SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q / A
AMENDMENT NO.1
(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, 2002
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 6, 2002: 2,897,732
---------
1
PART 1. FINANCIAL INFORMATION
INLAND RESOURCES INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2002 AND DECEMBER 31, 2001
(In thousands)
<Table>
<Caption>
March 31, December 31,
2002 2001
------------- -------------
ASSETS (As Restated) (As Restated)
(See Note 1) (See Note 1)
Unaudited
Current assets:
Cash and cash equivalents $ 338 $ 1,949
Accounts receivable and accrued sales 4,163 3,320
Inventory 1,499 1,192
Other current assets 292 443
------------- -------------
Total current assets 6,292 6,904
------------- -------------
Property and equipment, at cost:
Oil and gas properties (successful efforts method) 206,677 205,535
Accumulated depletion, depreciation and amortization (45,495) (43,510)
------------- -------------
161,182 162,025
Other property and equipment, net 2,094 2,230
------------- -------------
Total property and equipment, net 163,276 164,255
Other long-term assets, net 2,073 2,217
------------- -------------
Total assets $ 171,641 $ 173,376
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 2,416 $ 4,011
Accrued expenses 2,398 2,321
Fair market value of derivative instruments 472 --
Long- term debt 83,500 --
Senior subordinated unsecured debt including accrued interest 5,372 --
Subordinated unsecured debt including accrued interest 106,345 --
Junior subordinated unsecured debt including accrued interest 5,372 --
------------- -------------
Total current liabilities 205,875 6,332
------------- -------------
Long- term debt -- 83,500
Senior subordinated unsecured debt including accrued interest -- 5,228
Subordinated unsecured debt including accrued interest -- 103,500
Junior subordinated unsecured debt including accrued interest -- 5,228
------------- -------------
Total long term liabilities -- 197,456
Commitments and contingencies
Stockholders' deficit:
Common stock, par value $.001; 25,000,000 shares authorized,
2,897,732 issued and outstanding 3 3
Additional paid-in capital 41,431 41,431
Accumulated other comprehensive income 672 1675
Accumulated deficit (76,340) (73,521)
------------- -------------
Total stockholders' deficit (34,234) (30,412)
------------- -------------
Total liabilities and stockholders' deficit $ 171,641 $ 173,376
============= =============
</Table>
The accompanying notes are an integral part of the
consolidated financial statements
2
INLAND RESOURCES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2002 AND 2001
(In thousands except earnings per share)
(Unaudited)
<Table>
<Caption>
Three months ended
March 31,
--------------------------
2002 2001
---------- ----------
(As Restated)
(See Note 1)
Revenues:
Oil and gas sales $ 7,113 $ 8,169
Operating expenses:
Lease operating expenses 3,140 2,281
Production taxes 105 206
Exploration 32 31
Depletion, depreciation and amortization 2,145 2,014
General and administrative, net 15 350
---------- ----------
Total operating expenses 5,437 4,882
---------- ----------
Operating income 1,676 3,287
Interest expense (4,503) (2,099)
Unrealized derivative loss due to time value -- (390)
Interest and other income 8 24
---------- ----------
Net income (loss) before cumulative effect of change
in accounting principle (2,819) 822
Cumulative effect of change in accounting principle -- 45
---------- ----------
Net income (loss) (2,819) 867
Accrued preferred Series D dividends -- (2,718)
Accrued preferred Series E dividends -- (420)
Accretion of preferred Series D discount -- (1,578)
Accretion of preferred Series E discount -- (255)
---------- ----------
Net loss attributable to common stockholders $ (2,819) $ (4,104)
========== ==========
Net income (loss) $ (2,819) $ 867
Comprehensive income from change in fair value of
derivative contracts -- 192
---------- ----------
Total comprehensive income (loss) $ (2,819) $ 1,059
========== ==========
Basic and diluted net loss per share before cumulative
effect of change in accounting principle $ (.97) $ (1.44)
Cumulative effect of change in accounting principle -- (.02)
---------- ----------
Basic and diluted net loss per share $ (.97) $ (1.42)
========== ==========
Basic and diluted weighted average common shares
outstanding 2,898 2,898
========== ==========
Dividends per common share NONE NONE
========== ==========
</Table>
The accompanying notes are an integral part of the
consolidated financial statements
3
INLAND RESOURCES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2002 AND 2001
(In thousands)
(Unaudited)
<Table>
<Caption>
2002 2001
------------- ----------
(As Restated)
(See Note 1)
Cash flows from operating activities:
Net income (loss) $ (2,819) $ 867
Adjustments to reconcile net income (loss) to net cash
provided by (used by) operating activities:
Depletion, depreciation and amortization 2,145 2,014
Amortization of debt issue costs and debt discount 141 300
Noncash charges related to derivatives (531) 345
Accrued interest expense added to subordinated debt 3,133 --
Effect of changes in current assets and liabilities:
Accounts receivable (843) 180
Inventory (307) (97)
Other assets 151 101
Accounts payable and accrued expenses (1,518) 959
------------- ----------
Net cash provided (used) by operating activities (448) 4,669
------------- ----------
Cash flows from investing activities:
Development expenditures and equipment purchases (1,163) (5,383)
------------- ----------
Net cash used by investing activities (1,163) (5,383)
------------- ----------
Net decrease in cash and cash equivalents (1,611) (714)
Cash and cash equivalents at beginning of period 1,949 848
------------- ----------
Cash and cash equivalents at end of period $ 338 $ 134
============= ==========
</Table>
The accompanying notes are an integral part of the
consolidated financial statements
4
INLAND RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------
1. RESTATEMENT OF PRIOR PERIODS:
In 2001 and prior years, the Company entered into certain commodity
derivative contracts with Enron North America Corp. ("ENAC"), a subsidiary
of Enron Corp. ("Enron"). On December 2, 2001, Enron and ENAC filed for
Chapter 11 bankruptcy, and the Company determined that the ENAC contracts
no longer qualified for cash flow hedge accounting under Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"). Consequently, the
Company recorded a loss of $5.5 million for the year ended December 31,
2001 and deferred a corresponding amount in accumulated other comprehensive
income, based on the estimated fair value of the derivative contracts based
on future commodity prices at November 28, 2001.
The Company subsequently determined it should have ceased accounting for
the derivative contracts as hedges at an earlier date, corresponding to the
deterioration in the credit of ENAC and Enron in mid October 2001. At this
date, changes in the fair value of the derivatives no longer were
considered effective in offsetting changes in the cash flows of the hedged
production. Accordingly, the Company adjusted the loss and the
corresponding amount deferred in other comprehensive income previously
recorded to reflect the estimated fair value of the derivative contracts at
that date of $2.2 million. An adjustment was also recorded to reclassify to
earnings $480,000 for the year ended December 31, 2001, representing the
portion of the fair value of the derivative attributable to the originally
scheduled settlements in 2001.
As a result, the Company has restated the accumulated other comprehensive
income and accumulated deficit balances included in the accompanying
December 31, 2001 balance sheet to reflect the adjustments discussed above.
The table below details the adjustments and restated balances for the
respective periods:
<Table>
<Caption>
As
Originally As
Reported Adjustments Restated
---------- ----------- --------
As of December 31, 2001:
Accumulated Other Comprehensive Income $ 5,503 $ (3,828) $ 1,675
========== =========== ========
Accumulated Deficit $ (77,349) $ 3,828 $(73,521)
========== =========== ========
As of March 31, 2002:
Accumulated Other Comprehensive Income $ 4,028 $ (3,356) $ 672
========== =========== ========
Accumulated Deficit $ (79,696) $ 3,356 $(76,340)
========== =========== ========
For the Year ended December 31, 2001:
Oil and gas sales $ 31,487 $ 480 $ 31,967
========== =========== ========
Unrealized derivative loss $ (5,548) $ 3,348 $ (2,200)
========== =========== ========
Operating income $ 10,929 $ 480 $ 11,409
========== =========== ========
Net loss $ (5,979) $ 3,828 $ (2,151)
========== =========== ========
Net loss attributable to common stockholders $ (4,071) $ 3,828 $ (243)
========== =========== ========
For the Three Months ended March 31, 2002:
Oil and gas sales $ 7,585 $ (472) $ 7,113
========== =========== ========
Operating income $ 2,148 $ (472) $ 1,676
========== =========== ========
Net loss $ (2,347) $ (472) $ (2,819)
========== =========== ========
Net loss attributable to common stockholders $ (2,347) $ (472) $ (2,819)
========== =========== ========
</Table>
Amounts expected to be reclassified to earnings in the reminder of 2002 and
in 2003 are $913,000 and $231,000, respectively.
