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 SEPTEMBER 30, 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
November 11, 2002: 2,897,732
PART 1. ITEM 1. FINANCIAL INFORMATION
INLAND RESOURCES INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
(In thousands)
<Table>
<Caption>
September 30, December 31,
2002 2001
------------- ------------
ASSETS Unaudited Restated
Current assets:
Cash and cash equivalents $ 2,130 $ 1,949
Accounts receivable and accrued sales 3,449 3,320
Inventory 1,344 1,192
Other current assets 118 443
----------- -----------
Total current assets 7,041 6,904
----------- -----------
Property and equipment, at cost:
Oil and gas properties (successful efforts method) 214,636 205,535
Accumulated depletion, depreciation and amortization (49,495) (43,510)
----------- -----------
165,141 162,025
Other property and equipment, net 1,950 2,230
----------- -----------
Total property and equipment, net 167,091 164,255
Other long-term assets, net 1,841 2,217
----------- -----------
Total assets $ 175,973 $ 173,376
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Secured debt in default $ 83,500 $ --
Accounts payable 3,101 4,011
Accrued expenses 3,401 2,321
Other 1,292 --
Senior subordinated unsecured debt in default includes accrued interest 5,672 --
Subordinated unsecured debt in default includes accrued interest 112,275 --
Junior subordinated unsecured debt in default includes accrued interest 5,672 --
Fair market value of derivative instruments 1,938 --
----------- -----------
Total current liabilities 216,851 6,332
----------- -----------
Long- term secured debt and other -- 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 (loss) (1,575) 1,675
Accumulated deficit (80,737) (73,521)
----------- -----------
Total stockholders' deficit (40,878) (30,412)
----------- -----------
Total liabilities and stockholders' deficit $ 175,973 $ 173,376
=========== ===========
</Table>
The accompanying notes are an integral part of the consolidated
financial statements
1
INLAND RESOURCES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS FOR
THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2002 AND 2001
(In thousands except earnings per share)
(Unaudited)
<Table>
<Caption>
Three months ended Nine months ended
September 30, September 30,
-------------------------- --------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(As Restated) (As Restated)
(See Note 3) (See Note 3)
Revenues:
Oil and gas sales $ 7,157 $ 8,103 $ 22,122 $ 24,844
---------- ---------- ---------- ----------
Operating expenses:
Lease operating expenses 2,744 2,112 8,227 6,493
Production taxes 115 201 340 618
Exploration 49 61 105 121
Depletion, depreciation and amortization 2,201 2,467 6,445 6,782
General and administrative, net 426 490 729 1,385
---------- ---------- ---------- ----------
Total operating expenses 5,535 5,331 15,846 15,399
---------- ---------- ---------- ----------
Operating income 1,622 2,772 6,276 9,445
Interest expense (4,555) (3,594) (13,519) (7,531)
Unrealized derivative gain (loss) due to time value -- 323 -- 86
Interest and other income 12 189 29 232
---------- ---------- ---------- ----------
Income (loss) before cumulative effect of change
in accounting principle (2,921) (310) (7,214) 2,232
Cumulative effect of change in accounting principle -- -- -- 45
---------- ---------- ---------- ----------
Net income (loss) (2,921) (310) (7,214) 2,277
Accrued Series D preferred dividends -- (906) -- (6,342)
Accrued Series E preferred dividends -- (140) -- (980)
Accretion of Series D preferred discount -- (435) -- (3,318)
Accretion of Series E preferred discount -- (70) -- (535)
Excess carrying value of Series E preferred over
redemption consideration -- 1,449 -- 1,449
---------- ---------- ---------- ----------
Net income(loss) attributable to common stockholders $ (2,921) $ (412) $ (7,214) $ (7,449)
========== ========== ========== ==========
Basic and diluted net income (loss) per share before
cumulative effect of change in accounting principle $ (1.01) $ (.14) $ (2.49) $ (2.59)
Cumulative effect of change in accounting principle -- -- -- .02
---------- ---------- ---------- ----------
Basic and diluted net income (loss) per share $ (1.01) $ (.14) $ (2.49) $ (2.57)
========== ========== ========== ==========
Basic and diluted weighted average common shares
outstanding 2,898 2,898 2,898 2,898
========== ========== ========== ==========
</Table>
The accompanying notes are an integral part of the consolidated
financial statements
2
INLAND RESOURCES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2002 AND 2001
(In thousands)
(Unaudited)
<Table>
<Caption>
Nine Months Nine Months
Ended Sept. 30 Ended Sept. 30,
2002 2001
-------------- --------------
Cash flows from operating activities:
Net income (loss) $ (7,214) $ 2,277
Adjustments to reconcile net income (loss) to net cash
Provided by operating activities:
Depletion, depreciation and amortization 6,445 6,782
Amortization of debt issue costs 346 496
Cumulative effect of accounting change -- (45)
Non cash changes related to derivatives (1,312) (86)
Accrued interest expense added to subordinated debt 9,663 1,938
Effect of changes in current assets and liabilities:
Accounts receivable (130) 281
Inventory (152) (181)
Other assets 347 292
Accounts payable and accrued expenses 170 1,793
------------ ------------
Net cash provided by operating activities 8,163 13,547
------------ ------------
Cash flows from investing activities:
Development expenditures and equipment purchases (9,191) (16,952)
------------ ------------
Net cash used by investing activities (9,191) (16,952)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of other long-term debt 1,292 10,000
Retirement of preferred stock -- (2,000)
Payments of long-term debt -- (500)
Debt issuance costs (83) (1,389)
------------ ------------
Net cash used by financing activities 1,209 6,111
------------ ------------
Net decrease in cash and cash equivalents 181 2,706
Cash and cash equivalents at beginning of period 1,949 848
------------ ------------
Cash and cash equivalents at end of period $ 2,130 $ 3,554
============ ============
</Table>
The accompanying notes are an integral part of the consolidated
financial statements
3
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 and nonproducing oil and gas
property interests located in the Monument Butte Field within the Uinta
Basin of Northeastern Utah (the "Field").
