SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period ________________ to __________________
Commission file number 0-16487
Inland Resources Inc.
(Exact name of small business issuer as specified in its charter)
Washington 91-1307042
(State of incorporation or organization) (IRS Employer
Identification
No.)
475 17th Street, Suite 1500, Denver, Colorado 80202
(Address of principal executive offices) (ZIP Code)
Issuer's telephone number, including area code: (303) 292-0900
(Former name, address and fiscal year, if changed, since last report)
Indicate by check mark whether the issuer (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes xx No
Number of shares of common stock, par value $.001 per share, outstanding as of
May 1, 1996: 40,927,999
1<PAGE>
<TABLE>
PART 1. FINANCIAL INFORMATION
INLAND RESOURCES INC.
CONSOLIDATED BALANCE SHEETS
March 31, 1996 and December 31, 1995
<CAPTION>
March 31, December 31,
1996 1995
ASSETS (Unaudited)
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,394,272 $ 2,970,305
Accounts receivable and
accrued sales 1,091,021 701,956
Inventory 570,641 417,665
Prepaid expenses 220,789 19,338
----------- ----------
Total current assets 5,276,723 4,109,264
----------- ----------
Property and equipment, at cost:
Oil and gas properties
(successful efforts method) 21,109,736 17,251,885
Gas and water transportation
facilities 318,845 152,395
Accumulated depletion,
depreciation and amortization (749,119) (585,590)
---------- ----------
20,679,462 16,818,690
Other property and
equipment, net 615,508 593,106
Debt issue costs 400,874 401,803
---------- ----------
Total assets $ 26,972,567 $ 21,922,863
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and
accrued expenses $ 3,032,532 $ 2,859,775
Current portion of
long-term debt 325,000 48,021
Property reclamation costs,
short-term 230,000 200,000
---------- ---------
Total current
liabilities 3,587,532 3,107,796
---------- ---------
Long-term debt 9,154,864 4,436,225
Property reclamation costs,
long-term 390,250 399,433
Stockholders' equity:
Preferred Class A stock, par
value $.001; 20,000,000 shares
2<PAGE>
authorized, 106,850 shares of
Series A issued and outstanding;
liquidation preference of $5,342,500 107 107
Additional paid-in capital -
preferred 4,100,261 4,100,261
Common stock, par value $.001;
100,000,000 shares authorized;
issued and outstanding 40,927,999 40,928 40,928
Additional paid-in capital -
common 19,146,284 19,146,284
Accumulated deficit (9,447,659) (9,308,171)
----------- ----------
Total stockholders
equity 13,839,921 13,979,409
----------- ----------
Total liabilities
and stockholders
equity $ 26,972,567 $ 21,922,863
============ ===========
</TABLE>
The accompanying notes are an integral
part of the financial statements
3<PAGE>
<TABLE>
PART 1. FINANCIAL INFORMATION (Continued)
INLAND RESOURCES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three-month periods ended March 31, 1996 and 1995
(Unaudited)
<CAPTION>
<S> <C> <C>
1996 1995
----------- ----------
Sales of oil and gas $ 691,982 $ 552,956
----------- ----------
Operating expenses:
Lease operating expenses 164,336 387,366
Production taxes 31,217 51,104
Exploration 9,781 11,927
Depletion, depreciation
and amortization 195,029 253,665
General and administrative, net 276,744 306,431
----------- ----------
Total operating
expenses 677,107 1,010,493
----------- ----------
Operating income (loss) 14,875 (457,537)
Interest expense (186,934) (175,906)
Other income, net 32,571 24,655
----------- ----------
Net loss $ (139,488) $ (608,788)
=========== ==========
Net loss per share $ (.00) $ (.02)
=========== ==========
Weighted average common
shares outstanding 40,927,999 28,927,999
=========== ==========
Dividends per share NONE NONE
=========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements
4<PAGE>
<TABLE>
PART 1. FINANCIAL INFORMATION (Continued)
INLAND RESOURCES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three-month periods ended March 31, 1996 and 1995
(Unaudited)
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (139,488) $ (608,788)
Adjustments to reconcile net
loss to net cash
used by operating activities:
Net cash provided (used) by
discontinued operations 20,817 (58,634)
Depletion, depreciation
and amortization 195,029 253,665
Effect of changes in
current assets and
liabilities:
Accounts receivable (389,065) 580,239
Inventory (152,976) (143,457)
Other assets (200,522) (214,036)
Accounts payable and
accrued expenses 172,757 (592,791)
----------- ----------
Net cash used by operating
activities (493,448) (783,802)
----------- ----------
Cash flows from investing activities:
Development expenditures and
equipment purchases (4,078,203) (1,021,817)
Change in restricted cash (181,978)
----------- ----------
Net cash used by investing
activities (4,078,203) (1,203,795)
----------- ----------
Cash flows from financing activities:
Proceeds from long-term debt 5,000,000 1,000,000