5
2. COMPANY ORGANIZATION:
Inland Resources Inc. (the "Company") is an independent energy company with
substantially all of its producing and nonproducing oil and gas property
interests located in the Monument Butte Field within the Uinta Basin of
Northeastern Utah (the "Field").
3. 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, 2001.
4. ACCOUNTING PRONOUNCEMENTS:
In June 2001, SFAS No. 141 "Business Combination" and SFAS No. 142
"Goodwill and Other Intangible Assets" were issued, which requires all
business combinations to be accounted for using the purchase method and
also changes the treatment of goodwill created in a business combination to
discontinue amortization of goodwill. The adoption of these two statements
did not have an impact on the Company's financial position or results of
operations.
Additionally, SFAS No. 143 "Accounting for Asset Retirement Obligations"
was issued in July 2001. This standard requires entities to record the
discounted fair value of a liability for an asset retirement obligation as
a liability. When the liability is initially recorded, the entity
capitalizes the cost by increasing the carrying amount of the related
long-lived asset. The carrying amount of the liability is accreted to its
full liability as operating expense, and the asset previously recorded is
then depreciated over the estimated useful life. The present value of the
retirement obligation is adjusted each reporting period. The Company has
not yet determined the impact of adopting this statement, which will be
required on January 1, 2003.
5. FINANCIAL INSTRUMENTS:
Periodically, the Company enters into commodity contracts to hedge or
otherwise reduce the impact of oil price fluctuations. The amortized cost
and the monthly settlement gain or losses are reported as adjustments to
revenue in the period in which the related oil is sold. Hedging activities
do not affect the actual sales price for the Company's crude oil. The
Company is subject to the creditworthiness of its counterparties since the
contracts are not collateralized. Until December 31, 2001, the Company had
entered into all of its hedging contracts with Enron North America Corp.
("ENAC").
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS No. 133") was issued. This statement establishes
accounting and reporting standards for derivative instruments and hedging
activity. SFAS No. 133 requires recognition of all derivative instruments
on the balance sheet as either assets or liabilities measured at fair
value. Changes in the derivative's fair value are 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 impact of adopting SFAS No. 133 on
January 1, 2001 resulted in recording a current liability of $1,927,000 and
recorded a cumulative effect of a change in accounting principle as
accumulated comprehensive loss in the equity section of $1,972,000 and
income recorded as a cumulative effect of a change in accounting principle
of $45,000.
On March 11, 2002, the Company hedged 30,000 net barrels per month in the
form of swaps with a third party counterparty for the period of April 2002
to December 2002 period with a settlement amount of $23.90 per barrel. As
of March 31, 2002, the effect of SFAS No. 133 resulted in the Company
recording a liability reflecting the fair value of derivatives to $472,000.
Accumulated other comprehensive loss ("OCI") was adjusted to $4,028,000 as
a result of recording $472,000 to current liabilities reflecting the fair
value of derivatives at March 31, 2002 and $531,000 that had been
reclassified out of OCI to earnings related to the Company's ineffective
ENAC contracts.
6
6. CHANGE OF CONTROL AND RECAPITALIZATION:
In January 2002, the Company announced that it had hired Lehman Brothers
Inc. and Petroleum Place Energy Advisors to advise the Company regarding
its review of strategic alternatives, which may include a potential sale or
merger of the Company. The Company is engaged in various levels of
negotiations regarding such a transaction.
1999 Exchange Agreement - On September 21, 1999, the Company entered into
an Exchange Agreement (the "Exchange Agreement") with Trust Company of the
West, as Sub-Custodian for Mellon Bank for the benefit of Account No. CPFF
873-3032 ("Fund V"), TCW Portfolio No. 1555 DR V Sub-Custody Partnership,
L.P. ("Portfolio") (Portfolio and Fund V collectively being referred to as
"TCW"), Inland Holdings LLC ("Holdings") and Joint Energy Development
Investments II Limited Partnership ("JEDI"). Pursuant to the Exchange
Agreement, Fund V agreed to exchange $75 million in principal amount of
subordinated indebtedness of IPC plus accrued interest of $5.7 million and
Portfolio agreed to exchange warrants to purchase 15,852 shares of Common
Stock for the following securities of Inland issued to Holdings, whose
members are Fund V and Portfolio: (1) 10,757,747 shares of Series D
Preferred Stock, (2) 5,882,901 shares of Series Z Preferred Stock, which
automatically converted into 588,291 shares of Common Stock on December 14,
1999, and (3) 1,164,295 shares of Common Stock. JEDI agreed to exchange the
100,000 shares of Inland's Series C Cumulative Convertible Preferred Stock
("Series C Preferred Stock") owned by JEDI, together with $2.2 million of
accumulated dividends thereon, for (A) 121,973 shares of Series E Preferred
Stock and (B) 292,098 shares of Common Stock (the "Recapitalization"). The
Series C Preferred Stock bore dividends at a rate of $10 per share, had a
liquidation preference of $100 per share and was required to be redeemed at
a price of $100 per share not later than January 21, 2008.
March 2001 Transaction - On March 20, 2001, Hampton Investments LLC
("Hampton"), an affiliate of Smith Management LLC, ("Smith") purchased from
JEDI the 121,973 shares of Series E Preferred Stock and 292,098 shares of
Common Stock acquired by JEDI in the Exchange Agreement. Following closing
of the Exchange Agreement and the purchase by Hampton of JEDI's shares,
Holdings owned 1,752,586 shares of Common Stock, representing approximately
60.5% of the outstanding shares of Common Stock as of March 20, 2001.
Hampton owned 292,098 shares of Common Stock, representing approximately
10.1% of the outstanding shares of Common Stock as of March 20, 2001. TCW
Asset Management Company has the power to vote and dispose of the
securities owned by Holdings.
August 2001 Transaction - On August 2, 2001, the Company closed two
subordinated debt transactions totaling $10 million in aggregate with
SOLVation Inc. ("SOLVation"), a company affiliated with Smith, and entered
into other restructuring transactions as described below. The first of the
two debt transactions with SOLVation was the issuance of a $5 million
unsecured senior subordinated note to SOLVation due July 1, 2007. The
interest rate is 11% per annum compounded quarterly. The interest payment
is payable in arrears in cash subject to the approval from the senior bank
group and accumulates if not paid in cash. The Company is not required to
make any principal payments prior to the July 1, 2007 maturity date.
However, the Company is required to make payments of principal and interest
in the same amounts as any principal payment or interest payments on the
TCW Subordinated Note (described below). Prior to the July 1, 2007 maturity
date, subject to the bank subordination agreement, the Company may prepay
the senior subordinated note in whole or in part with no penalty.
The Company also issued a second $5 million unsecured junior subordinated
note to SOLVation. The interest rate is 11% per annum compounded quarterly.
The maturity date is the earlier of (i) 120 days after payment in full of
the TCW subordinated debt or (ii) March 31, 2010. Interest is payable in
arrears in cash subject to the approval from the senior bank group and
accumulates if not paid in cash. The Company is not required to make any
principal payments prior to the March 31, 2010 maturity date. Prior to the
March 31, 2010 maturity date, subject to both bank and subordination
agreements, the Company may prepay the junior subordinated note in whole or
in part with no penalty. A portion of the proceeds from the senior and
junior subordinated notes was used to fund a $2 million payment to Holdings
and other Company working capital needs.
