<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 SEPTEMBER 30, 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 [X] No [ ]
Number of shares of common stock, par value $.001 per share, outstanding as of
November 1, 2000: 2,897,732
<PAGE> 2
PART 1. FINANCIAL INFORMATION
INLAND RESOURCES INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,073 $ 1,018
Accounts receivable and accrued sales 4,715 2,166
Inventory 1,006 1,287
Other current assets 104 50
Net current assets of discontinued operations 223 2,140
--------- ---------
Total current assets 7,121 6,661
--------- ---------
Property and equipment, at cost:
Oil and gas properties (successful efforts method) 180,398 170,217
Accumulated depletion (33,104) (27,805)
--------- ---------
147,294 142,412
Other property and equipment, net 2,024 2,437
Other long-term assets 1,377 1,892
--------- ---------
Total assets $ 157,816 $ 153,402
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 1,985 $ 3,422
Accrued expenses 2,059 1,759
--------- ---------
Total current liabilities 4,044 5,181
--------- ---------
Long-term debt 83,500 79,082
Commitments
Mandatorily redeemable preferred stock:
Series D stock, 10,757,747 shares issued and outstanding,
liquidation preference of $80.7 million 66,698 61,973
Accrued preferred series D dividends 9,561 2,262
Series E stock, 121,973 shares issued and outstanding,
liquidation preference of $12.2 million 8,895 8,220
Accrued preferred series E dividends 1,479 350
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 55,767 69,595
Accumulated deficit (72,131) (73,264)
--------- ---------
Total stockholders' equity (16,361) (3,666)
--------- ---------
Total liabilities and stockholders' equity $ 157,816 $ 153,402
========= =========
</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 AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
(In thousands except earnings per share)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------- ----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Oil and gas sales $ 7,444 $ 4,359 $ 20,529 $ 12,774
Operating expenses:
Lease operating expenses 1,836 1,863 5,149 5,223
Production taxes 135 211 473 411
Exploration 62 67 121 131
Depletion, depreciation and amortization 2,010 2,275 5,749 7,990
General and administrative, net 763 1,621 1,462 2,629
----------- ----------- ----------- -----------
Total operating expenses 4,806 6,037 12,954 16,384
----------- ----------- ----------- -----------
Operating income (loss) 2,638 (1,678) 7,575 (3,610)
Interest expense (2,213) (5,137) (6,231) (14,133)
Interest and other income 34 8 39 36
----------- ----------- ----------- -----------
Net income (loss) from continuing operations 459 (6,807) 1,383 (17,707)
Discontinued operations (250) (122) (250) 100
----------- ----------- ----------- -----------
Net income (loss) before extraordinary loss 209 (6,929) 1,133 (17,607)
Extraordinary loss on early extinguishment of debt (556) (556)
----------- ----------- ----------- -----------
Net income (loss) 209 (7,485) 1,133 (18,163)
Accrued preferred Series C stock dividends (153) (663)
Accrued preferred Series D stock dividends (2,433) (7,299)
Accrued preferred Series E stock dividends (376) (1,129)
Accretion of preferred Series D stock discount (1,575) (4,725)
Accretion of preferred Series E stock discount (225) (675)
----------- ----------- ----------- -----------
Net loss available to common stockholders $ (4,400) $ (7,638) $ (12,695) $ (18,826)
=========== =========== =========== ===========
Basic and diluted net loss per share:
Continuing operations $ (1.43) $ (6.48) $ (4.29) $ (19.80)
Discontinued operations (0.09) (0.11) (0.09) 0.11
Extraordinary loss (0.52) (0.60)
----------- ----------- ----------- -----------
Total $ (1.52) $ (7.11) $ (4.38) $ (20.29)
=========== =========== =========== ===========
Weighted average common shares outstanding 2,897,732 1,075,200 2,897,732 927,900
=========== =========== =========== ===========
Dividends per common share NONE NONE 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 NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,133 $(18,163)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depletion, depreciation and amortization 5,749 7,990
Amortization of debt issue costs and debt discount 360 630
Loss on sale of assets 51
Noncash interest consideration 8,822
Loss on early extinguishment of debt 556
Effect of changes in current assets and liabilities:
Accounts receivable (2,549) 1,348
Inventory 281 219
Other assets 101 (23)
Accounts payable and accrued expenses (1,137) (6,696)
-------- --------
Net cash provided (used) by operating activities 3,989 (5,317)
-------- --------
Cash flows from investing activities:
Development expenditures and equipment purchases (10,436) (569)
-------- --------
Net cash used by investing activities (10,436) (569)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 4,585 6,250
Payments of long-term debt (32)
Debt issuance costs (494)
Restructuring costs related to Series D and Series E (500)
-------- --------
Net cash provided by financing activities 4,585 5,224
-------- --------
Net cash and cash equivalents used by continuing operations (1,862) (662)
Net cash and cash equivalents from discontinued operations 1,917 (546)
Cash and cash equivalents at beginning of period 1,018 1,627
-------- --------
Cash and cash equivalents at end of period $ 1,073 $ 419
======== ========
</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 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 - Deferral of
the Effective Date of FASB Statement No. 133 - an Amendment of FASB
Statement No. 133 and was modified by SFAS No. 138 "Accounting for Certain
Derivative Instruments and Certain Hedging Activities". 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.
