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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____ to _____
Commission file number 0-16487
INLAND RESOURCES INC.
------------------------------------------
(Exact name of Registrant as specified in its charter)
Washington 91-1307042
- ---------------------------------------- --------------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
410 17th Street, Suite 700, Denver, Colorado 80202
- -------------------------------------------- ----------------
(Address of Principal Executive Offices) (ZIP Code)
Registrant's Telephone Number, Including Area Code: (303) 893-0102
(Former name, address and fiscal year, if changed, since last report) __________
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [xx] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act. Yes [ ] No [xx]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDEING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
[ ] Yes [ ] No
Number of shares of common stock, par value $.001 per share, outstanding as of
May 12, 2003: 2,897,732
1
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
INLAND RESOURCES INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 AND DECEMBER 31, 2002
(In thousands)
March 31, December 31,
2003 2002
-------------- --------------
Unaudited
ASSETS
Current assets:
Cash and cash equivalents $ 1,406 $ 1,525
Accounts receivable and accrued sales 4,002 3,351
Inventory 1,058 1,088
Other current assets 435 510
-------------- --------------
Total current assets 6,901 6,474
-------------- --------------
Property and equipment, at cost:
Oil and gas properties (successful efforts method) 227,049 217,961
Accumulated depletion, depreciation and amortization (53,628) (51,627)
-------------- --------------
173,421 166,334
Other property and equipment, net 2,834 2,737
-------------- --------------
Total property and equipment, net 176,255 169,071
Other long-term assets, net 1,505 1,671
-------------- --------------
Total assets $ 184,661 $ 177,216
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 3,945 $ 3,614
Accrued expenses 4,030 3,180
Senior secured debt 83,500 83,500
Other notes payable 1,195 1,388
Senior subordinated unsecured debt including accrued interest 5,988 5,828
Subordinated unsecured debt including accrued interest 118,535 115,362
Junior subordinated unsecured debt including accrued interest 5,988 5,828
Fair market value of derivative instruments 1,384 1,555
-------------- --------------
Total current liabilities 224,565 220,255
-------------- --------------
Asset retirement obligation 2,845 -
Total liabilities 227,410 220,255
-------------- --------------
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 (1,254) (1,324)
Accumulated deficit (82,929) (83,149)
-------------- --------------
Total stockholders' deficit (42,749) (43,039)
-------------- --------------
Total liabilities and stockholders' deficit $ 184,661 $ 177,216
============== ==============
The accompanying notes are an integral part of the consolidated financial
statements
2
INLAND RESOURCES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2003 AND 2002
(In thousands except per share data)
(Unaudited)
Three months ended
March 31,
----------------------------------
2003 2002
-------------- ---------------
Revenues:
Oil and gas sales $ 8,643 $ 7,113
Drilling net revenues 104 -
-------------- ---------------
Total revenues 8,747 7,113
Operating expenses:
Lease operating expenses 2,143 2,934
Production taxes 121 105
Exploration 30 32
Depletion, depreciation and amortization 2,193 2,145
General and administrative, net 347 221
-------------- ---------------
Total operating expenses 4,835 5,437
-------------- ---------------
Operating income 3,912 1,676
Interest expense (4,727) (4,503)
Interest and other income 43 8
-------------- ---------------
Net income (loss) before cumulative effect of change
in accounting principle (772) (2,819)
Cumulative effect of change in accounting principle 992 -
-------------- ---------------
Net income (loss) $ 220 $ (2,819)
============== ===============
Basic and diluted net income (loss) per share before
cumulative effect of change in accounting principle $ (.27) $ (.97)
Cumulative effect of change in accounting principle .35 -
-------------- ---------------
Basic and diluted net income (loss) per share $ .08 $ (.97)
============== ===============
Basic and diluted weighted average common shares
outstanding 2,898 2,898
============== ===============
Dividends per common share NONE NONE
============== ===============
The accompanying notes are an integral part of the consolidated financial
statements
3
INLAND RESOURCES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2003 AND 2002
(In thousands)
(Unaudited)
Three months ended
March 31,
-----------------------------------
2003 2002
------------- --------------
Cash flows from operating activities:
Net income (loss) $ 220 $ (2,819)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depletion, depreciation and amortization 2,125 2,145
Accretion of asset retirement obligation 68 -
Amortization of debt issue costs and debt discount 152 141
Noncash charges related to derivatives (100) (531)
Accrued interest expense added to subordinated debt 3,493 3,133
Cumulative effect of change in accounting principle (992) -
Effect of changes in current assets and liabilities:
Accounts receivable (651) (843)
Inventory 30 (307)
Other assets 75 151
Accounts payable and accrued expenses 1,181 (1,518)
------------- --------------
Net cash provided (used) by operating activities 5,601 (448)
------------- --------------
Cash flows from investing activities:
Development expenditures and equipment purchases (5,527) (1,163)
------------- --------------
Net cash used by investing activities (5,527) (1,163)
------------- --------------
Cash flows from financing activities:
Payments of long term debt (193) -
------------- --------------
Net cash used by financing activities (193) -
------------- --------------
Net decrease in cash and cash equivalents (119) (1,611)
Cash and cash equivalents at beginning of period 1,525 1,949
------------- --------------
Cash and cash equivalents at end of period $ 1,406 $ 338
============= ==============
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 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, 2002.
3. CHANGE IN ACCOUNTING PRINCIPLE:
Effective January 1, 2003, the Company adopted SFAS No. 143, "Accounting
for Asset Retirement Obligations," which addresses accounting and reporting
associated with the retirement of tangible long-lived asset and the
associated asset retirement costs. The Standard applies to legal
obligations associated with the retirement of long-lived assets that result
from the acquisition, construction, development or normal use of assets.
The fair value of a liability for an asset retirement obligation is
recognized in the period in which it is incurred if a reasonable estimate
of fair value can be made. The fair value of the liability is also added to
the carrying amount of the associated asset and is depreciated over the
life of the asset. The liability is accreted at the end of each period
through charges to accretion expense, which is recorded as additional
depreciation, depletion and amortization. If the obligation is settled for
other than the carrying amount of the liability, we will recognize a gain
or loss on settlement.
The Company identified all required asset retirement obligations and
determined the fair value of these obligations on the date of adoption. The
determination of fair value was based upon regional market and specific
well or mine type information. In conjunction with the initial application
of SFAS No. 143, the Company recorded a cumulative effect of change in
accounting principle, of $992,000 as an increase to income for the three
months ended March 31, 2003. In addition, the Company recorded an asset
retirement obligation of $2,688,00 upon adoptions of the new standard.
