<PAGE>
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, 1997
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 April 25, 1997: 6,312,059
Transitional Small Business Disclosure Format:
Yes No xx
----- -----
<PAGE>
PART 1. FINANCIAL INFORMATION
INLAND RESOURCES INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND DECEMBER 31, 1996
<TABLE>
March 31, December 31,
1997 1996
------------ ------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,757,825 $ 10,030,982
Accounts receivable and accrued sales 1,949,476 2,077,661
Inventory 1,579,745 862,229
Other current assets 301,378 242,022
------------ ------------
Total current assets 12,588,424 13,212,894
------------ ------------
Property and equipment, at cost:
Oil and gas properties (successful efforts method) 51,418,276 46,832,811
Accumulated depletion, depreciation and amortization (4,974,559) (3,834,517)
------------ ------------
46,443,717 42,998,294
Other property and equipment, net 928,357 779,161
Debt issue costs, net 314,562 338,262
------------ ------------
Total assets $ 60,275,060 $ 57,328,611
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 3,275,542 $ 4,236,734
Current portion of long-term debt 1,425,000 1,148,000
------------ ------------
Total current liabilities 4,700,542 5,384,734
------------ ------------
Long-term debt 22,971,197 19,972,014
Stockholders' equity:
Preferred Class A stock, par value $.001, 20,000,000 shares
authorized; 1,000,000 shares of Series B issued and
outstanding, liquidation preference of $12,400,000 1,000 1,000
Additional paid-in capital - preferred 9,999,000 9,999,000
Common stock, par value $.001; 25,000,000 shares
authorized; issued and outstanding 6,312,059 6,312 6,312
Additional paid-in capital - common 28,649,185 29,129,185
Accrued preferred Series B dividends 1,150,000 670,000
Accumulated deficit (7,202,176) (7,833,634)
------------ ------------
Total stockholders' equity 32,603,321 31,971,863
------------ ------------
Total liabilities and stockholders' equity $ 60,275,060 $ 57,328,611
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
1
<PAGE>
INLAND RESOURCES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1997 AND 1996
(Unaudited)
Three months ended
March 31,
--------------------------
1997 1996
------------ -----------
Revenues:
Sales of oil and gas $ 3,602,296 $ 691,982
Operating expenses:
Lease operating expenses 600,821 164,336
Production taxes 223,673 31,217
Exploration 9,658 9,781
Depletion, depreciation and amortization 1,194,042 195,029
General and administrative, net 460,326 276,744
----------- ----------
Total operating expenses 2,488,520 677,107
----------- ----------
Operating income 1,113,776 14,875
Interest expense (640,021) (186,934)
Other income, net 157,703 32,571
----------- ----------
Net income (loss) $ 631,458 $ (139,488)
----------- ----------
----------- ----------
Net income (loss) per share - Primary $ .09 $ (.03)
----------- ----------
----------- ----------
Weighted average common and common
equivalent shares outstanding - Primary 6,707,633 4,092,800
----------- ----------
----------- ----------
Net income (loss) per share - Fully diluted $ .08 $ (.03)
----------- ----------
----------- ----------
Weighted average common and common
equivalent shares outstanding - Fully diluted 8,302,529 4,092,800
----------- ----------
----------- ----------
Dividends per common share NONE NONE
----------- ----------
----------- ----------
The accompanying notes are an integral part of the consolidated
financial statements
2
<PAGE>
INLAND RESOURCES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1997 AND 1996
(Unaudited)
<TABLE>
1997 1996
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 631,458 $ (139,488)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Net cash provided by discontinued operations 20,817
Depletion, depreciation and amortization 1,194,042 195,029
Amortization of debt issue costs and debt discount 70,200
Effect of changes in current assets and liabilities:
Accounts receivable and accrued sales 128,185 (389,065)
Inventory (717,516) (152,976)
Other current assets (59,356) (200,522)
Accounts payable and accrued expenses (961,192) 172,757
------------- ------------
Net cash provided (used) by operating activities 285,821 (493,448)
------------- ------------
Cash flows from investing activities:
Development expenditures and equipment purchases (4,788,661) (4,078,203)
------------- ------------
Net cash used by investing activities (4,788,661) (4,078,203)
------------- ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 3,500,000 5,000,000
Payments of long-term debt (270,317) (4,382)
------------- ------------
Net cash provided by financing activities 3,229,683 4,995,618
------------- ------------
Net increase (decrease) in cash and cash equivalents (1,273,157) 423,967
Cash and cash equivalents at beginning of period 10,030,982 2,970,305
------------- ------------
Cash and cash equivalents at end of period $ 8,757,825 $ 3,394,272
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
3
<PAGE>
PART 1. FINANCIAL INFORMATION (CONTINUED)
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 property interests located in the Monument Butte
Field within the Uinta Basin of Northeastern Utah.