2. BASIS OF PRESENTATION:
The preceding financial information is unaudited and 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. Partial year
results are not necessarily indicative of results that may be obtained
for the full year.
Certain reclassifications have been made to conform the prior period to
the current period presentation.
3. 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, based on the financial
difficulties of ENAC, 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 in the amount 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. In addition, the Company intends to file an amended
2001 annual report on Form 10-K and an amended March 31, 2002 Form 10-Q
to reflect the adjustments discussed above.
In addition, as described further in Note 7, on August 2, 2001, the
Company's Series D Preferred and Series E Preferred stock held by
Inland Holdings LLC, a company controlled by TCW Asset Management
Company ("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 and represented the face value plus accrued
dividends of the Series D Preferred stock as of August 2, 2001. As a
result of the exchange, the Company retired both the Series D and
Series E Preferred stock.
4
When recording the transaction discussed above, the Company originally
recorded additional accretion on the Series D and Series E Preferred
stock of $9,092,000 and $2,542,000, respectively, as decreases to
additional paid-in capital. In addition, due to the related party
nature of the transaction, the difference between the aggregate
subordinated note balance and $2 million cash paid to TCW and the
aggregate liquidation value of the Series D and Series E Preferred
stock (including the additional accretion) plus accrued dividends
resulted in an increase to additional paid-in capital of $13,083,000.
Further, when calculating net income (loss) attributable to common
stockholders for the year ended December 31, 2001, the Company included
the $13,083,000 increase to additional paid-in capital as a component
of net income (loss) attributable to common stockholders, but did not
include the aggregate $11,634,000 decrease to additional paid-in
capital as a component of net income (loss) attributable to common
stockholders.
As a result, the Company has restated net income (loss) attributable to
common stockholders and net income (loss) attributable to common
stockholders per share for the three and nine months ended September
30, 2001 to reflect the reduction to the excess carrying value of the
Series D and Series E Preferred stock from $13,083,000 to $1,449,000.
The table below details the adjustments and restated balances for the
respective periods:
<Table>
<Caption>
As
Originally As
Reported Adjustments Restated
------------- ------------- -------------
(In thousands, except per share amounts)
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) $ (7,806) $ (11,877)
============= ============= =============
Basic and diluted income (loss) per share:
Loss from continuing operations
attributable to common stockholders $ (1.42) $ (2.69) $ (4.11)
============= ============= =============
Loss attributable to common stockholders $ (1.40) $ (2.69) $ (4.09)
============= ============= =============
For the nine months ended September 30, 2001:
Excess carrying value of preferred
over redemption $ 13,083 $ (11,634) $ 1,449
============= ============= =============
Net income (loss) attributable to
common stockholders $ 4,105 $ (11,634) $ (7,449)
============= ============= =============
Basic and diluted net income (loss)
per share from continuing operations
before cumulative effect of change in
accounting principle $ 1.42 $ (4.01) $ (2.59)
============= ============= =============
Basic and diluted net income (loss)
per share $ 1.44 $ (4.01) $ (2.54)
============= ============= =============
</Table>
5
<Table>
<Caption>
As
Originally As
Reported Adjustments Restated
------------ ------------ ------------
(In thousands, except per share amounts)
For the three months ended September 30, 2001:
Excess carrying value of preferred
over redemption consideration $ 13,083 $ (11,634) $ 1,449
============ ============ ============
Net income (loss) attributable to
common stockholders $ 11,222 $ (11,634) $ (412)
============ ============ ============
Basic and diluted net income (loss)
per share from continuing operations
before cumulative effect of change in
accounting principle $ 3.87 $ (4.01) $ (0.14)
============ ============ ============
Basic and diluted net income (loss)
per share $ 3.87 $ (4.01) $ (0.14)
============ ============ ============
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>
The Company's independent accountants have been engaged to re-audit the
Company's financial statements as of and for the year ended December
31, 2001.
