000 during the second quarters of 1999 and
1998, respectively, to recognize hedging contract settlement gains and losses
and contract purchase cost amortization.
COST OF REFINERY FEEDSTOCK. The Company eliminated in consolidation
$2.7 million and $1.9 million of feedstock costs associated with sales
between its production operations and the Woods Cross Refinery during the
second quarters of 1999 and 1998, respectively. Without consideration of
these eliminations, refinery feedstock costs changed less than 1% between
second quarters.
REFINERY OPERATING EXPENSES. Refinery operating expense for the
quarter ended June 30, 1999 increased 11%, or $247,000, from the second
quarter of 1998. The increase was the result of a number of factors including
(1) increased transportation costs since the current crude oil slate and the
refined product sold had more volumes shipped via railcar or truck rather
than pipeline, (2) an increase in the number of operating employees and pay
rates, and (3) less processing fees and maintenance credits associated with
the Company's MDDW unit.
LEASE OPERATING EXPENSES. Lease operating expense for the second
quarter ended June 30, 1999 decreased 11%, or $206,000, from the second
quarter of 1998. Lease operating expense per BOE was consistent in each year
at $3.76 as cost reductions and new efficiencies were offset by lower
production.
7
PRODUCTION TAXES. Production taxes as a percentage of oil and gas
sales were 2.2% in the second quarters of 1999 and 1998. 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 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, 1999 increased 1%, or
$33,000, from the previous year. 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 average depletion
rate increased from $4.89 per BOE sold during the second quarter of 1998 to
$5.03 per BOE sold during the second quarter of 1999.
GENERAL AND ADMINISTRATIVE, NET. General and administrative expense
for the quarter ended June 30, 1999 increased 30%, or $251,000, from the
previous year. After removal of one-time costs related to an unsuccessful
combination, net general and administrative costs decreased $58,000 or 7%
between periods.
INTEREST EXPENSE. Interest expense for the second quarter of 1999
increased 28%, or $992,000, compared to the second quarter of 1998. The
increase resulted from increased average borrowings outstanding as the
Company's debt balance increased $24 million during the twelve months ended
June 30, 1999. Interest cost approximated 10.6% during the second quarters of
1999 and 1998.
OTHER INCOME. Other income in 1999 and 1998 primarily represents
interest earned on the investment of surplus cash balances.
INCOME TAXES. In 1999 and 1998, no income tax provision or benefit
was recognized due to net operating losses incurred and the reversal and
recording of a full valuation allowance.
ACCRUED SERIES C STOCK DIVIDENDS. Inland's Series C stock accrues
dividends at 10%, compounded quarterly, or approximately $1,000,000 per year.
No dividends have been paid since the stock was issued on July 21, 1997. The
amount accrued represents those dividends earned during the respective period.
SIX MONTH PERIODS ENDED JUNE 30, 1999 AND 1998:
REFINED PRODUCTS SALES. The Company averaged refined product sales
of 8,800 barrels per day from the Woods Cross Refinery during the initial six
months of 1999, of which 54% represented gasoline and diesel products. This
is an increase of 400 barrels per day when compared to the first six months
of 1998. Although sales volumes were higher in 1999, sales revenue decreased
$2.6 million due to a decline in the average price received for the Company's
refined product slate. The price decrease was due to general market
conditions in the Salt Lake City region.
OIL AND GAS SALES. The Company eliminated in consolidation $4.3
million and $1.9 million of crude oil sales made between its production
operations and the Woods Cross Refinery during the initial six months 1999
and 1998, respectively. Prior to considering intercompany eliminations and
hedging activities, crude oil and natural gas sales decreased $1.2 million or
12% between years. The change in revenues was the effect of an 5% decline in
the Company's BOE sales combined with an 8% decrease in the price per BOE
sold. Crude oil approximates 75% of the Company's revenues. Crude oil prices
increased from an average of $10.42 per barrel during the first six months of
1998 to $10.75 during the first six months of 1999.
