<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
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
May 1, 2000: 2,897,732
<PAGE> 2
PART 1. FINANCIAL INFORMATION
INLAND RESOURCES INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000 AND DECEMBER 31, 1999
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 791 $ 1,018
Accounts receivable and accrued sales 3,291 2,166
Inventory 1,328 1,287
Other current assets 300 306
Net current assets of discontinued operations 1,177 2,140
--------- ---------
Total current assets 6,887 6,917
--------- ---------
Property and equipment, at cost:
Oil and gas properties (successful efforts method) 173,844 170,217
Accumulated depletion, depreciation and amortization (29,443) (27,805)
--------- ---------
144,401 142,412
Other property and equipment, net 2,408 2,437
Other long-term assets 1,685 1,892
--------- ---------
Total assets $ 155,381 $ 153,658
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 3,354 $ 3,422
Accrued expenses 1,143 1,759
Current portion of long-term debt 266
--------- ---------
Total current liabilities 4,497 5,447
--------- ---------
Long-term debt 81,668 79,072
Committments
Mandatorily redeemable preferred stock:
Series D stock, 10,757,747 shares issued and outstanding,
liquidation preference of $80.7 million 63,548 61,973
Accrued preferred series D dividends 4,695 2,262
Series E stock, 121,973 shares issued and outstanding,
liquidation preference of $12.2 million 8,445 8,220
Accrued preferred series E dividends 726 350
Stockholders' deficit:
Preferred Class A stock, par value $.001, 20,000,000 shares authorized,
Series D and Series E outstanding
Common stock, par value $.001; 25,000,000 shares authorized,
2,897,732 shares issued and outstanding 3 3
Additional paid-in capital 64,986 69,595
Accumulated deficit (73,187) (73,264)
--------- ---------
Total stockholders' equity (8,198) (3,666)
--------- ---------
Total liabilities and stockholders' equity $ 155,381 $ 153,658
========= =========
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements
1
<PAGE> 3
INLAND RESOURCES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999
(In thousands except earnings per share)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------------
2000 1999
----------- -----------
<S> <C> <C>
Revenues:
Oil and gas sales $ 6,058 $ 4,034
Operating expenses:
Lease operating expenses 1,650 1,714
Production taxes 159 89
Exploration 29 36
Depletion, depreciation and amortization 1,788 3,168
General and administrative, net 373 325
----------- -----------
Total operating expenses 3,999 5,332
----------- -----------
Operating income (loss) 2,059 (1,298)
Interest expense (2,003) (4,438)
Interest and other income 21 23
----------- -----------
Net income (loss) from continuing operations 77 (5,713)
Loss from discontinued operations (303)
----------- -----------
Net income (loss) 77 (6,016)
Accrued preferred Series C stock dividends (255)
Accrued preferred Series D stock dividends (2,433)
Accrued preferred Series E stock dividends (376)
Accretion of preferred Series D stock discount (1,575)
Accretion of preferred Series E stock discount (225)
----------- -----------
Net loss available to common stockholders $ (4,532) $ (6,271)
=========== ===========
Basic and diluted net loss per share:
Continuing operations $ (1.56) $ (7.00)
Discontinued operations (0.35)
----------- -----------
Total $ (1.56) $ (7.35)
=========== ===========
Weighted average common shares outstanding 2,897,732 853,000
=========== ===========
Dividends per common share NONE NONE
=========== ===========
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements
2
<PAGE> 4
INLAND RESOURCES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 77 $(6,016)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depletion, depreciation and amortization 1,788 3,168
Amortization of debt issue costs and debt discount 120 210
Noncash interest consideration 1,828
Effect of changes in current assets and liabilities:
Accounts receivable (1,125) 766
Inventory (41) 385
Other assets 93 (4)
Accounts payable and accrued expenses (684) (3,490)
------- -------
Net cash provided (used) by operating activities 228 (3,153)
------- -------
Cash flows from investing activities:
Development expenditures and equipment purchases (3,748) (95)
------- -------
Net cash used by investing activities (3,748) (95)
------- -------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 2,585 3,250
Payments of long-term debt (255)
Debt issue costs (21)
------- -------
Net cash provided by financing activities 2,330 3,239
------- -------
Net cash and cash equivalents used by continuing operations (1,190) (9)
Net cash and cash equivalents provided by discontinued operations 963 425
Cash and cash equivalents at beginning of period 1,018 1,627
------- -------
Cash and cash equivalents at end of period $ 791 $ 2,043
======= =======
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements
3
<PAGE> 5
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 "Field"). The Company also operated a crude oil refinery located in
Woods Cross, Utah (the "Woods Cross Refinery") until it was sold on January
31, 2000. The refinery had 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, 1999.
