ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
[THIS SPACE INTENTIONALLY LEFT BLANK]
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Since July 29, 1999, Inland's Common Stock has been traded over-the-counter and quoted from time to time in the OTC Bulletin Board and in the "Pink Sheets" under the trading symbol "INLN". Prior to July 29, 1999, Inland's Common Stock was quoted on the Nasdaq SmallCap Market under the symbol "INLN". As of March 13, 2002, there were approximately 513 holders of record of Inland's Common Stock. The following table sets forth the range of high and low sales prices as reported by Nasdaq for the periods indicated prior to July 29, 1999, and the range of high and low bid prices as reported by the OTC Bulletin Board for the periods indicated after July 29, 1999. The quotations reflect inter-dealer prices without retail markup, markdown or commission, and may not necessarily represent actual transactions. All prices have been adjusted to give retroactive effect to the 1-for-10 reverse split of the Common Stock effected on December 14, 1999. This adjustment was made by multiplying the actual price by a factor of 10. There can be no assurance that the shares would have traded at such adjusted price had the reverse split occurred prior to the dates reflected below.
DIVIDEND POLICY
Inland has not paid cash dividends on Inland's Common Stock during the last five years and does not intend to pay cash dividends on Common Stock in the foreseeable future. The payment of future dividends will be determined by Inland's Board of Directors in light of conditions then existing, including Inland's earnings, financial condition, capital requirements, restrictions in financing agreements, business conditions and other factors. The Fortis Credit Agreement forbids the payment of dividends by Inland on its Common Stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected historical consolidated financial and operating data for Inland as of and for each of the five years ended December 31, 2001. Inland utilizes the successful efforts method of accounting for oil and gas activities. Such data should be read together with the historical consolidated financial statements of Inland incorporated in this annual report.
(1) Excludes production taxes.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's consolidated financial statements and notes thereto included elsewhere in this Annual Report and the information set forth under the heading "Selected Financial Data" and is intended to assist in the understanding of the Company's financial position and results of operations for each of the years ended December 31, 2001, 2000 and 1999.
GENERAL
Inland is a diversified and independent energy company engaged in the acquisition, development and enhancement of oil and gas properties in the western United States. All of the Company's oil and gas reserves are located in the Monument Butte Field (the "Field") within the Uinta Basin of northeastern Utah.
On January 31, 2000, the Company sold its 100% owned subsidiary, Inland Refining, Inc. The subsidiary owned the Woods Cross Refinery and a nonoperating refinery located in Roosevelt, Utah. The Woods Cross refinery was originally purchased on December 31, 1997 for $22.9 million and the Roosevelt refinery was originally purchased on September 16, 1998 for $2.25 million. Due to this sale, the Company is no longer involved in the refining of crude oil or the sale of refined products. As a result, all refining operations have been classified as discontinued operations in the accompanying consolidated financial statements.
In January 2002, the Company announced that it had hired Lehman Brothers Inc. and Petroleum Place Energy Advisors to advise the Company regarding its review of strategic alternatives, which may include a potential sale or merger of the Company. The Company is engaged in various levels of negotiations regarding such a transaction.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion of financial condition and results of operation are based upon the information reported in our consolidated financial statements. The preparation of these financial statements requires us to make assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses as well as the disclosure of contingent assets and liabilities at the date of our financial statements. We base our decisions on historical experience and various other sources that are believed to be reasonable under the circumstances. Actual results may differ from the estimates we calculated due to changing business conditions or unexpected circumstances. Policies we believe are critical to understanding our business operations and results of operations are detailed below. For additional information on our significant accounting policies you should see Note 1 in our accompanying consolidated financial statements.
Revenue recognition. The Company is engaged in the acquisition, development, and enhancement of oil and gas properties of crude oil and natural gas. Our revenue recognition policy is significant because our revenue is a key component of our results of operations and our forward looking statements contained in Liquidity and Capital Resources. We derive our revenue primarily from the sale of produced crude oil and natural gas. Revenue is recorded in the month our production is delivered to the purchaser, but payment is generally received between 30 and 60 days after the date of production. At the end of each period we make estimates of the amount of production delivered to the purchaser and the price we received. We use our knowledge of our properties, their historical performance, NYMEX and local spot market prices and other factors as the basis for these estimates. Variances between our estimates and the actual amounts received are recorded in the month payment is received.
Oil and gas reserve quantities. Estimated reserve quantities and the related estimates of future net cash flows affect our periodic calculations of depletion, depreciation and impairment for our proved oil and gas properties. Proved oil and gas reserves are the estimated quantities of crude oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operation conditions. Future inflows and future production and development costs are determined by applying benchmark prices and costs, including transportation and basis differentials, in effect at the end of each period to the estimated quantities of oil and gas remaining to be produced at the end of that period. Expected cash flows are reduced to present value using a discount rate that depends upon the calculation for which the reserve estimates will be used. Reserve estimates are inherently imprecise. Estimates of new discoveries are more imprecise that those of proved producing oil and gas properties. We expect that periodic reserve estimates will change in the future, as additional information becomes available or as oil and gas prices and costs change. For any period, unknown circumstances could have caused us to calculate more or less depletion, depreciation or impairment. Changes in these calculations caused by changes in reserve quantities or net cash flows are recorded in the period that the reserve estimates changed.