The Company adopted FIN No. 44 "Accounting for Certain Transactions
Involving Stock Compensation - an Interpretation of APB Opinion No. 25" on
July 1, 2000. As a result, the Company is required to account for certain
stock options as variable option grants, based on the Company's market
price on July 1, 2000 ($5.25 per share). These options are 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. No adjustments were made to net income during the third quarter of
year 2000 since the closing market price of the Company's common stock was
lower than the base market price of 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. ("Refining"), a wholly owned subsidiary, was sold on
January 31, 2000 to Silver Eagle Refining, Inc. ("Silver Eagle"). Refining
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 a wholly
owned subsidiary of the Company. This subsidiary also agreed to satisfy
various accounts payable and accrued liabilities not assumed by Silver
Eagle.
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. The Company recorded an additional loss of
$250,000 during the third quarter of 2000 to reflect adjustments to the
refinery shut-down accruals. 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 $51.4 million during the nine-month periods ended
September 30, 2000 and 1999; and $0 and $18.8 million during the
three-month periods ended September 30, 2000 and 1999, respectively. The
net current assets of discontinued operations of $223,000 at September 30,
2000 consist primarily of a note receivable collected in full in October
2000.
5. 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 ("ING"), U.S. Bank National Association and Fortis
Capital Corp. (the "Senior Lenders"). At September 30, 2000, the Company
had advanced all funds under its current borrowing base of $83.5 million.
The borrowing base is calculated as the collateral value of proved reserves
and is subject to redetermination on October 1, 2000 and April 1, 2001 and
may be redetermined at the option of the Senior Lenders one additional time
at any point after October 1, 2000. If the borrowing base is lower than the
outstanding principal balance then drawn, the Company must immediately pay
the difference. The Senior Lenders are in process of performing the October
1, 2000 redetermination. Although there can be no assurance, the Company
does not expect the Senior Lenders to determine a borrowing base lower than
the current borrowing base of $83.5 million.
Under the terms of the ING Credit Agreement, the Company must pay a
facility fee equal to 0.50% of the borrowing base ($417,500) 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 ($835,000) on November 15, 2000 if
ING continues to be a member of the Senior Lenders on November 15, 2000.
Although there can be no assurance, the Company expects to replace ING as a
Senior Lender before November 15, 2000.
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. In addition, the Company's Series D Preferred Stock must be
redeemed equally over three years beginning upon the earlier of September
21, 2004 or the repayment in full of the Company's existing senior credit
facility, which by its terms is October 1, 2001. The Company does not
expect to generate sufficient cash from operations before October 1, 2001
to satisfy these commitments. As a result, the Company is developing a plan
to address this issue which may include (1) renegotiating its existing ING
Credit Agreement to provide for repayment terms beyond October 1, 2001 (2)
entering into a new senior credit facility with repayment terms beyond
October 1, 2001 (3) issuing subordinated debt of the Company (4) selling
equity of the Company (5) selling assets of the Company. Although
management cannot give assurance, they believe the Company will be
successful in obtaining modifications to existing agreements or raising the
necessary capital from other sources in the time frames required.
