SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 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
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INLAND RESOURCES INC.
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(Exact name of Registrant as specified in its charter)
<Table>
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)
----------------------
</Table>
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
August 15, 2002: 2,897,732
---------
1
PART 1. FINANCIAL INFORMATION
INLAND RESOURCES INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND DECEMBER 31, 2001
(In thousands)
(Unaudited)
<Table>
<Caption>
June 30, December 31,
2002 2001
----------- -----------
ASSETS Restated
Current assets:
Cash and cash equivalents $ 1,144 $ 1,949
Accounts receivable and accrued sales 3,695 3,320
Inventory 1,496 1,192
Other current assets 227 443
----------- -----------
Total current assets 6,562 6,904
----------- -----------
Property and equipment, at cost:
Oil and gas properties (successful efforts method) 209,179 205,535
Accumulated depletion, depreciation and amortization (47,444) (43,510)
----------- -----------
161,735 162,025
Other property and equipment, net 2,028 2,230
----------- -----------
Total property and equipment, net 163,763 164,255
Other long-term assets, net 2,381 2,217
----------- -----------
Total assets $ 172,706 $ 173,376
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 2,004 $ 4,011
Accrued expenses 2,687 2,321
Fair market value of derivative instruments 802 --
Long- term secured debt and other 83,568 --
Senior subordinated unsecured debt including accrued interest 5,520 --
Subordinated unsecured debt including accrued interest 109,269 --
Junior subordinated unsecured debt including accrued interest 5,520 --
----------- -----------
Total current liabilities 209,370 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) (283) 1,675
Accumulated deficit (77,815) (73,521)
----------- -----------
Total stockholders' deficit (36,664) (30,412)
----------- -----------
Total liabilities and stockholders' deficit $ 172,706 $ 173,376
=========== ===========
</Table>
The accompanying notes are an integral part of the consolidated
financial statements
2
INLAND RESOURCES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED
JUNE 30, 2002 AND 2001
(In thousands except earnings per share)
(Unaudited)
<Table>
<Caption>
Three months ended Six months ended
June 30, June 30,
-------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Revenues:
Oil and gas sales $ 7,851 $ 8,572 $ 14,964 $ 16,741
----------- ----------- ----------- -----------
Operating expenses:
Lease operating expenses 2,548 2,160 5,482 4,383
Production taxes 120 211 225 417
Exploration 25 31 57 61
Depletion, depreciation and amortization 2,099 2,301 4,244 4,315
General and administrative, net 81 485 303 894
----------- ----------- ----------- -----------
Total operating expenses 4,873 5,188 10,311 10,070
----------- ----------- ----------- -----------
Operating income 2,978 3,384 4,653 6,671
Interest expense (4,460) (1,837) (8,963) (3,936)
Unrealized derivative gain (loss) due to time value -- 153 -- (237)
Interest and other income 8 20 16 44
----------- ----------- ----------- -----------
Income (loss) before cumulative effect of change
in accounting principle (1,474) 1,720 (4,294) 2,542
Cumulative effect of change in accounting principle -- -- -- 45
----------- ----------- ----------- -----------
Net income (loss) (1,474) 1,720 (4,294) 2,587
Accrued preferred Series D dividends -- (2,718) -- (5,436)
Accrued preferred Series E dividends -- (420) -- (840)
Accretion of preferred Series D discount -- (1,305) -- (2,883)
Accretion of preferred Series E discount -- (210) -- (465)
----------- ----------- ----------- -----------
Net loss attributable to common stockholders $ (1,474) $ (2,933) $ (4,294) $ (7,037)
=========== =========== =========== ===========
Basic and diluted net loss per share before cumulative
effect of change in accounting principle $ (.51) $ (1.01) $ (1.48) $ (2.45)
Cumulative effect of change in accounting principle -- -- -- .02
----------- ----------- ----------- -----------
Basic and diluted net loss per share $ (.51) $ (1.01) $ (1.48) $ (2.43)
=========== =========== =========== ===========
Basic and diluted weighted average common shares
outstanding 2,898 2,898 2,898 2,898
=========== =========== =========== ===========
Dividends per common share NONE NONE NONE NONE
=========== =========== =========== ===========
</Table>
The accompanying notes are an integral part of the consolidated
financial statements
3
INLAND RESOURCES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2002 AND 2001
(In thousands)
(Unaudited)
<Table>
<Caption>
2002 2001
----------- -----------
Cash flows from operating activities:
Net income (loss) $ (4,294) $ 2,587
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depletion, depreciation and amortization 4,244 4,315
Amortization of debt issue costs 287 390
Noncash changes related to derivatives (1,156) 192
Accrued interest expense added to subordinated debt 6,353 --
Effect of changes in current assets and liabilities:
Accounts receivable (375) 18
Inventory (304) (159)
Other assets (150) 225
Accounts payable and accrued expenses (1,641) 2,822
----------- -----------
Net cash provided by operating activities 2,964 10,390
----------- -----------
Cash flows from investing activities:
Development expenditures and equipment purchases (3,754) (11,229)
----------- -----------
Net cash used by investing activities (3,754) (11,229)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of other long-term debt 68 --
Debt issuance costs (83) --
----------- -----------
Net cash used by financing activities (15) --
----------- -----------
Net decrease in cash and cash equivalents (805) (839)
Cash and cash equivalents at beginning of period 1,949 848
----------- -----------
Cash and cash equivalents at end of period $ 1,144 $ 9
=========== ===========
</Table>
The accompanying notes are an integral part of the consolidated
financial statements
4
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 it should have ceased accounting
for the derivative contracts as hedges at an earlier date,
corresponding to the deterioration in the credit of ENAC and Enron in
mid October 2001. At this date, changes in the fair value of the
derivatives no longer were considered effective in offsetting changes
in the cash flows of the hedged production. Accordingly, the Company
adjusted the loss and the corresponding amount deferred in other
comprehensive income previously recorded to reflect the estimated fair
value of the derivative contracts at that date of $2.2 million. An
adjustment was also recorded to reclassify to earnings $480,000 for the
year ended December 31, 2001, representing the portion of the fair
value of the derivative attributable to the originally scheduled
settlements in 2001.