Payments of long-term debt (4,382) (40,003)
----------- ----------
Net cash provided by financing
activities 4,995,618 959,997
----------- ----------
Net increase (decrease) in cash
and cash equivalents 423,967 (1,027,600)
Cash and cash equivalents at
beginning of period 2,970,305 1,691,156
----------- ----------
Cash and cash equivalents at
end of period $ 3,394,272 $ 663,556
=========== =========
5<PAGE>
Noncash financing activity:
Issuance of note payable for
consulting services $ 87,500
=========
The accompanying notes are an integral
part of the financial statements
</TABLE>
6<PAGE>
PART 1. FINANCIAL INFORMATION (Continued)
INLAND RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
______
1. COMPANY ORGANIZATION:
Inland Resources Inc. (the "Company") was incorporated on August 12,
1985 in the State of Washington for the purpose of acquiring, exploring
and developing interests in mining properties. In 1987 the Company
developed a leased property (the "Toiyabe Mine") and began production of
gold and silver. Operations at the Toiyabe Mine have included open-pit
mining, crushing, agglomerations, heap leaching and gold and silver
recovery processes. Currently, the Company's mining operations are
limited to the final detoxification, reclamation and closure of the
Toiyabe Mine in compliance with Nevada and federal laws.
Effective March 1, 1993, the Company acquired an undivided 50% interest
in certain oil and gas leases and other assets located in the Uinta
Basin in Duchesne County, Utah (the "Duchesne County Fields").
Accordingly, the Company's business emphasis changed from precious
metals mining to oil and gas development and production.
Effective September 21, 1994, the Company acquired all the outstanding
common and preferred stock of Lomax Exploration Company, now known as
Inland Production Company ("IPC"). IPC is also engaged primarily in oil
and gas development and production activities in the Uinta Basin area of
Northeastern Utah, in the oil and gas field known as the Monument Butte
Field. IPC operates as a wholly-owned subsidiary of the Company.
Effective July 1, 1995, the Company sold its undivided interest in the
Duchesne County Fields. As a result, the Company is now focused on the
development of the Monument Butte Field where the Company controls
operations for the majority of its holdings and has a significant
infrastructure in place to conduct secondary recovery water flood
operations.
2. BASIS OF PRESENTATION:
The preceding financial information has been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC") and, in the opinion of the Company, includes all
normal and recurring adjustments necessary for a fair statement of the
results of each period shown. Certain information and footnote
disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to SEC rules and regulations. Management
believes the disclosures made are adequate to ensure that the financial
information is not misleading, and suggests that these financial
statements be read in conjunction with the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1995.
3. RECLASSIFICATIONS:
Certain amounts for 1995 have been reclassified to conform with the 1996
financial statement presentation. The reclassifications had no impact on
net loss or the accumulated deficit.
7<PAGE>
4. PROPOSED REVERSE STOCK SPLIT:
On March 22, 1996, the Company's Board of Directors approved for
shareholder vote a 1-for-10 reverse stock split of the Company's common
stock. The effect of the proposed stock split would be to reduce
authorized common shares from 100,000,000 to 10,000,000 shares and
reduce outstanding common shares from 40,927,999 to 4,092,800 shares.
The Board further approved an increase in the number of post-split
authorized shares from 10,000,000 to 25,000,000 shares. Consummation of
the reverse stock split and increase in post-split authorized common
shares remains subject to adoption by the stockholders of the Company at
the annual meeting of stockholders to be held on May 22, 1996.
ITEM 2. Management s Discussion and Analysis or Plan of Operation:
GENERAL:
Effective March 1, 1993, the Company acquired an undivided 50% interest in the
Duchesne County Fields, which changed the Company's business emphasis from
precious metals mining to oil and gas development and production. Effective
September 21, 1994, the Company further increased its oil and gas holdings by
acquiring all the outstanding common and preferred stock of IPC, a company
with significant oil and gas development and production activities in the
Monument Butte Field of Northeastern Utah. Effective July 1, 1995, the Company
sold its undivided interest in the Duchesne County Fields. As a result, the
Company is now focused on the development of the Monument Butte Field where
the Company controls operations for the majority of its holdings and has a
significant infrastructure in place to conduct secondary recovery water flood
operations.