Valuation of long-lived and intangible assets. Our property and equipment are recorded at cost. An impairment allowance is provided on unproved property when we determine that the property will not be developed. We evaluate the reliability of our proved producing and other long-lived assets whenever events or changes in circumstances indicate that an impairment may have occurred. Our impairment test compares the expected undiscounted future net revenues from a property using escalated pricing with the related net capitalized costs of the property at the end of each period. When the net capitalized costs exceed the undiscounted future net revenue of a property, the cost of the property is written down to our estimate of fair value, which is determined by applying a 10% discount rate to future net revenues. Each company has its own criteria for acceptable internal rates of return, and those criteria can change over time. Different pricing assumptions or discount rates would result in a different calculated impairment.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000
Oil and Gas Sales. Crude oil and natural gas revenue for the year ended December 31, 2001 increased $3 million, or 11% from the previous year. As shown in the table below, the $3 million variance in 2001 was caused by higher crude oil and natural gas volumes and, in the case of natural gas higher average prices, offset by lower crude oil prices. The Company operates and is in control of over 98% of its oil and gas production. Crude oil sales as a percentage of total oil and gas sales were 79% and 83% during 2001 and 2000, respectively. Crude oil will continue to be the predominant product produced from the Field.
The Company had entered into price protection agreements to hedge against volatility in crude oil prices. 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. The Company recorded a loss of $5.5 million to the statement of operations to reflect ineffectiveness of the derivative contracts following the filing of Chapter 11 bankruptcy of ENAC. The amount that had been deferred in accumulated other comprehensive income will be reclassified to earnings based on the originally scheduled delivery period. Amounts expected to be reclassified to earnings in 2002 and 2003 are $3,993,000 and $1,510,000, respectively. Although hedging activities do not affect the Company's actual sales price for crude oil in the Field, the financial impact of hedging transactions is reported as an adjustment to crude oil revenue in the period in which the related oil is sold. Crude oil sales were decreased by $2.9 million and $6.1 million during year 2001 and 2000, respectively, to recognize hedging contract settlement losses. See Item 7A
Item 7A "Quantitative and Qualitative Disclosures About Market Risk".
On January 30, 2002, the Company terminated all of its hedging contracts with ENAC and determined a potential bankruptcy unsecured claim against ENAC in excess of $7.5 million.
Lease Operating Expenses. Lease operating expense for the year ended December 31, 2001 increased $1,748,000, or 23% from the previous year. Lease operating expense per BOE increased from $5.23 per BOE sold in 2000 to $5.78 per BOE in 2001. The increase in year 2001 on a BOE basis is due to substantially higher costs of materials and labor, due to increased demand for products, services and employees in the Monument Butte region and neighboring areas.
Production Taxes. Production taxes as a percentage of sales were 1.4% in 2001 and 1.4% in 2000. Production tax expense consists of estimates of the Company's yearly effective tax rate for Utah state severance tax and production ad valorem tax. Changes in sales prices, tax rates, tax exemptions and the timing, location and results of drilling activities can all affect the Company's actual effective tax rate.
Exploration. Exploration expense in 2001 and 2000 represents the Company's cost to retain unproved acreage including delay rentals.
Depletion, Depreciation and Amortization. Depletion, depreciation and amortization for the year ended December 31, 2001 increased 16.5%, or $1.3 million, from the previous year. The increase resulted from increased sales volumes and a higher average depletion rate. Depletion, which is based on the units-of-production method, comprises the majority of the total charge. The depletion rate is a function of capitalized costs and related underlying proved reserves in the periods presented. The Company's average depletion rate was $5.26 per BOE sold during 2001 compared to $4.95 per BOE sold during 2000. Based on December 31, 2001 proved reserves, the Company's depletion rate entering 2002 is $5.25 per BOE.
General and Administrative, Net. General and administrative expense for the year ended December 31, 2001 decreased $642,000, or 30% from the previous year. General and administrative expense is reported net of operator fees and reimbursements which were $7.5 million and $5.5 million during 2001 and 2000, respectively. Gross general and administrative expense was $9 million in 2001 and $7.2 million in 2000. The lower net general and administrative expenses for 2001 was due to higher reimbursement from operating overhead, drilling and labor due to the 2001 drilling program offset by higher labor and benefit costs.
Interest Expense. Interest expense for the year ended December 31, 2001 increased $3.7 million, or 45% from the previous year. The increase was the result of the new issuance of subordinated debt on August 2, 2001 of $109 million at a rate of 11% per annum. Accrued interest on the subordinated debt for 2001 was $5 million compared to none for 2000. Interest on the senior bank debt decreased $1.5 million or 19% from the previous year. Borrowings during 2001 and 2000 were recorded at effective interest rates of 8.8% and 10.2%, respectively.