6. TERMINATION OF FLYING J LETTER OF INTENT:
On October 10, 2000 the Company announced it had discontinued asset
purchase negotiations with Flying J Inc. The Company had entered into a
letter of intent with Flying J in May 2000 to purchase Flying J's North
Salt Lake refinery, nine gasoline stations and their Uinta Basin oil and
gas assets.
7. RECLASSIFICATIONS:
Certain amounts in prior years have been reclassified to conform to the
year 2000 presentation.
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 September 30, 2000 and 1999:
Oil and Gas Sales. Crude oil and natural gas sales for the quarter
ended September 30, 2000 increased $3.1 million, or 71% from the previous year.
As shown in the table below, the variance was caused primarily by higher average
crude oil and natural gas prices. The Company operates and is in control of over
99% of its oil and gas production. The Company's gross operated crude oil sales
were 4,260 barrels per day during the third quarter of year 2000. Crude oil
sales as a percentage of total oil and gas sales were 83% and 80% in the third
quarters 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
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 $1.9
million and $1.7 million during the third quarters of 2000 and 1999,
respectively, to recognize hedging contract settlement losses. See Item 3
"Quantitative and Qualitative Disclosures About Market Risk."
<TABLE>
<CAPTION>
Three Months Ended September 30, 2000 Three Months Ended September 30, 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 277,039 $27.99 $ 7,753 280,428 $17.22 $ 4,828
Natural Gas Sales 631,261 $ 2.51 1,585 717,827 $ 1.72 1,238
Hedging Loss (1,894) (1,707)
------- -------
Total $ 7,444 $ 4,359
======= =======
</TABLE>
Lease Operating Expenses. Lease operating expense for the quarter ended
September 30, 2000 decreased $27,000, or 1% from the previous year third
quarter. Lease operating expense per BOE increased from $4.65 per BOE sold in
the third quarter of 1999 to $4.80 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 would 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
recorded at 1.4% during the third quarter of 2000 and 3.5% during the third
quarter of 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.
Exploration. Exploration expense represents the Company's cost to
retain unproved acreage.
6
<PAGE> 8
Depletion, Depreciation and Amortization. Depletion, depreciation and
amortization for the quarter ended September 30, 2000 decreased 12%, or
$265,000, from the previous year third 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. The Company's depletion
rate was $4.86 per BOE sold during the third quarter of 2000 compared to $5.15
per BOE sold during the third quarter of 1999.
General and Administrative, Net. General and administrative expense for
the quarter ended September 30, 2000 decreased $858,000 from the previous year
third quarter. After removal of $1.2 million of restructuring costs in the 1999
period and $430,000 of costs related to an unsuccessful combination and employee
severance costs in the 2000 period, general and administrative costs were
$90,000, or 21% lower in the third quarter of 2000. General and administrative
expense is reported net of operator fees and reimbursements which were $1.4
million and $1.2 million during the third quarter of 2000 and 1999,
respectively. Gross general and administrative expense was $2.2 million during
the third quarter of 2000 and $2.8 million during the third quarter of 1999.
Interest Expense. Interest expense for the quarter ended September 30,
2000 decreased $2.9 million from the previous year third quarter. The decrease
resulted from a decrease in the average amount of borrowings outstanding due to
the financial restructuring performed in September 1999. Interest incurred on
borrowings during the third quarters of 2000 and 1999 were recorded at effective
interest rates of 10.0% and 10.6%, respectively.
Other Income. Other income primarily represents interest earned on cash
balances.
Income Taxes. During the third 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 third quarter 1999, the Company
reported an operating loss of $122,000 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 Refining
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. The Company recorded an additional loss of $250,000
during the third quarter of 2000 to reflect adjustments to the refinery
shut-down accruals.
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.
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 in September 1999 and is being accreted to face value ($80.7
million) 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 in September 1999 and is being accreted to face value ($12.2
million) over the period until the minimum mandatory redemption date of October
1, 2003.
7
<PAGE> 9
Nine Month Periods Ended September 30, 2000 and 1999:
Oil and Gas Sales. Crude oil and natural gas sales for the nine months
ended September 30, 2000 increased $7.76 million, or 61% from the previous year.