The Company's strategy for achieving profitability is to increase oil and gas
reserves and production through acquisition of existing oil and gas production
in developed fields, and further developing such existing production through
development drilling, reworking existing wells and engaging in secondary
recovery enhancement operations. Increased production levels will allow for
more efficient operations at the field level which in turn will have a
positive impact on the Company's equivalent per barrel lifting costs. In
addition, general and administrative costs will decrease in relation to
production since these costs are generally fixed in nature and thereby do not
increase proportionate to production. The Company also has protected the price
it receives for a portion of its oil production by entering into hedging
arrangements. The ultimate success of the Company's plan to achieve
profitability is primarily dependent on locating and purchasing properties on
terms acceptable to the Company, continuing to secure sufficient capital to
acquire target properties and conduct extensive development and secondary
recovery operations, then successfully implementing development and secondary
recovery plans.
8<PAGE>
The Company does not generally intend to pursue exploratory drilling in
undeveloped oil and gas properties due to the industry's relatively high
historical failure rate relating to exploratory drilling and the resulting
higher associated finding costs. However, from time to time the Company may
for various reasons determine to drill exploratory wells in certain areas
considered strategic by the Company.
RESULTS OF OPERATIONS:
Three Months Ended March 31, 1996 and 1995:
Continuing Operations. The Company sold the Duchesne County Fields effective
July 1, 1995. Accordingly, the results of operations for the first quarter of
1996 does not include any activity from the Duchesne County Fields while the
results of operations for the first quarter of 1995 includes three full months
of activity from the Duchesne County Fields.
Oil and gas sales - Oil and gas sales during the first quarter of 1996
exceeded the previous year first quarter by $139,000, or 25%. The increase was
attributable to increased oil sales volumes in the Monument Butte Field and
increased average oil sales prices as summarized below:
<TABLE>
<S> <C> <C>
Oil sales in Bbls,
gas sales in Mcf) 1996 1995
--------------------- ------- -------
Oil sales - Monument
Butte Field 40,516 16,915
Oil sales - Duchesne
County Fields - 11,901
------ -------
Total oil sales 40,516 28,816
------ -------
Average oil price per
barrel sold $18.37 $ 17.09
Gas sales - Monument
Butte Field 10,745 5,457
Gas sales - Duchesne
County Fields - 34,814
------ -------
Total gas sales 10,745 40,271
------ -------
Average gas price per
Mcf sold $ 0.95 $ 1.50
</TABLE>
9<PAGE>
The increased oil and gas sales volumes in the Monument Butte Field are
attributable to the thirteen new wells that IPC drilled and put on production
during the first quarter of 1996. Oil sales as a percentage of total oil and
gas sales increased from 89% during the first quarter of 1995 to 98% in 1996.
Crude oil is expected to continue as the predominant product produced from the
Monument Butte Field.
As further discussed in "Liquidity and Capital Resources" below, the Company
has entered into price protection agreements to hedge against the 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. The effects of these contracts resulted in a
loss of $62,500 during the first quarter of 1996.
Lease operating expenses - Lease operating expense decreased $223,000,
or 58%, between periods. Lease operating expense per barrel of oil equivalent
("BOE") sold decreased from $10.90 during the first quarter of 1995 to $3.02
during the first quarter of 1996. As shown below, this reduction is
attributable to the sale of the Duchesne County Fields and a reduction of
lease operating expenses within the Monument Butte Field. The reduction of
lease operating expenses within the Monument Butte Field is the result of an
effort to eliminate unnecessary labor and material charges in conjunction with
increased production levels which allowed for more efficient operating
procedures and wider allocation of fixed operating costs.
<TABLE>
<S> <C> <C>
1996 1995
Monument Butte Field --------- --------
Lease operating expense $ 164,336 $ 176,536
Lease operating expense per
BOE sold $ 3.02 $ 9.90
Duchesne County Fields
Lease operating expense $ 210,830
Lease operating expense per
BOE sold $ 11.91
</TABLE>
The Company's policy is to expense the costs of water injection operations
during the start-up phase of secondary recovery water flood operations. These
expenses include the costs of purchasing water and operating water source
wells, water injection wells and water injection stations. As a result of this
policy, the Company's per barrel lifting costs will be higher than if the
Company would capitalize and deplete these costs as part of secondary recovery
enhancement projects.
Lease operating expense in the Monument Butte Field benefits from certain of
the Company's gas transportation contracts. Under the terms of the applicable
contracts, the Company is allowed to use natural gas produced from the
Monument Butte, Gilsonite and Boundary Units to power field operations
throughout the Monument Butte Field. As a result of this provision, the
Company does not recognize lease operating expense for natural gas used as
lease fuel since their is no charge to the Company for such usage and, if
sold, the related gas proceeds would not inure to the benefit of the Company.