3. ACCOUNTING PRONOUNCEMENT:
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS No. 133") was issued, which establishes
accounting and reporting standards for derivative instruments and hedging
activity. The adoption of SFAS No. 133 was deferred to all fiscal quarters
of all fiscal years beginning after June 15, 2000, by SFAS No. 137
"Accounting for Derivative Instruments and Hedging activities -Deferred of
the Effective Date of FASB Statement No. 133 - an Amendment of FASB
Statement No. 133. SFAS No. 133 requires recognition of all derivative
instruments on the balance sheet as either assets or liabilities and
measurement of fair value. Changes in the derivative's fair value will be
recognized currently in earnings unless specific hedge accounting criteria
are met. Gains and losses on derivative hedging instruments must be
recorded in either other comprehensive income or current earnings,
depending on the nature and designation of the instrument. The Company is
currently assessing the effect of adopting SFAS No. 133 and plans to adopt
the statement on January 1, 2001.
FIN No. 44 "Accounting for Certain Transactions Involving Stock
Compensation - an Interpretation of APB Opinion No. 25" was issued in April
2000. As a result, the Company will be required to account for certain
stock options as variable option grants, based on the market price on July
1, 2000. These options will be marked-to-market with gains and losses
recorded in income for each reporting period subsequent to July 1, 2000,
but only to the extent there are increases in the Company's stock price
above the market price of the stock on July 1, 2000.
4. DISCONTINUED OPERATIONS:
Pursuant to a decision by the Company's board of directors on December 10,
1999 to dispose of the Company's refinery operations, 100% of the stock in
Inland Refining, Inc., a wholly owned subsidiary, was sold on January 31,
2000 to Silver Eagle Refining, Inc. ("Silver Eagle"). This subsidiary owned
the Woods Cross Refinery and a nonoperating refinery located in Roosevelt,
Utah. The Woods Cross refinery was originally purchased on December 31,
1997 for $22.9 million and the Roosevelt refinery was originally purchased
on September 16, 1998 for $2.25 million. The sales price was $500,000
together with the assumption by Silver Eagle of refinery assets,
liabilities and obligations including all environmental related
liabilities. Prior to the sale, the Company transferred the existing
inventory, cash, accounts receivable and a note receivable to another
wholly owned subsidiary of the Company. This subsidiary also agreed to
satisfy various accounts payable and accrued liabilities not assumed by
Silver Eagle. The assets and liabilities retained will be disposed of
within one year of December 10, 1999.
4
<PAGE> 6
Due to this sale, the Company is no longer involved in the refining of
crude oil or the sale of refined products. As a result, all refining
operations have been classified as discontinued operations in the
accompanying consolidated financial statements. To account for the sale,
the Company recorded a loss on sale of discontinued operations of $14.5
million at December 31, 1999. In addition, certain prior year amounts were
reclassified as discontinued operations, with no net effect on net loss or
accumulated deficit as previously reported. Revenue from discontinued
operations was $0 and $14.6 million during the three-month periods ended
March 31, 2000 and 1999, respectively. The net current assets of
discontinued operations of $1.2 million at March 31, 2000 consists
primarily of cash, accounts receivable and a note receivable.
5
<PAGE> 7
INLAND RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation:
RESULTS OF OPERATIONS:
General
On January 31, 2000, the Company sold its 100% owned subsidiary, Inland
Refining, Inc. The subsidiary owned the Woods Cross Refinery and a nonoperating
refinery located in Roosevelt, Utah. Due to this sale, the Company is no longer
involved in the refining of crude oil or the sale of refined products. As a
result, all refining operations have been classified as discontinued operations
in the accompanying consolidated financial statements.
Three Month Periods Ended March 31, 2000 and 1999:
Oil and Gas Sales. Crude oil and natural gas sales for the quarter
ended March 31, 2000 increased $2.0 million, or 50% from the previous year.