In conjunction with the issuance of the two subordinated notes to
SOLVation, the Series D Preferred and Series E Preferred stock held by
Holdings were exchanged for an unsecured subordinated note due September
30,
7
2009 and $2 million in cash from the Company. Holdings had previously
purchased the Series E Preferred Stock from Hampton. The TCW Subordinated
Note amount was for $98,968,964 that represented the face value plus
accrued dividends of the Series D Preferred Stock as of August 2, 2001. The
interest rate on this debt is 11% per annum compounded quarterly. Interest
is payable in arrears in cash subject to the approval from the senior bank
group and accumulates if not paid in cash. Interest payments will be made
quarterly, commencing on the earlier of September 30, 2005 or the end of
the first calendar quarter after the senior bank debt has been reduced to
$40 million or less, subject to both bank and senior subordination
agreements. Beginning the earlier of two years prior to the maturity date
or the first December 30 after the repayment in full of the senior bank
debt, subject to both bank and senior subordination agreements, the Company
will make equal annual principal payments of one third of the aggregate
principal amount of the TCW Subordinated Note. Any unpaid principal or
interest amounts are due in full on the September 30, 2009 maturity date.
Prior to the September 30, 2009 maturity date, subject to both bank and
senior subordination agreements, the Company may prepay the TCW
Subordinated Note in whole or in part with no penalty. As a result of the
exchange, the Company retired both the Series D and Series E Preferred
stock. Due to the related party nature of this transaction, the difference
between the aggregate subordinated note balance and $2 million cash paid to
Holdings and the aggregate liquidation value of the Series D and E
preferred stock plus accrued dividends of $13,083,000 was recorded as an
increase to additional paid-in capital.
As part of this restructuring, Holdings also sold to Hampton, 1,455,390
shares of their common stock in the Company. Consequently, Hampton now
controls approximately 80% of the issued and outstanding shares of the
Company. Holdings also terminated any existing option rights to the
Company's common stock, and relinquished the right to elect four persons to
the Company's Board of Directors to Hampton. However, Holdings has the
right to nominate one person to the Company's Board. Remaining board
members will be nominated by the Company's shareholders. As long as Hampton
or its affiliates own at least a majority of the common stock of the
Company, Hampton has agreed with Holdings that Hampton will have the right
to appoint at least two members to the board.
7. FORTIS CAPITAL AGREEMENT:
Effective September 21, 1999, the Company entered into a credit agreement
(the "Fortis Credit Agreement"). The current participants are Fortis
Capital Corp. and U.S. Bank National Association (the "Senior Lenders"). At
December 31, 2001, 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 or
before March 31, 2002 and with subsequent determinations to be made on each
subsequent October 1 and April 1. If the borrowing base is lower than the
outstanding principal balance then drawn, the Company must immediately pay
the difference. The borrowing base was redetermined to be $83.5 million at
March 26, 2002.
In conjunction with SOLVation financing, the Fortis Credit Agreement with
the senior bank group was amended to change the maturity date to June 30,
2007 from April 1, 2002, or potentially earlier if the borrowing base is
determined to be insufficient. Interest accrues under the Fortis Credit
Agreement, at the Company's option, at either (i) 2% above the prime rate
or (ii) at various rates above the LIBOR rate. The LIBOR rates will be
determined by the senior debt to EBITDA ratios starting August 2, 2001. If
the senior debt to EBITDA ratio is greater than 4.00 to 1.00, the rate is
3.25% above the LIBOR rate; if the senior debt to EBITDA ratio is equal to
or less than 4.00 to 1.00 but greater than 3.00 to 1.00, the rate is 2.75%
above the LIBOR rate; if the senior debt to EBITDA ratio is less than 3.00
to 1.00, the rate is 2.25% above the LIBOR rate. As of March 31, 2002, $83
million and $500,000 were borrowed under the LIBOR option at interest rates
of 6.27% and 4.65%, respectively. The revolving termination date is June
30, 2004 at which time the loan converts into a term loan payable in 12
equal quarterly installments of principal, with accrued interest, beginning
September 30, 2004. The Fortis Credit Agreement is secured by a first lien
on substantially all assets of the Company. The Fortis Credit Agreement was
amended on March 25, 2002 to require that starting on July 1, 2002 at least
50% of the Company's expected oil and gas production to be financially
hedge by July 1, 2002 for the period through September 30, 2003.
The Fortis Credit Agreement has covenants that restrict the payment of cash
dividends, borrowings, sale of assets, loans to others, investments, 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 Company was in compliance of its bank covenants
except for one covenant as March 31, 2002. The
8
covenant is the debt to EBITDA ratio that was 4.48 to 1.00 rather than the
required 3.75 to 1.00. No default has been claimed by Fortis, but under the
terms of the Credit Agreement, no notice or period of time to cure the
default is required, and therefore the Company was in default. As a result
of the noncompliance with such covenant and the ability of Fortis to call
the amount payable immediately, the entire amount payable to Fortis of
$83.5 million has been reclassified as a current liability. The Senior
Lenders waived the compliance with the original March 31, 2002 senior debt
to EBITDA ratio on June 6, 2002.
The Company was in compliance with its bank covenants as of June 30, 2002
and September 30, 2002 except for the senior debt to EBITDA ratios, which
were 4.80 to 1.00 rather than the required 4.75 to 1.00 and 5.23 to 1.00
rather than the required 4.35 to 1.00, respectively. Under the terms of the
Fortis Credit Agreement, no notice or period of time to cure the default is
required, and therefore the Company was in default. As a result of the
noncompliance with such covenant and the ability of the Senior Lenders to
call the amount payable immediately, the entire amount payable to the
Senior Lenders of $83.5 million has been reclassified as a current
liability. Also, since the subordinated debt has cross default provisions
in their agreements, the Company has reclassified the aggregated
subordinated debt balance of $117.1 million as a current liability. As a
result of these defaults, and in an attempt to achieve a stronger financial
position, the Company is reviewing its capital structure and considering
various alternatives that may be available. These could include an
amendment to the Fortis Loan Agreement to ease certain financial covenants
and to redefine the events of default, and a restructuring of other long
term debt. There is no assurance the Company will be able to achieve any
such restructuring, and in the event the Senior Lenders were to exercise
their remedies, the Company would be forced to seek protection. The Fortis
Credit Agreement has been amended on five previous occasions, however,
there can be no assurance that the Senior Lenders will agree to a future
amendment to the Fortis Credit Agreement or that they will not assert their
rights to foreclose on their collateral. Foreclosure by the Senior Lenders
on their collateral would have a material adverse effect on the Company's
financial position and results of operations. Should Fortis attempt to
foreclose, the Company would immediately seek alternative financing and/or
the potential sale of a portion or all of its oil and gas properties,
although there can be no assurance that it would be successful. If the
Company is unable to obtain a waiver, negotiate an amendment to the Fortis
Credit Agreement, otherwise refinance its debt, or sell sufficient assets
to repay the secured debt, its inability to do so would raise substantial
doubt about the Company's ability to continue as a going concern.
The report of KPMG LLP that accompanies the restated financial statements
as of and for the year ended December 31, 2001, contained in Amendment No.
One of Form 10-K/A, states that "the Company has suffered losses from
operations, has a net capital deficiency and has defaulted on its senior
indebtedness subsequent to year-end which raise substantial doubt about its
ability to continue as a going concern".
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
8. SUBSEQUENT EVENT:
An amendment of the Fortis Credit Agreement dated February 3, 2003 was
executed to provide for (1) extension of the Company's borrowing base of
$83.5 million through July 31, 2003, (2) a credit commitment of $5 million
for letters of credit to support commodity pricing hedging and other
obligations to be secured by letters of credit, (3) modification of the
maturity date of the revolving facility to be paid in installments between
2004 and 2008 if the Company obtains $15 million of capital in the form of
equity, debt or contributed property by December 31, 2003 and modification
of certain financial covenants such that the Company expects to be able to
be in compliance throughout 2003. The Company agreed to hedge 50% of its
net oil and gas production through December 31, 2004 by June 30, 2003.
Also, by December 31, 2003 and by each December 31 thereafter during the
term of the credit agreement, the Company agreed to hedge 50% of the oil
and gas production for the following twelve months. However, the bank
amendment does not become effective until the actual closing of the TCW and
Smith Exchange except the Company will be able to use the $5 million
letters of credit for commodity pricing hedging for a period of 90 days
after the date of the amendment.