Below is a beginning and ending aggregate carrying amount of the Company's
retirement obligations as of March 31, 2003.
Three Months
Ended March 31,
2003
---------------
(in thousands)
Beginning of the period $ -
Initial adoption entry 2,688
Liabilities incurred in the current period 89
Liabilities settled in the current period -
Accretion expense 68
----------
End of period $ 2,845
==========
5
The following table summarizes the pro forma net income and earnings per
share for the three months ended March 31, 2002 and for the years ended
December 31, 2002, 2001 and 2000 as if the change in accounting been
implemented on January 1 of the respective years.
Three Months
Ended March 31, Year Ended December 31,
2002 2002 2001 2000
--------------- ---------- ---------- ----------
Net income (loss)
As Reported $ (2,819) $ (9,628) $ (11,877) $ (16,544)
Pro Forma $ (2,795) $ (9,534) $ (11,744) $ (16,412)
Net income (loss) per share- Reported
Basic and Diluted $ (.97) $ (3.32) $ (4.09) $ (5.71)
Net income (loss) per share- Pro Forma
Basic and Diluted $ (.96) $ (3.29) $ (4.05) $ (5.66)
In addition, a pro forma basis as required by SFAS No. 143, had we adopted
the provisions of SFAS No. 143 prior to January 1, 2003, the amount of the
asset retirement obligations would have been as follows:
Pro Forma
Asset Retirement
On Adoption Date Obligation
- ------------------------ --------------------
(in thousands)
January 1, 2000 $ 1,300
December 31, 2000 $ 1,995
December 31, 2001 $ 2,373
March 31, 2002 $ 2,452
December 31, 2002 $ 2,688
4. STOCK -BASED COMPENSATION:
The Company has elected to account for stock options and warrants granted to
employees and non-employee directors of the Company under APB Opinion No. 25 and
its interpretations. If compensation expense for grants of stock options and
warrants had been determined consistent with SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company's net income (loss) and income (loss) per
share ("LPS") would have been the following pro forma amounts (in thousands,
except per share data):
Three Months ended
March 31,
-------------------
2003 2002
-------- ---------
Net income (loss), attributable to common stockholders:
As reported $ 220 $ (2,819)
Pro forma (72) (3,111)
Basic and Diluted LPS:
As reported $ .08 $ (.97)
Pro forma (.02) (1.07)
5 ACCOUNTING PRONOUNCEMENTS:
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 is to be applied
prospectively to exit or disposal activities initiated after December 31,
2002. The standard requires companies to recognize costs associated with
exit or disposal activities when they are incurred rather than at the date
of a commitment to an exit or disposal plan. Examples of costs covered
6
by the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing or other exit or disposal activity. The Company's
adoption of SFAS No. 146 on January 1, 2003 had no impact on its financial
position or results of operations.
SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure-an amendment of FASB Statement No. 123," was issued in December
2002. The standard provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for employee
stock-based compensation. SFAS No. 148 does not change the provisions of
SFAS No. 123 that permit entities to continue to apply the intrinsic value
method of APB 25, "Accounting for Stock Issued to Employees." The Company's
accounting for stock-based compensation will not change as a result of SFAS
No. 148 as it intends to continue following the provisions of APB 25. SFAS
No. 148 does require certain new disclosures in both annual and interim
financial statements.
FASB Interpretation 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantee of Indebtedness of Others,"
was issued in November 2002. FIN 45 requires that upon issuance of a
guarantee, the guarantor must recognize a liability for the fair value of
the obligation it assumes under that guarantee. FIN 45's provisions for
initial recognition and measurement should be applied on a prospective
basis to guarantees issued or modified after December 31, 2002. The
guarantor's previous accounting for guarantees that were issued before the
date of FIN 45's initial application may not be revised or restated to
reflect the effect of the recognition and measurement provisions of the
interpretation. The disclosure requirements are effective for financial
statements of both interim and annual periods that end after December 15,
2002. The Company is not a guarantor under any significant guarantees and
thus this interpretation does not have a significant effect on its
financial position or results of operations.
FASB Interpretation 46, "Consolidation of Variable Interest Entities, An
Interpretation of ARB 51," was issued in January 2003. The primary
objectives of FIN 46 are to provide guidance on how to identify entities
for which control is achieved through means other than through voting
rights (variable interest entities or VIEs) and how to determine when and
which business enterprise should consolidate the VIE. This new model for
consolidation applies to an entity in which either (1) the equity investors
do not have a controlling financial interest or (2) the equity investment
at risk is insufficient to finance that entity's activities without
receiving additional subordinated financial support from other parties. The
Company does not expect this interpretation to have any impact on its
financial position or results of operations.
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.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133") was issued in June 1998. 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.
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. Under the provisions of SFAS No. 133, the Company
ceased accounting for the ENAC derivative contracts as hedges at a 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 derivative
contracts no longer were considered effective in offsetting changes in the
cash flows of the hedged production. Consequently, the Company recorded a
loss of $2.155 million for the year ended December 31, 2001 and deferred a
corresponding
7
amount in accumulated other comprehensive income, based on the estimated
fair value of the derivative contracts at that date.
Of the $2,155,000 deferred in accumulated other comprehensive income,
$1,444,000 and $480,000 was reclassified out of accumulated other
comprehensive income in 2002 and 2001, respectively, as an increase in
crude oil sales revenues. Of the remaining $231,000 deferred in 2003 to
accumulated other comprehensive income, $100,000 was reclassified to crude
oil sales revenues for the three months ended March 31, 2003 and $531,000
for the three months ended March 31, 2002.
On March 11, 2002, the Company hedged 30,000 net barrels per month with
Shell Trading Company ("Shell") for the April 2002 to December 2002 period
using a swap with a settlement amount of $23.90 per barrel. On various
dates between March and August of 2002, the Company hedged a total of
60,000 net barrels per month for the January 2003 to August 2003 period
with Shell using a swap with various settlement amounts that average $24.78
per barrel. On January 16, 2003, the Company hedged 60,000 net barrels per
month with Shell for the September 2003 to December 2003 period using a
swap with a settlement amount of $25.63 per barrel. On February 26, 2003,
the Company hedged another 40,000 net barrels per month with Shell for the
January 2004 to December 2004 period using various swaps with an average
settlement amount of $25.25 per barrel.
Shell 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 hedging positions and a "credit margin". On February 27,
2003 Shell increased the Company's credit margin from $500,000 to
$1,500,000. On March 18, 2003, Fortis Capital Corp. issued a letter of
credit totaling $3 million (in replacement of a previously issued $1.4
million letter of credit) to cover any deficiencies between the $1,500,000
credit margin and the mid market estimate from Shell. On May 8, 2003, Shell
released the $3 million letter of credit since the mid market estimate on
the swap positions were below the $1.5 million credit margin.