Prior to considering hedging losses of $1.1 million in 2000, the Company's oil
and gas revenues increased 78% between first quarters. As shown in the table
below, the variance was caused by higher average crude oil prices offset by
sales volume declines. Due to financial concerns, the Company suspended its
drilling program in October 1998 and did not resume drilling until October 1999.
This temporary suspension of the drilling program caused the Company's gross
crude oil production to decline from 5,000 barrels per day during the first
quarter of 1999 to 4,000 barrels per day during the first quarter of 2000. The
Company's gross crude oil production is currently at 4,500 barrels per day.
Crude oil sales as a percentage of total oil and gas sales were 87% and 72% in
the first quarter of 2000 and 1999, respectively. Crude oil will continue to be
the predominant product produced from the Field.
The Company has entered into price protection agreements to hedge
against 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. Crude oil sales were
decreased by $1.1 million in the first quarter of 2000 to recognize hedging
contract settlement losses. See Item 3 "Quantitative and Qualitative Disclosures
About Market Risk."
<TABLE>
<CAPTION>
Quarter Ended March 31, 2000 Quarter Ended March 31, 1999
--------------------------------------- -----------------------------------------
Net Volume Average Sales Net Volume Average Sales
(Bbls or Mcfs) Price (in 000's) (Bbls or Mcfs) Price (in 000's)
-------------- ------- ----------- ----------------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Crude Oil Sales 248,361 $25.27 $ 6,275 340,094 $8.60 $ 2,924
Natural Gas Sales 531,835 $ 1.72 914 644,971 $1.72 1,110
Hedging (1,131) 0
------- -------
Total $ 6,058 $ 4,034
======= =======
</TABLE>
Lease Operating Expenses. Lease operating expense for the quarter ended
March 31, 2000 decreased $64,000, or 4% from the previous year first quarter.
Lease operating expense per BOE increased from $3.83 per BOE sold in the first
quarter of 1999 to $4.90 in 2000. The increase on a BOE basis is due to the
lower volume produced in year 2000. The Company expects that continued
development drilling will cause an improvement to its 2000 operating expense
rate per BOE sold by increasing sales volumes and allowing for more efficient
operations and a wider allocation of fixed operating costs.
Production Taxes. Production taxes as a percentage of sales were
consistent at 2.2% during the first quarter of 2000 and 1999. Production tax
expense consists of estimates of the Company's yearly effective tax rate for
Utah state severance tax and production ad valorem tax. Changes in sales prices,
tax rates, tax exemptions and the timing, location and results of drilling
activities can all affect the Company's actual effective tax rate.
6
<PAGE> 8
Exploration. Exploration expense represents the Company's cost to
retain unproved acreage.
Depletion, Depreciation and Amortization. Depletion, depreciation and
amortization for the quarter ended March 31, 2000 decreased 44%, or $1.4
million, from the previous year first quarter. The decrease resulted from
decreased sales volumes and a lower average depletion rate. Depletion, which is
based on the units-of-production method, comprises the majority of the total
charge. The depletion rate is a function of capitalized costs and related
underlying proved reserves in the periods presented. Proved reserves during the
first quarter of 1999 were significantly lower due to low oil prices, which
caused proved undeveloped reserves to be uneconomic. The Company's depletion
rate was $4.86 per BOE sold during the first quarter of 2000 compared 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, 2000 increased $48,000 from the previous year first
quarter. General and administrative expense is reported net of operator fees and
reimbursements which were $1.35 million and $1.14 million during the first
quarter of 2000 and 1999, respectively. Gross general and administrative expense
was $1.72 million during the first quarter of 2000 and $1.46 million during the
first quarter of 1999.
Interest Expense. Interest expense for the quarter ended March 31, 2000
decreased $2.4 million from the previous year first quarter. The decrease
resulted from a decrease in the average amount of borrowings outstanding during
the quarter due to the financial restructuring performed in September 1999.
Borrowings during the first quarter of 2000 and 1999 were recorded at an
effective interest rate of 9.8% and 10.6%, respectively.
Other Income. Other income primarily represents interest earned on cash
balances.
Income Taxes. During the first quarter of 2000 and 1999, no income tax
provision or benefit was recognized due to net operating losses incurred and the
reversal and recording of a full valuation allowance.