The amount deferred in accumulated other comprehensive income at
September 30, 2002 will be reclassified to earnings during the
remainder of 2002 and 2003 based on the originally scheduled settlement
periods of the contracts. Amounts expected to be reclassified to
earnings in the fourth quarter of 2002 and in 2003 are $132,000 and
$231,000, respectively. Oil and gas sales for the three and nine months
ended September 30, 2002 include $157,000 and $1,313,000, respectively,
of amounts reclassified out of accumulated other comprehensive income.
4. COMPREHENSIVE INCOME (LOSS):
Comprehensive income (loss) for the Company for the nine months ended
September 30, 2002 and 2001 are as follows (in thousands):
<Table>
<Caption>
2002 2001
----------- -----------
Net income (loss) $ (7,214) $ 4,185
Components of other comprehensive income:
Cumulative effect of change in accounting principle -- (1,972)
Change in fair value of derivative contracts (2,926) 751
Hedge settlements reclassified to income (324) 3,166
----------- -----------
Comprehensive income (loss) $ (10,464) $ 6,130
=========== ===========
</Table>
5. 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
6
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 its 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 to be adopted on January 1, 2003.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of". SFAS No. 121 did not address
the accounting for a segment of a business accounted for as a
discontinued operation which resulted in two accounting models for
long-lived assets to be disposed of. SFAS No. 144 establishes a single
accounting model for long-lived assets to be disposed of by sale and
requires that those long-lived assets be measured at the lower of
carrying amount or fair value less cost to sell, whether reported in
continuing operations or in discontinued operations. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. The
Company's adoption of SFAS No. 144 on January 1, 2002, had no impact on
its financial position or results of operations
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 is to be
applied prospectively to exit or disposal activities initiated after
December 31, 2002. The standard requires companies to recognize costs
associated with exit or disposal activities when they are incurred
rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination
costs and certain employee severance costs that are associated with a
restructuring, discontinued operation, plant closing or other exit or
disposal activity. Management does not expect the adoption of SFAS No.
146 to have a material impact on the financial position or results of
operations of the Company.
6. FINANCIAL INSTRUMENTS:
Periodically, the Company enters into commodity contracts to hedge or
otherwise reduce the impact of oil price fluctuations. The amortization
of the cost of the contracts, if any, 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.
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 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 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. Subsequent
to March 11, 2002 the Company hedged 60,000 net barrels per month for
the January 2003 to August 2003 period with the same third party
counterparty using a swap with various settlement amounts that average
$24.78. The counterparty has the right to require the Company to post
collateral for the difference between the mid market estimate of the
cost of liquidating and terminating the above mentioned hedging
position and $500,000. As of September 30, 2002, Fortis Capital Corp.
has issued a letter of credit of $1.4 million to cover any deficiencies
between the $500,000 credit margin and the mid market estimate from the
counterparty. As of September 30, 2002, there were no requirements to
post collateral in additional to the $1.4 million letter of credit
issued by Fortis Capital Corp. for the above mentioned hedging
contracts.
On April 11, 2002, the Company hedged another 30,000 net barrels per
month with another third party counterparty for the May 2002 to
December 2002 period using a swap with a settlement amount of $24.90
per
7
barrel. The counterparty has the right to require the Company to post
collateral for the difference between the mid market estimate of the
cost of liquidating and terminating the above mentioned hedging
position and $1,000,000. As of September 30, 2002, there were no
requirements to post collateral for the above mentioned hedging
contracts. The Company recognized a reduction in revenues of $697,000
and $989,000 during the three and nine months ended September 30, 2002,
respectively. During the three and nine months ended September 30,
2001, the Company recognized a reduction in revenues of $874,000 and
$3,166,000, respectively.
7. 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. At this time, no such
transactions are contemplated by the Company. The engagement expired
June 30, 2002.
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
8
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 shares of the Series D Preferred Stock and Series E
Preferred Stock held by Holdings were exchanged for an unsecured
subordinated note (the "TCW Subordinated Note") due September 30, 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 Lenders 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 Preferred Stock 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 carrying
value of the Series D Preferred Stock and Series E Preferred Stock plus
accrued dividends was recorded as an increase to additional paid-in
capital of $1,449,000.
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 Board of Directors and
elected 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.