On April 8, 2002, the Company hedged 30,000 net barrels per month with Big
West Oil Company ("Big West") for the May 2002 to December 2002 period
using a swap with a settlement amount of $24.90 per barrel. On January 27,
2003, the Company hedged 30,000 net barrels per month with Big West for the
January 2004 to December 2004 period using various swaps with an average
settlement amount of $23.95 per barrel. On February 18, 2003, the Company
hedged another 10,000 net barrels per month with Big West for the January
2004 to December 2004 period using a swap with an average settlement amount
of $24.90 per barrel.
Big West 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. There are
no current requirements from Big West to issue collateral on the
above-mentioned Big West swap positions.
The Company recognized a reduction in revenues of $1,604,000 and $0 for the
three months ended March 31, 2003 and 2002 under hedging contracts.
Unrealized losses of $1,254,000 at March 31, 2003 have been deferred as a
component of accumulated other comprehensive income.
7. CHANGES OF CONTROL AND RECAPITALIZATION:
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"- whose members are Fund V and
Portfolio) 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, all issued to Holdings: (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; and JEDI agreed to exchange
the 100,000 shares of Inland's Series C Cumulative Convertible Preferred
Stock ("Series C Preferred Stock") owned by JEDI, together with $2.2
million of accumulated dividends thereon, for (A) 121,973 shares of Series
E Preferred Stock and (B) 292,098 shares of Common Stock (the
"Recapitalization"). The Series C Preferred Stock bore annual dividends at
a rate
8
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,
Hampton owned 292,098 shares of Common Stock, representing approximately
10.1% of the outstanding shares of Common Stock as of March 20, 2001 and
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. 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 Pengo
Securities Corp. ("Pengo"), transferee from SOLVation Inc., a company
affiliated with Smith, and entered into other restructuring transactions as
described below. The first of the two debt transactions with Pengo was the
issuance of a $5 million unsecured senior subordinated note to Pengo 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 Pengo. 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 Note 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 Pengo,
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 of
$98,968,964 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
$1,449,000 was recorded as an increase to additional paid-in capital.
As part of this restructuring, Holdings also sold to Hampton, 1,455,390
shares of Inland common stock held by Holdings. 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,
9
Holdings has the right to nominate one person to the Company's Board.
Remaining board members will be nominated by the Company's stockholders. 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.
January 30, 2003 Transaction - An amendment to the Fortis Credit Agreement
dated February 3, 2003 was executed to provide for (1) extension of the
Company's borrowing base of $83.5 million through July 31, 2003, (2) a
commitment of $5 million for letters of credit to support commodity price
hedging and other obligations to be secured by letters of credit, (3)
modification of the maturity date of the revolving facility to be paid in
installments between 2004 and 2008 if the Company obtains $15 million of
capital in the form of equity, debt or contributed property by December 31,
2003 and modification of certain financial covenants such that the Company
expects to be in compliance throughout 2003. The Company agreed to hedge
50% of its net oil and gas production through December 31, 2004 by June 30,
2003. Also, by December 31, 2003 and by each December 31 thereafter during
the term of the credit agreement, the Company agreed to hedge 50% of the
oil and gas production for the following twelve months. The bank amendment
does not become effective until the actual closing of the "TCW and Smith
Exchange" and "Merger" (discussed below) except that the Company is able to
use the $5 million letters of credit for commodity price hedging for a
period through June 20, 2003 after the date of the amendment.
On January 30, 2003, TCW agreed to exchange its subordinated note in the
principal amount of $98,968,964, plus all accrued and unpaid interest, for
22,053,000 shares of the Company's common stock and that number of shares
of Series F Preferred Stock equal to 911,588 shares plus 338 shares for
each day after November 30, 2002. Smith has also agreed to exchange its
Junior Subordinated Note in the principal amount of $5,000,000, plus all
accrued and unpaid interest, for that number of shares of Series F
Preferred Stock equal to 68,854 shares plus 27 shares for each day after
November 30, 2002. The Company has authorized 1,100,000 shares of Series F
Preferred Stock (the "TCW and Smith Exchange").
In the event of a voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of the Series F Preferred Stock
shall be entitled to receive, in preference to the holders of the common
stock, a per share amount equal to $100, as adjusted for any stock
dividends, combinations or splits with respect to such shares, plus all
accrued or declared but unpaid dividends on such shares. Each share of
Series F Preferred Stock will be automatically converted into 100 shares of
the Company's common stock when sufficient shares of Common Stock have been
authorized.
TCW and two Smith Parties will form a new Delaware corporation to be known
as Inland Resources Inc. ("Newco"). TCW will contribute to Newco all of
TCW's holdings in the Company's common stock and Series F Preferred Stock
in exchange for 92.5% of the common stock of Newco, and each of the Smith
Parties will contribute to Newco all of their holdings in the Company's
common stock and Series F Preferred Stock in exchange for an aggregate of
7.5% of the common stock of Newco. Newco will then own 99.7% of the
Company's common stock and common stock equivalents.
Upon closing of the TCW and Smith Exchange and the formation of Newco, the
Board of Directors of Newco will meet to pass a resolution for Inland to
merge with and into Newco, with Newco surviving as a Delaware corporation
(the "Merger"). No action is required by the Company's stockholders or
Board of Directors under the relevant provisions of Washington and Delaware
law with respect to a merger of a subsidiary owned more than 90% by its
parent corporation. Stockholders unaffiliated with Newco are expected to
receive cash equal to $1.00 per share as a result of the Merger.
Stockholders of Inland will also have the right to dissent from the Merger
and have a court appraise the value of their shares. Stockholders electing
to exercise their right of appraisal will not receive the $1.00 per share
paid to all other unaffiliated stockholders, but will instead receive the
appraised value, which may be more or less than $1.00 per share.
The Merger will result in Inland terminating its status as a reporting
company under the Securities Exchange Act of 1934 and its stock ceasing to
be traded on the over-the-counter bulletin board. Its successor, Newco,
will instead be a private company owned by three stockholders. On February
3, 2003, the Company filed a Schedule 13E-3 with the Securities and
Exchange Commission (SEC) in order to complete the TCW and Smith
10
Exchange and Merger. On May 5, 2003, the Company mailed the Transaction
Statement for the merger to its stockholders. The transaction described
herein is expected to be closed and become effective on or about June 1,
2003.