As a result, the Company has restated the accumulated other
comprehensive income and accumulated deficit balances included in the
accompanying December 31, 2001 balance sheet to reflect the adjustments
discussed above. 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. The table below details the
adjustments and restated balances for the respective periods:
5
<Table>
<Caption>
As
Originally As
Reported Adjustments Restated
----------- ----------- -----------
As of December 31, 2001:
Accumulated Other Comprehensive Income $ 5,503 $ (3,828) $ 1,675
=========== =========== ===========
Accumulated Deficit $ (77,349) $ 3,828 $ (73,521)
=========== =========== ===========
As of March 31, 2002:
Accumulated Other Comprehensive Income $ 4,028 $ (3,356) $ 672
=========== =========== ===========
Accumulated Deficit $ (79,696) $ 3,356 $ (76,340)
=========== =========== ===========
For the Year ended December 31, 2001:
Oil and gas sales $ 31,487 $ 480 $ 31,967
=========== =========== ===========
Unrealized derivative loss $ (5,548) $ 3,348 $ (2,200)
=========== =========== ===========
Operating income $ 10,929 $ 480 $ 11,409
=========== =========== ===========
Net loss $ (5,979) $ 3,828 $ (2,151)
=========== =========== ===========
Net loss attributable to common stockholders $ (4,071) $ 3,828 $ (243)
=========== =========== ===========
For the Three Months ended March 31, 2002:
Oil and gas sales $ 7,585 $ (472) $ 7,113
=========== =========== ===========
Operating income $ 2,148 $ (472) $ 1,676
=========== =========== ===========
Net loss $ (2,347) $ (472) $ (2,819)
=========== =========== ===========
Net loss attributable to common stockholders $ (2,347) $ (472) $ (2,819)
=========== =========== ===========
</Table>
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 June
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
second half of 2002 and in 2003 are $288,000 and $231,000,
respectively. Oil and gas sales for the three and six months ended June
30, 2002 include $625,000 and $1,156,000, respectively, of amounts
reclassified out of accumulated other comprehensive income.
4. COMPREHENSIVE INCOME (LOSS):
Comprehensive income (loss) for the Company for the six months ended
June 30, 2002 and 2001 are as follows:
<Table>
<Caption>
2002 2001
------------ ------------
Net income (loss) $ (4,294) $ 2,587
Components of other comprehensive income:
Cumulative effect of change in accounting principle -- (1,972)
Change in fair value of derivative contracts (802) (1,069)
Hedge settlements reclassified to income (1,156) 2,292
------------ ------------
Comprehensive income (loss) $ (6,252) $ 1.838
============ ============
</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.
6
Additionally, SFAS No. 143 "Accounting for Asset Retirement
Obligations" was issued in July 2001. This standard requires entities
to record the discounted fair value of a liability for an asset
retirement obligation as a liability. When the liability is initially
recorded, the entity capitalizes the cost by increasing the carrying
amount of the related long-lived asset. The carrying amount of the
liability is accreted to its full liability as operating expense, and
the asset previously recorded is then depreciated over the estimated
useful life. The present value of the retirement obligation is adjusted
each reporting period. The Company has not yet determined the impact of
adopting this statement, which will be required on January 1, 2003.
6. FINANCIAL INSTRUMENTS:
Periodically, the Company enters into commodity contracts to hedge or
otherwise reduce the impact of oil price fluctuations. The amortized
cost and the monthly settlement gain or losses are reported as
adjustments to revenue in the period in which the related oil is sold.
Hedging activities do not affect the actual sales price for the
Company's crude oil. The Company is subject to the creditworthiness of
its counterparties since the contracts are not collateralized.
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 July 2003 period with the same third party
counterparty using a swap with various settlement amounts that average
$24.77. 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. 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 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 June 30, 2002, there
were no requirements to post collateral for the above mentioned hedging
contracts.
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.
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
7
Cumulative Convertible Preferred Stock ("Series C Preferred Stock")
owned by JEDI, together with $2.2 million of accumulated dividends
thereon, for (A) 121,973 shares of Series E Preferred Stock and (B)
292,098 shares of Common Stock (the "Recapitalization"). The Series C
Preferred Stock bore dividends at a rate of $10 per share, had a
liquidation preference of $100 per share and was required to be
redeemed at a price of $100 per share not later than January 21, 2008.
March 2001 Transaction - On March 20, 2001, Hampton Investments LLC
("Hampton"), an affiliate of Smith Management LLC, ("Smith") purchased
from JEDI the 121,973 shares of Series E Preferred Stock and 292,098
shares of Common Stock acquired by JEDI in the Exchange Agreement.
Following closing of the Exchange Agreement and the purchase by Hampton
of JEDI's shares, Holdings owned 1,752,586 shares of Common Stock,
representing approximately 60.5% of the outstanding shares of Common
Stock as of March 20, 2001. Hampton owned 292,098 shares of Common
Stock, representing approximately 10.1% of the outstanding shares of
Common Stock as of March 20, 2001. TCW Asset Management Company has the
power to vote and dispose of the securities owned by Holdings.
August 2001 Transaction - On August 2, 2001, the Company closed two
subordinated debt transactions totaling $10 million in aggregate with
SOLVation Inc. ("SOLVation"), a company affiliated with Smith, and
entered into other restructuring transactions as described below. The
first of the two debt transactions with SOLVation was the issuance of a
$5 million unsecured senior subordinated note to SOLVation due July 1,
2007. The interest rate is 11% per annum compounded quarterly. The
interest payment is payable in arrears in cash subject to the approval
from the senior bank group and accumulates if not paid in cash. The
Company is not required to make any principal payments prior to the
July 1, 2007 maturity date. However, the Company is required to make
payments of principal and interest in the same amounts as any principal
payment or interest payments on the TCW Subordinated Note (described
below). Prior to the July 1, 2007 maturity date, subject to the bank
subordination agreement, the Company may prepay the senior subordinated
note in whole or in part with no penalty.