As further discussed in "Liquidity and Capital Resources" below, the Company
has entered into price protection agreements to hedge against volatility in
crude oil prices. Although hedging activities do not affect the Company's
actual sales price for crude oil in the field, the financial impact of
hedging transactions is reported as an adjustment to crude oil revenue in the
period in which the related oil is sold. Oil and gas sales were decreased by
$812,000 and
8
increased by $94,000 during the initial six months of 1999 and 1998,
respectively, to recognize hedging contract settlement gains and losses and
contract purchase cost amortization.
COST OF REFINERY FEEDSTOCK. The Company eliminated in
consolidation $4.3 million and $1.9 million of feedstock costs associated
with sales between its production operations and the Woods Cross Refinery
during the initial six months of 1999 and 1998, respectively. Without
consideration of these eliminations, refinery feedstock costs decreased $3.1
million consistent with the decline in refined product prices.
REFINERY OPERATING EXPENSES. Refinery operating expense during the
initial six months of 1999 increased 24%, or $959,000, from the comparable
period in 1998. The increase was the result of a number of factors including
(1) increased transportation costs since the current crude oil slate and the
refined product sold had more volumes shipped via railcar or truck rather
than pipeline, (2) an increase in the number of operating employees and pay
rates, and (3) less processing fees and maintenance credits associated with
the Company's MDDW unit.
LEASE OPERATING EXPENSES. Lease operating expense for the first six
months of 1999 decreased 18%, or $736,000, from the comparable period in
1998. Lease operating expense per BOE decreased from $4.28 per BOE sold in
1998 to $3.69 in 1999. The Company made considerable cost reductions during
the first and second quarters that were not present in the prior year.
PRODUCTION TAXES. Production taxes as a percentage of oil and gas
sales were recorded at 2.2% during 1999 and 1998. 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 tax rate.
EXPLORATION. Exploration expense represents the Company's cost to
retain unproved acreage.
DEPLETION, DEPRECIATION AND AMORTIZATION. Depletion, depreciation
and amortization for the initial six months of 1999 increased 16%, or
$829,000, from the previous year. 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 average depletion
rate increased from $4.89 per BOE sold during the first six months of 1998 to
$5.91 per BOE sold during the first six months of 1999.
GENERAL AND ADMINISTRATIVE, NET. General and administrative expense
during the six months ended June 30, 1999 increased 2%, or $32,000, from the
previous year. After removal of one-time costs related to an unsuccessful
combination, net general and administrative costs decreased $277,000 or 15%
between periods.
INTEREST EXPENSE. Interest expense for the initial six months of
1999 increased 31%, or $2.1 million, compared to the same period in 1998. The
increase resulted from increased average borrowings outstanding as the
Company's debt balance increased $24 million during the twelve months ended
June 30, 1999. Interest cost approximated 10.6% during the initial six months
of 1999 and 1998.
OTHER INCOME. Other income in 1999 and 1998 primarily represents
interest earned on the investment of surplus cash balances.
INCOME TAXES. In 1999 and 1998, no income tax provision or benefit
was recognized due to net operating losses incurred and the reversal and
recording of a full valuation allowance.
ACCRUED SERIES C STOCK DIVIDENDS. Inland's Series C stock accrues
dividends at 10%, compounded quarterly, or approximately $1,000,000 per year.
No dividends have been paid since the stock was issued on July 21, 1997. The
amount accrued represents those dividends earned during the respective period.
9
LIQUIDITY AND CAPITAL RESOURCES
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as going concern. However, the low
oil price environment during 1998 and the first quarter of 1999 significantly
impacted the Company's financial condition. The Company had a working capital
deficit of $148.3 million at June 30, 1999 and generated a net loss of $10.7
million for the first six months of 1999 and $23.5 million during the year
ended December 31, 1998. Principal amounts related to the Company's long-term
debt facilities contributed $148.8 million to the working capital deficit.
The Company's principal payment of $9.5 million originally due June 29, 1999
has been extended to August 13, 1999. Based on current conditions, the
Company will not be able to make this payment as scheduled. In addition, at
June 30, 1999 the Company was in default of certain provisions of its credit
agreements, including $2.1 million of liens filed by vendors.