The Company estimates the amount of natural gas used as lease fuel, net to the
10<PAGE>
Company's interest, was 25,000 Mcf and 13,500 Mcf during the first quarters of
1996 and 1995, respectively. The Company does not intend to renew these
contracts when they expire on October 31, 1997. After expiration of the
contracts, natural gas production from these areas will be the property of the
Company causing natural gas used as lease fuel to have a direct impact on the
Company's natural gas sales.
Production taxes - Production taxes as a percentage of sales decreased
from 9.2% during the first quarter of 1995 to 4.1% during 1996. The decrease
was caused by the sale of the Duchesne County Fields where the effective
production tax rate was 12.6%. The higher tax rate for the Duchesne County
Fields is due to their location on the Reservation of the Ute Indian Tribe
where an additional Ute Indian severance tax is imposed. In addition, new
wells drilled by the Company in Utah are allowed a six month exemption from
state severance taxes.
Exploration and impairment - Exploration and impairment expense
represents the Company's share of costs to retain unproved acreage.
Depletion, depreciation and amortization - The decrease in depletion,
depreciation and amortization resulted from a decreased average depletion rate
offset by increased sales volumes. Depletion, which is based on the
units-of-production method, comprises the majority of the total charge. The
depletion rate is a function of capitalized costs and related underlying
reserves in the periods presented. The Company's average depletion rate was
$3.89 per BOE sold during the first quarter of 1996 compared to $6.25 per BOE
sold during the first quarter of 1995. The decreased rate was due to the sale
of the Duchesne County Fields and the positive impact that the Company's
recent drilling activities combined with lower lease operating expenses had on
total proved reserves of the Company.
General and administrative, net - General and administrative expense
decreased $30,000 or 10% on a net basis between quarters. General and
administrative expense is reported net of operator fees and reimbursements
which were $396,000 and $225,000 during the first quarter of 1996 and 1995,
respectively. The increase in reimbursements is primarily a function of the
level of operated drilling activity. During the first three months of 1996,
the Company operated the drilling of 16 wells while in the same period of 1995
the Company operated the drilling of only three wells. Gross general and
administrative expense increased from $531,000 in 1995 to $673,000 in 1996.
The increase is related to increased salaries, payroll taxes and employee
benefits as the Company's employee base grew from twenty-two employees at
January 1, 1995 to thirty-five employees at March 31, 1996. The increase in
employees was required to control the increased level of operated drilling
activity during the last half of 1995 and into 1996. The remaining increase is
associated with the cost of operating with a larger employee base.
11<PAGE>
Interest expense - Borrowings during the first quarter of 1996 averaged
approximately $6.8 million at an average effective interest rate of 11.0%.
Borrowings during the first quarter of 1995 averaged approximately $4.5
million at an average effective interest rate of 15.5%. The change in the
effective interest rate resulted from the debt refinancing performed on
November 29, 1995 as further explained in "Liquidity and Capital Resources",
below.
Other income - Other income in the first quarter of 1996 and 1995
primarily represents interest earned on the investment of surplus cash
balances.
Income taxes - No income tax provision or benefit has been recognized
due to past net operating losses incurred and the recording of a full
valuation allowance.
Discontinued Operations. The Company classifies all mining operations as
discontinued operations. The only mining operation remaining is ongoing
reclamation activities at the Toiyabe Mine located near Crescent Valley,
Nevada. Since July 1992, reclamation activities have focused on rinsing the
leach pads with fresh water and recycled leaching solution. The goal of the
rinsing activity is to reduce concentrations of certain constituents to state
drinking water standards and to achieve "stabilization" of certain other
elements, such that their concentration would not be lowered with further
rinsing. Based upon ongoing testing results, the Company believes it has
achieved its rinsing goals. As a result, 1996 operations will focus on
evaporation of all solutions remaining in the contained circulation system,
the submission of a Final Closure Report to the Nevada Department of
Environmental Protection (the "NDEP") and certain other reclamation tasks.
Assuming that the NDEP agrees Toiyabe's leach pads are stabilized and that
the Company's method to treat future stormwater infiltration into the
leach pads is sufficient, among other items, the Company could be in a
post-closure monitoring mode at the Toiyabe Mine by October 1997. Based on
the foregoing assumptions, the Company has established a reserve for
reclamation activities $620,000 at March 31, 1996. Although the ultimate
future reclamation cost is dependent upon certain events which cannot be
precisely predicted, the Company believes that based on factors presently
known or anticipated the current reserve will be adequate to fully
reclaim the Toiyabe Mine in compliance with Nevada and federal laws.