The Company also issued a second $5 million unsecured junior
subordinated note to SOLVation. The interest rate is 11% per annum
compounded quarterly. The maturity date is the earlier of (i) 120 days
after payment in full of the TCW subordinated debt or (ii) March 31,
2010. Interest is payable in arrears in cash subject to the approval
from the senior bank group and accumulates if not paid in cash. The
Company is not required to make any principal payments prior to the
March 31, 2010 maturity date. Prior to the March 31, 2010 maturity
date, subject to both bank and subordination agreements, the Company
may prepay the junior subordinated note in whole or in part with no
penalty. A portion of the proceeds from the senior and junior
subordinated notes was used to fund a $2 million payment to Holdings
and other Company working capital needs.
In conjunction with the issuance of the two subordinated notes to
SOLVation, the Series D Preferred and Series E Preferred stock held by
Holdings were exchanged for an unsecured subordinated note due
September 30, 2009 and $2 million in cash from the Company. Holdings
had previously purchased the Series E Preferred Stock from Hampton. The
TCW Subordinated Note amount was for $98,968,964 that represented the
face value plus accrued dividends of the Series D Preferred Stock as of
August 2, 2001. The interest rate on this debt is 11% per annum
compounded quarterly. Interest is payable in arrears in cash subject to
the approval from the senior bank group and accumulates if not paid in
cash. Interest payments will be made quarterly, commencing on the
earlier of September 30, 2005 or the end of the first calendar quarter
after the senior bank debt has been reduced to $40 million or less,
subject to both bank and senior subordination agreements. Beginning the
earlier of two years prior to the maturity date or the first December
30 after the repayment in full of the senior bank debt, subject to both
bank and senior subordination agreements, the Company will make equal
annual principal payments of one third of the aggregate principal
amount of the TCW Subordinated Note. Any unpaid principal or interest
amounts are due in full on the September 30, 2009 maturity date. Prior
to the September 30, 2009 maturity date, subject to both bank and
senior subordination agreements, the Company may prepay the TCW
Subordinated Note in whole or in part with no penalty. As a result of
the exchange, the Company retired both the Series D and Series E
Preferred stock. Due to the related party nature of this transaction,
the difference between the aggregate subordinated note balance and $2
million cash paid to Holdings and the aggregate liquidation value of
the Series D and E preferred stock plus accrued dividends of
$13,083,000 was recorded as an increase to additional paid-in capital.
8
As part of this restructuring, Holdings also sold to Hampton, 1,455,390
shares of their common stock in the Company. Consequently, Hampton now
controls approximately 80% of the issued and outstanding shares of the
Company. Holdings also terminated any existing option rights to the
Company's common stock, and relinquished the right to elect four
persons to the Company's Board of Directors to Hampton. However,
Holdings has the right to nominate one person to the Company's Board.
Remaining board members will be nominated by the Company's
shareholders. As long as Hampton or its affiliates own at least a
majority of the common stock of the Company, Hampton has agreed with
Holdings that Hampton will have the right to appoint at least two
members to the board.
8. FORTIS CAPITAL AGREEMENT:
Effective September 21, 1999, the Company entered into a credit
agreement (the "Fortis Credit Agreement"). The current participants are
Fortis Capital Corp., as agent, and U.S. Bank National Association (the
"Senior Lenders"). At June 30, 2002, the Company had advanced all funds
under its current borrowing base of $83.5 million. The borrowing base
is calculated as the collateral value of proved reserves and 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 SOLVation financing, the Fortis Credit Agreement
with the senior bank group was amended to change the maturity date to
June 30, 2007 from April 1, 2002, or potentially earlier if the
borrowing base is determined to be insufficient. Interest accrues under
the Fortis Credit Agreement, at the Company's option, at either (i) 2%
above the prime rate or (ii) at various rates above the LIBOR rate. The
LIBOR rates are determined by the senior debt to EBITDA ratios. 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 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 of its bank covenants at June 30, 2002
except for the senior debt to EBITDA ratio, which was 4.80 to 1.00
rather than the required 4.75 to 1.00. No default has been asserted by
the Senior Lenders, but under the terms of the Credit Agreement, no
notice or period of time to cure the default is required, and therefore
the Company was in default. As a result of the noncompliance with such
covenant and the ability of 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 $120.3 million as a current liability. The Company is in discussions
with Fortis regarding an amendment to the financial covenants, and
believes that the default will be cured in the near future as a result
of an amendment. The Fortis Credit Agreement has been amended on five
previous occasions, however, there can be no assurance that the Senior
Lenders will agree to a future amendment to the Fortis Credit Agreement
or that they will not assert their rights to foreclose on their
collateral. Foreclosure by the Senior Lenders on their collateral would
have a material
9
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 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. COMMITMENTS AND CONTINGENCIES:
The Company has contracted Custom Energy Construction, Inc. ("Custom")
for the installation of a gas processing facility located in the Field.
The total cost of the facility will be approximately $1.2 million,
which will be financed through a non-recourse promissory note with
Custom. Principle and interest payments will be made out of hydrocarbon
liquid proceeds generated by the plant over a 5-year period at 7% per
annum. Completion and operations are expected to occur early September
2002. Custom's collateral for the promissory note with the Company will
be a first lien on the plant.