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, 1996.
3. REVERSE STOCK SPLIT:
On May 22, 1996, the Company's shareholders approved a 1-for-10 reverse
stock split of the Company's common stock. All earnings per share amounts
and weighted average common and common equivalent shares outstanding as
reported on the Consolidated Statement of Operations for 1996 have been
restated as if the reverse split occurred January 1, 1996.
4. EARNINGS PER SHARE:
The Financial Accounting Standards Board issued Statement No. 128
"Earnings per Share" ("SFAS No. 128") effective for financial reports
issued subsequent to December 15, 1997. SFAS No. 128 replaces the
calculation of Primary EPS with a calculation called Basic EPS and replaces
Fully Diluted EPS with a calculation called Diluted EPS. The following
table shows the impact that adoption of the SFAS No. 128 as of January 1,
1996 would have had on the Company's reported earnings per share:
Three Months Ending March 31,
1997 1996
---- ----
Primary earnings per share (as reported) $ .09 $ (.03)
Basic earnings per share $ .10 $ (.03)
Fully Diluted earnings per share (as reported) $ .08 $ (.03)
Diluted earnings per share $ .08 $ (.03)
4
<PAGE>
PART 1. FINANCIAL INFORMATION (CONTINUED)
INLAND RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION:
RESULTS OF OPERATIONS:
THREE MONTH PERIODS ENDED MARCH 31, 1997 AND 1996:
OIL AND GAS SALES - Oil and gas sales during the first quarter of 1997
exceeded the previous year first quarter by $2.9 million, or 421%. The
increase was attributable to increased oil and gas sales volumes as the
Company drilled and completed 61 wells in the Monument Butte Field during
1996, acquired 20 producing properties on June 12, 1996 through the purchase
of Farmout Inc. and drilled an additional seven wells during the first
quarter of 1997. Higher average oil and gas sales prices also contributed to
the increase.
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
$106,000 and $62,500 during the first quarters of 1997 and 1996,
respectively, to recognize hedging contract settlement losses and contract
purchase cost amortization.
LEASE OPERATING EXPENSES - Lease operating expense increased $436,000 or
266% between periods. Lease operating expense per barrel of oil equivalent
("BOE") sold was $3.02 during the first quarters of 1997 and 1996. The
Company expects to improve upon its 1997 operating expense rate per BOE sold,
as it did in 1996, by increasing the rate of its development program, thereby
increasing sales volumes and allowing for more efficient operations and a
wider allocation of operating costs.
PRODUCTION TAXES - Production taxes as a percentage of sales increased
from 4.1% during the first quarter of 1996 to 6.0% during 1997. Production
tax expense consists of estimates of the companies yearly effective tax rate
for Utah state severance tax and production ad valorem tax. Changes in sales
prices, tax rates, tax exemptions and the timing, location and results of
drilling activities can all affect the Company's actual effective tax rate.
The Company believes it has conservatively recorded production taxes during
the first quarter of 1997.
EXPLORATION - Exploration expense represents the Company's share of
costs to retain unproved acreage.
DEPLETION, DEPRECIATION AND AMORTIZATION - The increase in depletion,
depreciation and amortization resulted from 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 $5.65 per BOE sold during the first quarter of
1997 compared to $3.89 per BOE sold during the first quarter of 1996.