8. FORTIS CAPITAL AGREEMENT AND DEFAULTS ON LOAN AGREEMENTS:
Effective September 21, 1999, the Company entered into a credit
agreement (the "Fortis Credit Agreement"). The current participants are
Fortis Capital Corp., as agent, and U.S. Bank National Association (the
"Senior Lenders"). At September 30, 2002, the Company had borrowed all
funds under its current borrowing base of $83.5 million. In addition,
Fortis Capital Corp. has issued a letter of credit of $1.4 million to
cover any deficiencies between the $500,000 credit margin and the mid
market estimate from the counterparty as described in above Note 6. The
borrowing base is calculated as the collateral value of proved reserves
and was subject to an initial redetermination on or before March 31,
2002, 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. The Company has not received confirmation
from its Senior Lenders of the redetermined borrowing base for October
1, 2002.
In conjunction with SOLVation financing, the Fortis Credit Agreement
with the Senior Lenders 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. As
amended on June 6, 2002, if the senior debt to EBITDA ratio is greater
than 4.00 to 1.00, the rate is 3.75% 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
9
senior debt to EBITDA ratio is less than 3.00 to 1.00, the rate is
2.25% above the LIBOR rate. As of September 30, 2002, $83 million and
$500,000 were borrowed under the LIBOR option at interest rates of
5.86% and 5.84%, 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 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. As of March 31,
2002, the covenant that required the senior debt to EBITDA to be no
greater than 3.75 to 1.00 was actually 4.48 to 1.00. No default was
asserted by the Senior Lenders, but under the terms of the Fortis
Credit Agreement, no notice or period of time to cure the default was
required, therefore, the Company was in default as of March 31, 2002.
On June 6, 2002 the Fortis Credit Agreement was amended to require that
the senior debt to EBITDA ratio be equal to or less than 4.75 to 1.00
for the four prior fiscal quarters ending June 30, 2002, 4.35 to 1.00
for the four prior fiscal quarters ending September 30, 2002 and 3.75
to 1.00 for any four fiscal quarters ending after September 30, 2002.
The Senior Lenders waived the compliance with the original March 31,
2002 senior debt to EBITDA ratio.
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 $123.6 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.
9. CUSTOM ENERGY CONSTRUCTION INC.:
The Company has contracted Custom Energy Construction, Inc. ("Custom")
for the installation of a gas liquids processing facility located in
the Field. As of September 30, 2002, the total cost of the facility was
recorded as $1,363,730, which is financed primarily through a
non-recourse promissory note with Custom. Principal and interest
payments at 7% per annum will be made out of hydrocarbon liquid
proceeds generated by the plant over a 5-year period. Completion of the
gas plant and operations started in late August 2002. Custom's
collateral for the promissory note is a first lien on the plant.
10
10. 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 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
11
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.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation:
RESULTS OF OPERATIONS:
Three Month Periods Ended September 30, 2002 and 2001:
Oil and Gas Sales. Crude oil sales for the quarter ended September 30,
2002 decreased $611,000 or 8.3% from the previous year. Natural gas sales for
the quarter ended September 30, 2002 decreased $736,000 or 45% from the previous
year. As shown in the table below, decreased crude volumes of 16% offset by
higher average crude prices of 9.2% resulted in a reduction in crude sales of
$611,000. Decreased natural gas volumes of 13% and lower average natural gas
prices of 37% resulted in a reduction in natural gas sales of $736,000. Crude
oil sales as a percentage of total oil and gas sales were 88 % and 82% in the
third quarter of 2002 and 2001, respectively. Crude oil has been and is expected
to 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. As discussed in note
3 to the consolidated financial statements, crude oil sales were increased by
$157,000 in the third quarter 2002 to reflect the reclass of non-cash gains from
accumulated other comprehensive income recorded in 2001 relating to certain
derivative contracts. Crude oil sales were decreased by $697,000 and $874,000
during the third quarters of 2002 and 2001, respectively, to recognize hedging
contract settlement losses. See Item 3 "Quantitative and Qualitative Disclosures
About Market Risk."