10
INLAND RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation:
RESULTS OF OPERATIONS:
Three Month Periods Ended June 30, 2002 and 2001:
Oil and Gas Sales. Crude oil sales for the quarter ended June 30, 2002
decreased $769,000 or 10% from the previous year. Natural gas sales for the
quarter ended June 30, 2002 decreased $1.3 million or 60% from the previous
year. As shown in the table below, decreased crude volumes of 6% and lower
average crude prices of 5% caused the lower crude sales of $769,000. Decreased
natural gas volumes of 27% and lower average natural gas prices of 45% caused
the lower natural gas sales of $1.3 million. Lower natural gas sales volumes
were partly 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 April through May 2002 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 88% and
77% in the second 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 $625,000 in
the second quarter 2002 to reflect the reclass of non-cash gains from
accumulated other comprehensive income recorded in 2001 for the ineffectiveness
of certain derivative contracts in connection with the filing of Chapter 11
bankruptcy of ENAC in 2001. Crude oil sales were decreased by $292,000 and $1.1
million during the second 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 June 30, 2002 Three Months Ended June 30, 2001
----------------------------------- ------------------------------------
Net Volume Average Sales Net Volume Average Sales
(Bbls or Price (in 000's) (Bbls or Price (in 000's)
---------- ------- ---------- ---------- ------- ----------
Mcfs) Mcfs)
---------- ---------
Crude Oil Sales 285,167 $23.24 $ 6,627 303,922 $24.34 $ 7,396
Natural Gas Sales 483,430 $1.84 891 666,102 $3.35 2,230
Reclass of non-cash gains from
Accumulated Other
Comprehensive Income 625 --
Hedging gain (loss) (292) (1,054)
--------- ---------
Total $ 7,851 $ 8,572
========= =========
</Table>
11
Lease Operating Expenses. Lease operating expense for the quarter ended
June 30, 2002 increased $387,000 or 18% from the previous year second quarter.
Lease operating expense per BOE increased from $5.21 per BOE sold in the second
quarter of 2001 to $6.96 per BOE sold in 2002. The increase in lease operating
expenses is due to substantially higher costs of materials and labor, due to
increased demand for products, services and employees in the Monument Butte
region and neighboring areas. Certain reclassifications to lease operating
expenses were made to the three month period ending June 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
$209,000 for the quarter ended June 30, 2001. 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 second 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 June 30, 2002 decreased $202,000 or 9% from
the previous year second 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 $5.25 per
BOE sold during the second quarter of 2002 compared to $5.12 per BOE sold during
the second quarter of 2001.
General and Administrative, Net. General and administrative expense,
net for the second quarter ended June 30, 2002 decreased $404,000 or 83% from
the previous year second quarter. The decrease in general and administrative
expense, net for the second quarter ended June 30, 2002 is primarily due to
receiving higher operating reimbursements for direct labor and field vehicles of
$383,000. Gross general and administrative expenses were $2.1 million for both
the second quarter of 2002 and 2001. General and Administrative expense is
reported net of operator fees and reimbursements which were $2.0 million and
$1.6 million during the second quarters of 2002 and 2001, respectively.
Interest Expense. Interest expense for the second quarter ended June
30, 2002 increased $2.6 million or 143% from the previous year second 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 second quarter of 2002 was $3.2
million compared to none for 2001. Interest on the senior bank debt decreased
$621,000 or 36% from the previous year second quarter. Total interest expense,
including amortization of debt issuance costs, during the second quarter of 2002
and 2001 were recorded at effective interest rates of 8.8% and 8.8%,
respectively.
Other Income. Other income primarily represents interest earned on cash
balances.
Income Taxes. During the second quarter of 2002 and 2001, no income tax
provision or benefit was recognized due to net operating losses incurred and the
establishment of a full valuation allowance.
Preferred Series D Stock Dividends. Inland's Preferred Series D Stock
accrued dividends at 11.25% compounded quarterly for the second quarter of 2001.
The Company's Preferred Series D Stock was cancelled in exchange for the TCW
subordinated notes and $2 million on August 2, 2001.
Preferred Series E Stock Dividends. Inland's Preferred Series E Stock
accrued dividends at 11.5% compounded quarterly for the second quarter of 2001.
The Company's Preferred Series E Stock was cancelled on August 2, 2001.
Preferred Series D Stock Discount. Inland's Preferred Series D Stock
was initially recorded on the financial statements at a discount of $20.2
million and was being accreted to face value ($80.7 million) over the
12
minimum mandatory redemption period, that started on April 1, 2002 and ended on
April 1, 2004. The Company's Preferred Series D Stock was cancelled in exchange
for TCW subordinated notes and $2 million on August 2, 2001.
Preferred Series E Stock Discount. Inland's Preferred Series E Stock
was initially recorded on the financial statements at a discount of $4.2 million
and was being accreted to face value ($12.2 million) over the period to the
minimum mandatory redemption date of April 1, 2004. The Company's Preferred
Series E Stock was cancelled on August 2, 2001.
Six Month Periods Ended June 30, 2002 and 2001:
Oil and Gas Sales. Crude oil sales for the six months ended June 30,
2002 decreased $2.4 million or 17% from the previous year. Natural gas sales for
the six months ended June 30, 2002 decreased $2.5 million or 55% from the
previous year. As shown in the table below, decreased crude volumes of 2% and
lower average crude prices of 15% caused the lower crude sales of $2.4 million.
Decreased natural gas volumes of 10% and lower average natural gas prices of 50%
caused the lower natural gas sales of $2.5 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 85% and 76% in
the six months ended June 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
$1,156,000 in the first six months of 2002 to reflect the reclass of non-cash
gains from accumulated other comprehensive income recorded in 2001 for the
ineffectiveness of certain derivative contracts in connection with the filing of
Chapter 11 bankruptcy of ENAC in 2001. Crude oil sales were decreased by
$292,000 and $2.3 million during the six months ended June 30, 2002 and 2001,
respectively to recognize hedging contract settlement losses. See Item 3
"Quantitative and Qualitative Disclosures About Market Risk."
