<PAGE>
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 MARCH 31, 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
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
--------------------
(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 April 10, 1999: 8,529,765
<PAGE>
PART 1. FINANCIAL INFORMATION
INLAND RESOURCES INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,043 $ 1,627
Accounts receivable and accrued sales 5,355 5,682
Inventory 3,655 5,353
Other current assets 658 700
--------- ---------
Total current assets 11,711 13,362
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Property and equipment, at cost:
Oil and gas properties (successful efforts method) 180,622 180,538
Accumulated depletion, depreciation and amortization (24,436) (21,433)
--------- ---------
156,186 159,105
Other property and equipment, net 19,890 20,212
Other long-term assets 2,985 3,150
--------- ---------
Total assets $ 190,772 $ 195,829
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,436 $ 14,282
Accrued expenses 3,105 2,408
Current portion of long-term debt 144,959 141,709
--------- ---------
Total current liabilities 157,500 158,399
--------- ---------
Long-term debt 18,997 17,114
Environmental liability 850 875
Mandatorily redeemable preferred Series C stock,
100,000 shares issued and outstanding 9,568 9,568
Accrued preferred Series C stock dividends 1,789 1,534
Warrants outstanding 1,300 1,300
Stockholders' equity:
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 (41,999) (35,728)
--------- ---------
Total stockholders' equity 768 7,039
--------- ---------
Total liabilities and stockholders' equity $ 190,772 $ 195,829
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
1
<PAGE>
PART 1. FINANCIAL INFORMATION (CONTINUED)
INLAND RESOURCES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
(In thousands except earnings per share)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------------
1999 1998
-------- --------
<S> <C> <C>
Revenues:
Refined product sales $ 14,639 $ 16,804
Oil and gas sales 2,343 5,277
-------- --------
Total revenues 16,982 22,081
-------- --------
Operating expenses:
Cost of refinery feedstock 10,148 14,949
Refinery operating expenses 2,490 1,778
Lease operating expenses 1,714 2,244
Production taxes 89 115
Exploration 36 61
Depletion, depreciation and amortization 3,384 2,588
General and administrative, net 730 949
-------- --------
Total operating expenses 18,591 22,684
-------- --------
Operating loss (1,609) (603)
Interest expense (4,443) (3,327)
Interest and other income 36 60
-------- --------
Net loss $ (6,016) $ (3,870)
Accrued preferred Series C stock dividends (255) (250)
-------- --------
Net loss attributable to common stockholders $ (6,271) $ (4,120)
-------- --------
-------- --------
Basic net loss per share $ (0.74) $ (0.49)
-------- --------
-------- --------
Basic weighted average common shares outstanding 8,530 8,360
-------- --------
-------- --------
Diluted net loss per share $ (0.74) $ (0.49)
-------- --------
-------- --------
Diluted weighted average common shares outstanding 8,530 8,360
-------- --------
-------- --------
Dividends per common share NONE NONE
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
2
<PAGE>
PART 1. FINANCIAL INFORMATION (CONTINUED)
INLAND RESOURCES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (6,016) $ (3,870)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depletion, depreciation and amortization 3,384 2,588
Amortization of debt issuance costs and debt discount 210 206
Interest converted to principal 1,828
Effect of changes in current assets and liabilities:
Accounts receivable and accrued sales 328 3,075
Inventory 1,697 (919)
Other assets 88 (107)
Accounts payable and accrued expenses (4,174) 6,882
-------- --------
Net cash provided (used) by operating activities (2,655) 7,855
-------- --------
Cash flows from investing activities:
Development expenditures and equipment purchases (143) (11,349)
-------- --------
Net cash used in investing activities (143) (11,349)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 3,250 10,000
Payments of long-term debt (15) (4,973)
Debt issuance costs (21) (312)
-------- --------
Net cash provided by financing activities 3,214 4,715
-------- --------
Net change in cash and cash equivalents 416 1,221
Cash and cash equivalents, at beginning of period 1,627 604
-------- --------
Cash and cash equivalents, at end of period $ 2,043 $ 1,825
-------- --------
-------- --------
Cash paid for interest $ 1,207 $ 2,691
-------- --------
-------- --------
</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 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 has
significantly impacted the Company's financial condition. The Company had a
working capital deficit of $145.8 million at March 31, 1999 and generated a
net loss of $6.0 million for the first quarter of 1999 and $23.5 million
during the year ended December 31, 1998. Approximately $145.0 million of
the working capital deficit is caused by principal amounts related to the
Company's long-term debt facilities. Based on current conditions, the
Company will not be able to make its 1999 principal payments as scheduled.