Prior to considering hedging losses of $4.2 million in 2000 and $2.5 million in
1999, the Company's oil and gas revenues increased 62% between nine month
periods. As shown in the table below, the variance was caused by higher average
crude oil and natural gas prices offset by sales volume declines. The Company
operates and is control of over 99% of its oil and gas production. 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 sales to decline from
5,000 barrels per day during the first quarter of 1999 to 3,600 barrels per day
during the fourth quarter of 1999. Since resumption of drilling in October 1999,
the Company has grown its gross crude oil sales back to 4,500 barrels per day.
Crude oil sales as a percentage of total oil and gas sales were 85% and 77%
during the initial nine months 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
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 $4.2
million and $2.5 million during the first nine months of 2000 and 1999,
respectively to recognize hedging contract settlement losses. See Item 3
"Quantitative and Qualitative Disclosures About Market Risk."
<TABLE>
<CAPTION>
Nine Months Ended September 30, 2000 Nine Months Ended September 30, 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 800,032 $26.17 $ 20,934 924,591 $12.71 $ 11,754
Natural Gas Sales 1,749,450 $ 2.18 3,808 2,321,864 $ 1.52 3,540
Hedging Loss (4,213) (2,520)
-------- --------
Total $ 20,529 $ 12,774
======== ========
</TABLE>
Lease Operating Expenses. Lease operating expense for the initial nine
months of year 2000 decreased $74,000, or 1.4% from the previous year period.
Lease operating expense per BOE increased from $3.98 per BOE sold during the
first nine months of 1999 to $4.72 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
recorded at 1.9% during the initial nine months of 2000 and 2.7% during the same
period in 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.
Exploration. Exploration expense represents the Company's cost to
retain unproved acreage.
Depletion, Depreciation and Amortization. Depletion, depreciation and
amortization for the nine-month period ended September 30, 2000 decreased 28%,
or $2.24 million, from the comparable previous year period. 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. The
Company's depletion rate was $4.86 per BOE sold during the initial nine months
of 2000 compared to an average of $5.71 per BOE sold during the same period in
1999.
8
<PAGE> 10
General and Administrative, Net. General and administrative expense for
the nine months ended September 30, 2000 decreased $1.17 million from the
comparable previous year period. After removal of costs related to unsuccessful
combinations in the 1999 and 2000 periods and restructuring costs in the 1999
period, comparable net general and administrative costs were lower by $70,000 or
6.3%. General and administrative expense is reported net of operator fees and
reimbursements which were $4.12 million and $3.53 million during the initial
nine months of 2000 and 1999, respectively. Gross general and administrative
expense was $5.58 million during the first nine months of 2000 and $6.16 million
during the same period in 1999.
Interest Expense. Interest expense for the nine month period ended
September 30, 2000 decreased $7.9 million from the comparable prior year period.
The decrease resulted from a decrease in the average amount of borrowings
outstanding during the period due to the financial restructuring performed in
September 1999. Interest incurred on borrowings during the first nine months of
2000 and 1999 were recorded at effective interest rates of 10.0% and 10.6%,
respectively.
Other Income. Other income primarily represents interest earned on cash
balances.
Income Taxes. During the first nine months 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 nine months of 1999, the
Company reported operating income of $100,000 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 Refining 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. The Company recorded an additional
loss of $250,000 during the third quarter of 2000 to reflect adjustments to the
refinery shut-down accruals.
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.
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 in September 1999 and is being accreted to face value ($80.7
million) 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 in September 1999 and is being accreted to face value ($12.2
million) over the period to the minimum mandatory redemption date of October 1,
2003.
9
<PAGE> 11
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 ("ING"), U.S. Bank National Association and Fortis Capital Corp.
(the "Senior Lenders"). At September 30, 2000, the Company had advanced all
funds under its current borrowing base of $83.5 million. The borrowing base is
calculated as the collateral value of proved reserves and is subject to
redetermination on October 1, 2000 and April 1, 2001 and may be redetermined at
the option of the Senior Lenders one additional time at any point after October
1, 2000. If the borrowing base is lower than the outstanding principal balance
then drawn, the Company must immediately pay the difference. The Senior Lenders
are in process of performing the October 1, 2000 redetermination. Although there
can be no assurance, the Company does not expect the Senior Lenders to determine
a borrowing base lower than the current borrowing base of $83.5 million.