<Table>
<Caption>
Six Months Ended June 30, 2002 Six Months Ended June 30, 2001
------------------------------------- ---------------------------------------
Net Volume Average Sales Net Volume Average Sales
(Bbls or Price (in 000's) (Bbls or Price (in 000's)
---------- ------- ---------- ----------- ------- ----------
Mcfs) Mcfs)
---------- ----------
Crude Oil Sales 576,228 $20.88 $ 12,032 587,412 $24.65 $ 14,480
Natural Gas Sales 1,038,970 $1.99 2,068 1,149,164 $3.96 4,552
Reclass of non-cash gains
from Accumulated Other
Comprehensive Income 1,156 --
Hedging Loss (292) (2,291)
----------- ------------
Total $ 14,964 $ 16,741
=========== ============
</Table>
Lease Operating Expenses. Lease operating expenses for the six months
of year 2002 increased $1.1 million or 25% from the previous year period. Lease
operating expenses per BOE increased from $5.63 per BOE sold in the first half
of 2001 to $7.32 per BOE in 2002. The increase in lease operating expenses are
due to substantially higher labor costs, overhead fees and other Field operating
expenses such as repairs and maintenance and fuel. Also, the Company put
approximately 32 wells previously shut in on production the first six months of
2002. Certain reclassifications to lease operating expenses were made to the six
month period ending June 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 $268,000 for
the six months ended June 30, 2001. General and administrative expenses were
increased by the same amounts.
13
Production Taxes. Production taxes as a percentage of sales were 1.6%
and 2.2% during the initial six 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 six-month period ended June 30, 2002 decreased $71,000 or
2% 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 $5.25 per BOE sold during the
initial six months of 2002 compared to an average of $5.12 per BOE sold during
the same period in 2001.
General and Administrative, Net. General and administrative expense for
the six months ended June 30, 2002 decreased $591,000 or 66% from the comparable
previous year period. The $591,000 decrease in general and administrative
expense, net for six months ended June 30, 2002 is primarily due to receiving
reimbursements for direct labor and field vehicles of $801,000. Gross general
and administrative expense was $4.4 million during the first half of 2002 and
$4.0 million during the first half of 2001. The higher gross general and
administrative expenses are primarily due increased corporate salary and benefit
expenses. General and administrative expense is reported net of operator fees
and reimbursements which were $4.1 million and $3.1 million during the initial
six months of 2002 and 2001, respectively.
Interest Expense. Interest expense for the six months ended June 30,
2002 increased $5 million or 128% 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 six months ended June 30, 2002 was $6.4 million
compared to none for 2001. Interest on the senior bank debt decreased $1.2
million or 34% from the previous year period. Total interest expense, including
amortization of debt issuance costs, during the six months ended June 30, 2002
and 2001 were recorded at effective interest rates of 9.0% and 9.5%,
respectively.
Other Income. Other income primarily represents interest earned on cash
balances.
Income Taxes. During the first half of 2002 and 2001, no income tax
provision or benefit was recognized due to net operating losses incurred and the
reversal and recording of a full valuation allowance.
Preferred Series D Stock Dividends. Inland's Preferred Series D Stock
accrued dividends at 11.25% compounded quarterly for the six months ended June
30, 2001. The Company's Preferred Series D Stock was cancelled in exchange for
the TCW subordinated notes and $2 million on August 2, 2001.
Preferred Series E Stock Dividends. Inland's Preferred Series E Stock
accrued dividends at 11.5% compounded quarterly for the six months ended June
30, 2001. The Company's Preferred Series E Stock was cancelled on August 2,
2001.
Preferred Series D Stock Discount. Inland's Preferred Series D Stock
was initially recorded on the financial statements at a discount of $20.2
million and was being accreted to face value ($80.7 million) over the minimum
mandatory redemption period, that started on April 1, 2002 and ended on April 1,
2004. The Company's Preferred Series D Stock was cancelled in exchange for TCW
subordinated notes and $2 million on August 2, 2001.
Preferred Series E Stock Discount. Inland's Preferred Series E Stock
was initially recorded on the financial statements at a discount of $4.2 million
and was being accreted to face value ($12.2 million) over the period to the
minimum mandatory redemption date of April 1, 2004. The Company's Preferred
Series E Stock was cancelled on August 2, 2001.
14
LIQUIDITY AND CAPITAL RESOURCES
FORTIS CREDIT AGREEMENT
Effective September 21, 1999, the Company entered into a credit
agreement (the "Fortis Credit Agreement"). The current participants are Fortis
Capital Corp. and U.S. Bank National Association (the "Senior Lenders"). At June
30, 2002, the Company had advanced all funds under its current borrowing base of
$83.5 million. The borrowing base is calculated as the collateral value of
proved reserves and 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 SOLVation financing, the Fortis Credit Agreement
with the senior bank group was amended to change the maturity date to June 30,
2007 from April 1, 2002, or potentially earlier if the borrowing base is
determined to be insufficient. Interest accrues under the Fortis Credit
Agreement, at the Company's option, at either (i) 2% above the prime rate or
(ii) at various rates above the LIBOR rate. The LIBOR rates are determined by
the senior debt to EBITDA ratios. If the senior debt to EBITDA ratio is greater
than 4.00 to 1.00, the rate is 3.75% 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 of its bank covenants at June 30, 2002
except for the senior debt to EBITDA ratio, which was 4.80 to 1.00 rather than
the required 4.75 to 1.00. No default has been asserted by the Senior Lenders,
but under the terms of the Credit Agreement, no notice or period of time to cure
the default is required, and therefore the Company was in default. As a result
of the noncompliance with such covenant and the ability of 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 $120.3
million as a current liability. The Company is in discussions with Fortis
regarding an amendment to the financial covenants, and believes that the default
will be cured in the near future as a result of an amendment. The Fortis Credit
Agreement has been amended on five previous occasions, however, there can be no
assurance that the Senior Lenders will agree to a future amendment to the Fortis
Credit Agreement or that they will not assess their rights to foreclose on their
collateral.
15
SUBORDINATED UNSECURED DEBT TO SOLVATION INC.
On August 2, 2001, the Company closed two subordinated debt
transactions totaling $10 million in aggregate with SOLVation Inc. The first of
the two debt transactions with SOLVation was the issuance of a $5 million
unsecured senior subordinated note to SOLVation due July 1, 2007. The interest
rate is 11% per annum compounded quarterly. The interest payment is payable in
arrears in cash subject to the approval from the senior bank group and
accumulates if not paid in cash. The Company is not required to make any
principal payments prior to the July 1, 2007 maturity date. However, the Company
is required to make payments of principal and interest in the same amounts as
any principal payment or interest payments on the TCW subordinated debt
(described below). Prior to the July 1, 2007 maturity date, subject to the bank
subordination agreement, the Company may prepay the senior subordinated note in
whole or in part with no penalty.