Also, on January 30, 2003, TCW agreed to exchange its subordinated note in
the principal amount of $98,968,964, plus all accrued and unpaid interest
for 22,053,000 shares of the Company's common stock and that number of
shares of Series F Preferred Stock equal to 911,588 shares plus 338 shares
for each day after
9
November 30, 2002. Smith has also agreed to exchange its Junior
Subordinated Note in the principal amount of $5,000,000, plus all accrued
and unpaid interest for that number of shares of Series F Preferred Stock
equal to 68,854 shares plus 27 shares for each day after November 30, 2002.
The Company will authorize 1,100,000 shares of Series F Preferred Stock
In the event of a voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of the Series F Preferred Stock
shall be entitled to receive, in preference to the holders of the common
stock, a per share amount equal to $100, as adjusted for any stock
dividends, combinations or splits with respect to such share, plus all
accrued or declared but unpaid dividends on such share. Each share of
Series F Preferred Stock will be automatically converted into 100 shares of
the Company's common stock when sufficient shares of Common Stock have been
authorized.
TCW and the Smith Parties will form a new Delaware corporation to be known
as Inland Resources Inc. ("Newco"). TCW will contribute to Newco all of
TCW's holdings in the Company's common stock and Series F Preferred Stock
in exchange for 92.5% of the common stock of Newco, and each of the Smith
Parties will contribute to Newco all of its holdings in the Company's
common stock and Series F Preferred Stock in exchange for an aggregate of
7.5% of the common stock of Newco. Newco will then own 99.7% of the
Company's common stock and common stock equivalents.
Upon the formation of Newco and closing of the Exchange, the Board of
Directors of Newco will meet to pass a resolution for Inland to merge with
and into Newco, with Newco surviving as a Delaware corporation (the
"Merger"). No action is required by the Company's shareholders or Board of
Directors under the relevant provisions of Washington and Delaware law with
respect to a merger of a subsidiary owned more than 90% by its parent
corporation.
Shareholders of Inland will have the right to dissent from the Merger and
have a court appraise the value of their shares. Shareholders electing to
exercise their right of appraisal will not receive the $1.00 per share paid
to all other public shareholders, but will instead receive the appraised
value, which may be more or less than $1.00 per share.
The Merger will result in Inland terminating its status as a reporting
company under the Securities Exchange Act of 1934 and its stock ceasing to
be traded on the over-the-counter bulletin board. Its successor, Newco,
will instead be a private company owned by two shareholders.
However, at the date of this report, the Company is unable to obtain a
complete waiver of the Fortis Credit Agreement due to the effectiveness of
the amendment being contingent upon the closing of the TCW and Smith
Exchange. The Company's inability to consummate the amendment to the Fortis
Credit Agreement would raise substantial doubt about the Company's ability
to continue as a going concern. The Fortis Credit Agreement has been
amended on five previous occasions, however, there can be no absolute
assurance that the January 30, 2003 amendment will go into effect and that
the Senior Lenders will not assert their rights to foreclose on their
collateral. Foreclosure by the Senior Lenders on their collateral would
have a material adverse effect on the Company's financial position and
results of operations. Should Fortis attempt to foreclose, the Company
would immediately seek alternative financing and/or the potential sale of a
portion or all of its oil and gas properties, although there can be no
assurance that it would be successful.
10
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:
Three Month Periods Ended March 31, 2002 (Restated) (See Note 1) and 2001:
Oil and Gas Sales. Crude oil and natural gas sales for the quarter
ended March 31, 2002 decreased $1,056,000, or 13% from the previous year. As
shown in the table below, the variance was caused by lower crude oil and natural
gas prices offset by higher crude oil, natural gas sales volumes and a non-cash
hedging crude oil gain. Crude oil sales as a percentage of total oil and gas
sales were 82% and 75% in the first quarter of 2002 and 2001, respectively.
Excluding non-cash hedging crude oil gain, crude oil and natural gas sales for
the quarter ended March 31, 2002 decreased $2.8 million, or 30% from the
previous year. Crude oil will continue to be the predominant product produced
from the Field.
The Company has entered into crude oil price protection agreements to
reduce its exposure to market price fluctuations. 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
increased by $531,000 of non-cash gains during the first quarter of 2002 to
reflect the amortization of deferred hedging gains to the Company's hedging
contracts with ENAC. Crude oil sales were decreased by $1.2 million during the
first quarter of 2001 to recognize hedging contract settlement losses. See Item
3 "Quantitative and Qualitative Disclosures About Market Risk."
<Table>
<Caption>
Quarter Ended March 31, 2002 Quarter Ended March 31, 2001
----------------------------------- --------------------------------------
Net Volume Net Volume
(Bbls or Average Sales (Bbls or Average Sales
Mcfs) Price (in 000's) Mcfs) Price (in 000's)
---------- ------- ---------- ---------- ------- ----------
Crude Oil Sales 291,061 $ 18.58 $ 5,407 283,490 $ 24.99 $ 7,084
Natural Gas Sales 555,540 $ 2.11 1,175 483,062 $ 4.81 2,322
Hedging Gain(Loss) 531 (1,237)
---------- ----------
Total $ 7,113 $ 8,169
========== ==========
</Table>
Lease Operating Expenses. Lease operating expense for the quarter ended
March 31, 2002 increased $859,000 or 38% from the previous year 2001 first
quarter. Lease operating expense per BOE increased from $6.27 per BOE sold in
the first quarter of 2001 to $8.18 in 2002. The increase of $859,000 is due to
the costs of placing on production wells previously shut in, higher field labor
costs due to decreased drilling activity in the first quarter of 2002, higher
repair and maintenance expenses, higher overhead rates, and higher fuel and
other chemicals costs.
Production Taxes. Production taxes as a percentage of sales were 1.6%
and 2.2% during the first quarters of 2002 and 2001, respectively. 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 including delay rentals.
Depletion, Depreciation and Amortization. Depletion, depreciation and
amortization for the quarter ended March 31, 2002 increased 6.5%, or $131,000,
from the previous year first quarter. The increase resulted from increased sales
volumes and a higher 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 $5.59 per
BOE sold during the first quarter of 2002 compared to $5.53 per BOE sold during
the first quarter of 2001.
11
General and Administrative, Net. General and administrative expense,
net for the quarter ended March 31, 2002 decreased $335,000 from the previous
year first quarter. The decrease in general and administrative expense, net for
the quarter ended March 31, 2002 is due to receiving higher overhead fees and
other operating reimbursements received by the Company for 2002 which are
recorded as offsets to general and administrative expenses. Gross general and
administrative expenses were $2.253 million and $1.915 million during the first
quarters of 2002 and 2001, respectively. General and Administrative expense is
reported net of operator fees and reimbursements which were $2.238 million and
$1.570 million during the first quarters of 2002 and 2001, respectively.
Interest Expense. Interest expense for the quarter ended March 31, 2002
increased $2.4 million or 115% from the previous year first quarter. The
increase was the result of the issuance of subordinated debt on August 2, 2001
of $109 million at an interest rate of 11% per annum. Accrued interest on the
subordinated debt for the first quarter of 2002 was $3.1 million compared to
none for 2001. Interest on the senior bank debt decreased $600,000 or 33% from
the previous year first quarter. Borrowings during the first quarter of 2002 and
2001 were recorded at effective interest rates of 9.1% and 10.1%, respectively.
Other Income. Other income primarily represents interest earned on cash
balances.
Income Taxes. During the first quarter of 2002 and 2001, no income tax
provision or benefit was recognized due to net operating losses incurred and the
establishment of a full valuation allowance.
Preferred Series D Stock Dividends. Inland's Preferred Series D Stock
accrued dividends at 11.25% compounded quarterly. The Company's Preferred Series
D Stock was cancelled in exchange for the TCW subordinated notes and $2 million
on August 2, 2001.
Preferred Series E Stock Dividends. Inland's Preferred Series E Stock
accrued dividends at 11.5% compounded quarterly. The Company's Preferred Series
E Stock was cancelled on August 2, 2001.
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 was being accreted to face value ($80.7 million) over the minimum
mandatory redemption period, that started on April 1, 2002 and ended on April 1,
2004. The Company's Preferred Series D Stock was cancelled in exchange for TCW
subordinated notes and $2 million on August 2, 2001.
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 was being accreted to face value ($12.2 million) over the period to the
minimum mandatory redemption date of April 1, 2004. The Company's Preferred
Series E Stock was cancelled on August 2, 2001.