Under the terms of the ING Credit Agreement, the Company must pay a facility fee
equal to 0.50% of the borrowing base ($417,500) 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 ($835,000) on November 15, 2000 if ING continues to be a
member of the Senior Lenders on November 15, 2000. Although there can be no
assurance, the Company expects to replace ING as a Senior Lender before November
15, 2000.
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. In
addition, the Company's Series D Preferred Stock must be redeemed equally over
three years beginning upon the earlier of September 21, 2004 or the repayment in
full of the Company's existing senior credit facility, which by its terms is
October 1, 2001. The Company does not expect to generate sufficient cash from
operations before October 1, 2001 to satisfy these commitments. As a result, the
Company is developing a plan to address this issue which may include (1)
renegotiating its existing ING Credit Agreement to provide for repayment terms
beyond October 1, 2001 (2) entering into a new senior credit facility with
repayment terms beyond October 1, 2001 (3) issuing subordinated debt of the
Company (4) selling equity of the Company (5) selling assets of the Company.
Although management cannot give assurance, they believe the Company will be
successful in obtaining modifications to existing agreements or raising the
necessary capital from other sources in the time frames required.
Interest accrues under the ING Credit Agreement, at the Company's option, at
either (i) 2% above the prime rate or (ii) 3% above the LIBOR rate. At September
30, 2000, all amounts were borrowed under the LIBOR option at an effective
interest rate of 9.63% through November 30, 2000. The Company must pay a
facility fee equal to 0.50% of the borrowing base ($417,500) on April 1, 2001
and again on September 30, 2001. 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.
The Company reinitiated its drilling program in October 1999 based on liquidity
generated from the financial restructuring. The Company drilled eight wells in
1999, 32 wells during the first nine months of year 2000 and has plans to drill
an additional 13 wells in 2000. The Company also continued its efforts to
pressurize the Field by converting 22 wells to water injection in 1999, 24 wells
during the first nine months of year 2000 and has plans to convert an additional
17 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.
10
<PAGE> 12
During the first nine months of 2000, the Company borrowed $4.6 million under
the ING Credit Agreement and generated $13.3 million of EBITDA (earnings before
interest, taxes, depreciation and amortization) which it used to continue its
development of the Field ($10.4 million), service interest on borrowings ($6.2
million) and reduce outstanding accounts payable ($1.4 million). The Company's
capital budget for development of the Field in year 2000 is $13.0 million net to
the Company. Although there can be no assurance, the Company believes that cash
on hand along with future cash to be generated from operations will be
sufficient to implement its development plans for the next year.
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.
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, credit facilities, 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 SEC.
11
<PAGE> 13
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 September 30, 2000, the ING
Credit Agreement had a principal balance of $83.5 million at an average floating
interest rate of 9.63% per annum, which rate has been locked in through November
30, 2000. Assuming the principal is paid according to the terms of the loan,
increased interest rates could result in increased 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
-------------------------------------------------
October 1, 2000 through January 1, 2001 through
December 31, 2000 October 1, 2001
----------------------- -----------------------
<S> <C> <C>
1% increase in Interest Rates $ 70,000 $ 625,000
2% increase in Interest Rates $140,000 $1,250,000
</TABLE>
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 collars to hedge
crude oil production during calendar years 2000 and 2001. The Company recorded a
loss of $4.2 million during the first nine months of 2000 under these contracts.
The potential future losses on these contracts for the period October 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
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
All Remaining
Contracts $ 22.00 $ 24.00 $ 26.00 $ 28.00 $ 30.00 $ 32.00
Year 2000 $ -0- $ (320,000) $ (680,000) $(1,040,000) $(1,400,000) $(1,760,000)
Year 2001 $ (126,000) $(1,220,000) $(2,390,000) $(3,560,000) $(4,730,000) $(5,900,000)
</TABLE>
12
<PAGE> 14
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.
13
<PAGE> 15
INLAND RESOURCES INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INLAND RESOURCES INC.
---------------------
(Registrant)
Date: November 1, 2000 By: /s/ Bill I. Pennington
---------------- ---------------------------------------
Bill I. Pennington
Chief Executive Officer
Chief Financial Officer
Date: November 1, 2000 By: /s/ Michael J. Stevens
---------------- ---------------------------------------
Michael J. Stevens
Vice President, Secretary and Treasurer
(Principal Accounting Officer)
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
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.*
</TABLE>
----------
* Filed herewith.