At the date of this report, however, the Company is unable to complete the
amendment to the Fortis Credit Agreement because it is contingent upon the
closing of the TCW and Smith Exchange and Merger. The Company's inability
to effect the amendment to the Fortis Credit Agreement before the Exchange
raises substantial doubt about the Company's ability to continue as a going
concern. The Fortis Credit Agreement has been amended on five previous
occasions; however, there can be no absolute assurance that the February 3,
2003 amendment will go into effect and that the Senior Lenders will not
assert their rights to foreclose on their collateral. Foreclosure by the
Senior Lenders on their collateral would have a material adverse effect on
the Company's financial position and results of operations. Should the
Senior Lenders attempt to foreclose, the Company would immediately seek
alternative financing, the potential sale of a portion or all of its oil
and gas properties, or bankruptcy protection. Although there can be no
assurance that alternative financing or the potential sale of a portion or
all of its oil and gas properties would be successful.
In addition to the defaults under its debt agreements, the Company has
suffered losses from operations and has a net capital deficit, and
therefore, there is a substantial doubt about its ability to continue as a
going concern. The accompanying financial statements have been prepared
assuming the Company will continue as a going concern. The financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
8. FORTIS CAPITAL AGREEMENT:
Effective September 21, 1999, the Company entered into a credit agreement
(the "Fortis Credit Agreement"). The current participants are Fortis
Capital Corp. and U.S. Bank National Association (the "Senior Lenders"). At
March 31, 2003, the Company had borrowed all funds under its current
borrowing base of $83.5 million. The borrowing base is calculated as the
collateral value of proved reserves and is subject to redetermination
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 has yet to be redetermined as discussed
below.
In conjunction with the Pengo financing, discussed above, 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 Company's senior debt to EBITDA ratios. If the
senior debt to EBITDA ratio is greater than 4.00 to 1.00, the rate is 3.25%
above the LIBOR rate; if the senior debt to EBITDA ratio is equal to or
less than 4.00 to 1.00 but greater than 3.00 to 1.00, the rate is 2.75%
above the LIBOR rate; if the senior debt to EBITDA ratio is less than 3.00
to 1.00, the rate is 2.25% above the LIBOR rate. As of March 31, 2003,
$83.5 million was borrowed under the LIBOR option at weighted average
interest rate of 5.2%. 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 has covenants that restrict the payment
of cash dividends, borrowings, sale of assets, loans to others,
investments, merger activity and hedging contracts without the prior
consent of the lenders and requires the Company to maintain certain net
worth, interest coverage and working capital ratios. The Fortis Credit
Agreement is secured by a first lien on substantially all assets of the
Company.
As of March 31, 2002, the Company was not in compliance with the senior
debt to EBITDA ratio. Subsequent to March 31, 2002, the senior lenders
waived compliance with the debt to EBITDA ratio related to March 31, 2002.
However, the Company was not in compliance with its bank covenants as of
June 30, 2002, September 30, 2002, December 31, 2002 and March 31, 2003 for
the senior debt to EBITDA ratios. Also, the Company was not in compliance
with its bank covenant for the current ratio as of December 31, 2002 and
March 31, 2003. Under the terms of the Fortis Credit Agreement, no notice
or period of time to cure the default is required, and therefore the
Company was in default. As a result of the noncompliance with such
covenant, the Senior Lenders have the ability to call the amount payable
immediately. As a result of the covenant violations, the entire amount
payable to the Senior Lenders of $83.5 million has been classified as a
current liability. Also, since the subordinated debt has cross default
provisions in their agreements, the Company has reclassified its
subordinated debt as of March 31, 2003, aggregating $130.5 million, as a
current liability.
11
9. Going Concern:
At the date of this report, the Company is unable to complete the amendment
to the Fortis Credit Agreement because it is contingent upon the closing of
the TCW and Smith Exchange and Merger. The defaults and cross defaults on
the Company's debt result in all of the debt being due and payable. In
addition to the defaults under its debt agreements, the Company has
suffered losses from operations and has a net capital deficit. The
Company's current financial condition and inability to effect the amendment
to the Fortis Credit Agreement raise substantial doubt about the Company's
ability to continue as a going concern. The Fortis Credit Agreement has
been amended on five previous occasions; however, there can be no absolute
assurance that the February 3, 2003 amendment will go into effect and that
the Senior Lenders will not assert their rights to foreclose on their
collateral. Foreclosure by the Senior Lenders on their collateral would
have a material adverse effect on the Company's financial position and
results of operations. Should the Senior Lenders attempt to foreclose, the
Company would immediately seek alternative financing, the potential sale of
a portion or all of its oil and gas properties, or bankruptcy protection.
Although there can be no assurance that alternative financing or the
potential sale of a portion or all of its oil and gas properties would be
successful. 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.
12
INLAND RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation:
RESULTS OF OPERATIONS:
Three Month Periods Ended March 31, 2003 and 2002:
Oil and Gas Sales. Crude oil and natural gas sales for the quarter
ended March 31, 2003 increased $1,530,000, or 22% from the previous year. As
shown in the table below, the variance was caused by higher crude oil and
natural gas prices and natural gas liquids sales offset by lower crude oil,
natural gas sales volumes and a lower non-cash gain from accumulated other
comprehensive income. Crude oil sales as a percentage of total oil and gas sales
were 84% and 82% in the first quarter of 2002 and 2002, respectively. Crude oil
will continue to be the predominant product produced from the Field.
The Company periodically enters into price protection agreements to
hedge against volatility in crude oil prices. During 2001, the Company entered
into all of its hedging contracts with Enron North America Corp. ("ENAC"). On
December 2, 2001, ENAC filed for Chapter 11 bankruptcy. The ENAC bankruptcy
caused default on all of the Company's hedging contracts from November 2001
through September 30, 2003. As discussed in Note 6 to the consolidated financial
statements, in 2001 the Company recorded a loss of $2.2 million to reflect
ineffectiveness of the ENAC derivative contracts and deferred a corresponding
amount in accumulated other comprehensive income. Of the $2.155 million deferred
in accumulated other comprehensive income, $1.92 million was reclassified out of
accumulated other comprehensive income by December 31, 2002, resulting in an
increase in crude oil sales revenues. For the three months ended March 31, 2003
and 2002, $100,000 and $531,000, respectively were reclassified to crude sales
and the remaining $131,000 deferred in accumulated other comprehensive income at
March 31, 2003 will be reclassified to oil and gas sales revenue during the
second and third quarters of 2003. 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 oil and gas sales revenue
in the period in which the related oil is sold. Excluding the effects of the
ENAC derivatives discussed above, oil and gas sales revenues were decreased by
$1.6 million during the three months ended March 31, 2003 to recognize hedging
contract settlement losses. There were no hedging gains or losses during the
three months ended March 31, 2002, other than the ENAC non-cash gain of
$531,000. See Item 7A "Quantitative and Qualitative Disclosures About Market
Risk".