However, should unforeseen circumstances arise that that cause the closure
timetable to be delayed or additional labor, material and holding costs to be
incurred, future reclamation exposure could exceed $620,000.
12<PAGE>
LIQUIDITY AND CAPITAL RESOURCES:
TCW Loan Agreement - On November 29, 1995, the Company entered into a
Credit Agreement (the "TCW Loan Agreement") with Trust Company of the West and
affiliated entities (collectively "TCW"), which provides a recourse loan
facility to the Company of up to $25.0 million for the development of the
Monument Butte Field. The TCW Loan Agreement bears interest at 10% per annum
payable quarterly. Commencing in March 1997, minimum payments of principal are
required in the following amounts per quarter: $275,000 in 1997, $550,000 in
1998, $1,300,000 in 1999, $1,400,000 in 2000, $1,200,000 in 2001, $750,000 in
2002, $425,000 in 2003, and $350,000 in 2004. Additional principal payments
may be due in certain circumstances out of excess cash flow, as defined in the
TCW Loan Agreement. The Company also granted TCW an initial 7% overriding
royalty interest, proportionately reduced by the Company's working interest in
the oil and gas properties, which continues until TCW earns a 16% rate of
return at which time it reduces to 3%, proportionately reduced by the
Company's interest in the oil and gas properties, until TCW earns a 22% rate
of return. The TCW Loan Agreement also subjects the Company to penalties on
the overriding royalty interests to achieve a 16% and 22% rate of return if
the loan is prepaid prior to November 29, 1997. The Company is required to
meet certain minimum ratios, is subject to covenants not to engage in various
activities without TCW s prior consent, and may not pay any dividends or make
any other distributions without TCW s prior written consent. The agreement
also contains a provision that if any material adverse change occurs in the
Company's financial condition that is not remedied within 60 days, TCW has the
right to declare the Company in default. The TCW Loan Agreement is
collateralized by the Company's interest in substantially all of its oil and
gas and other properties.
During the first quarter of 1996, the Company drew down an additional $5.0
million under the TCW Loan Agreement increasing total advanced funds to $10.0
million at March 31, 1996. The additional $5.0 million was used to drill and
complete 13 gross (11.2 net) development wells within the Monument Butte Field
and further expand the water delivery and gas gathering infrastructure. The
Company intends on drilling an additional 72 gross (54 net) wells in 1996 with
the remaining availability under the TCW Loan Agreement and cash generated
from operations. Approximately 10 of the newly drilled wells are expected to
be converted to water injection during 1996 depending on connectivity with
surrounding wells, sand porosity, sand permeability and overall injection
patterns. Development will also include the conversion of existing producing
wells to water injection wells, the drilling of water source wells, the
expansion of the water delivery infrastructure and the expansion of the gas
gathering infrastructure, among other things. Based on results to date, the
Company believes it will be able to meet the terms of the TCW Loan Agreement
and advance the entire $15.0 million of remaining availability by September
30, 1996. Should the Company experience unfavorable drilling results, it is
possible the Company may not be able to draw down the entire $15 million.
Although less borrowings could potentially slow the development of the
Company's properties in the Monument Butte Field and associated cash flow, the
Company believes it will be able to meet all of its financial obligations
during the next year. Through May 10, 1996, the Company had borrowed $12.5
million under the TCW Loan Agreement.
13<PAGE>
Working capital and cash holdings - The Company increased its cash
position by $424,000 and its working capital position by $688,000 during the
first quarter of 1996. The Company's working capital and cash positions are
primarily dependent on the timing of advances under the TCW Loan Agreement and
payment of drilling obligations. The Company generated $210,000 of cash flow
from operations in the first quarter of 1996, a substantial increase from the
$204,000 of cash used by operations during the first quarter of 1995. The
Company is required to cover reclamation costs of the Toiyabe Mine, net
general and administrative expenses, lease operating expenses, production
taxes, undeveloped acreage holding costs and discretionary capital
expenditures out of cash generated from operations and its current cash
holdings. The Company believes that cash sources and holdings will be
sufficient to cover such costs and meet its working capital needs throughout
the next year.
Option to purchase Farmout interest - During the last six months of
1995, the Company drilled twenty-one wells totaling $6.8 million under a
Farmout Agreement (the "Farmout") with a significant stockholder ("Farmee").