LIQUIDITY AND CAPITAL RESOURCES
FORTIS CREDIT AGREEMENT
Effective September 21, 1999, the Company entered into a credit
agreement (the "Fortis Credit Agreement"). The current participants are Fortis
Capital Corp. and U.S. Bank National Association (the "Senior Lenders"). At
March 31, 2002, 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 or before March 31, 2002
and with subsequent determinations to be made on each subsequent October 1 and
April 1. If the borrowing base is lower than the outstanding principal balance
then drawn, the Company must immediately pay the difference. The borrowing base
was redetermined to be $83.5 million at March 26, 2002.
In conjunction with SOLVation financing, the Fortis Credit Agreement
with the senior bank group was amended to change the maturity date to June 30,
2007 from April 1, 2002, or potentially earlier if the borrowing base is
determined to be insufficient. Interest accrues under the Fortis Credit
Agreement, at the Company's option, at either (i) 2% above the prime rate or
(ii) at various rates above the LIBOR rate. The LIBOR rates are determined by
the senior debt to EBITDA ratios. If the senior debt to EBITDA ratio is greater
than 4.00 to 1.00, the rate is 3.25% above the LIBOR rate; if the senior debt to
EBITDA ratio is equal to or less than 4.00 to 1.00 but greater than 3.00 to
1.00, the rate is 2.75% above the LIBOR rate; if the senior debt to EBITDA ratio
is less than
12
3.00 to 1.00, the rate is 2.25% above the LIBOR rate. As of March 31, 2002, $83
million and $500,000 were borrowed under the LIBOR option at interest rates of
5.15% and 5.28%, respectively. The revolving termination date is June 30, 2004
at which time the loan converts into a term loan payable in 12 equal quarterly
installments of principal, with accrued interest, beginning September 30, 2004.
The Fortis Credit Agreement is secured by a first lien on substantially all
assets of the Company. The Fortis Credit Agreement was amended on March 25, 2002
to require that starting on July 1, 2002 at least 50% of the Company's expected
oil and gas production to be financially hedge by July 1, 2002 for the period
through September 30, 2003.
The Fortis Credit Agreement has covenants that restrict the payment of
cash dividends, borrowings, sale of assets, loans to others, investments, 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 Company was in compliance of its bank covenants
except for one covenant as March 31, 2002. The covenant is the debt to EBITDA
ratio that was 4.48 to 1.00 rather than the required 3.75 to 1.00. As a result
of the noncompliance with such covenant and the ability of Fortis to call the
amount payable immediately, the entire amount payable to Fortis of $83.5 million
has been reclassified as a current liability. The Senior Lenders waived the
compliance with the original March 31, 2002 senior debt to EBITDA ratio on June
6, 2002.
The Company was in compliance with its bank covenants as of June 30,
2002 and September 30, 2002 except for the senior debt to EBITDA ratios, which
were 4.80 to 1.00 rather than the required 4.75 to 1.00 and 5.23 to 1.00 rather
than the required 4.35 to 1.00, respectively. Under the terms of the Fortis
Credit Agreement, no notice or period of time to cure the default is required,
and therefore the Company was in default. As a result of the noncompliance with
such covenant and the ability of the Senior Lenders to call the amount payable
immediately, the entire amount payable to the Senior Lenders of $83.5 million
has been reclassified as a current liability. Also, since the subordinated debt
has cross default provisions in their agreements, the Company has reclassified
the aggregated subordinated debt balance of $117.1 million as a current
liability. As a result of these defaults, and in an attempt to achieve a
stronger financial position, the Company is reviewing its capital structure and
considering various alternatives that may be available. These could include an
amendment to the Fortis Loan Agreement to ease certain financial covenants and
to redefine the events of default, and a restructuring of other long term debt.
There is no assurance the Company will be able to achieve any such
restructuring, and in the event the Senior Lenders were to exercise their
remedies, the Company would be forced to seek protection. The Fortis Credit
Agreement has been amended on five previous occasions, however, there can be no
assurance that the Senior Lenders will agree to a future amendment to the Fortis
Credit Agreement or that they will not assert their rights to foreclose on their
collateral. Foreclosure by the Senior Lenders on their collateral would have a
material adverse effect on the Company's financial position and results of
operations. Should Fortis attempt to foreclose, the Company would immediately
seek alternative financing and/or the potential sale of a portion or all of its
oil and gas properties, although there can be no assurance that it would be
successful. If the Company is unable to obtain a waiver, negotiate an amendment
to the Fortis Credit Agreement, otherwise refinance its debt, or sell sufficient
assets to repay the secured debt, its inability to do so would raise substantial
doubt about the Company's ability to continue as a going concern.
The report of KPMG LLP that accompanies the restated financial
statements as of and for the year ended December 31, 2001, contained in
Amendment No. One of Form 10/A, states that "the Company has suffered losses
from operations, has a net capital deficiency and has defaulted on its senior
indebtedness subsequent to year-end which raise substantial doubt about its
ability to continue as a going concern".
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
SUBORDINATED UNSECURED DEBT TO SOLVATION INC.
On August 2, 2001, the Company closed two subordinated debt
transactions totaling $10 million in aggregate with SOLVation Inc. The first of
the two debt transactions with SOLVation was the issuance of a $5 million
unsecured senior subordinated note to SOLVation due July 1, 2007. The interest
rate is 11% per annum compounded quarterly. The interest payment is payable in
arrears in cash subject to the approval from the senior bank group and
accumulates if not paid in cash. The Company is not required to make any
principal payments prior to the July 1, 2007 maturity date. However, the Company
is required to make payments of principal and interest in
13
the same amounts as any principal payment or interest payments on the TCW
subordinated debt (described below). Prior to the July 1, 2007 maturity date,
subject to the bank subordination agreement, the Company may prepay the senior
subordinated note in whole or in part with no penalty.
The Company also issued a second $5 million unsecured junior
subordinated note to SOLVation. The interest rate is 11% per annum compounded
quarterly. The maturity date is the earlier of (i) 120 days after payment in
full of the TCW subordinated debt or (ii) March 31, 2010. Interest is payable in
arrears in cash subject to the approval from the senior bank group and
accumulates if not paid in cash. The Company is not required to make any
principal payments prior to the March 31, 2010 maturity date. Prior to the March
31, 2010 maturity date, subject to both bank and subordination agreements, the
Company may prepay the junior subordinated note in whole or in part with no
penalty. A portion of the proceeds from the senior and junior subordinated notes
was used to fund a $2 million payment to TCW and other Company working capital
needs.
SUBORDINATED UNSECURED DEBT TO TCW
In conjunction with the issuance of the two subordinated notes to
SOLVation, the Series D Preferred and Series E Preferred stock held by Inland
Holdings LLC, a company controlled by TCW, were exchanged for an unsecured
subordinated note due September 30, 2009 and $2 million in cash from the
Company. The note amount was for $98,968,964 that represented the face value
plus accrued dividends of the Series D Preferred stock as of August 2, 2001. The
interest rate is 11% per annum compounded quarterly. Interest shall be payable
in arrears in cash subject to the approval from the senior bank group and
accumulates if not paid in cash. Interest payments will be made quarterly,
commencing on the earlier of September 30, 2005 or the end of the first calendar
quarter after the senior bank debt has been reduced to $40 million or less,
subject to both bank and senior subordination agreements. Beginning the earlier
of two years prior to the maturity date or the first December 30 after the
repayment in full of the senior bank debt, subject to both bank and senior
subordination agreements, the Company will make equal annual principal payments
of one third of the aggregate principal amount of the TCW subordinated note. Any
unpaid principal or interest amounts are due in full on the September 30, 2009
maturity date. Prior to the September 30, 2009 maturity date, subject to both
bank and senior subordination agreements, the Company may prepay the TCW
subordinated note in whole or in part with no penalty.