Discontinued Operations. During the first quarter 1999, the Company
incurred an operating loss of $303,000 at its Woods Cross Refinery. On January
31, 2000, the refinery along with certain other assets were sold to Silver
Eagle. Although the margins obtained for refined product sales in the Salt Lake
City region were strong for most of 1999, the Company suffered from inefficient
operations since it was unable to secure sufficient quantities of feedstock due
to its financial condition. After the Company's financial restructuring in
September 1999, increasing crude oil costs reduced margins on refined product
sales to unacceptable levels. These circumstances combined with the availability
of alternative buyers for the Company's crude oil caused the Company to
discontinue refinery operations in December 1999 and subsequently sell the
refinery on January 31, 2000. As a result of this activity, the accompanying
consolidated financial statements for the current period and all prior periods
have been adjusted to report refining operations as discontinued operations. The
Company recorded a charge of $14.5 million in 1999 to record the disposal of the
refining business segment. Shut-down and disposal accruals made during 1999 were
sufficient such that no additional charges were required during the first
quarter of 2000.
Accrued Preferred Series C Stock Dividends. Inland's Preferred Series C
Stock was exchanged for Common Stock and Preferred Series E Stock as part of the
financial restructuring transaction on September 21, 1999. Prior to that time,
the Preferred Series C Stock accrued dividends at 10% compounded quarterly.
Accrued Preferred Series D Stock Dividends. Inland's Preferred Series D
Stock accrues dividends at 11.25% compounded quarterly.
Accrued Preferred Series E Stock Dividends. Inland's Preferred Series E
Stock accrues dividends at 11.5% compounded quarterly.
7
<PAGE> 9
Accretion of Preferred Series D Stock Discount. Inland's Preferred
Series D Stock was initially recorded on the financial statements at a discount
of $20.2 million and is being accreted to face value over the minimum mandatory
redemption period which starts on October 1, 2001 and ends on October 1, 2003.
Accretion of Preferred Series E Stock Discount. Inland's Preferred
Series E Stock was initially recorded on the financial statements at a discount
of $4.2 million and is being accreted to face value over the minimum mandatory
redemption date of October 1, 2003.
LIQUIDITY AND CAPITAL RESOURCES
ING Credit Agreement
Effective September 21, 1999, the Company entered into the Second Amended and
Restated Credit Agreement (the "ING Credit Agreement") with ING (U.S.) Capital
Corporation, U.S. Bank National Association and Meespierson Capital Corporation
(the "Senior Lenders") pursuant to which the Senior Lenders agreed to a
borrowing base of $83.5 million. The outstanding principal balance at March 31,
2000 was $81.5 million. All borrowings under the ING Credit Agreement are due on
October 1, 2001, or potentially earlier if the borrowing base is determined to
be insufficient. The borrowing base is calculated as the collateral value of
proved reserves and will be redetermined on October 1, 2000 and April 1, 2001
and may be redetermined at the option of the Senior Lenders one additional time
after October 1, 2000. Upon redetermination, if the borrowing base is lower than
the outstanding principal balance then drawn, the Company must immediately pay
the difference. Interest accrues, at the Company's option, at either (i) 2%
above the prime rate or (ii) 3% above the LIBOR rate. At March 31, 2000, all
amounts were borrowed under the LIBOR option at an effective interest rate of
9.2% through June 29, 2000. The Company paid a facility fee of $150,000 and an
additional fee of $208,000 to the Senior Lenders at closing. The Company must
also pay a facility fee equal to 0.50% of the borrowing base on April 1, 2001
and again on September 30, 2001. The Senior Lenders will also receive a fee
equal to 1% of the borrowing base on October 1, 2000 if ING (U.S.) Capital
Corporation continues to be a member of the Senior Lenders at September 30,
2000. The ING Credit Agreement has 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. The ING Credit Agreement is secured by a first lien on
substantially all assets of the Company.
Cash Flow and Capital Projects
As a result of the financial restructuring performed on September 21, 1999, the
Company greatly improved its financial flexibility. The exchange of subordinated
debt for equity securities decreased the Company's debt service requirements
thereby increasing discretionary cash flow available for capital projects. The
restructuring of the ING Credit Agreement's principal repayment terms beyond
calendar year 2000 allows the Company to reinvest its operating cash flow for
further development of the Field. As of April 30, 2000, the Company had $2.0
million of borrowing base availability under the ING Credit Agreement.