Quarter Ended March 31, 2003 Quarter Ended March 31, 2002
---------------------------------- --------------------------------
Net Net
Volume Sales Volume Sales
(Bbls or Average (in (Bbls or Average (in
Mcfs) Price 000's) Mcfs) Price 000's)
---- ------ ----- ---- ----- -----
Crude Oil Sales 276,423 $ 30.96 $ 8,542 291,061 $18.58 $ 5,407
Natural Gas Sales 428,735 $ 3.08 1,319 555,540 $ 2.11 1,175
Natural Gas Liquids 11,044 $ 25.89 286 - $ - -
Reclass of non-cash gains 100 531
from Accumulated Other
Comprehensive Income
Hedging Loss (1,604) -
-------- -------
Total $ 8,643 $ 7,113
======== =======
Drilling net revenues. The Company owns a drilling rig, which drills
wells on behalf of the Company and third party working interest owners. The
$104,000 of net revenue reflects the net revenue for the three months ended
March 31, 2003 for only the third party working interest owners. There was no
net revenue for the
13
three months ended March 31, 2002.
Lease Operating Expenses. Lease operating expense for the quarter ended
March 31, 2003 decreased $791,000 or 27% from the previous year 2002 first
quarter. Lease operating expense per BOE decreased from $7.65 per BOE sold in
the first quarter of 2002 to $6.16 in 2003. The decrease of $791,000 is due to
the non recurring costs of placing on production wells previously shut in the
first quarter of 2002, lower field labor costs due to increased drilling
activity in the first quarter of 2003, and higher transportation fees associated
with the liquids gas plant.
Production Taxes. Production taxes as a percentage of sales were 1.2%
and 1.6% during the first quarters of 2003 and 2002, 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. (I believe
1.2% and 1.6% are correct please review Kate's wo rkpapers)
Exploration. Exploration expense represents the Company's cost to
retain unproved acreage including delay rentals.
Depletion, Depreciation and Amortization. Depletion, depreciation and
amortization for the quarter ended March 31, 2003 increased $50,000 or 2.3%,
from the previous year first quarter. The increase resulted from the asset
retirement obligation accretion expense of $68,000 offset by decreased 2003
sales volumes and a lower average 2003 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 $5.57
per BOE sold during the first quarter of 2003 compared to $5.59 per BOE sold
during the first quarter of 2002.
General and Administrative, Net. General and administrative expense,
net for the quarter ended March 31, 2003 increased $126,000 or 57% from the
previous year first quarter. The increase in general and administrative expense,
net for the quarter ended March 31, 2003 is due to the legal, accounting and
other costs of $410,000 associated with proposed TCW and Smith Exchange. Gross
general and administrative expenses were $2.533 million and $2.253 million
during the first quarters of 2003 and 2002, respectively. General and
Administrative expense is reported net of operator fees and reimbursements which
were $2.19 million and $2.03 million during the first quarters of 2003 and 2002,
respectively.
Interest Expense. Interest expense for the quarter ended March 31, 2003
increased $224,000 or 5% from the previous year first quarter. The increase was
the result of higher accrued interest on the subordinated debt for the first
quarter of 2003 of $359,000 offset by lower interest on the senior bank debt of
$145,000 from the previous year first quarter. Borrowings during the first
quarter of 2003 and 2002 were recorded at effective interest rates of 8.8% and
9.1%, respectively.
Interest and Other Income. Interest and other income primarily
represents interest earned on cash balances.
Income Taxes. During the first quarter of 2003 and 2002, no income tax
provision or benefit was recognized due to net operating losses incurred and the
establishment of a full valuation allowance.
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
December 31, 2002, the Company had borrowed all funds under its current
borrowing base of $83.5 million. The borrowing base is calculated as the
collateral value of proved reserves and is subject to redetermination 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 has yet to be redetermined as discussed below.
In conjunction with Pengo financing, discussed below, 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 Company's senior debt to EBITDA ratios. If the senior debt to EBITDA ratio
is greater than 4.00 to 1.00, the rate is 3.25% above the LIBOR rate; if the
senior debt to EBITDA ratio is equal to or less than 4.00 to 1.00 but greater
than 3.00 to 1.00, the rate is 2.75% above the LIBOR rate; if the senior debt to
EBITDA ratio is less than 3.00 to 1.00, the rate is 2.25% above the LIBOR rate.
As of March 31, 2003, $83.5 million was borrowed under the LIBOR option at
weighted average interest rate of 5.2%. 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 has covenants that restrict the payment of
cash dividends, borrowings, sale of assets, loans to others, investments, merger
activity and hedging contracts without the prior consent of the lenders and
requires the Company to maintain certain net worth, interest coverage and
working capital ratios. The Fortis Credit Agreement is secured by a first lien
on substantially all assets of the Company.
As of March 31, 2002, the Company was not in compliance with the senior
debt to EBITDA ratio. Subsequent to March 31, 2002, the senior lenders waived
compliance with the debt to EBITDA ratio related to March 31, 2002. However, the
Company was not in compliance with its bank covenants as of June 30, 2002,
September 30, 2002, December 31, 2002 and March 31, 2003 for the senior debt to
EBITDA ratios. Also, the Company was not in compliance with its bank covenant
for the current ratio as of December 31, 2002 and March 31, 2003. Under the
terms of the Fortis Credit Agreement, no notice or period of time to cure the
default is required, and therefore the Company was in default. As a result of
the noncompliance with such covenant, the Senior Lenders have the ability to
call the amount payable immediately. As a result of the covenant violations, the
entire amount payable to the Senior Lenders of $83.5 million has been classified
as a current liability. Also, since the subordinated debt has cross default
provisions in their agreements, the Company has reclassified its subordinated
debt as of March 31, 2003, aggregating $130.5 million, as a current liability.
An amendment of the Fortis Credit Agreement dated February 3, 2003 was
executed to provide for (1) extension of the Company's borrowing base of $83.5
million through July 31, 2003, (2) a commitment of $5 million for letters of
credit to support commodity price hedging and other obligations to be secured by
letters of credit, (3) modification of the maturity date of the revolving
facility to be paid in installments between 2004 and 2008 if the Company obtains
$15 million of capital in the form of equity, debt or contributed property by
December 31, 2003 and modification of certain financial covenants such that the
Company expects to be in compliance throughout 2003. The Company agreed to hedge
50% of its net oil and gas production through December 31, 2004 by June 30,
2003. Also, by December 31, 2003 and by each December 31 thereafter during the
term of the credit agreement, the Company agreed to hedge 50% of the oil and gas
production for the following twelve months. However, the bank amendment does not
become effective until the actual closing of the "TCW and Smith Exchange" and
"Merger" (discussed below) except that the Company is able to use the $5 million
letters of credit for commodity price hedging through June 30, 2003 days after
the date of the amendment.