On November 22, 1995, the Company entered into an Option Agreement with the
Farmee which allows the Company the right to purchase the Farmout interests on
March 10, 1997 by issuing Common Stock of the Company. The value of the
Farmout interests on March 10, 1997 (the "Farmout Value") is computed using
the Payout calculation as defined in the Farmout. The number of shares of the
Company's Common Stock to be issued is calculated by dividing the Farmout
Value by a value of $0.50 per Common Share ($5.00 per Common Share assuming
the reverse stock split is consummated). In addition, the Company issued the
Farmee a Warrant Certificate whereby if the Company does not exercise its
rights under the Option Agreement on March 10, 1997, the Farmee has three days
to purchase for cash the number of shares of the Company's Common Stock equal
to the Farmout Value divided by a value of $0.50 per Common Share ($5.00 per
Common Share assuming the reverse stock split is consummated). The Company
expects to exercise the Option Agreement since it is a requirement under the
TCW Loan Agreement. Subject to changes in oil prices, operating costs,
production rates and other factors, the Company estimates the Farmout Value on
March 10, 1997 to be between $4.25 to $4.75 million, which would cause the
issuance of 8.5 million to 9.5 million new shares of the Company's Common
Stock.
14<PAGE>
Hedging Activity - The Company has entered into price protection
agreements to hedge against the volatility in crude oil prices and to help
insure the repayment of indebtedness. The Company has a hedge in place with
Enron Capital and Trade Resources Corp. (an affiliate of Enron Corp.) (the
"Enron Hedge") to hedge crude oil production over a five year period beginning
January 1, 1996 in monthly amounts escalating from 8,500 Bbls in January 1996
to 14,000 Bbls in December 2000. The hedge is structured as a cost free collar
whereby if the average monthly price (based on NYMEX Light Sweet Crude Oil
Futures Contracts) (the "Average Price") is between $18.00 and $20.55 per
barrel, no payment is due under the contract. If the Average Price is less
than $18.00, the Company is paid the difference between $18.00 and the Average
Price, multiplied by the barrels of crude oil hedged that month. Similarly,
should the Average Price exceed $20.55 per barrel, the Company is required to
pay the difference between $20.55 and the Average Price, multiplied by the
barrels of crude oil hedged that month. The Company entered into a similarly
structured contract with Koch Gas Services Company ("Koch") on November 20,
1995. This contract hedges 12,000 Bbls of crude oil per month throughout 1996.
This hedge is also structured as cost free collar with a floor price of $16.00
and a ceiling of $18.20. Since hedged quantities are based on expected future
development in the Monument Butte Field and because hedging activities do not
affect the actual sales price for the Company's crude oil, there exists risk
to the Company's financial position and results of operations should the
Average Price rise significantly above the ceiling prices of $18.20 and
$20.55, respectively, and development activities not produce the expected
results or progress on a slower than expected timetable. The Company is aware
of and continually evaluates this financial risk and has the ability to enter
into commodity contracts to mitigate potential financial loss should risk
factors begin to materialize. In this regard, on April 3, 1996, due to the
sharp increase in crude oil prices, the Company purchased a call option for
$86,400 that directly offsets the exposure created by the $18.20 ceiling on
the Koch hedge for the period July 1, 1996 through December 31, 1996.
In order to further protect the price the Company receives for crude oil
production, on January 18, 1996 the Company entered into three additional
contracts with Enron Capital and Trade Resources Corp. The effect of two of
the contracts was to lower the floor under the Enron Hedge from $18.00 to
$16.50 during the eleven month period from February 1996 to December 31, 1996.
The Company received $52,400 as a result of this restructuring. Under the
final contract, the Company purchased for $149,000 an additional 257,000 put
options with a strike price of $16.50 covering the period February 1996
through December 1996 in monthly amounts escalating from 10,000 barrels to
35,000 during the contract period. The net cost of these three additional
contracts and the net gain or net loss on all hedging transactions will be
included as an adjustment to crude oil revenue in the period the related oil
is sold.
15<PAGE>
Acquisition financing - The Company continues to aggressively seek other
opportunities to acquire existing oil and gas production in developed fields.
The Company will attempt to finance such acquisitions through (i) seller
financing, whenever possible; (ii) joint operating agreements with industry
partners where the Company may sell part of its position to provide
acquisition and development funds; (iii) sales of equity or debt of the
Company; or (iv) traditional bank lines of credit, although the Company
currently has no existing bank lines of credit or arrangements with any bank
to loan funds.
Environmental discussion - The Company is subject to numerous federal
and state laws and regulations relating to environmental matters. Increasing
focus on environmental issues nationally has lead the Company to continue to
evaluate its responsibilities to the environment. The Company believes it is
in compliance in all material respects with applicable federal, state and
local environmental regulations. There are no environmental proceedings
pending against the Company. At March 31, 1996, the Company had recognized a
liability of $620,000 to cover the future costs of reclaiming the Toiyabe
Mine.