The Company reinitiated its drilling program in October 1999 based on
liquidity generated from the financial restructuring. The Company drilled eight
wells in 1999, 11 wells during the first quarter of year 2000 and has plans to
drill an additional 35 wells in 2000. The Company also continued its efforts to
pressurize the Field by converting 22 wells to water injection in 1999, seven
wells during the first quarter of year 2000 and has plans to convert an
additional 40 wells to water injection in 2000. 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, commodity prices, operating cash flows and development
results, among other items.
During the first quarter of 2000, the Company borrowed $2.6 million
under the ING Credit Agreement and generated $3.8 million of cash from
operations which it used to continue its development of the Field ($3.7
million), service debt ($2.0 million) and reduce outstanding accounts payable
($0.7 million). The Company's capital budget for development of the Field in
year 2000 is $14.5 million. Although there can be no assurance, the Company
believes that cash on hand along with future cash to be generated from
operations and borrowing base availability will be sufficient to implement its
development plans and service its debt for the next year.
8
<PAGE> 10
INFLATION AND CHANGES IN PRICES
The Company's revenues and the value of its oil and gas properties have been and
will be affected by changes in oil and gas prices. The Company's ability to
borrow from traditional lending sources and to obtain additional capital on
attractive terms is also substantially dependent on oil and gas prices. Oil and
gas prices are subject to significant seasonal and other fluctuations that are
beyond the Company's ability to control or predict. Although certain of the
Company's costs and expenses are affected by the level of inflation, inflation
did not have a significant effect on the Company's results of operations during
2000 or 1999.
YEAR 2000 ISSUES
The Company is aware of the issues associated with the programming code in many
existing computer systems and devices with embedded technology. The "Year 2000"
problem concerns the inability of information and technology-based operating
systems to properly recognize and process date-sensitive information beyond
December 31, 1999. The conversion from calendar year 1999 to calendar year 2000
occurred without any disruption to the Company's operations or business systems.
The Company will continue to monitor any Year 2000 issues, both internally and
with third party dependencies with respect to vendors, customers, and other
significant business relationships. The total costs incurred to date in the
assessment, evaluation and remediation of Year 2000 matters plus any additional
costs that may be incurred are expected to be less than management's original
estimate of $50,000.
FORWARD LOOKING STATEMENTS
Certain statements in this report, including statements of the Company's and
management's expectation, intentions, plans and beliefs, including those
contained in or implied by "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Notes to Consolidated Financial
Statements, are "forward-looking statements", within the meaning of Section 21E
of the Securities Exchange Act of 1934, that are subject to certain events, risk
and uncertainties that may be outside the Company's control. These
forward-looking statements include statements of management's plans and
objectives for the Company's future operations and statements of future economic
performance, information regarding drilling schedules, expected or planned
production or transportation capacity, future production levels of fields,
marketing of crude oil and natural gas, the Company's capital budget and future
capital requirements, 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").
9
<PAGE> 11
PART 1. FINANCIAL INFORMATION (CONTINUED)
INLAND RESOURCES INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
---------------
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk:
Market risk generally represents the risk that losses may occur in the value of
financial instruments as a result of movements in interest rates, foreign
currency exchange rates and commodity prices.
Interest Rate Risk. The Company is exposed to market risk due to the
floating interest rate under the ING Credit Agreement. See Item 2. -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources." All borrowings under the ING
Agreement are due and payable October 1, 2001. As of March 31, 2000, the ING
Credit Agreement had a principal balance of $81.5 million at an average floating
interest rate of 9.2% per annum, which rate has been locked in through June 29,
2000. 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, 2000 through January 1, 2001 through
December 31, 2000 October 1, 2001
---------------------- -----------------------
<S> <C> <C>
1% increase in Interest Rates $ 405,000 $ 610,000
2% increase in Interest Rates $ 810,000 $ 1,220,000
</TABLE>
On April 30, 1998, the Company 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 9.75% on $35.0 million of borrowings. The
effect of the hedge through December 31, 2000 will be to limit hypothetical
increases in interest expenses under the ING Credit Agreement to $325,000
assuming a 1% increase in interest rates and $550,000 assuming a 2% increase in
interest rates.
Commodity Risks. The Company hedges a portion of its crude oil
production to reduce its exposure to fluctuations in the market prices thereof.