In addition, at March 31, 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. A potential solution is the following
transaction. On January 18, 1999, the Company entered into a non-binding
letter of intent with Flying J Inc. ("Flying J") and Smith Management LLC
("Smith Management") (an affiliate of and a majority shareholder in the
Company) regarding the acquisition of certain assets by the Company from
Flying J or one of its subsidiaries. The acquisition includes a 25,000
barrel per day refinery located in North Salt Lake City, eleven Flying J
gasoline stations located primarily in the Salt Lake City area and Idaho
and all oil and gas reserves owned by Flying J in the Uinta Basin, fifteen
miles north of the Monument Butte Field. The purchase price is $80.0
million in cash and approximately 12.8 million shares of the Company's
common stock, par value $0.001 per share, which is equal to approximately
60% of the shares outstanding after the acquisition. This transaction would
be accounted for as a reverse merger. A restructuring of the Company's
capital and debt structure could be required to effectuate the acquisition.
Management anticipates that if the transaction is consummated, it will
close during the third quarter of 1999. The acquisition is contingent on
preparation of definitive documents, financing, due diligence procedures
and approval by regulatory agencies, the Company's lenders, the Board of
Directors of each company and the Company's shareholders. The failure of
any one of these events could prevent the consummation of the acquisition.
4
<PAGE>
The Company is also involved in negotiations to restructure its debt and
equity which may provide financing such that a drilling program can be
resumed, although there is no assurance that the Company will be
successful. Until the Flying J transaction or 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 $500,000. The Company also
expects to spend $900,000 performing required capital improvements at the
Woods Cross Refinery. 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, issuing
additional debt or selling equity. 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 all upgrades at the Woods Cross Refinery.
4. ACCOUNTING PRONOUNCEMENT:
The Financial Accounting Standards Board issued Statement No. 133
"Accounting for Derivative Instruments and Hedging Activities" 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.
5. INVENTORIES:
Inventories at March 31, 1999 and December 31, 1998 consist of the
following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
Crude Oil $ 867 $ 827
Refined Product 1,554 2,910
Tubular goods 1,031 1,416
Materials and supplies 203 200
------- -------
Total $ 3,655 $ 5,353
------- -------
------- -------
</TABLE>
5
<PAGE>
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
quarter ended March 31, 1999 are as follows (in thousands).
<TABLE>
<CAPTION>
Quarter Ended March 31, 1999
E&P Refinery Eliminations Total
--------- ----------- ------------ ---------
<S> <C> <C> <C> <C>
Revenues from external customers $ 2,343 $ 14,639 - $ 16,982
Intercompany revenue transactions (1,691) - $ (1,691) -
Interest income and other 266 12 (242) 36
Interest expense 4,437 248 (242) 4,443
Lease operating and production taxes 1,803 - - 1,803
Depreciation, depletion and amort. 3,168 216 - 3,384
Capital additions 95 48 - 143
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended March 31, 1998
E&P Refinery Eliminations Total
--------- ----------- ------------ ---------
<S> <C> <C> <C> <C>
Revenues from external customers $ 5,277 $ 16,804 - $ 22,081
Intercompany revenue transactions - - - -
Interest income and other 15 45 - 60
Interest expense 3,132 195 - 3,327
Lease operating and production taxes 2,359 - - 2,359
Depreciation, depletion and amort. 2,408 180 - 2,588
Capital additions 10,849 500 - 11,349
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet
E&P Refinery Eliminations Total
--------- ----------- ------------ ---------
<S> <C> <C> <C> <C>
Total assets at March 31, 1999 $176,433 $ 25,956 $ 11,617 $ 190,772
Total assets at December 31, 1998 $183,389 $ 27,222 $ 14,782 $ 195,829
</TABLE>
6
<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 OF FINANCIAL CONDITION AND RESULTS
OF OPERATION:
RESULTS OF OPERATIONS:
THREE MONTH PERIODS ENDED MARCH 31, 1999 AND 1998:
REFINED PRODUCTS SALES. The Company averaged refined product sales of
9,300 barrels per day from the Woods Cross Refinery during the first quarter
of 1999, of which 56% represented gasoline and diesel products. This is an
increase of 900 barrels per day when compared to the first quarter of 1998.