<Table>
<Caption>
Three Months Ended Three Months Ended
September 30, 2002 September 30, 2001
---------------------------------------------- -------------------------------------------
Net Volume Net
(Bbls, Volume
Mcfs or Average Sales (Bbls or Average Sales
Gals) Price (in 000's) Mcfs) Price (in 000's)
----------- ----------- ----------- ----------- ----------- -----------
Crude Oil Sales 271,362 $ 24.87 $ 6,725 322,097 $ 22.78 $ 7,336
Natural Gas Sales 585,441 $ 1.54 905 672,603 $ 2.44 1,641
NGL Sales 155,000 $ .43 67 -- -- --
Reclass of non-cash gains from
Accumulated Other
Comprehensive Income 157 --
Hedging contract settlement
losses (697) (874)
----------- -----------
Total $ 7,157 $ 8,103
=========== ===========
</Table>
Lease Operating Expenses. Lease operating expense for the quarter ended
September 30, 2002 increased $632,000 or 30% from the previous year third
quarter. Lease operating expense per BOE increased from $4.87 per BOE sold in
the third quarter of 2001 to $7.44 per BOE sold in 2002. The increase in lease
operating expenses is due to an increase in well count resulting from the
drilling of 23 new wells and returning 32 shut in wells to production and higher
costs of materials and labor and due to increased demand for products, services
and
12
employees in the Monument Butte region and neighboring areas. On a monthly per
well basis, the lease operating expenses increased 12% to $1,763 per well for
the average three months ended September 30, 2002 from $1,572 per well for the
same period of 2001. Certain reclassifications to lease operating expenses were
made to the three month period ending September 30, 2001 to reflect the
allocation of the Company's overhead expenses to lease operating expenses
directly rather than using COPAS overhead fees as the method for allocating
overhead to lease operating expense. Lease operating expenses were decreased
$151,000 for the quarter ended September 30, 2001 and general and administrative
expenses were increased by the same amount.
Production Taxes. Production taxes as a percentage of sales were 1.5%
and 2.2% during the third quarter 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 September 30, 2002 decreased $266,000 or 11%
from the previous year third quarter. The decrease resulted from decreased sales
volumes offset by 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 an average
of $5.56 per BOE sold during the third quarter of 2002, compared to $5.32 per
BOE sold during the third quarter of 2001.
General and Administrative, Net. General and administrative expense,
net for the third quarter ended September 30, 2002, decreased $64,000 or 13%
from the previous year third quarter. The decrease in general and administrative
expense, net for the third quarter ended September 30, 2002, is primarily due to
receiving higher operating reimbursements for direct labor and field vehicles of
$141,000. Gross general and administrative expenses were $2.6 million for the
third quarter of 2002 compared to $2.3 million in 2001. General and
administrative expense is reported net of operator fees and reimbursements,
which were $2.2 million and $1.8 million during the third quarters of 2002 and
2001, respectively.
Interest Expense. Interest expense for the third quarter ended
September 30, 2002 increased $961,000 or 27% from the previous year third
quarter. The increase was the result of the issuance on August 2, 2001 of $109
million of subordinated debt at an interest rate of 11% per annum in connection
with a recapitalization (see note 7 to the consolidated financial statements).
Accrued interest on the subordinated debt for the third quarter of 2002 was $3.3
million compared to $1.9 million for 2001. Interest on the senior bank debt
decreased $456,000 or 29% from the previous year third quarter. Total interest
expense, including amortization of debt issuance costs, during the third quarter
of 2002 and 2001 were recorded at effective interest rates of 8.8% and 10.4%,
respectively.
Other Income. Other income primarily represents interest earned on cash
balances.
Income Taxes. During the third 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.
Series D Preferred Stock Dividends. The Company's Series D Preferred
Stock was cancelled in exchange for the TCW subordinated notes and $2 million on
August 2, 2001.
Series E Preferred Stock Dividends. The Company's Series E Preferred
Stock was cancelled on August 2, 2001.
Series D Preferred Stock Discount. Inland's Series D Preferred 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 Series D Preferred Stock was cancelled in exchange the TCW
Subordinated Note and $2 million on August 2, 2001.
13
Series E Preferred Stock Discount. Inland's Series E Preferred 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 Series E
Preferred Stock was cancelled on August 2, 2001.
Nine Month Periods Ended September 30, 2002 and 2001:
Oil and Gas Sales. Crude oil sales for the nine months ended September
30, 2002 decreased $3.1 million or 14% from the previous year. Natural gas sales
for the nine months ended September 30, 2002 decreased $3.2 million or 52% from
the previous year. As shown in the table below, decreased crude volumes of 7%
and lower average crude prices of 8% resulted in a reduction in crude sales of
$3.1 million. Decreased natural gas volumes of 11% and lower average natural gas
prices of 46% resulted in a reduction in natural gas sales of $3.2 million.
Lower natural gas sales volumes were primarily caused by a pipeline curtailment
for a 48 day period in April and May 2002. The total estimated loss of natural
gas sales volumes to the Company was 164,000 mcfs for the 48 day period or
$302,000. Currently, there is no such curtailment of natural gas sales volumes
in the Monument Butte Field. Crude oil sales as a percentage of total oil and
gas sales were 86% and 78% in the nine months ended September 30, 2002 and 2001,
respectively. Crude oil has been and is expected to 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. As discussed in note
3 to the consolidated financial statements, crude oil sales were increased by $
1,313,000 in the first nine months of 2002 to reflect the reclass of non-cash
gains from accumulated other comprehensive income recorded in 2001 relating to
certain derivative contracts. Crude oil sales were decreased by $989,000 and
$3.2 million during the nine months ended September 30, 2002 and 2001,
respectively to recognize hedging contract settlement losses. See Item 3
"Quantitative and Qualitative Disclosures About Market Risk."