The Company uses various financial instruments whereby monthly settlements are
based on differences between the prices specified in the instruments and the
settlement prices of certain futures contracts quoted on the NYMEX index. Gains
or losses on hedging activities are recognized as an adjustment to crude oil
sales in the period in which the hedged production is sold.
The Company has entered into various contracts in the form of swaps or collars
to hedge crude oil production during calendar years 2000 and 2001. The Company
recorded a loss of $1.1 million during the first quarter of 2000 under these
contracts. The potential future losses on these contracts for the period April
1, 2000 through December 31, 2000 and all of year 2001 based on a hypothetical
average market price of equivalent product for these periods are as follows:
<TABLE>
<CAPTION>
Average NYMEX Per Barrel Market Price for the Contract Period
---------------------------------------------------------------------------
$20.00 $22.00 $24.00 $26.00 $28.00 $30.00
---------- ---------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
All Contracts - 2000 $33,000 $380,000 $1,340,000 $2,420,000 $3,500,000 $4,580,000
All Contracts - 2001 $ -0- $126,000 $1,220,000 $2,390,000 $3,560,000 $4,730,000
</TABLE>
10
<PAGE> 12
PART II. OTHER INFORMATION
INLAND RESOURCES INC.
---------------
Items 1, 2, 3, 4 and 5 are omitted from this report as inapplicable.
Item 6. Exhibits and Reports on Form 8-K.
The following documents are filed as part of this Quarterly Report on Form 10-Q.
Exhibit
Number Description of Exhibits
- ------- -----------------------
3.1 Amended and Restated Articles of Incorporation, as amended
through December 14, 1999 (filed as Exhibit 3.1 to Inland's
Current Report on Form 8-K dated September 21, 1999, and
incorporated herein by reference).
3.2 Bylaws of the Company (filed as Exhibit 3.2 to the Company's
Registration Statement of Form S-18, Registration No.
33-11870-F, and incorporated herein by reference).
3.2.1 Amendment to Article IV, Section 1 of the Bylaws of the
Company adopted February 23, 1993 (filed as Exhibit 3.2.1 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1992, and incorporated herein by
reference).
3.2.2 Amendment to the Bylaws of the Company adopted April 8, 1994
(filed as Exhibit 3.2.2 to the Company's Registration
Statement of Form S-4, Registration No. 33-80392, and
incorporated herein by reference).
3.2.3 Amendment to the Bylaws of the Company adopted April 27, 1994
(filed as Exhibit 3.2.3 to the Company's Registration
Statement of Form S-4, Registration No. 33-80392, and
incorporated herein by reference).
27.1 Financial Data Schedule.*
- ---------------------
* Filed herewith.
(b) Reports on Form 8-K:
None.
11
<PAGE> 13
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 1, 2000 By: /s/ Bill I. Pennington
-------------- -----------------------------
Bill I. Pennington
Chief Executive Officer
Chief Financial Officer
Date: May 1, 2000 By: /s/ Michael J. Stevens
-------------- -----------------------------
Michael J. Stevens
Vice President, Secretary
and Treasurer
(Principal Accounting Officer)
12
<PAGE> 14
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibits
- ------- -----------------------
3.1 Amended and Restated Articles of Incorporation, as amended
through December 14, 1999 (filed as Exhibit 3.1 to Inland's
Current Report on Form 8-K dated September 21, 1999, and
incorporated herein by reference).
3.2 Bylaws of the Company (filed as Exhibit 3.2 to the Company's
Registration Statement of Form S-18, Registration No.
33-11870-F, and incorporated herein by reference).
3.2.1 Amendment to Article IV, Section 1 of the Bylaws of the
Company adopted February 23, 1993 (filed as Exhibit 3.2.1 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1992, and incorporated herein by
reference).
3.2.2 Amendment to the Bylaws of the Company adopted April 8, 1994
(filed as Exhibit 3.2.2 to the Company's Registration
Statement of Form S-4, Registration No. 33-80392, and
incorporated herein by reference).
3.2.3 Amendment to the Bylaws of the Company adopted April 27, 1994
(filed as Exhibit 3.2.3 to the Company's Registration
Statement of Form S-4, Registration No. 33-80392, and
incorporated herein by reference).
27.1 Financial Data Schedule.*
- ---------------------
* Filed herewith.
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77,414
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