PART II. OTHER INFORMATION
Items 1, 2, 3, 4 and 5 are omitted from this report as inapplicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following documents are filed as part of this Quarterly Report
on Form 10-QSB:
Exhibit
Number Description of Exhibits
3.1 Articles of Incorporation, as amended through May 5, 1993 (filed as
Exhibit 3.1 to the Company's Registration Statement on Form S-18,
Registration No. 33-11870-F, and incorporated herein by reference).
3.1.1 Articles of Amendment to Articles of Incorporation dated May 6, 1993
(filed as Exhibit 3.1.1 to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1993, and
incorporated herein by reference).
16<PAGE>
3.1.2 Articles of Amendment to Articles of Incorporation dated August 16,
1994 designating a series of stock (filed as Exhibit 3.1.2 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1994, and incorporated herein by reference).
3.1.3 Articles of Amendment to Articles of Incorporation filed with
Secretary of State of Washington on August 30, 1994 (filed as
Exhibit 3.1.3 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1994, and incorporated herein by
reference).
3.1.4 Articles of Correction to Articles of Amendment dated August 31,
1994 (filed as Exhibit 3.1.4 to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1994, and incorporated
herein by reference).
3.2 Bylaws of the Company (filed as Exhibit 3.2 to the Company's
Registration Statement of Form S-18, Registration No. 33-11870-F,
and incorporated herein by reference).
3.2.1 Amendment to Article IV, Section 1 of the Bylaws of the Company
adopted February 23, 1993 (filed as Exhibit 3.2.1 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1992, and incorporated herein by reference).
3.2.2 Amendment to the Bylaws of the Company adopted April 8, 1994 (filed
as Exhibit 3.2.2 to the Company's Registration Statement of Form
S-4, Registration No. 33-80392, and incorporated herein by
reference).
3.2.3 Amendment to the Bylaws of the Company adopted April 27, 1994 (filed
as Exhibit 3.2.3 to the Company's Registration Statement of Form
S-4, Registration No. 33-80392, and incorporated herein by
reference).
10.1 Crude Oil Call Option between IPC and Enron Capital & Trade
Resources dated April 3, 1996 (without exhibits).*
27.1 Financial Data Schedule required by Item 601 of Regulation S-B.*
___________________
* Filed herewith.
(a) No Current Report on Form 8-K was filed during the quarter
ended March 31, 1996.
17<PAGE>
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: May 14, 1996 By: /s/ Kyle R. Miller
Kyle R. Miller
Chief Executive
Officer
Date: May 14, 1996 By: /s/Michael J. Stevens
Michael J. Stevens
Controller (Principal
Financial and
Accounting Officer)
18<PAGE>
ENRON Capital & Trade Resources
CONFIRMATION OF AN OPTION
(CALL)
Date: April 03, 1996
To: Inland Resources Inc. ("Counterparty")
Attention: Bill Pennington
From: Enron Capital & Trade Resources Corp.
("ECT")
Re: Commodity Option
Contract No.: ECT Contract No. e31409.1
The purpose of this letter agreement (together with the
General Terms and Conditions of Confirmation as set forth in
Annex A and any other attachments hereto, collectively the
(Confirmation") is to confirm the terms and conditions of the
transaction entered into between us on the Trade Date specified
below (the "Transaction") pursuant to a telephone conversation
between Bill Pennington and Fred Lagrasta whereby we accepted
your offer to enter into the Transaction. The terms of the
particular Transaction to which this Confirmation relates are as
follows:
General Terms for Call:
Trade Date: April 03, 1996
Commodity: Crude Oil
Commodity Unit: Barrels (BBL) (42 U.S. Gallons)
Option Type: Call Option
Seller: ECT
Buyer: Counterparty
Total Premium: U.S. Dollars $86,400.00 due ECT
Premium Payment Date(s): April 5, 1996
Automatic Exercise: Applicable
Exercise Period: Inapplicable
1<PAGE>
Written Confirmation: Inapplicable
Transaction Terms:
Notional Quantity Per
Determination Period: 12,000 Barrels per month
Effective Date: July 01, 1996
Termination Date: December 31, 1996
Determination Period(s): Each calendar month beginning with
July 01, 1996 and ending on
December 31, 1996. The end date
for each Determination Period
shall be the last day of each such
calendar month.