<Table>
<Caption>
Nine Months Ended Nine Months Ended
September 30, 2002 September 30, 2001
--------------------------------------------- --------------------------------------------
Net Net
Volume Volume
(Bbls, Mcfs Average Sales (Bbls or Average Sales
or Gals) Price (in 000's) Mcfs) Price (in 000's)
------------- ------------- ------------- ------------- ------------- -------------
Crude Oil Sales 847,590 $ 22.13 $ 18,758 909,509 $ 23.99 $ 21,816
Natural Gas Sales 1,624,411 $ 1.83 2,973 1,821,787 $ 3.40 6,194
NGL Sales 155,000 $ .43 67 -- -- --
Reclass of non-cash gains from
Accumulated Other Comprehensive
Income 1,313 --
Hedging contract settlement
losses (989) (3,166)
------------- -------------
Total $ 22,122 $ 24,844
============= =============
</Table>
Lease Operating Expenses. Lease operating expenses for the nine months
ended September 30, 2002 increased $1.7 million or 27% from the previous year
period. Lease operating expenses per BOE increased from $5.35 per BOE sold for
the nine months of year 2001 to $7.36 per BOE for the same period in 2002. The
increase in lease operating expenses are due to an increase in well count
resulting from the drilling of 23 new wells and returning 32 shut in wells to
production and substantially higher labor costs, overhead fees and other field
operating expenses such as repairs and maintenance and fuel. On a monthly per
well basis, the lease operating expenses increased 14% to $1,872 per well for
the average nine months ended September 30, 2002 from $1,649 per well for the
same period of 2001. Certain reclassifications to lease operating expenses were
made to the nine month period ending September 30, 2001 to reflect the
allocation of the Company's overhead expenses to lease operating expenses
directly rather than using COPAS overhead fees as the method for allocating the
Company's portion of overhead to lease operating expense. Lease operating
expenses were decreased $420,000 for the nine months ended
14
September 30, 2001, and general and administrative expenses were increased by
the same amount.
Production Taxes. Production taxes as a percentage of sales were 1.6%
and 2.2% during the initial nine months 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 nine-month period ended September 30, 2002 decreased
$337,000 or 5% from the comparable previous year period. The decrease resulted
from decreased 2002 sales volumes offset by a slightly higher average depletion
rate in 2002. 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 an average of $5.36 per BOE sold
during the initial nine months of 2002 compared to a depletion rate of $5.32 per
BOE sold during the same period in 2001.
General and Administrative, Net. General and administrative expense for
the nine months ended September 30, 2002 decreased $656,000 or 47% from the
comparable previous year period. The $656,000 decrease in general and
administrative expense, net for the nine months ended September 30, 2002 is
primarily due to receiving increased reimbursements for direct labor and field
vehicles in the amount of $459,000. Gross general and administrative expense was
$7 million during for the nine months ended September 30, 2002 and $6.3 million
for the same period in 2001. The higher gross general and administrative
expenses are primarily due to increased corporate salary and benefit expenses.
General and administrative expense is reported net of operator fees and
reimbursements, which were $6.3 million and $4.9 million during the nine months
for 2002 and 2001, respectively.
Interest Expense. Interest expense for the nine months ended September
30, 2002 increased $6 million or 80% from the previous year period. The increase
was the result of the issuance on August 2, 2001 of $109 million of subordinated
debt at an interest rate of 11% per annum in connection with a recapitalization
(see note 7 to the consolidated financial statements) . Accrued interest on the
subordinated debt for the nine months ended September 30, 2002 was $9.7 million
compared to $1.9 million in 2001. Interest on the senior bank debt decreased
$1.7 million or 33% from the previous year period. Total interest expense,
including amortization of debt issuance costs, during the nine months ended
September 30, 2002 and 2001 were recorded at effective interest rates of 8.9%
and 7.2%, respectively.
Other Income. Other income primarily represents interest earned on cash
balances.
Income Taxes. During the first nine months of 2002, the Company
generated net operating losses for which no tax benefit was recognized. During
the first nine months of 2001, the Company generated pre tax income and reversed
a portion of its previously established deferred tax valuation allowance.
Series D Preferred Stock Dividends. Series D Preferred Stock accrued
dividends at 11.25% compounded quarterly for the nine months ended September 30,
2001. The Company's Series D Preferred Stock was cancelled in exchange for the
TCW subordinated notes and $2 million on August 2, 2001.