SUBSEQUENT EVENT
An amendment of the Fortis Credit Agreement dated February 3, 2003 was
executed to provide for (1) extension of the Company's borrowing base of $83.5
million through July 31, 2003, (2) a credit commitment of $5 million for letters
of credit to support commodity pricing hedging and other obligations to be
secured by letters of credit, (3) modification of the maturity date of the
revolving facility to be paid in installments between 2004 and 2008 if the
Company obtains $15 million of capital in the form of equity, debt or
contributed property by December 31, 2003 and modification of certain financial
covenants such that the Company expects to be able to be in compliance
throughout 2003. The Company agreed to hedge 50% of its net oil and gas
production through December 31, 2004 by June 30, 2003. Also, by December 31,
2003 and by each December 31 thereafter during the term of the credit agreement,
the Company agreed to hedge 50% of the oil and gas production for the following
twelve months. However, the bank amendment does not become effective until the
actual closing of the TCW and Smith Exchange except the Company will be able to
use the $5 million letters of credit for commodity pricing hedging for a period
of 90 days after the date of the amendment.
Also, on January 30, 2003, TCW agreed to exchange its subordinated note
in the principal amount of $98,968,964, plus all accrued and unpaid interest for
22,053,000 shares of the Company's common stock and that number of shares of
Series F Preferred Stock equal to 911,588 shares plus 338 shares for each day
after November 30, 2002. Smith has also agreed to exchange its Junior
Subordinated Note in the principal amount of $5,000,000, plus all accrued and
unpaid interest for that number of shares of Series F Preferred Stock equal to
68,854 shares plus 27 shares for each day after November 30, 2002. The Company
will authorize 1,100,000 shares of Series F Preferred Stock
In the event of a voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of the Series F Preferred Stock shall be
entitled to receive, in preference to the holders of the common stock, a per
share amount equal to $100, as adjusted for any stock dividends, combinations or
splits with respect to such share, plus all accrued or declared but unpaid
dividends on such share. Each share of Series F Preferred Stock will
14
be automatically converted into 100 shares of the Company's common stock when
sufficient shares of Common Stock have been authorized.
TCW and the Smith Parties will form a new Delaware corporation to be
known as Inland Resources Inc. ("Newco"). TCW will contribute to Newco all of
TCW's holdings in the Company's common stock and Series F Preferred Stock in
exchange for 92.5% of the common stock of Newco, and each of the Smith Parties
will contribute to Newco all of its holdings in the Company's common stock and
Series F Preferred Stock in exchange for an aggregate of 7.5% of the common
stock of Newco. Newco will then own 99.7% of the Company's common stock and
common stock equivalents.
Upon the formation of Newco and closing of the Exchange, the Board of
Directors of Newco will meet to pass a resolution for Inland to merge with and
into Newco, with Newco surviving as a Delaware corporation (the "Merger"). No
action is required by the Company's shareholders or Board of Directors under the
relevant provisions of Washington and Delaware law with respect to a merger of a
subsidiary owned more than 90% by its parent corporation.
Shareholders of Inland will have the right to dissent from the Merger
and have a court appraise the value of their shares. Shareholders electing to
exercise their right of appraisal will not receive the $1.00 per share paid to
all other public shareholders, but will instead receive the appraised value,
which may be more or less than $1.00 per share.
The Merger will result in Inland terminating its status as a reporting
company under the Securities Exchange Act of 1934 and its stock ceasing to be
traded on the over-the-counter bulletin board. Its successor, Newco, will
instead be a private company owned by two shareholders.
However, at the date of this report, the Company is unable to obtain a
complete waiver of the Fortis Credit Agreement due to the effectiveness of the
amendment being contingent upon the closing of the TCW and Smith Exchange. The
Company's inability to to consummate the amendment to the Fortis Credit
Agreement would raise substantial doubt about the Company's ability to continue
as a going concern. The Fortis Credit Agreement has been amended on five
previous occasions, however, there can be no absolute assurance that the January
30, 2003 amendment will go into effect and that the Senior Lenders will not
assert their rights to foreclose on their collateral. Foreclosure by the Senior
Lenders on their collateral would have a material adverse effect on the
Company's financial position and results of operations. Should Fortis attempt to
foreclose, the Company would immediately seek alternative financing and/or the
potential sale of a portion or all of its oil and gas properties, although there
can be no assurance that it would be successful.
CASH FLOW AND CAPITAL PROJECTS
During the 2002 first quarter, the Company used its cash of $1.6
million to fund the cash used from operations of $448,000 and to continue
development of the Field of $1.2 million. Field development expenditures of $1.2
million in the first quarter of 2002 consisted of the completion of wells
drilled in 2001, the drilling of 1 well, recompletion of existing wells and the
continued extension of the gas gathering and water delivery infrastructures.
The Company's capital budget for development of the Field in year 2002
is $10 to $12 million net to the Company. The Company plans to drill 26 to 30
wells and convert 25 wells to water injection. 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 and service debt. The level of 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.
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
15
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
2002 or 2001.
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.
16
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 some market risk due to
the floating interest rate under the Fortis 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 Fortis
Credit Agreement are due and payable in 12 equal quarterly installments of
principal with accrued interest, beginning September 30, 2004. As of March 31,
2002, the Fortis Credit Agreement had a principal balance of $83.5 million
locked in at various interest rates as described below:
<Table>
<Caption>
Principal Amount Period Locked In Interest Rate
---------------- ---------------- -------------
$83 million February 22, 2002 - May 23, 2002 5.15%
$500,000 January 1, 2002 - June 3, 2002 5.28%
</Table>
The Company's total subordinated debt of $117 million outstanding at
March 31, 2002 has a fixed interest rate of 11% per annum compounded quarterly
and is not subject to rate increases. 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
-------------------------------------------
1% increase in 2% increase in
interest rates interest rates
---------------- ----------------
April 1, 2002 through
December 31, 2002 $515,000 $1,030,000
Year 2003 $830,000 $1,660,000
Year 2004 $818,000 $1,635,000
Year 2005 $591,000 $1,183,000
Year 2006 $313,000 $626,000
January 1, 2007 through
June 30, 2007 $157,000 $313,000
</Table>
Commodity Risks. The Company hedges a portion of its crude oil
production to reduce its exposure to market price fluctuations. 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.
17
On March 11, 2002, the Company hedged 30,000 net barrels per month with a third
party counterparty for the April 2002 to December 2002 period using a swap with
a settlement amount of $23.90 per barrel. On April 11, 2002, the Company hedged
another 30,000 net barrels per month with a third party counterparty for the May
2002 to December 2002 period using a swap with a settlement amount of $24.90 per
barrel. The potential gains or (losses) on this contract based on a hypothetical
average market price of equivalent product for this period is as follows:
<Table>
<Caption>
Average NYMEX Per Barrel Market Price for the Contract Period
----------------------------------------------------------------------------------------
$18.00 $20.00 $22.00 $24.00 $26.00 $28.00 $30.00
---------- ---------- ---------- -------- --------- ----------- -----------
All 2002 Contracts $3,249,000 $2,229,000 $1,209,000 $189,000 $(831,000) $(1,851,000) $(2,871,000)
</Table>
18
PART II. OTHER INFORMATION
INLAND RESOURCES INC.
----------
Items 1, 2, 4 and 5 are omitted from this report as inapplicable.
Item 3. Defaults Upon Senior Securities.
As of March 31, 2002, the Company was not in compliance with the senior debt to
EBITDA ratio which was 4.48 to 1.00 rather than the required 3.75 to 1.00.
Subsequent to March 31, 2002, the senior lenders waived compliance with the debt
to EBITDA ratio on June 6, 2002 related to March 31, 2002. Under the terms of
the Credit Agreement, no notice or period of time to cure the default is
required, and therefore the Company was in default. As a result of the
noncompliance with such covenant, the Senior Lenders have the ability to call
the amount payable immediately. In addition to the above events of
non-compliance, the Company was not in compliance at September 30, 2001 with the
senior debt to EBITDA ratio and subsequently received a waiver for the September
30, 2001 covenant violation. As a result of the prior and subsequent covenant
violations, the entire amount payable to the Senior Lenders of $83.5 million has
been reclassified as a current liability. Also, since the subordinated debt has
cross default provisions in their agreements, the Company has reclassified the
aggregated subordinated debt balance of $117.1 million as a current liability.