Strike Price: US Dollars $18.20000 per Barrel
Floating Price: The average of the daily settlement
prices for the prompt month of the
YMEX Light Sweet Crude Oil Futures
Contract for each NYMEX Trading Day
of the Determination Period.
Strike Price
Differential: A price per Commodity Unit equal to
the excess (if a positive number)
of (i)the Floating Price over (ii)
the Strike Price.
Cash Settlement Amount: For each relevant Determination
Period, an amount (if any) equal to
the product of (i) the Notional
Quantity per Determination Period
multiplied by (ii)the Strike Price
Differential, which amount shall be
due and payable on the application
Payment Date for such Determination
Period (if for any Determination
Period the Floating Price is equal
to or less than the Strike Price,
then no payment shall be due with
respect to such determination
Period.)
Payment Date(s): The fifth Business Day after the
Floating Price is determinable.
Contractual Currency: US Dollars
Governing Law: Texas
2<PAGE>
General Terms and Conditions
of Confirmations: The general terms and conditions
contained in Annex A attached
hereto and made a part here of
apply and are incorporated herein
by reference.
Credit or Other Special Provisions: Inapplicable.
For the purposes of the calculations of the Floating Price
(s), all numbers shall be rounded as follows: Floating Price (s)
relating to commodities quoted in (i) gallons shall be rounded to
five places, (ii) MMBtu s shall be rounded to four places and
(iii) barrels shall be rounded to three places. If the number
after the final number is five (5) or greater then the final
number shall be increased by one (1), and if the number after the
final number is less than five (5) then the final number shall
remain unchanged.
This confirmation is a complete and binding agreement
between you and us as to the Transaction. Until a master
Agreement is executed by you and us, all currently existing swap,
option or other financially settled derivative transactions
between the parties shall be governed by the terms and conditions
set forth in any Annex attached hereto. All such swap, option or
other financially-settled derivative transactions, shall
constitute single integrated agreement between you and us, it
being acknowledged that the parties are relying upon the fact
that all such swap, option or other financially-settled
derivative transactions will form a single agreement and the
parties would not otherwise enter into any transactions. The
terms and conditions contained in any Annex attached hereto are
incorporated into this Confirmation, and in the event of any
inconsistency between any Annex and this letter agreement, this
letter agreement shall govern. Upon execution by you and us of a
Master Agreement, this confirmation will supplement, form a part
of, and be subject to the Master Agreement. In the event of any
inconsistency between the Confirmation and the Master Agreement,
the Master Agreement shall govern except as expressly set forth
there in.
If this confirmation correctly sets forth the terms of the
Transaction that we have entered into, please promptly confirm in
a reply to us by signing below and sending this Confirmation (or
a copy hereof) to us (or notifying us of any bona fide error that
would require revision in order to accurately reflect our
agreement on the Transaction) by facsimile transmission within
two Business Days after your receipt of this confirmation. If
you fail to so reply within such time period, the terms hereof
will constitute binding and conclusive evidence of the
Transaction. We look forward to receiving your prompt reply.
3<PAGE>
Sincerely,
Enron Capital & Trade Resources Corp. Inland Resources Inc.
By: ______________________ By: ______________________
Name: ____________________ Name: ____________________
Title: ___________________ Title: _____________________
Date: ____________________ Date: _____________________
COUNTERPARTY: AFTER YOU HAVE CONFIRMED TRANSACTION, PLEASE
RETURN TO ECT, ATTENTION: DIRECTOR OF DOCUMENTATION AT FAX NO.
(713) 646-4816
4<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet at March 31, 1996 and the consolidated statements of
operations and cash flows for the quarter ended March 31, 1996, and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1996
<CASH> 3,394,272
<SECURITIES> 0
<RECEIVABLES> 1,091,021
<ALLOWANCES> 0
<INVENTORY> 570,641
<CURRENT-ASSETS> 5,276,723
<PP&E> 22,239,977
<DEPRECIATION> (945,007)
<TOTAL-ASSETS> 26,972,567
<CURRENT-LIABILITIES> 3,587,532
<BONDS> 9,154,864
0
4,100,368
<COMMON> 19,187,212
<OTHER-SE> (9,447,659)
<TOTAL-LIABILITY-AND-EQUITY> 26,972,567
<SALES> 691,982
<TOTAL-REVENUES> 691,982
<CGS> 195,553
<TOTAL-COSTS> 677,107
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 186,934
<INCOME-PRETAX> (139,488)
<INCOME-TAX> (139,488)
<INCOME-CONTINUING> (139,488)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (139,488)
<EPS-PRIMARY> $ (.00)
<EPS-DILUTED> 0
</TABLE>