The lower volumes during the prior year reflect the Company's first quarter
of refinery ownership and resulted from the Company performing various
neglected repairs and maintenance procedures. Although volumes sold increased
over the prior year, sales decreased due to a decline in the average price
received for the Company's refined product slate from $20.76 per barrel in
the first quarter of 1998 to $17.18 in 1999. The decrease was due to general
market conditions in the Salt Lake City region.
OIL AND GAS SALES. The Company eliminated in consolidation $1.7 million
of crude oil sales made between its production operations and the Woods Cross
Refinery during the first quarter of 1999. Prior to considering intercompany
eliminations, crude oil and natural gas revenue for the first quarter ended
March 31, 1999 decreased $1.2 million, or 24% from the previous year. The
decrease was attributable to a decrease in crude oil and natural gas prices
since the Company's production in the first quarter of 1999 was only slightly
lower than the prior year first quarter. Crude oil prices decreased 21% from
an average of $10.83 per barrel during the first quarter of 1998 to $8.60
during the first quarter of 1999. Since approximately 73% of the Company's
revenues are derived from crude oil sales, the 17% decrease in the average
price received for natural gas sales had less of an impact.
COST OF REFINERY FEEDSTOCK. The Company eliminated in consolidation $1.7
million of feedstock costs associated with sales between its production
operations and the Woods Cross Refinery. Without consideration of this
elimination, refinery feedstock costs decreased $3.1 million or 21% between
first quarters. This is in exact relation to the Company's price decrease
noted for its crude oil sales in the "Oil and Gas Sales" explanation above.
In addition, the decrease is consistent with an industry wide downward trend
in the demand and associated price for crude oil during the first quarter of
1999.
REFINERY OPERATING EXPENSES. Refinery operating expense for the quarter
ended March 31, 1999 increased 40%, or $712,000, from the first 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 and (2) an increase in the number of operating employees and
pay rates, (3) less processing fees and maintenance credits associated with
the Company's MDDW unit. Routine turnaround projects totaling approximately
$400,000 are expected in 1999, in addition to ongoing repairs and upgrades to
the Company's buildings, tanks and roads.
LEASE OPERATING EXPENSES. Lease operating expense for the first quarter
ended March 31, 1999 decreased 24%, or $530,000, from the first quarter of
1998. Lease operating expense per BOE sold decreased $1.00 or 21% to $3.83.
The improved operating costs results reflect the full and efficient
integration of operations related to the large producing well purchases made
during the last half of 1997.
7
<PAGE>
PRODUCTION TAXES. Production taxes as a percentage of oil and gas sales
were 2.2% in the first 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 during the first quarters of 1999 and
1998 represents the Company's cost to retain unproved acreage.
DEPLETION, DEPRECIATION AND AMORTIZATION. Depletion, depreciation and
amortization for the quarter ended March 31, 1999 increased 31%, or $796,000,
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 quarter of 1998 to $6.67 per BOE sold during
the first quarter of 1999.
GENERAL AND ADMINISTRATIVE, NET. General and administrative expense for
the quarter ended March 31, 1999 decreased 23%, or $219,000, from the
previous year. The decrease was spread between refining and producing
operations and generally resulted from employee and related benefit
reductions necessitated by the low oil price environment.
INTEREST EXPENSE. Interest expense for the first quarter of 1999
increased 34%, or $1.1 million, compared to the first quarter of 1998. The
increase resulted from increased average borrowings outstanding as the
Company's debt balance increased $36 million from March 31, 1998 to March 31,
1999. Borrowings during the first quarters of 1999 and 1998 were recorded at
an effective interest rate of approximately 10.6%.
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.
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 has
significantly impacted the Company's financial condition. The Company had a
working capital deficit of $145.8 million at March 31, 1999 and generated a
net loss of $6.0 million for the first quarter of 1999 and $23.5 million
during the year ended December 31, 1998. Approximately $145.0 million of the
working capital deficit is caused by principal amounts related to the
Company's long-term debt facilities. Based on current conditions, the Company
will not be able to make its 1999 principal payments as scheduled. In
addition, at March 31, 1999 the Company was in default of certain provisions
of its credit agreements.