If the Company is unable to obtain a waiver, negotiate an amendment to the
Fortis Credit Agreement, otherwise refinance its debt, or sell sufficient assets
to repay the secured debt, its inability to do so would raise substantial doubt
about the Company's ability to continue as a going concern. The Company is in
discussions with Fortis regarding an amendment to the financial covenants, and
believes that the default will be cured in the near future as a result of an
amendment. The Fortis Credit Agreement has been amended on five previous
occasions, however, there can be no assurance that the Senior Lenders will agree
to a future amendment to the Fortis Credit Agreement or that they will not
assert their rights to foreclose on their collateral. Foreclosure by the Senior
Lenders on their collateral would have a material adverse effect on the
Company's financial position and results of operations. Should Fortis attempt to
foreclose, the Company would immediately seek alternative financing and/or the
potential sale of a portion or all of its oil and gas properties, although there
can be no assurance that it would be successful. In addition, the Company has
suffered losses from operations and has a net capital deficit and therefore
there is a substantial doubt about its ability to continue as a going concern.
Also, the Company is in discussions with its subordinated debt holders to find
solutions, including refinancing the debt, that will assist in its efforts to
amend the Fortis Credit financial covenants.
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
- ------- -----------------------
2.1 Agreement and Plan of Merger between Inland Resources Inc.
("Inland"), IRI Acquisition Corp. and Lomax Exploration Company
(exclusive of all exhibits) (filed as Exhibit 2.1 to Inland's
Registration Statement on Form S-4, Registration No. 33-80392, and
incorporated herein by this reference).
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 By-Laws of Inland (filed as Exhibit 3.2 to Inland's Registration
Statement on 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 Inland adopted
February 23, 1993 (filed as Exhibit 3.2.1 to Inland's Annual
Report on Form 10-K for the year ended December 31, 1992, and
incorporated herein by reference).
3.2.2 Amendment to the Bylaws of Inland adopted April 8, 1994 (filed as
Exhibit 3.2.2
</Table>
19
<Table>
to Inland's Registration Statement on Form S-4, Registration No.
33-80392, and incorporated herein by reference).
3.2.3 Amendment to the Bylaws of Inland adopted April 27, 1994 (filed as
Exhibit 3.2.3 to Inland's Registration Statement on Form S-4,
Registration No. 33-80392, and incorporated herein by reference).
4.1 Credit Agreement dated September 23, 1997 between Inland
Production Company ("IPC"), Inland, ING (U.S.) Capital
Corporation, as Agent, and Certain Financial Institutions, as
banks (filed as Exhibit 4.1 to Inland's Current Report on Form 8-K
dated September 23, 1997, and incorporated herein by reference).
4.1.1 Third Amendment to Credit Agreement entered into as of April 22,
1998, amending Exhibit 4.1 (filed as Exhibit 4.1.1 to Inland's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1998, and incorporated herein by reference).
4.1.2 Amended and Restated Credit Agreement dated as of September 11,
1998 amending and restating Exhibit 4.1 (filed as Exhibit 4.1.2 to
Inland's Annual Report on Form 10-K for the year ended December
31, 1998, and incorporated herein by reference).
4.1.3 First Amendment to Amended and Restated Credit Agreement dated as
of March 5, 1999 amending Exhibit 4.1.2 (filed as Exhibit 4.1.3 to
Inland's Annual Report on Form 10-K for the year ended December
31, 1998, and incorporated herein by reference).
4.1.4 Second Amended and Restated Credit Agreement dated September 15,
1999, but effective as of September 21, 1999, amending and
restating Exhibit 4.1 (without exhibits or schedules) (filed as
Exhibit 4.1 to Inland's Current Report on Form 8-K dated September
21, 1999, and incorporated herein by reference).
4.2 Credit Agreement dated September 23, 1997, among IPC, Inland,
Trust Company of the West, and TCW Asset Management Company, in
the capacities described therein (filed as Exhibit 4.2 to Inland's
Current Report on Form 8-K dated September 23, 1997, and
incorporated herein by reference).
4.2.1 Second Amendment to Credit Agreement entered into as of April 22,
1998, amending Exhibit 4.2 (filed as Exhibit 4.2.1 to Inland's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1998, and incorporated herein by reference).
4.2.2 Amended and Restated Credit Agreement dated as of September 11,
1998, amending and restating Exhibit 4.2 (filed as Exhibit 4.2.2
to Inland's Annual Report on Form 10-K for the year ended December
31, 1998, and incorporated herein by reference).
4.2.3 First Amendment to Amended and Restated Credit Agreement dated as
of March 5, 1999, amending Exhibit 4.2.2 (filed as Exhibit 4.2.3
to Inland's Annual Report on Form 10-K for the year ended December
31, 1998, and incorporated herein by reference).
4.2.4 Exchange Agreement dated as of September 21, 1999 by and between
Inland, IPC, Refining, Trust Company of the West, a California
trust company, as Sub-Custodian for Mellon Bank for the benefit of
Account No. CPFF 873-3032, Inland Holdings LLC, TCW Portfolio No.
1555 DR V Sub-Custody Partnership, L.P. and Joint Energy
Development Investments II Limited Partnership (without exhibits
or schedules), terminating Exhibits 4.2 and 4.3, as previously
amended, and Exhibits 4.4, 4.5, 10.10 and 10.11 (filed as Exhibit
10.1 to Inland's Current Report on Form 8-K dated September 21,
1999, and incorporated herein by reference).
4.3 Intercreditor Agreement dated September 23, 1997, between IPC, TCW
Asset Management Company, Trust Company of the West and ING (U.S.)
Capital Corporation (filed as Exhibit 4.3 to Inland's Current
Report on Form 8-K dated September 23, 1997, and incorporated
herein by reference).
</Table>
20
<Table>
4.3.1 Third Amendment to Intercreditor Agreement entered into as of
April 22, 1998, amending Exhibit 4.3 (filed as Exhibit 4.3.1 to
Inland's Quarterly Report on Form 10-Q for the quarter ended March
31, 1998, and incorporated herein by reference).
4.3.2 Amended and Restated Intercreditor Agreement dated as of September
11, 1998, amending and restating Exhibit 4.3 (filed as Exhibit
4.3.2 to Inland's Annual Report on Form 10-K for the year ended
December 31, 1998, and incorporated herein by reference).
4.3.3 First Amendment to Amended and Restated Intercreditor Agreement
dated as of March 5, 1999, amending Exhibit 4.3.2 (filed as
Exhibit 4.3.3 to Inland's Annual Report on Form 10-K for the year
ended December 31, 1998, and incorporated herein by reference).
4.4 Warrant Agreement by and between Inland and TCW Portfolio No. 1555
DR V Sub-Custody Partnership, L.P. dated September 23, 1997 (filed
as Exhibit 4.4 to Inland's Current Report on Form 8-K dated
September 23, 1997, and incorporated herein by reference).
4.5 Warrant issued by Inland pursuant to the Warrant Agreement, dated
September 23, 1997, representing the right to purchase 100,000
shares of Inland's Common Stock (filed as Exhibit 4.5 to Inland's
Current Report on Form 8-K dated September 23, 1997, and
incorporated herein by reference).
10.1 1988 Option Plan of Inland Gold and Silver Corp. (filed as Exhibit
10(15) to Inland's Annual Report on Form 10-K for the year ended
December 31, 1988, and incorporated herein by reference).
10.1.1 Amended 1988 Option Plan of Inland Gold and Silver Corp. (filed as
Exhibit 10.10.1 to Inland's Annual Report on Form 10-K for the
year ended December 31, 1992, and incorporated herein by
reference).
10.1.2 Amended 1988 Option Plan of Inland, as amended through August 29,
1994 (including amendments increasing the number of shares to
212,800 and changing "formula award") (filed as Exhibit 10.1.2 to
Inland's Annual Report on Form 10-KSB for the year ended December
31, 1994, and (incorporated herein by reference).
10.1.3 Automatic Adjustment to Number of Shares Covered by Amended 1988
Option Plan executed effective June 3, 1996 (filed as Exhibit 10.1
to Inland's Quarterly Report on Form 10-QSB for the quarter ended
June 30, 1996, and incorporated herein by reference).
10.2 Letter agreement dated October 30, 1996 between Inland and Johnson
Water District (filed as Exhibit 10.41 to Inland's Annual Report
on Form 10-KSB for the year ended December 31, 1996, and
incorporated herein by reference).