The Company is considering a number of strategies to cure its working capital
and liquidity issues. The Company is involved in advanced negotiations to
restructure its debt and equity, which may provide financing to improve
short-term liquidity and provide drilling capital, although there is no
assurance that the Company will be successful. Until a capital restructuring
is completed the Company does not plan to drill additional wells. Instead,
the Company will focus on its continuing efforts to pressurize the Monument
Butte Field through additional development of its water injection
infrastructure. The Company plans to convert 30 wells to injection during
1999 while incurring net capital expenditures of $700,000. The level of these
and other capital expenditures is largely discretionary, and the amount of
funds devoted to any particular activity may increase or decrease
significantly depending on available opportunities, capital availability and
market conditions.
Other possible solutions the Company is considering include obtaining
additional modifications to its credit agreements, selling assets or issuing
additional debt. The Company believes its lenders will assist in solving the
Company's liquidity and working capital issues, although management can not
be assured that the Company will obtain modifications or concessions from its
lenders or raise the necessary capital from other sources in the time frames
required. As a result, the Company may have to further slow or stop
development of the Monument Butte Field and suspend capital additions to the
Woods Cross Refinery. As a result of the items noted above, there is
substantial doubt about the Company's ability to continue as a going concern.
The consolidated financial statements do not include any adjustments relating
to the recoverability and classification of asset carrying amounts or the
amount and classifications of liabilities that might result should the
Company be unable to continue as a going concern.
During the first six months of 1999, the Company focused its efforts on
pressurizing the Monument Butte Field by converting twelve wells to water
injection. Due to its financial condition, the Company incurred only $648,000
of net capital expenditures with respect to its producing and refining
operations. During the first half of 1999, the Company borrowed $3.25 million
from its lenders and generated $4.3 million of cash from operations which it
primarily used to reduce outstanding accounts payable to $6.8 million; a 52%
decrease from the January 1, 1999 accounts payable balance of $14.3 million.
FINANCING. On September 30, 1997, the Company closed separate Credit
Agreements with Trust Company of the West and TCW Asset Management Company in
their capacities as noteholder and agent (collectively "TCW") and ING (U.S.)
Capital Corporation ("ING"). Subsequent to the closing of the ING Credit
Agreement, U.S. Bank National Association and Meespierson Capital Corp.
(collectively referred to herein with ING as the "Senior Lenders") became
loan participants in the ING Credit Agreement. The Credit Agreement with TCW
provided the Company with $75.0 million, all of which was funded at closing.
The ING Credit Agreement provides the Company with a $73.25 million borrowing
base as of June 30, 1999. The borrowing base under the ING facility is
limited to the collateral value of proved reserves as determined semiannually
by the Senior Lenders. At June 30, 1999, the Company had $70.9 million of
borrowings and $2.35 million of letter of credit obligations outstanding
under the ING Credit Agreement.
On March 11, 1999, the Company entered into amendments to the ING Credit
Agreement and the TCW Credit Agreement. The ING amendment increased the
borrowing base to $73.25 million. The Company immediately borrowed the
additional $3.25 million of availability and used the proceeds to reduce
accounts payable. The Senior Lenders received a warrant to purchase 50,000
shares of common stock at $1.75 as consideration for entering into the
amendment. Under the TCW amendment, TCW agreed to defer the quarterly
payments for interest accruing
10
during the initial six months of 1999 until the earlier of December 31, 2003
or the date on which the ING loan is paid in full. The amount deferred during
the first six months of 1999 was $3.7 million increasing the principal
outstanding under the TCW Credit Agreement to $78.7 million at June 30, 1999.
The deferred interest bears interest at 12%. TCW received a warrant to
purchase 58,512 shares of common stock at $1.75 as consideration for entering
into the amendment.