Series E Preferred Stock Dividends. Inland's Series E Preferred Stock
accrued dividends at 11.5% compounded quarterly for the nine months ended
September 30, 2001. The Company's Series E Preferred Stock was cancelled on
August 2, 2001.
Series D Preferred Stock Discount. Inland's Series D Preferred 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 Series D Preferred Stock was cancelled in exchange the TCW
Subordinated Note and $2 million on August 2, 2001.
15
Series E Preferred Stock Discount. Inland's Series E Preferred 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 Series E
Preferred Stock was cancelled on August 2, 2001.
LIQUIDITY AND CAPITAL RESOURCES
FORTIS CREDIT AGREEMENT AND DEFAULTS ON LOAN AGREEMENTS
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 June
30, 2002, the Company had borrowed all funds under its current borrowing base of
$83.5 million. In addition, Fortis Capital Corp. has issued a letter of credit
of $1.4 million to cover any deficiencies between the $500,000 credit margin and
the mid market estimate from the counterparty as described in Note 6 to the
Financial Statements. The borrowing base is calculated as the collateral value
of proved reserves and was subject to an initial redetermination on or before
March 31, 2002, 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 the SOLVation financing, the Fortis Credit
Agreement with the Senior Lenders 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 3.75% 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 June
30, 2002, $83 million and $500,000 were borrowed under the LIBOR option at
interest rates of 5.86% and 5.84 %, 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 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. As of March 31, 2002, the covenant that required the
senior debt to EBITDA to be no greater than 3.75 to 1.00 was actually 4.48 to
1.00. No default was asserted by the Senior Lenders, but under the terms of the
Fortis Credit Agreement, no notice or period of time to cure the default was
required, therefore, the Company was in default as of March 31, 2002. On June 6,
2002 the Fortis Credit Agreement was amended to require that the senior debt to
EBITDA ratio be equal to or less than 4.75 to 1.00 for the four prior fiscal
quarters ending June 30, 2002, 4.35 to 1.00 for the four prior fiscal quarters
ending September 30, 2002 and 3.75 to 1.00 for any four fiscal quarters ending
after September 30, 2002. The Senior Lenders waived the compliance with the
original March 31, 2002 senior debt to EBITDA ratio.
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 aggregate subordinated debt balance of $123.6 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
16
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 exercise 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.
SUBORDINATED UNSECURED DEBT TO SOLVATION INC.
On August 2, 2001, the Company closed two subordinated debt
transactions totaling $10 million in the 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 Lenders 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 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 Lenders 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 shares of Series D Preferred Stock and Series E Preferred Stock
held by Inland Holdings LLC, a company controlled by TCW, were exchanged for an
unsecured subordinated note (the "TCW Subordinated Note") due September 30, 2009
and $2 million in cash from the Company. The TCW Subordinated Note amount was
for $98,968,964, which 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
17
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 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.
18
CASH FLOW AND CAPITAL PROJECTS
During the first nine months of 2002, the Company increased its cash
balance $181,000. The Company's cash flows provided by operating activities in
the nine months ended September 30, 2002 were $8,163,000, consisting primarily
of a $7,215,000 net loss offset by $6,445,000 of non-cash depletion,
depreciation and amortization and $9,662,000 of accrued interest that was not
paid and added to the principal of subordinated debt. Cash used in investing
activities consisted entirely of $9,191,000 of development expenditures and
equipment purchases. Cash flows from financing activities consisted of a net
$1,209,000 proceeds from issuance of long term debt related to the gas liquids
plant. Field development expenditures in the first nine months of 2002 consisted
of the completion of 2 wells, which commenced drilling in 2001, the drilling and
completion of 15 wells, recompletion of 23 existing wells and the continued
extension of the gas gathering and water delivery infrastructures and the
investment in a gas liquids plant, which commenced operations in August 2002
The Company's capital budget for development of the Field in year 2002
is $11 to $12 million net to the Company. The Company plans to drill 15 to 17
wells, convert 25 wells to water injection and recomplete approximately 45
existing wells. Because the Company has the ability, under its subordinated debt
agreements to defer interest payments, cash flow from operations continue to
fund a substantial portion of the Company's development expenditures. 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.
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.
19
PART 1. FINANCIAL INFORMATION (CONTINUED)
----------
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 interest rate 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 September
30, 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 May 24, 2002 - November 19, 2002 5.86 %
$500,000 June 4, 2002 - November 29, 2002 5.84 %
</Table>
A 1% increase in interest rates increase annual interest expense on the
secured note payable by $835,000.
The fair value of the secured note payable to the Senior Lenders
approximates the carrying value, since the notes bear interest at a variable
rate.