10.3 Interest Rate Cap Agreement dated April 30, 1998 between IPC and
Enron Capital and Trade Resources Corp. (filed as Exhibit 10.4 to
Inland's Quarterly Report on Form 10-Q for the quarter ended March
31, 1998, and incorporated herein by reference).
10.4 Farmout Agreement between Inland and Smith Management LLC dated
effective as of June 1, 1998 (filed as Exhibit 10.1 to Inland's
Current Report on Form 8-K dated June 1, 1998, and incorporated
herein by reference).
10.5 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 10.20 to Inland's Annual
Report on Form 10-K for the year ended December 31, 1998, and
incorporated herein by reference).
10.6 Warrant Certificate dated March 5, 1999 between Inland and TCW
Portfolio No. 1555 DR V Sub-Custody Partnership, L.P. representing
5,852 shares (filed as Exhibit
</Table>
21
<Table>
10.21 to Inland's Annual Report on Form 10-K for the year ended
December 31, 1998, and incorporated herein by reference).
10.7 Shareholders Agreement dated as of September 21, 1999 between
Inland, Holdings, Fund V, JEDI and Pengo Securities Corp., Smith
Energy Partnership, Randall D. Smith, Jeffrey A. Smith, Barbara
Stovall Smith, John W. Adams and Arthur J. Pasmas (collectively,
the "Smith Group") (filed as Exhibit 10.2 to Inland's Current
Report on Form 8-K dated September 21, 1999, and incorporated
herein by reference).
10.8 Registration Rights Agreement dated as of September 21, 1999
between Inland, Holdings, Portfolio, JEDI and the Smith Group
filed as Exhibit 10.3 to Inland's Current Report on Form 8-K dated
September 21, 1999, and incorporated herein by reference).
10.9 Severance Agreement between Inland and John E. Dyer dated November
18, 1999 (filed as Exhibit 10.13 to Inland's Annual Report on Form
10-K for the year ended December 31, 1999, and incorporated herein
by reference).
10.10 Employment Agreement between Inland and William T. War dated
effective as of October 1, 1999 (filed as Exhibit 10.14 to
Inland's Annual Report on Form 10-K for the year ended December
31, 1999, and incorporated herein by reference).
10.11 Stock Option Agreement between Inland and William T. War dated
October 1, 1999 representing 25,000 post-split shares of Common
Stock (filed as Exhibit 10.15 to Inland's Annual Report on Form
10-K for the year ended December 31, 1999, and incorporated herein
by reference).
10.12 Amendment to Employment Agreement between Inland and William T.
War, amending the Employment Agreement filed as Exhibit 10.10.
10.13 Employment Agreement between Inland and Michael J. Stevens dated
effective as of February 1, 2001.
10.14 Employment Agreement between Inland and Marc MacAluso dated
effective as of February 1, 2001.
10.15 Stock Option Agreement between Inland and Marc MacAluso dated
effective as of February 1, 2001 representing 150,000 post-split
shares of Common Stock.
10.16 Employment Agreement between Inland and Bill I. Pennington dated
effective as of February 1, 2001.
10.17 Stock Option Agreement between Inland and Bill I. Pennington dated
effective as of February 1, 2001 representing 150,000 post-split
shares of Common Stock.
10.18 Oil Purchase and Delivery Agreement dated November 7, 2000.
10.19 Common Stock Purchase Agreement dated August 2, 2001 by and
between Inland Holdings, LLC ("Inland Holdings") and Hampton
Investments LLC ("Hampton Investments")(without exhibits or
schedules)(filed as Exhibit 10.1 to the Company's Current Report
on Form 8-K dated August 2, 2001, and incorporated herein by
reference).
10.20 Contribution Agreement dated August 2, 2001 by and among Park
Hampton Holdings LLC ("Hampton Holdings"), Pengo Securities Corp.
("Pengo"), Smith Energy Partnership ("SEP"), the five individuals
and Hampton Investments (filed as Exhibit 10.2 to the Company's
Current Report on Form 8-K dated August 2, 2001, and incorporated
herein by reference).
10.21 Series E Preferred Stock Purchase Agreement dated as of August 2,
2001 by and
</Table>
22
<Table>
between Hampton Investments and Inland Holdings (without exhibits
or schedules)(filed as Exhibit 10.3 to the Company's Current
Report on Form 8-K dated August 2, 2001, and incorporated herein
by reference).
10.22 Termination Agreement dated as of August 2, 2001 by and between
Hampton Investments and Inland (without exhibits or
schedules)(filed as Exhibit 10.4 to the Company's Current Report
on Form 8-K dated August 2, 2001, and incorporated herein by
reference).
10.23 Exchange and Note Issuance Agreement dated August 2, 2001 by and
among Inland, Production and Inland Holdings (without exhibits or
schedules)(filed as Exhibit 10.5 to the Company's Current Report
on Form 8-K dated August 2, 2001, and incorporated herein by
reference).
10.24 Termination Agreement dated as of August 2, 2001 by and among
Inland and Inland Holdings (without exhibits or schedules)(filed
as Exhibit 10.6 to the Company's Current Report on Form 8-K dated
August 2, 2001, and incorporated herein by reference).
10.25 Amended and Restated Registration Rights Agreement dated as of
August 2, 2001 by and among Inland, Inland Holdings and Hampton
Investments (without exhibits or schedules)(filed as Exhibit 10.7
to the Company's Current Report on Form 8-K dated August 2, 2001,
and incorporated herein by reference).
10.26 Amended and Restated Shareholders Agreement dated as of August 2,
2001 by and among Inland, Inland Holdings and Hampton Investments
(without exhibits or schedules)(filed as Exhibit 10.8 to the
Company's Current Report on Form 8-K dated August 2, 2001, and
incorporated herein by reference).
10.27 Senior Subordinated Note Purchase Agreement dated as of August 2,
2001 by and among Inland, Production and SOLVation (without
exhibits or schedules)(filed as Exhibit 10.9 to the Company's
Current Report on Form 8-K dated August 2, 2001, and incorporated
herein by reference).
10.28 Junior Subordinated Note Purchase Agreement dated as of August 2,
2001 by and among Inland, Production and SOLVation (without
exhibits or schedules)(filed as Exhibit 10.10 to the Company's
Current Report on Form 8-K dated August 2, 2001, and incorporated
herein by reference).
21.1 Subsidiaries of Inland.
23.2 Consent of Ryder Scott Company, L.P.
99.1 Letter to Securities and Exchange Commission dated August 7, 2002
terminating Arthur Andersen LLP as the Company's auditors and
employing KPMG LLP as its new auditors for December 31, 2002.
*99.3 Certification of Chief Executive Officer pursuant to section 1350
as adopted pursuant to sections 302 and 906 of the Sarbanes-Oxley
Act of 2002
*99.4 Certification of Chief Financial Officer pursuant to section 1350
as adopted pursuant to sections 302 and 906 of the Sarbanes-Oxley
Act of 2002.
</Table>
- ----------
All above Exhibits have been previously filed.
(b) Reports on Form 8-K:
None.
* Filed herewith.
23
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: February 3, 2003 By: /s/ Marc MacAluso
----------------- ----------------------------------------
Marc MacAluso
Chief Executive Officer and
Chief Operating Officer
Date: February 3, 2003 By: /s/ Bill I. Pennington
----------------- ----------------------------------------
Bill I. Pennington
President and Chief Financial Officer
(Principal Accounting Officer)
24
CERTIFICATION
I, Marc MacAluso, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Inland Resources
Inc;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 3, 2003 /s/ Marc MacAluso,
---------------------------------------
Marc MacAluso, Chief Executive Officer
25
CERTIFICATION
I, Bill I. Pennington, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Inland Resources
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 3, 2003
/s/ Bill I. Pennington
-------------------------------------------
Bill I. Pennington, Chief Financial Officer
26
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
*99.3 Certification of Chief Executive Officer pursuant to section 1350
as adopted pursuant to sections 302 and 906 of the Sarbanes-Oxley
Act of 2002
*99.4 Certification of Chief Financial Officer pursuant to section 1350
as adopted pursuant to sections 302 and 906 of the Sarbanes-Oxley
Act of 2002.
</Table>
* Filed herewith