The ING Credit Agreement constituted a revolving line of credit until March
31, 1999, at which time it converted to a term loan payable in quarterly
installments through March 29, 2003. The quarterly installments, based on a
$73.25 million borrowing base, are $9.5 million extended to August 13, 1999,
$6.2 million for the next two quarters of 1999, $4.7 million for each quarter
of 2000, $3.9 million for each quarter of 2001, $3.5 million for each quarter
of 2002, and $3.0 million on March 29, 2003. The initial quarterly
installment of $9.5 million due June 29, 1999 has been extended and is now
due August 13, 1999. The ING loan bears interest, at the Company's option, at
either (i) the average prime rates announced from time to time by The Chase
Manhatten Bank, Citibank, N.A. and Morgan Guaranty Trust Company of New York
plus 0.5% per annum; or (ii) at LIBOR plus 1.75%. The Company has
consistently selected the LIBOR rate option resulting in a currently
effective interest rate of approximately 6.8%. As required by the ING and TCW
Credit Agreements, on April 30, 1998 the Company paid $140,000 to put in
place an interest rate hedge. The hedge covers the period June 12, 1998
through December 12, 2000 and effectively provides a 6.75% LIBOR rate
interest ceiling (before consideration of the 1.75% adjustment) on $35.0
million of borrowings under the ING Credit Agreement. The ING Credit
Agreement is secured by a first lien on substantially all assets of the
Company.
In addition to the $3.7 million of deferred interest discussed above, the TCW
Credit Agreement is comprised of a $65.0 million tranche and a $10.0 million
tranche and is payable interest only, at a rate of 9.75% per annum, quarterly
until the earlier of December 31, 2003 or the date on which the ING loan is
paid in full (as discussed above, TCW has deferred interest payments during
the initial six months of 1999). At that time, the TCW Credit Agreement
converts to a term loan payable in twelve quarterly installments of principal
and interest. The quarterly principal installments are $6.25 million for the
first four quarters, $8.75 million for the next four quarters and $3.75
million for the last four quarters. The Company granted a warrant to TCW to
purchase 100,000 shares of common stock at an exercise price of $10.00 per
share any time after September 23, 2000 and before September 23, 2007. Due to
anti-dilution adjustments, the number of shares covered by the initial
100,000 share warrant has increased to 326,457 shares at an adjusted exercise
price of $1.04 per share. The Company also granted piggyback registration
rights in connection with such warrants. TCW is also entitled to additional
interest on the $65.0 million tranche in an amount that yields TCW a 12.5%
internal rate of return, such interest payment to be made concurrently with
the final payment of all principal and interest on the TCW Credit Agreement.
For purposes of the internal rate of return calculation, the Company is given
credit for the funding fee of $2.25 million paid to TCW at closing. With
respect to the $10.0 million tranche, upon payment in full of the TCW Credit
Agreement by the Company, TCW may elect to "put" their warrants back to the
Company and accept a cash payment which will cause TCW to achieve a 12.5%
rate of return on such tranche. The TCW Credit Agreement restricts any
repayment of the indebtedness until October 1, 1999. The TCW Credit Agreement
is secured by a second lien on substantially all assets of the Company.
The TCW and ING Credit Agreements have common covenants that restrict the
payment of cash dividends, borrowings, sale of assets, loans to others,
investment and merger activity and hedging contracts without the prior
consent of the lenders and requires the Company to maintain certain net
worth, interest coverage and working capital ratios. At June 30, 1999, the
Company was in violation of certain covenants common to both the ING Credit
Agreement and the TCW Credit Agreement. All lenders have been notified of the
covenant defaults, including the filings of liens by vendors. Although there
can be no assurance in the future, the Company's lenders have shown
willingness in the past to help the Company solve its working capital and
liquidity issues. The Company's management is estimating that current cash
flow projections will not be sufficient to repay scheduled maturities. As a
result, all borrowings for both of these facilities have been classified as
current under the cross-collateralization provisions of such facilities.
11
DELISTING OF COMMON STOCK
Effective with the close of business July 28, 1999, the Company's Common
Stock was delisted from the Nasdaq SmallCap Market. The Company was no longer
able to satisfy the net tangible asset maintenance standard for continued
listing. The Company's Common Stock is now traded on the NASD
over-the-counter bulletin board under the same symbol "INLN".