The interest rate on the Company's subordinated and other debt is fixed
and therefore the Company is not subject to interest rate risk. The carrying
value of the debt approximates the fair value of the debt.
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. 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.
As of September 30, 2002, the Company had the following oil swaps in place:
<Table>
<Caption>
Average Hedged
Barrels per Month Price per Barrel
----------------- ----------------
October 2002 - December 2002 (1) 30,000 $23.90
January 2003 - August 2003 60,000 $24.78
October 2002 - December 2002 (2) 30,000 $24.90
</Table>
(1) The counterparty has the right to require the Company to post
collateral for the difference between the mid market estimate of the
cost of liquidating and terminating the above mentioned hedging
position and $500,000. As of September 30, 2002, a letter of credit was
issued by Fortis Capital Corp. of $1.4 million to cover any
deficiencies between the $500,000 credit margin and the mid market
estimate from the counterparty as described in above Note 6. As of
September 30, 2002, there were no requirements to post collateral in
additional to the $1.4 million letter of credit issued by Fortis
Capital Corp. for the above mentioned hedging contracts.
(2) The counterparty has the right to require the Company to post
collateral for the difference between the mid market estimate of the
cost of liquidating and terminating the above mentioned hedging
position and $1,000,000. As of September 30, 2002, there were no
requirements to post collateral for the above mentioned hedging
contracts.
20
The potential gains or (losses) on these contracts, based on a hypothetical
average market price of equivalent product for this period, are 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
October - December 2002 $ 1,152,000 $ 792,000 $ 432,000 $ 72,000 $ (288,000) $ (648,000) $ (1,008,000)
Year 2003 $ 3,249,000 $ 2,289,000 $ 1,329,000 $ 369,000 $ (591,000) $ (1,551,000) $ (2,511,000)
</Table>
ITEM 4. Controls and Procedures:
(a) Within the 90-day period prior to the date of this report, we
carried out an evaluation, under the supervision and with the participation of
our management, including the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act
of 1934 (the "Exchange Act"). Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in our Exchange Act filings.
(b) There have been no significant changes in our internal controls or in other
factors, which could significantly affect internal controls subsequent to the
date we carried out our evaluation.
21
PART II. OTHER INFORMATION
----------
Item 3. Defaults upon Senior Securities.
See note 8 to consolidated financial statements and, Item 2 of Part II,
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
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
- ------- -----------------------
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 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).
22
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).
4.1.5 Second amendment to Third Amended and Restated Credit
Agreement dated June 6, 2002 to Fortis Credit Agreement
(filed as Exhibit 4.1.5 to Inland's Current report on Form
8-K dated June 6, 2002, 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).
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).
23
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 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).
24
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 (filed as Exhibit 10.12 to Inland's Annual
Report on Form 10-K for the year ended December 31, 2000,
and incorporated herein by reference).
10.13 Employment Agreement between Inland and Michael J. Stevens
dated effective as of February 1, 2001(filed as Exhibit
10.13 to Inland's Annual Report on Form 10-K for the year
ended December 31, 2000, and incorporated herein by
reference).
10.14 Employment Agreement between Inland and Marc MacAluso
dated effective as of February 1, 2001(filed as Exhibit
10.14 to Inland's Annual Report on Form 10-K for the year
ended December 31, 2000, and incorporated herein by
reference).
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 (filed as
Exhibit 10.15 to Inland's Annual Report on Form 10-K for
the year ended December 31, 2000, and incorporated herein
by reference).
10.16 Employment Agreement between Inland and Bill I. Pennington
dated effective as of February 1, 2001(filed as Exhibit
10.16 to Inland's Annual Report on Form 10-K for the year
ended December 31, 2000, and incorporated herein by
reference).
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
(filed as Exhibit 10.17 to Inland's Annual Report on Form
10-K for the year ended December 31, 2000, and
incorporated herein by reference).
10.18 Oil Purchase and Delivery Agreement dated November 7, 2000
(filed as Exhibit 10.18 to Inland's Annual Report on Form
10-K for the year ended December 31, 2000, and
incorporated herein by reference).
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 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).
25
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).
99.1 Letter to Securities and Exchange Commission dated March
26, 2002 concerning Arthur Andersen LLP (filed as Exhibit
99.1 to Inland's Annual Report on Form 10-K for the year
ended December 31, 2001, and incorporated herein by
reference).
99.2(b) 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.
- ----------
(b) Reports on Form 8-K:
Report 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.
* Filed Herewith.
26
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)
27
CERTIFICATION
I, Marc MacAluso, certify that:
1. I have reviewed this quarterly report on Form 10-Q 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
28
CERTIFICATION
I, Bill I. Pennington, certify that:
1. I have reviewed this quarterly report on Form 10-Q 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
29
INDEX TO EXHIBITS
<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.