The Company is considering a number of strategies to cure its working capital
and liquidity issues. A potential solution is the following transaction. On
January 18, 1999, the Company entered into a non-binding letter of intent
with Flying J Inc. ("Flying J") and Smith Management LLC ("Smith Management")
(an affiliate of and a majority shareholder in the Company) regarding the
acquisition of certain assets by the Company from Flying J or one of its
subsidiaries. The acquisition includes a 25,000 barrel per day refinery
located in North Salt Lake City, eleven Flying J gasoline stations located
primarily in the Salt Lake City area and Idaho and all oil and gas reserves
owned by Flying J in the Uinta Basin, fifteen miles north of the Monument
Butte Field. The purchase price is $80.0 million in cash and approximately
12.8 million shares of the Company's common stock, par value $0.001 per
share, which is
8
<PAGE>
equal to approximately 60% of the shares outstanding after the acquisition.
This transaction would be accounted for as a reverse merger. A restructuring
of the Company's capital and debt structure could be required to effectuate
the acquisition. Management anticipates that if the transaction is
consummated, it will close during the third quarter of 1999. The acquisition
is contingent on preparation of definitive documents, financing, due
diligence procedures and approval by regulatory agencies, the Company's
lenders, the Board of Directors of each company and the Company's
shareholders. The failure of any one of these events could prevent the
consummation of the acquisition.
The Company is also involved in negotiations to restructure its debt and
equity which may provide financing such that a drilling program can be
resumed, although there is no assurance that the Company will be successful.
Until the Flying J transaction or 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 $500,000. The Company also expects to spend
$900,000 performing required capital improvements at the Woods Cross
Refinery. 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, issuing
additional debt or selling equity. 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 all upgrades at 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 quarter of 1999, the Company focused its efforts on
pressurizing the Monument Butte Field by converting seven wells to water
injection. Due to its financial condition, the Company incurred only $143,000
of net capital expenditures with respect to its producing and refining
operations. During the first quarter of 1999, the Company borrowed $3.25
million from its lenders and generated $1.8 million of cash from operations
which it primarily used to reduce outstanding accounts payable which, as a
result, decreased 34% from January 1, 1999 to March 31, 1999 to $9.4 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 March 31, 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 March 31, 1999, the Company had $70.9 million of
borrowings and $2.2 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 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 quarter of 1999 was $1.8 million
increasing the principal outstanding under the TCW Credit Agreement to $76.8
million at March 31, 1999. The deferred interest bears
9
<PAGE>
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 on June 29, 1999, $6.2
million for the next two quarters, $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 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 $1.8 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 March 31, 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. Based on the
recent borrowing base increase and interest deferral, the Company's lenders
have shown a willingness to help the Company solve its working capital and
liquidity issues. Although there can be no assurance, the Company does not
expect its lenders to issue notices of default allowing them to call their
debt for repayment in the near future. 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.
INFLATION AND CHANGES IN PRICES
Inland's revenues and the value of its oil and gas properties have been and
will be affected by changes in oil and gas prices. Inland'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 Inland's ability to control or predict. Although certain of
Inland's costs and expenses
10
<PAGE>
are affected by the level of inflation, inflation did not have a significant
effect on Inland'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 is scheduled
to be updated before June 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 June 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 "Business and Properties" and "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 the Flying J transaction, 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").
11
<PAGE>
PART 1. FINANCIAL INFORMATION (CONTINUED)
INLAND RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
------
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 7.
- -"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
March 31, 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 $2.2
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:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
Increase in Interest Expense Without Hedge
---------------------------------------------------------------------------------------------------
April 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
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
1% increase in $473,000 $430,000 $257,000 $109,000 $6,000
Interest Rates
- --------------------------------------------------------------------------------------------------------------------
2% increase in $950,000 $877,000 $537,000 $246,000 $19,000
Interest Rates
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
Increase in Interest Expense with Hedge
---------------------------------------------------------------------------------------------------
April 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
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
1% increase in $473,000 $430,000 $257,000 $109,000 $6,000
Interest Rates
- --------------------------------------------------------------------------------------------------------------------
2% increase in $800,000 $667,000 $374,000 $164,000 $10,000
Interest Rates
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
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 gains or losses on these contracts
based on a hypothetical average market price of equivalent product for the
period from April 1, 1999 to December 31, 1999 are as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
Average NYMEX Per Barrel Market Price for the Contract Period
-------------------------------------------------------------------------------------------------
$14.00 $15.00 $16.00 $17.00 $18.00 $19.00 $20.00
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
$14.02 Contract $7,000 $(353,000) $(713,000) $(1,073,000) $(1,433,000) $(1,793,000) $(2,153,000)
- ---------------------------------------------------------------------------------------------------------------------
$14.54 Contract $194,000 $(166,000) $(526,000) $(886,000) $(1,246,000) $(1,606,000) $(1,996,000)
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's hedging contracts had no effect on income during the first
quarter of 1999 and generated $62,000 of income during the first quarter of
1998.