The Company also issued a second $5 million unsecured junior
subordinated note to SOLVation. The interest rate is 11% per annum compounded
quarterly. The maturity date is the earlier of (i) 120 days after payment in
full of the TCW subordinated debt or (ii) March 31, 2010. Interest is payable in
arrears in cash subject to the approval from the senior bank group and
accumulates if not paid in cash. The Company is not required to make any
principal payments prior to the March 31, 2010 maturity date. Prior to the March
31, 2010 maturity date, subject to both bank and subordination agreements, the
Company may prepay the junior subordinated note in whole or in part with no
penalty. A portion of the proceeds from the senior and junior subordinated notes
was used to fund a $2 million payment to TCW and other Company working capital
needs.
SUBORDINATED UNSECURED DEBT TO TCW
In conjunction with the issuance of the two subordinated notes to
SOLVation, the Series D Preferred and Series E Preferred stock held by Inland
Holdings LLC, a company controlled by TCW, were exchanged for an unsecured
subordinated note due September 30, 2009 and $2 million in cash from the
Company. The note amount was for $98,968,964 that represented the face value
plus accrued dividends of the Series D Preferred stock as of August 2, 2001. The
interest rate is 11% per annum compounded quarterly. Interest shall be payable
in arrears in cash subject to the approval from the senior bank group and
accumulates if not paid in cash. Interest payments will be made quarterly,
commencing on the earlier of September 30, 2005 or the end of the first calendar
quarter after the senior bank debt has been reduced to $40 million or less,
subject to both bank and senior subordination agreements. Beginning the earlier
of two years prior to the maturity date or the first December 30 after the
repayment in full of the senior bank debt, subject to both bank and senior
subordination agreements, the Company will make equal annual principal payments
of one third of the aggregate principal amount of the TCW subordinated note. Any
unpaid principal or interest amounts are due in full on the September 30, 2009
maturity date. Prior to the September 30, 2009 maturity date, subject to both
bank and senior subordination agreements, the Company may prepay the TCW
subordinated note in whole or in part with no penalty.
CASH FLOW AND CAPITAL PROJECTS
During the first six months of 2002, the Company used its cash of
approximately $900,000 and cash from operations of $2.9 million for Field
development expenditures and other expenditures totaling $3.8 million. Field
development expenditures in the first six months of 2002 consisted of the
completion of two wells, which commenced drilling in 2001, the drilling of four
wells, recompletion of existing wells and the continued extension of the gas
gathering and water delivery infrastructures.
The Company's capital budget for development of the Field in year 2002
is $11 to $13 million net to the Company. The Company plans to drill 15 to 20
wells, convert 25 wells to water injection and recomplete approximately 50
existing wells. Although there can be no assurance, the Company believes that
cash on hand along with future cash to be generated from operations will be
sufficient to implement its development plans for the next year and service
debt. The level of capital expenditures is largely discretionary, and the amount
of funds devoted to any particular activity may increase or decrease
significantly depending on available opportunities, commodity prices, operating
cash flows and development results, among other items.
INFLATION AND CHANGES IN PRICES
The Company's revenues and the value of its oil and gas properties have been and
will be affected by changes in oil and gas prices. The Company's ability to
borrow from traditional lending sources and to obtain additional capital on
attractive terms is also substantially dependent on oil and gas prices. Oil and
gas prices are subject to significant
16
seasonal and other fluctuations that are beyond the Company's ability to control
or predict. Although certain of the Company's costs and expenses are affected by
the level of inflation, inflation did not have a significant effect on the
Company's results of operations during 2002 or 2001.
FORWARD LOOKING STATEMENTS
Certain statements in this report, including statements of the Company's and
management's expectation, intentions, plans and beliefs, including those
contained in or implied by Management's Discussion and Analysis of Financial
Condition and Results of Operations and the Notes to Consolidated Financial
Statements, are forward-looking statements, within the meaning of Section 21E of
the Securities Exchange Act of 1934, that are subject to certain events, risk
and uncertainties that may be outside the Company's control. These
forward-looking statements include statements of management's plans and
objectives for the Company's future operations and statements of future economic
performance, information regarding drilling schedules, expected or planned
production or transportation capacity, future production levels of fields,
marketing of crude oil and natural gas, the Company's capital budget and future
capital requirements, credit facilities, the Company's meeting its future
capital needs, the Company's realization of its deferred tax assets, the level
of future expenditures for environmental costs and the outcome of regulatory and
litigation matters, and the assumptions described in this report underlying such
forward-looking statements. Actual results and developments could differ
materially from those expressed in or implied by such statements due to a number
of factors, including, without limitation, those described in the context of
such forward-looking statements, fluctuations in the price of crude oil and
natural gas, the success rate of exploration efforts, timeliness of development
activities, risk incident to the drilling and completion for oil and gas wells,
future production and development costs, the strength and financial resources of
the Company's competitors, the Company's ability to find and retain skilled
personnel, climatic conditions, the results of financing efforts, the political
and economic climate in which the Company conducts operations and the risk
factors described from time to time in the Company's other documents and reports
filed with the SEC.
17
PART 1. FINANCIAL INFORMATION (CONTINUED)
INLAND RESOURCES INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
----------
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk:
Market risk generally represents the risk that losses may occur in the
value of financial instruments as a result of movements in interest rates,
foreign currency exchange rates and commodity prices.