On January 30, 2003, TCW agreed to exchange its subordinated note in
the principal amount of $98,968,964, plus all accrued and unpaid interest for
22,053,000 shares of the Company's common stock and that number of shares of
Series F Preferred Stock equal to 911,588 shares plus 338 shares for each day
after November 30, 2002 through the closing date of the TCW and Smith Exchange.
Smith has also agreed to exchange its Junior Subordinated Note in the principal
amount of $5,000,000, plus all accrued and unpaid interest for that number of
15
shares of Series F Preferred Stock equal to 68,854 shares plus 27 shares for
each day after November 30, 2002 through the closing date of the TCW and Smith
Exchange. The Company has authorized 1,100,000 shares of Series F Preferred
Stock to consummate the TCW and Smith Exchange.
In the event of a voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of the Series F Preferred Stock shall be
entitled to receive, in preference to the holders of the common stock, a per
share amount equal to $100, as adjusted for any stock dividends, combinations or
splits with respect to such shares, plus all accrued or declared but unpaid
dividends on such shares. Each share of Series F Preferred Stock will be
automatically converted into 100 shares of the Company's common stock when
sufficient shares of Common Stock have been authorized.
TCW and two Smith Parties will form a new Delaware corporation to be
known as Inland Resources Inc. ("Newco"). TCW will contribute to Newco all of
TCW's holdings in the Company's common stock and Series F Preferred Stock in
exchange for 92.5% of the common stock of Newco, and each of the Smith Parties
will contribute to Newco all of their holdings in the Company's common stock and
Series F Preferred Stock in exchange for an aggregate of 7.5% of the common
stock of Newco. Newco will then own 99.7% of the Company's common stock and
common stock equivalents.
Upon the formation of Newco and closing of the TCW and Smith Exchange,
the Board of Directors of Newco will meet to pass a resolution for Inland to
merge with and into Newco, with Newco surviving as a Delaware corporation (the
"Merger"). No action is required by the Company's shareholders or Board of
Directors under the relevant provisions of Washington and Delaware law with
respect to a merger of a subsidiary owned more than 90% by its parent
corporation. Stockholders unaffiliated with Newco will receive cash equal to
$1.00 per share as a result of the Merger.
Stockholders of Inland will have the right to dissent from the Merger
and have a court appraise the value of their shares. Stockholders electing to
exercise their right of appraisal will not receive the $1.00 per share paid to
all other public shareholders, but will instead receive the appraised value,
which may be more or less than $1.00 per share. Details of the TCW and Smith
Exchange and Merger will be set forth in a Transaction Statement to be mailed to
each stockholders 20 days prior to the effective date which will occur when such
statement clears the SEC review process.
The Merger will result in Inland terminating its status as a reporting
company under the Securities Exchange Act of 1934 and its stock ceasing to be
traded on the over-the-counter bulletin board. Its successor, Newco, will
instead be a private company owned by three stockholders. On February 3, 2003,
the Company filed a Schedule 13E-3 with the Securities and Exchange Commission
in order to complete the TCW and Smith Exchange and Merger. On May 5, 2003, the
Company mailed the Transaction Statement for the merger to its stockholders. The
transaction described herein will be closed and become effective on or about
June 1, 2003.
SUBORDINATED UNSECURED DEBT TO SOLVATION INC.
On August 2, 2001, the Company closed two subordinated debt
transactions totaling $10 million in aggregate with Pengo. The first of the two
debt transactions with Pengo was the issuance of a $5 million unsecured senior
subordinated note to Pengo 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. Since
the subordinated debt has cross default provisions in their agreements, the
Company has classified the subordinated debt as of March 31, 2003 as a current
liability.
The Company also issued a second $5 million unsecured junior
subordinated note to Pengo. 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 Note 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
16
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
Pengo, 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 of $98,968,964 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. Since the subordinated debt has cross default provisions in
their agreements, the Company has classified the subordinated debt as of March
31, 2003 as a current liability.
CASH FLOW AND CAPITAL PROJECTS
During the 2003 first quarter, the Company generated $5.6 million from
operations, which it used along with cash of $119,000 to fund the continued
development of the Field of $5.5 million and to make $193,000 of debt payments.
Field development expenditures of $5.5 million in the first quarter of 2003
consisted of the completion of 2 net wells drilled in 2002, the drilling of 10
net wells, recompletion of existing 12 net wells and the continued extension of
the Company's gas gathering and water delivery infrastructures.
The Company's capital budget for development of the Field in year 2003
is $20 million net to the Company. The Company plans to drill 50 to 55 wells and
convert 30 wells to water injection. Although there can be no assurance, the
Company believes that cash on hand along with future cash to be generated from
operations will be sufficient to implement its development plans and service
debt for the next year. 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 available, operating cash flows and development results, among
other items.
GOING CONCERN
At the date of this report, the Company is unable to complete the
amendment to the Fortis Credit Agreement because it is contingent upon the
closing of the TCW and Smith Exchange. The defaults and cross defaults on the
Company's debt essentially result in all of the debt potentially due and
payable. In addition to the defaults under its debt agreements, the Company has
suffered losses from operations and has a net capital deficit. The Company's
current financial condition and inability to effect the amendment to the Fortis
Credit Agreement would raise substantial doubt about the Company's ability to
continue as a going concern. The Fortis Credit Agreement has been amended on
five previous occasions; however, there can be no absolute assurance that the
February 3, 2003 amendment will go into effect and that the Senior Lenders will
not assert their rights to foreclose on their collateral. Foreclosure by the
Senior Lenders on their collateral would have a material adverse effect on the
Company's financial position and results of operations. Should the Senior
Lenders attempt to foreclose, the Company would immediately seek alternative
financing, the potential sale of a portion or all of its oil and gas properties,
or bankruptcy protection. Although there can be no assurance that alternative
financing or the potential sale of a portion or all of its oil and gas
properties would be successful. 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.
17
INFLATION AND CHANGES IN PRICES
The Company's revenues and the value of its oil and gas properties have been and
will be affected by changes in oil and gas prices. The Company's ability to
borrow from traditional lending sources and to obtain additional capital on
attractive terms is also substantially dependent on oil and gas prices. Oil and
gas prices are subject to significant seasonal and other fluctuations that are
beyond the Company's ability to control or predict. Although certain of the
Company's costs and expenses are affected by the level of inflation, inflation
did not have a significant effect on the Company's results of operations during
2003 or 2002.