INFLATION AND CHANGES IN PRICES
The Company's revenues and the value of its oil and gas properties have been
and will be affected by changes in oil and gas prices. The Company's ability
to borrow from traditional lending sources and to obtain additional capital
on attractive terms is also substantially dependent on oil and gas prices.
Oil and gas prices are subject to significant seasonal and other fluctuations
that are beyond the Company's ability to control or predict. Although certain
of the Company's costs and expenses are affected by the level of inflation,
inflation did not have a significant effect on the Company's result of
operations during the first quarter of 1999 or 1998.
YEAR 2000 ISSUES
The Company is aware of the issues associated with the programming code in
many existing computer systems as the millennium approaches. The "Year 2000"
problem is pervasive; virtually every computer operation may be affected in
some way by the rollover of the digit value to 00. The risk is that computer
systems will not properly recognize sensitive information when the year
changes to 2000. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail, resulting in
business interruption.
The Company has conducted a review of its computer systems and is taking
steps to correct Year 2000 compliance issues. The Company benefits from
having relatively new computer systems in most locations. The Company
believes its computer hardware and software is over 95% Year 2000 compliant.
Computer hardware and software that is not Year 2000 compliant will be
updated before September 1999. The Company's operations are not extremely
dependent on vendor compliance with Year 2000 issues. To the extent a major
vendor is not Year 2000 compliant by September 1999, the Company believes
that alternative vendors that are Year 2000 compliant will be available and
selected. In summary, management believes that Year 2000 issues can be
mitigated without a significant effect on the Company's financial position.
The Company expects to expend less than $50,000 to become fully Year 2000
compliant. However, given the complexity of the Year 2000 issue, there can be
no assurance that the Company will be able to address the problem without
incurring costs that are material to future financial results or future
financial condition.
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, sources of crude oil for
refining, marketing of refined products, refinery maintenance, operations and
upgrades, the Company's capital budget and future capital requirements, 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 Securities and Exchange Commission (the
"Commission").
12
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. Inland is exposed to some market risk due to the
floating interest rate under the ING Credit Agreement. See Item 2.
- -"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources." The ING Credit Agreement is 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. As of
June 30, 1999, the ING Credit Facility had a principal balance of $70.9
million at an average floating interest rate of 6.8% per annum and $2.35
million of letters of credit obligations outstanding. Assuming no hedge, and
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:
------------------------------------------------------------------------------------------------
Increase in Interest Expense Without Hedge
------------------------------------------------------------------------------------------------
July 1, 1999 January 1, 2000 January 1, 2001 January 1, 2002 January 1, 2003
through through through through through
December 31, 1999 December 31, 2000 December 31, 2001 December 31, 2002 March 29, 2003
------------------------------------------------------------------------------------------------
1% increase in $315,000 $430,000 $257,000 $109,000 $ 6,000
Interest Rates
- -----------------------------------------------------------------------------------------------------------------
2% increase in $633,000 $877,000 $537,000 $246,000 $19,000
Interest Rates
- -----------------------------------------------------------------------------------------------------------------
On April 30, 1998, as required by the ING Credit Agreement, Inland
entered into an interest rate hedge covering the ING Credit Agreement at a
cost of $140,000. This interest rate cap agreement with Enron Capital and
Trade Resources Corp. covers the period June 12, 1998 through December 12,
2000 and provides a 6.75% LIBOR rate, the net effect of which is to cap the
interest rate at 8.5% on $35.0 million of borrowings. Pursuant to the ING
Credit Agreement, this hedge must be renewed or replaced through the
remaining term of the loan. Assuming the renewal of the terms of the interest
rate cap agreement, the effect of the hedge through March 29, 2003 will be to
limit hypothetical increases in interest expenses under the ING Credit
Agreement, as shown by the following chart:
------------------------------------------------------------------------------------------------
Increase in Interest Expense with Hedge
------------------------------------------------------------------------------------------------
July 1, 1999 January 1, 2000 January 1, 2001 January 1, 2002 January 1, 2003
through through through through through
December 31, 1999 December 31, 2000 December 31, 2001 December 31, 2002 March 29, 2003
------------------------------------------------------------------------------------------------
1% increase in $315,000 $430,000 $257,000 $109,000 $ 6,000
Interest Rates
- -----------------------------------------------------------------------------------------------------------------
2% increase in $533,000 $667,000 $374,000 $164,000 $10,000
Interest Rates
- -----------------------------------------------------------------------------------------------------------------
13
COMMODITY RISKS. Inland hedges a portion of its oil and gas
production to reduce its exposure to fluctuations in the market prices
thereof. Inland 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 or certain other indices. Gains or losses on hedging activities are
recognized as oil and gas sales in the period in which the hedged production
is sold.