GENERAL AND ADMINISTRATIVE, NET - General and administrative expense
increased $184,000 on a net basis between quarters. General and
administrative expense is reported net of operator fees and reimbursements
which were $575,000 and $396,000 during the first quarters of 1997 and 1996,
respectively. Gross general and administrative expense was $1,035,000 in 1997
and $673,000 in 1996. The increase in expense and reimbursements is primarily
a function of the level of operated field activity. During the first quarter
of 1997, the Company operated 65 more wells than it did at January 1, 1996.
In addition, the Company now maintains and continues to expand its gas
gathering and water delivery infrastructures.
5
<PAGE>
INTEREST EXPENSE - The increase in interest expense resulted from an
increase in the average amount of borrowings outstanding during 1997's first
quarter.
OTHER INCOME - Other income represents interest earned on the investment
of surplus cash balances.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL AND CASH HOLDINGS - During the first quarter of 1997,
the Company borrowed its remaining loan availability of $3.5 million under
the TCW Loan Agreement and generated $1.8 million of cash from operations.
The Company used these cash sources and cash on hand to fund the drilling and
completion of seven wells, reduce payables, pay the Company's first quarter
principal and interest obligation and purchase an inventory of drilling
supplies. The net effect of these activities decreased cash $1.3 million and
maintained the Company's working capital position at $7.9 million.
The Company believes that cash generated from future operations and its
current cash holdings will be sufficient to meet its working capital needs
through 1997 and to fund approximately $23 million of its $28 million 1997
budgeted capital expenditures. The Company anticipates funding the shortfall
through sales of equity or debt of the Company or through traditional
borrowing facilities, but if it is unable to obtain funding from such sources
the Company will be required to modify its 1997 development program.
TCW LOAN AGREEMENT - On November 29, 1995, the Company entered into a
Credit Agreement (as amended June 12, 1996) (the "TCW Loan Agreement") with
Trust Company of the West and affiliated entities (collectively "TCW"), which
provides a recourse loan facility of $25 million for the development of the
Monument Butte Field. The TCW Loan Agreement bears interest at a rate of 10%
per annum payable quarterly. Minimum principal payments are also due
quarterly in the following amounts: $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, with the final payment being due and
payable on December 31, 2004. Additional principal payments may be due under
certain circumstances out of excess cash flow, as defined in the TCW Loan
Agreement. In addition to these payments, the Company granted TCW an equity
yield enhancement in the form of an initial 7% overriding royalty interest,
proportionately reduced by the Company's working interest in the oil and gas
properties, which continues until the internal annual rate of return to TCW
equals 16%, at which time it reduces to 3%, proportionately reduced by IPC's
working interest in the oil and gas properties, until TCW's internal annual
rate of return equals 22%. The TCW Loan Agreement also subjects the Company
to penalties if the loan is prepaid prior to its second anniversary date of
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 to
stockholders without TCW's prior written consent (consent has been given for
the payment of stock dividends on Inland's Series B Preferred Stock). The TCW
Loan 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. At March 31, 1997, the Company had
borrowed the entire $25 million of loan availability under the TCW Loan
Agreement.
CRUDE OIL HEDGING ACTIVITIES - The Company has a hedge in place with
Enron Capital and Trade Resources Corp. (the "Enron Hedge") that hedges 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, is
between $18.00 and $20.55 per barrel, no payment is due under the contract.
If the average price is less than $18.00, the Company is paid the difference
between $18.00 and the average price, multiplied by barrels of crude oil
hedged that month. Similarly, should the average price exceed $20.55 per
barrel, the Company is required to pay the difference between $20.55 and the
average price, multiplied by barrels of crude oil hedged that month. On
January 1, 1997, the Company paid $34,170 to enter into a contract with Koch
Gas Services Company ("Koch") that exactly offsets the effect of the Enron
Hedge during the period January 1998 through December 2000. The combination
of the two contracts limits the Company's remaining exposure under the Enron
Hedge to the settlements during the period
6
<PAGE>
January 1997 through December 1997 at 10,900 barrels per month. In an effort
to limit its downside exposure, on July 8, 1996, the Company purchased from
Koch 720,000 put options for $133,200 with a strike price of $15.00. The
contract settles in monthly amounts of 60,000 put options during the period
January 1997 to December 1997.