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.
18
PART 1. FINANCIAL INFORMATION (CONTINUED)
INLAND RESOURCES INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk:
INTEREST RATE RISK. Inland is exposed to some market risk due to the
floating interest rate under the Fortis Credit Agreement. See Item 2. -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources." All borrowings under the Fortis
Credit Agreement are due and payable in 12 equal quarterly installments of
principal with accrued interest, beginning September 30, 2004. As of March 31,
2003, the Fortis Credit Agreement had a principal balance of $83.5 million
locked in at various interest rates as described below:
Principal Amount Period Locked In Interest Rate
- ---------------- ---------------- -------------
$ 83 million January 1, 2003 - May 19, 2003 5.20%
$ 500,000 January 1, 2003 - May 19, 2003 5.22%
A 1% increase in interest rates would increase annual interest expense
on the $83.5 million secured note payable by $835,000.
The fair value of the secured note payable to the Senior Lenders
approximates the carrying value, since the notes bear interest at a variable
rate.
The interest rate on the Company's subordinated debt and other debt is
fixed and therefore the Company is not subject to interest rate risk. The
carrying value of the debt approximates the fair value of the debt.
COMMODITY RISKS. Inland hedges a portion of its oil production to
reduce its exposure to fluctuations in the market prices thereof. Inland 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 oil and gas sales in the period in which
the hedged production is sold.
As discussed in note 6 to the consolidated financial statements, on
December 2, 2001, ENAC filed for Chapter 11 bankruptcy. The bankruptcy caused
ENAC to default on all of the Company's hedging contracts from November 2001
through September 30, 2003. The Company recorded a loss of $2.2 million to
reflect ineffectiveness of the derivative contracts and deferred a corresponding
amount in accumulated other comprehensive income. The amount deferred in
accumulated other comprehensive income will be reclassified to earnings based on
the originally scheduled delivery period. An amount reclassified to earnings
through December 31, 2002 was $1.9 million. Amounts expected to be reclassified
to earnings in 2003 are $231,000 of which $100,000 was reclassified to earnings
in the three months ended March 31, 2003.
On March 11, 2002, the Company hedged 30,000 net barrels per month with
Shell Trading Company ("Shell") for the April 2002 to December 2002 period using
a swap with a settlement amount of $23.90 per barrel. On various dates between
March and August of 2002, the Company hedged a total of 60,000 net barrels per
month for the January 2003 to August 2003 period with Shell using a swap with
various settlement amounts that average $24.78 per barrel. On January 16, 2003,
the Company hedged 60,000 net barrels per month with Shell for the September
2003 to December 2003 period using a swap with a settlement amount of $25.63 per
barrel. On February 26, 2003, the Company hedged another 40,000 net barrels per
month with Shell for the January 2004 to December 2004 period using a various
swaps with an average settlement amount of $25.25 per barrel.
Shell 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 hedging positions and a "credit margin". On February 27,
19
2003 Shell increased the Company's credit margin from $500,000 to $1,500,000. On
March 18, 2003, Fortis Capital Corp. issued a letter of credit totaling $3
million (in replacement of a previously issued $1.4 million letter of credit) to
cover any deficiencies between the $1,500,000 credit margin and the mid market
estimate from Shell. On May 8, 2003, Shell released the $3 million letter of
credit since the mid market estimate on the swap positions were below the $1.5
million credit margin.
On April 8, 2002, the Company hedged 30,000 net barrels per month with
Big West Oil Company ("Big West") for the May 2002 to December 2002 period using
a swap with a settlement amount of $24.90 per barrel. On January 27, 2003, the
Company hedged 30,000 net barrels per month with Big West for the January 2004
to December 2004 period using various swaps with an average settlement amount of
$23.95 per barrel. On February 18, 2003, the Company hedged another 10,000 net
barrels per month with Big West for the January 2004 to December 2004 period
using a swap with an average settlement amount of $24.90 per barrel.
Big West 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. There are no
current requirements from Big West to issue collateral on the above-mentioned
Big West swap positions.
The potential gains or (losses) on the Company's open derivative
positions based on a hypothetical average market price of equivalent product for
this period is as follows (in thousands except for NYMEX prices):
----------------------------------------------------------------------------------
Average NYMEX Per Barrel Market Price for the Contract Period
----------------------------------------------------------------------------------
$ 20.00 $ 24.00 $ 28.00 $ 30.00 $ 34.00 $ 38.00 $ 40.00
- -----------------------------------------------------------------------------------------------------------
All Contracts - April
through December 2003 $ 2,755 $ 595 $ (1,565) $(2,645) $(4,805) $ (6,965) $ (8,045)
All Contracts - 2004 $ 4,532 $ 692 $ (3,148) $(5,068) $(8,908) $(12,748) $ (14,668)
- -----------------------------------------------------------------------------------------------------------
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.
ITEM 4. Controls and Procedures:
(a) Within the 90-day period prior to the date of this report, we carried
out an evaluation, under the supervision and with the participation of
our management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures pursuant to Rule 13a-14 of the
Securities Exchange Act of 1934 (the "Exchange Act"). Based upon that
evaluation, the Chief Executive officer and Chief Financial Officer
concluded that our disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company
(including it consolidated subsidiaries) required to be included in our
Exchange Act filings.
(b) There have been no significant changes in our internal controls or in
other factors, which could significantly affect internal controls
subsequent to the date we carried out our evaluation.
(c) The Company is not required to disclose the information required by
this Item.
20
PART II. OTHER INFORMATION
INLAND RESOURCES INC.
Items 1, 2, 4 and 5 are omitted from this report as inapplicable.
Item 3. Defaults Upon Senior Securities.
As of March 31, 2003, the Company was not in compliance with the senior debt to
EBITDA ratio, which was 4.47 to 1.00 rather than the required 3.75 to 1.00.
Also, the Company was not in compliance with its bank covenant for the current
ratio as of March 31, 2003, which was .87 to 1.00 rather than the required 1.00
to 1.00. The senior lenders have not waived compliance with the debt to EBITDA
or current ratios. Under the terms of the Credit Agreement, no notice or period
of time to cure the default is required, and therefore the Company is in
default. As a result of the noncompliance with such covenant, the Senior Lenders
have the ability to call the amount payable immediately. In addition to the
above events of non-compliance, the Company was not in compliance with its bank
covenants as of June 30, 2002, September 30, 2002, and December 31, 2002 for the
senior debt to EBITDA ratios. Also, the Company was not in compliance with its
bank covenant for the current ratio as of December 31, 2002. As a result of the
prior and subsequent covenant violations, the entire amount payable to the
Senior Lenders of $83.5 million has been classified 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 $130.5 million as a current liability.