Interest Rate Risk. The Company is exposed to some market risk due to
the floating interest rate under the Fortis Credit Agreement. See Item 2. -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources." All borrowings under the Fortis
Credit Agreement are due and payable in 12 equal quarterly installments of
principal with accrued interest, beginning September 30, 2004. As of June 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>
The Company's total subordinated debt of $120 million outstanding at
June 30, 2002 has a fixed interest rate of 11% per annum compounded quarterly
and is not subject to rate increases. Assuming the principal is paid according
to the terms of the loan, an increase in interest rates could result in an
increase in interest expense on the existing principal balance for the remaining
term of the loan, as shown by the following chart:
<Table>
<Caption>
Increase in Interest Expense
-----------------------------------------
1% increase in 2% increase in
interest rates interest rates
-------------- --------------
July - December 2002 $95,000 $190,000
Year 2003 $835,000 $1,670,000
Year 2004 $818,000 $1,635,000
Year 2005 $591,000 $1,183,000
Year 2006 $313,000 $626,000
January - June 2007 $104,000 $208,000
</Table>
Commodity Risks. The Company hedges a portion of its crude oil
production to reduce its exposure to market price fluctuations. The Company uses
various financial instruments whereby monthly settlements are based on
differences between the prices specified in the instruments and the settlement
prices of certain futures contracts quoted on the NYMEX index. Gains or losses
on hedging activities are recognized as an adjustment to crude oil sales in the
period in which the hedged production is sold.
18
As of June 30, 2002, the Company had the following oil swaps in place:
<Table>
<Caption>
Average Hedged
Barrels per Month Price per Barrel
----------------- ----------------
July 2002 - December 2002 (1) 30,000 $23.90
January 2003 - July 2003 60,000 $24.77
July 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.
(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 June 30, 2002, there were no requirements to post collateral for the above
mentioned hedging contracts.
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
------------ ------------ ------------ ------------ ------------ ------------ ------------
July -December 2002 $ 2,304,000 $ 1,584,000 $ 864,000 $ 144,000 $ (576,000) $ (1,296,000) $ (2,016,000)
Year 2003 $ 2,842,000 $ 2,002,000 $ 1,162,000 $ 322,000 $ (518,000) $ (1,358,000) $ (2,198,000)
</Table>
19
PART II. OTHER INFORMATION
INLAND RESOURCES INC.
Items 1, 2, 4 and 5 are omitted from this report as inapplicable.
Item 3. Defaults upon Senior Securities.
See note 8 to consolidated financial statements.
Item 6. Exhibits and Reports on Form 8-K.
The following documents are filed as part of this Quarterly Report on Form 10-Q.
<Table>
<Caption>
Exhibit
Number Description of Exhibits
- ------ -----------------------
2.1 Agreement and Plan of Merger between Inland Resources Inc.
("Inland"), IRI Acquisition Corp. and Lomax Exploration
Company (exclusive of all exhibits) (filed as Exhibit 2.1 to
Inland's Registration Statement on Form S-4, Registration No.
33-80392, and incorporated herein by this reference).
3.1 Amended and Restated Articles of Incorporation, as amended
through December 14, 1999 (filed as Exhibit 3.1 to Inland's
Current Report on Form 8-K dated September 21, 1999, and
incorporated herein by reference).
3.2 By-Laws of Inland (filed as Exhibit 3.2 to Inland's
Registration Statement on Form S-18, Registration No.
33-11870-F, and incorporated herein by reference).
3.2.1 Amendment to Article IV, Section 1 of the Bylaws of Inland
adopted February 23, 1993 (filed as Exhibit 3.2.1 to Inland's
Annual Report on Form 10-K for the year ended December 31,
1992, and incorporated herein by reference).
3.2.2 Amendment to the Bylaws of Inland adopted April 8, 1994 (filed
as Exhibit 3.2.2 to Inland's Registration Statement on Form
S-4, Registration No. 33-80392, and incorporated herein by
reference).
3.2.3 Amendment to the Bylaws of Inland adopted April 27, 1994
(filed as Exhibit 3.2.3 to Inland's Registration Statement on
Form S-4, Registration No. 33-80392, and incorporated herein
by reference).
4.1 Credit Agreement dated September 23, 1997 between Inland
Production Company ("IPC"), Inland, ING (U.S.) Capital
Corporation, as Agent, and Certain Financial Institutions, as
banks (filed as Exhibit 4.1 to Inland's Current Report on Form
8-K dated September 23, 1997, and incorporated herein by
reference).
4.1.1 Third Amendment to Credit Agreement entered into as of April
22, 1998, amending Exhibit 4.1 (filed as Exhibit 4.1.1 to
Inland's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998, and incorporated herein by reference).
4.1.2 Amended and Restated Credit Agreement dated as of September
11, 1998 amending and restating Exhibit 4.1 (filed as Exhibit
4.1.2 to Inland's Annual Report on Form 10-K for the year
ended December 31, 1998, and incorporated herein by
reference).
4.1.3 First Amendment to Amended and Restated Credit Agreement dated
as of March 5, 1999 amending Exhibit 4.1.2 (filed as Exhibit
4.1.3 to Inland's Annual Report on Form 10-K for the year
ended December 31, 1998, and incorporated herein by
reference).
4.1.4 Second Amended and Restated Credit Agreement dated September
15, 1999, but effective as of September 21, 1999, amending and
restating Exhibit 4.1 (without
</Table>
20
<Table>
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.
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).
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).
</Table>
21
<Table>
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).
</Table>
22
<Table>
10.10 Employment Agreement between Inland and William T. War dated
effective as of October 1, 1999 (filed as Exhibit 10.14 to
Inland's Annual Report on Form 10-K for the year ended
December 31, 1999, and incorporated herein by reference).
10.11 Stock Option Agreement between Inland and William T. War dated
October 1, 1999 representing 25,000 post-split shares of
Common Stock (filed as Exhibit 10.15 to Inland's Annual Report
on Form 10-K for the year ended December 31, 1999, and
incorporated herein by reference).
10.12 Amendment to Employment Agreement between Inland and William
T. War, amending the Employment Agreement filed as Exhibit
10.10.
10.13 Employment Agreement between Inland and Michael J. Stevens
dated effective as of February 1, 2001.
10.14 Employment Agreement between Inland and Marc MacAluso dated
effective as of February 1, 2001.
10.15 Stock Option Agreement between Inland and Marc MacAluso dated
effective as of February 1, 2001 representing 150,000
post-split shares of Common Stock.