MARKETS - The availability of a ready market and the prices obtained for
the Company's oil and gas depend on many factors beyond the Company's
control, including the extent of domestic production, imports of oil and gas,
the proximity and capacity of oil and natural gas pipelines and other
transportation facilities, fluctuating demands for oil and gas, the marketing
of competitive fuels, and the effects of governmental regulation of oil and
gas production and sales. Crude oil produced from the Monument Butte Field
is called "Black Wax" and is sold at the posted field price (an industry term
of the fair market value of oil in a particular field) less a deduction of
approximately $0.85 to $1.00 per barrel for oil quality adjustments. As the
quantity of Black Wax produced within the Monument Butte Field grows,
physical limitations within the regional refineries, located in Salt Lake
City, Utah, will limit the amount of Black Wax that can be processed. The
Company is conducting discussions with each refinery to inform them of the
outlook for Black Wax production in this region such that they can propose
solutions to existing plant configurations. While the outcome of these talks
is unknown, the Company expects to negotiate a long-term marketing
arrangement that will be beneficial to the Company. Until such an arrangement
is reached and the refinery modifications are accomplished, there may be
short-term downward pressure on Black Wax pricing.
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 MATTERS - 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. During 1996, the Vernal,
Utah office of the Bureau of Land Management ("BLM") undertook the
preparation of an Environmental Assessment ("EA") relating to certain lands
within the Monument Butte Field. Due to this process, the Company reduced its
activities on these lands during the last six months of 1996 and January 1997
pending issuance of the EA by the BLM. The formal Record of Decision relating
to the EA was issued by the BLM on February 3, 1997. The Company believes it
will be able to comply with the Record of Decision without causing a material
impact on its future drilling plans in the Monument Butte Field.
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.
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 1997 or 1996.
FORWARD LOOKING STATEMENTS
Certain statements included in this Management's Discussion and Analysis
or Plan of Operation are forward looking statements that predict the future
development of the Company. The realization of these predictions will be
subject to a number of variable contingencies, and there is no assurance that
they will occur in the time frame proposed. The risks associated with the
potential actualization of the Company's plans include: contractor delays,
the availability and cost of financing, the availability of materials, and
regulatory approvals, to name a few.
7
<PAGE>
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 47,847 shares of common stock dividends
related to its Preferred Series B Stock during the quarter. The Company
relied on the exemption provided by Section 4 (2) of the Securities Act
of 1933.
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 Amended and Restated Articles of Incorporation, as amended through
July 31, 1996. (filed as Exhibit 3.1 to the Company's Form 10-QSB
for the quarter ended June 30, 1996, 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 required by Item 601 of Regulation S-B.*
- ----------------------
* Filed herewith.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter.
8
<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: April 28, 1997 By: /s/ Kyle R. Miller
----------------------------------
Kyle R. Miller
Chief Executive Officer
Date: April 28, 1997 By: /s/ Michael J. Stevens
----------------------------------
Michael J. Stevens
Controller (Principal Accounting
Officer)
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 8,757,825
<SECURITIES> 0
<RECEIVABLES> 1,949,476
<ALLOWANCES> 0
<INVENTORY> 1,579,745
<CURRENT-ASSETS> 12,588,424
<PP&E> 52,346,633
<DEPRECIATION> 4,974,559
<TOTAL-ASSETS> 60,275,060
<CURRENT-LIABILITIES> 4,700,542
<BONDS> 22,971,197
0
10,000,000
<COMMON> 28,655,497
<OTHER-SE> (6,052,176)
<TOTAL-LIABILITY-AND-EQUITY> 60,275,060
<SALES> 3,602,296
<TOTAL-REVENUES> 3,602,296
<CGS> 824,494
<TOTAL-COSTS> 2,488,520
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 640,021
<INCOME-PRETAX> 631,458
<INCOME-TAX> 0
<INCOME-CONTINUING> 631,458
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 631,458
<EPS-PRIMARY> .09
<EPS-DILUTED> .08
</TABLE>