On March 10, 1999 Inland entered into two swap agreements with Enron
Capital and Trade Resources Corp. ("Enron"), each of which cover 40,000
barrels per month of crude oil production during the period April 1, 1999
through December 31, 1999. The swap price on the first contract is $14.02 and
the swap price on the second contract is $14.54, based on NYMEX Light Sweet
Crude Oil Futures Contracts. The potential losses on these contracts based on
a hypothetical average market price of equivalent product for the period from
July 1, 1999 to December 31, 1999 are as follows:
-----------------------------------------------------------------------------------------------
Average NYMEX Per Barrel Market Price for the Contract Period
-----------------------------------------------------------------------------------------------
$16.00 $17.00 $18.00 $19.00 $20.00 $21.00 $22.00
-----------------------------------------------------------------------------------------------
$14.02 Contract $475,000 $715,000 $955,000 $1,195,000 $1,435,000 $1,675,000 $1,915,000
- -------------------------------------------------------------------------------------------------------------------
$14.54 Contract 350,000 $590,000 $830,000 $1,070,000 $1,310,000 $1,550,000 $1,790,000
- -------------------------------------------------------------------------------------------------------------------
The Company's hedging activities resulted in a loss of $812,000
and a gain of $94,000 during the initial six months of 1999 and 1998,
respectively.
14
PART II. OTHER INFORMATION
INLAND RESOURCES INC.
Items 1, 3, 4 and 5 are omitted from this report as inapplicable.
ITEM 2. CHANGES IN SECURITIES.
The Company accrued for issuance 21,100 shares of common stock dividends
related to its Series C preferred stock during the period from April 1, 1999
to June 30, 1999.
ITEM 3. DEFAULT UPON SENIOR SECURITIES.
As discussed in the "Liquidity and Capital Resources" section of
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" the Company was in default of certain provisions of its credit
agreements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
The following documents are filed as part of this Quarterly Report on Form
10-Q.
Exhibit
Number Description of Exhibits
- ------- -----------------------
3.1 Amended and Restated Articles of Incorporation, as amended
through July 21, 1997 (filed as exhibit 3.1 to the Company's
Quarterly Report on Form 10-QSB for the quarter ended June 30,
1997, 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).
27.1 Financial Data Schedule.*
- -------------------
* Filed herewith.
(b) Reports on Form 8-K:
Form 8-K was filed under Item 5 on April 1, 1999 reporting an update of
Inland's risk factors.
Form 8-K was filed under Item 5 on April 22, 1999 reporting an
amendment to the non-binding letter of intent with Flying J Inc. and
Smith Management LLC.
Form 8-K was filed under Item 5 on May 26, 1999 reporting the
termination of the Letter of Intent with Flying J.
15
INLAND RESOURCES INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INLAND RESOURCES INC.
(Registrant)
Date: August 12, 1999 By: /s/ Kyle R. Miller
---------------------------
Kyle R. Miller
Chief Executive Officer
Date: August 12, 1999 By: /s/ Michael J. Stevens
---------------------------
Michael J. Stevens
Vice President - Accounting and
Administration
(Principal Accounting Officer)
16