10.16 Employment Agreement between Inland and Bill I. Pennington
dated effective as of February 1, 2001.
10.17 Stock Option Agreement between Inland and Bill I. Pennington
dated effective as of February 1, 2001 representing 150,000
post-split shares of Common Stock.
10.18 Oil Purchase and Delivery Agreement dated November 7, 2000.
10.19 Common Stock Purchase Agreement dated August 2, 2001 by and
between Inland Holdings, LLC ("Inland Holdings") and Hampton
Investments LLC ("Hampton Investments")(without exhibits or
schedules)(filed as Exhibit 10.1 to the Company's Current
Report on Form 8-K dated August 2, 2001, and incorporated
herein by reference).
10.20 Contribution Agreement dated August 2, 2001 by and among Park
Hampton Holdings LLC ("Hampton Holdings"), Pengo Securities
Corp. ("Pengo"), Smith Energy Partnership ("SEP"), the five
individuals and Hampton Investments (filed as Exhibit 10.2 to
the Company's Current Report on Form 8-K dated August 2, 2001,
and incorporated herein by reference).
10.21 Series E Preferred Stock Purchase Agreement dated as of August
2, 2001 by and between Hampton Investments and Inland Holdings
(without exhibits or schedules)(filed as Exhibit 10.3 to the
Company's Current Report on Form 8-K dated August 2, 2001, and
incorporated herein by reference).
10.22 Termination Agreement dated as of August 2, 2001 by and
between Hampton Investments and Inland (without exhibits or
schedules)(filed as Exhibit 10.4 to the Company's Current
Report on Form 8-K dated August 2, 2001, and incorporated
herein by reference).
10.23 Exchange and Note Issuance Agreement dated August 2, 2001 by
and among Inland, Production and Inland Holdings (without
exhibits or schedules)(filed as Exhibit 10.5 to the Company's
Current Report on Form 8-K dated August 2, 2001, and
incorporated herein by reference).
10.24 Termination Agreement dated as of August 2, 2001 by and among
Inland and Inland Holdings (without exhibits or
schedules)(filed as Exhibit 10.6 to the Company's Current
Report on Form 8-K dated August 2, 2001, and incorporated
herein by reference).
</Table>
23
<Table>
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.
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.
</Table>
- ----------
(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.
24
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: August 19, 2002 By: /s/ Marc MacAluso
------------------ ---------------------------
Marc MacAluso
Chief Executive Officer and
Chief Operating Officer
Date: August 19, 2002 By: /s/ Bill I. Pennington
------------------ ---------------------------
Bill I. Pennington
President and Chief Financial Officer
(Principal Accounting Officer)
25
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
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).
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
</Table>
<Table>
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.
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).
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).
</Table>
<Table>
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).
</Table>
<Table>
10.10 Employment Agreement between Inland and William T. War dated
effective as of October 1, 1999 (filed as Exhibit 10.14 to
Inland's Annual Report on Form 10-K for the year ended
December 31, 1999, and incorporated herein by reference).
10.11 Stock Option Agreement between Inland and William T. War dated
October 1, 1999 representing 25,000 post-split shares of
Common Stock (filed as Exhibit 10.15 to Inland's Annual Report
on Form 10-K for the year ended December 31, 1999, and
incorporated herein by reference).
10.12 Amendment to Employment Agreement between Inland and William
T. War, amending the Employment Agreement filed as Exhibit
10.10.
10.13 Employment Agreement between Inland and Michael J. Stevens
dated effective as of February 1, 2001.
10.14 Employment Agreement between Inland and Marc MacAluso dated
effective as of February 1, 2001.
10.15 Stock Option Agreement between Inland and Marc MacAluso dated
effective as of February 1, 2001 representing 150,000
post-split shares of Common Stock.
10.16 Employment Agreement between Inland and Bill I. Pennington
dated effective as of February 1, 2001.
10.17 Stock Option Agreement between Inland and Bill I. Pennington
dated effective as of February 1, 2001 representing 150,000
post-split shares of Common Stock.
10.18 Oil Purchase and Delivery Agreement dated November 7, 2000.
10.19 Common Stock Purchase Agreement dated August 2, 2001 by and
between Inland Holdings, LLC ("Inland Holdings") and Hampton
Investments LLC ("Hampton Investments")(without exhibits or
schedules)(filed as Exhibit 10.1 to the Company's Current
Report on Form 8-K dated August 2, 2001, and incorporated
herein by reference).
10.20 Contribution Agreement dated August 2, 2001 by and among Park
Hampton Holdings LLC ("Hampton Holdings"), Pengo Securities
Corp. ("Pengo"), Smith Energy Partnership ("SEP"), the five
individuals and Hampton Investments (filed as Exhibit 10.2 to
the Company's Current Report on Form 8-K dated August 2, 2001,
and incorporated herein by reference).
10.21 Series E Preferred Stock Purchase Agreement dated as of August
2, 2001 by and between Hampton Investments and Inland Holdings
(without exhibits or schedules)(filed as Exhibit 10.3 to the
Company's Current Report on Form 8-K dated August 2, 2001, and
incorporated herein by reference).
10.22 Termination Agreement dated as of August 2, 2001 by and
between Hampton Investments and Inland (without exhibits or
schedules)(filed as Exhibit 10.4 to the Company's Current
Report on Form 8-K dated August 2, 2001, and incorporated
herein by reference).
10.23 Exchange and Note Issuance Agreement dated August 2, 2001 by
and among Inland, Production and Inland Holdings (without
exhibits or schedules)(filed as Exhibit 10.5 to the Company's
Current Report on Form 8-K dated August 2, 2001, and
incorporated herein by reference).
10.24 Termination Agreement dated as of August 2, 2001 by and among
Inland and Inland Holdings (without exhibits or
schedules)(filed as Exhibit 10.6 to the Company's Current
Report on Form 8-K dated August 2, 2001, and incorporated
herein by reference).
</Table>
<Table>
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.
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.
</Table>
- ----------
* Filed herewith.