An amendment to the Fortis Credit Agreement dated February 3, 2003 was executed
to provide for (1) extension of the Company's borrowing base of $83.5 million
through July 31, 2003, (2) a commitment of $5 million for letters of credit to
support commodity price hedging and other obligations to be secured by letters
of credit, (3) modification of the maturity date of the revolving facility to be
paid in installments between 2004 and 2008 if the Company obtains $15 million of
capital in the form of equity, debt or contributed property by December 31, 2003
and modification of certain financial covenants such that the Company expects to
be in compliance throughout 2003. The Company agreed to hedge 50% of its net oil
and gas production through December 31, 2004 by June 30, 2003. Also, by December
31, 2003 and by each December 31 thereafter during the term of the credit
agreement, the Company agreed to hedge 50% of the oil and gas production for the
following twelve months. The bank amendment does not become effective until the
actual closing of the "TCW and Smith Exchange" except that the Company is able
to use the $5 million letters of credit for commodity price hedging through June
20, 2003 after the date of the amendment.
At the date of this report, however, the Company is unable to complete the
amendment to the Fortis Credit Agreement because it is contingent upon the
closing of the TCW and Smith Exchange and Merger. The Company's inability to
effect the amendment to the Fortis Credit Agreement would raise substantial
doubt about the Company's ability to continue as a going concern. The Fortis
Credit Agreement has been amended on five previous occasions; however, there can
be no absolute assurance that the February 3, 2003 amendment will go into effect
and that the Senior Lenders will not assert their rights to foreclose on their
collateral. Foreclosure by the Senior Lenders on their collateral would have a
material adverse effect on the Company's financial position and results of
operations. Should the Senior Lenders attempt to foreclose, the Company would
immediately seek alternative financing, the potential sale of a portion or all
of its oil and gas properties, or bankruptcy protection. Although there can be
no assurance that alternative financing or the potential sale of a portion or
all of its oil and gas properties would be successful.
Item 6. Exhibits and Reports on Form 8-K.
The following documents are filed as part of this Quarterly Report on Form 10-Q.
Exhibit
Number Description of Exhibits
------- -----------------------
2.1 Agreement and Plan of Merger between Inland Resources Inc.
("Inland"), IRI
21
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 Third Amended and Restated Credit Agreement dated November 30,
2001, between Inland Production Company (as borrower), Inland
Resources Inc. (as guarantor) and Fortis Capital Corp. (as
agent).
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).
10.4 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).
10.10 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).
22
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).
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).
23
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).
10.29 Exchange and Stock Issuance Agreement dated as of January 30,
2003, by and among Inland Resources Inc., Inland Production
Company, Inland Holdings, LLC and SOLVation, Inc., (filed as
an exhibit to the Company's Schedule 13E-3 dated February 5,
2003 and incorporated herein by reference).
10.30 Form of Amendment No. 1 to Employment Agreement by and between
Marc MacAluso and Newco, attached as an exhibit to the
Exchange Agreement (filed as an exhibit to the Company's
Schedule 13E-3 dated February 5, 2003 and incorporated herein
by reference).
10.31 Form of Amendment No. 1 to Employment Agreement by and between
Bill I. Pennington and Newco, attached as an exhibit to the
Exchange Agreement (filed as an exhibit to the Company's
Schedule 13E-3 dated February 5, 2003 and incorporated herein
by reference).
10.32 Form of Second Amended and Restated Registration Rights
Agreement by and among Inland Resources Inc., Inland Holdings,
LLC, Hampton Investments LLC and SOLVation, Inc, attached as
Exhibit E to the Exchange Agreement (filed as an exhibit to
the Company's Schedule 13E-3 dated February 5, 2003 and
incorporated herein by reference).
10.33 Form of First Amendment to Senior Subordinated Note Purchase
Agreement, attached as an exhibit to the Exchange Agreement
(filed as an exhibit to the Company's Schedule 13E-3 dated
February 5, 2003 and incorporated herein by reference).
10.34 Form of Development Agreement, attached as an exhibit to the
Exchange Agreement (filed as an exhibit to the Company's
Schedule 13E-3 dated February 5, 2003 and incorporated herein
by reference).
10.35 Investors' Agreement dated as of January 30, 2003 (the
"Investors' Agreement"), by and among Newco, Inland Holdings,
LLC, Hampton Investments LLC and SOLVation, Inc (filed as an
exhibit to the Company's Schedule 13E-3 dated February 5, 2003
and incorporated herein by reference).
10.36 Fourth Amendment to Third Amended and Restated Credit
Agreement (filed as an exhibit to the Company's Schedule 13E-3
dated February 5, 2003 and incorporated herein by reference).
21.1 Subsidiaries of Inland.
*99.1 Certification of Chief Executive Officer pursuant to section
1350 as adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002.
*99.2 Certification of Chief Financial Officer pursuant to section
1350 as adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002.
24
All above Exhibits have been previously filed.
(b) Reports on Form 8-K:
A Form 8K was filed February 3, 2003 disclosing in Item 5 the Stock
Exchange Agreement with affiliates of the Trust Company of the West and
Smith Management LLC to effect the restructuring discussed in item 1,
note 7 to the financial statements.
* Filed herewith.
INLAND RESOURCES INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INLAND RESOURCES INC.
(Registrant)
Date: May 13, 2003 By: /s/ Marc MacAluso
-------------------
Marc MacAluso
Chief Executive Officer and
Chief Operating Officer
Date: May 13, 2003 By: /s/ Bill I. Pennington
------------------------
Bill I. Pennington
President and Chief Financial Officer
(Principal Accounting Officer)
25
CERTIFICATION
I, Marc MacAluso, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Inland Resources
Inc;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I am responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 13, 2003 /s/ MarcMacAluso
--------------------------------------
Marc MacAluso, Chief Executive Officer
CERTIFICATION
I, Bill I. Pennington, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Inland Resources
Inc;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I am responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 13, 2003 /s/ Bill I. Pennington
-------------------------------------------
Bill I. Pennington, Chief Financial Officer
EXHIBIT INDEX
EXHIBIT No. DESCRIPTION
- --------- -----------
*99.1 Certification of Chief Executive Officer pursuant to section
1350 as adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002.
*99.2 Certification of Chief Financial Officer pursuant to section
1350 as adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002.
27