13
<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 21,100 shares of common stock dividends
related to its Series C preferred stock during the period from January 1,
1999 to March 31, 1999.
The Company issued its senior banks and TCW a total of 108,512 warrants at
$1.75 strike price as consideration for entering into the First Amendment to
Amended and Restated 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.
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
- ------- -----------------------
<S> <C>
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).
4.1 First Amendment to Amended and Restated Credit Agreement dated
as of March 5, 1999 (filed as exhibit 4.1.3 to Inland's Annual
Report on Form 10-K for the fiscal year ended December 31,
1998 and incorporated herein by reference).
4.2 First Amendment to Amended and Restated Credit Agreement dated
as of March 5, 1999 (filed as exhibit 4.2.3 to Inland's Annual
Report on Form 10-K for the fiscal year ended December 31,
1998 and incorporated herein by reference).
4.3 First Amendment to Amended and Restated Intercreditor
Agreement dated as of March 5, 1999 (filed as exhibit 4.3.3 to
Inland's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 and incorporated herein by reference).
</TABLE>
14
<PAGE>
<TABLE>
<S> <C>
10.2 Warrant Agreement dated as of March 5, 1999 between Inland
Resources Inc. and TCW Portfolio No. 1555 DR V Sub-Custody
Partnership, L.P. (filed as exhibit 10.2 to Inland's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998
and incorporated herein by reference).
10.3 Warrant Certificate dated as of March 5, 1999 between Inland
Resources Inc. and TCW Portfolio No. 1555 DR V Sub-Custody
Partnership, L.P. representing 58,512 shares (filed as exhibit
10.21 to Inland's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998 and incorporated herein by
reference).
10.4 Swap Agreement dated March 10, 1999 between Inland and Enron
Capital and Trade Resources Corp. (filed as exhibit 10.22 to
Inland's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 and incorporated herein by reference).
10.5 Swap Agreement dated March 10, 1999 between Inland and Enron
Capital and Trade Resources Corp. (filed as exhibit 10.23 to
Inland's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 and incorporated herein by reference).
27.1 Financial Data Schedule.*
</TABLE>
- --------------
* Filed herewith.
(b) Reports on Form 8-K:
Form 8-K was filed under Item 5 on January 25, 1999 reporting that
Inland had entered into a nonbinding Letter of Intent with Flying J
Inc. and Smith Management LLC.
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.
15
<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, 1999 By: /s/ Kyle R. Miller
--------------------------
Kyle R. Miller
Chief Executive Officer
Date: May 14, 1999 By: /s/ Michael J. Stevens
--------------------------
Michael J. Stevens
Vice President - Accounting and
Administration
(Principal Accounting Officer)
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,043
<SECURITIES> 0
<RECEIVABLES> 5,355
<ALLOWANCES> 0
<INVENTORY> 3,655
<CURRENT-ASSETS> 11,711
<PP&E> 0
<DEPRECIATION> 24,436
<TOTAL-ASSETS> 200,512
<CURRENT-LIABILITIES> 157,500
<BONDS> 18,997
9,568
0
<COMMON> 42,767
<OTHER-SE> (41,999)
<TOTAL-LIABILITY-AND-EQUITY> 190,772
<SALES> 16,982
<TOTAL-REVENUES> 16,982
<CGS> 14,441
<TOTAL-COSTS> 18,591
<OTHER-EXPENSES> (36)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,443
<INCOME-PRETAX> (6,016)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,016)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,016)
<EPS-PRIMARY> (0.74)
<EPS-DILUTED> (0.74)
</TABLE>