Other Income. Other income in 2001 and 2000 primarily represents interest earned on the investment of surplus cash balances and miscellaneous other income.
Income Taxes. In 2001 and 2000, no income tax provision or benefit was recognized due to net operating losses incurred and the establishment of a full valuation allowance.
Preferred Series D Stock Dividends. Inland's Preferred Series D Stock accrued dividends at 11.25% compounded quarterly. The amount accrued represented those dividends earned through August 1, 2001 and during 2000, respectively. As discussed under Note 5 to the Consolidated Financial Statements, the Company's Preferred Series D Stock was cancelled in exchange for the TCW subordinated notes and $2 million on August 2, 2001.
Preferred Series E Stock Dividends. Inland's Preferred Series E Stock accrued dividends at 11.5% compounded quarterly. The amount accrued represented those dividends earned through August 1, 2001 and during 2000, respectively. As discussed under Note 5 to the Consolidated Financial Statements, the Company's Preferred Series E Stock was cancelled on August 2, 2001.
Preferred Series D Stock Discount. Inland's Preferred Series D Stock was initially recorded on the financial statements at a discount of $20.2 million and was being accreted to face value ($80.7 million) over the minimum mandatory redemption period, that started on April 1, 2002 and ended on April 1, 2004. As discussed under Note 5 to the Consolidated Financial Statements, the Company's Preferred Series D Stock was cancelled in exchange for TCW subordinated notes and $2 million on August 2, 2001.
Preferred Series E Stock Discount. Inland's Preferred Series E Stock was initially recorded on the financial statements at a discount of $4.2 million and was being accreted to face value ($12.2 million) over the period to the minimum mandatory redemption date of April 1, 2004. As discussed under Note 5 to the Consolidated Financial Statements, the Company's Preferred Series E Stock was cancelled on August 2, 2001.
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH YEAR ENDED DECEMBER 31, 1999
Oil and Gas Sales. Crude oil and natural gas revenue for the year ended December 31, 2000 increased $12.1 million, or 74% from the previous year. As shown in the table below, the variance was caused by higher average crude oil and natural gas prices offset by lower sales volumes. The Company operates and is in control of over 99% of its oil and gas production. Crude oil sales as a percentage of total oil and gas sales were 83% and 79% during 2000 and 1999, respectively. Crude oil will continue to be the predominant product produced from the Field.
The Company has entered into price protection agreements to hedge against volatility in crude oil prices. Although hedging activities do not affect the Company's actual sales price for crude oil in the Field, the financial impact of hedging transactions is reported as an adjustment to crude oil revenue in the period in which the related oil is sold. Crude oil sales were decreased by $6.1 million and $4.9 million during year 2000 and 1999, respectively, to recognize hedging contract settlement losses. See Item 7A "Quantitative and Qualitative Disclosures About Market Risk."
Lease Operating Expenses. Lease operating expense for the year ended December 31, 2000 increased $436,000, or 6.1% from the previous year. Lease operating expense per BOE increased from $4.34 per BOE sold in 1999 to $5.23 in 2000. The increase on a BOE basis is due to the lower volume produced and general price increases throughout year 2000.
Production Taxes. Production taxes as a percentage of sales were 1.4% in 2000 and 1.0% in 1999. Production tax expense consists of estimates of the Company's yearly effective tax rate for Utah state severance tax and production ad valorem tax. Changes in sales prices, tax rates, tax exemptions and the timing, location and results of drilling activities can all affect the Company's actual effective tax rate.
Exploration. Exploration expense in 2000 and 1999 represents the Company's cost to retain unproved acreage including delay rentals.
Depletion, Depreciation and Amortization. Depletion, depreciation and amortization for the year ended December 31, 2000 decreased 21%, or $2.1 million, from the previous year. The decrease resulted from decreased sales volumes and a lower average depletion rate. Depletion, which is based on the units-of-production method, comprises the majority of the total charge. The depletion rate is a function of capitalized costs and related underlying proved reserves in the periods presented. The Company's average depletion rate was $4.95 per BOE sold during 2000 compared to $5.59 per BOE sold during 1999.
General and Administrative, Net. General and administrative expense for the year ended December 31, 2000 decreased $1.0 million, or 32% from the previous year. The 2000 amount includes $430,000 related to an unsuccessful business combination and employee severance costs. The 1999 amount includes $1.2 million related to the Company's financial restructuring. After removal of these costs, general and administrative expense was 12% lower between periods. General and administrative expense is reported net of operator fees and reimbursements which were $5.5 million and $4.7 million during 2000 and 1999, respectively. Gross general and administrative expense was $7.2 million (net of one-time costs) in 2000 and $6.6 million (net of restructuring costs) in 1999. The increase in reimbursements and expense is a function of operated field activity; which decreased in 1999 when the Company suspended development activity until the fourth quarter, then increased in year 2000 when the Company was active with development activities throughout the year.
Interest Expense. Interest expense for the year ended December 31, 2000 decreased $7.7 million, or 48% from the previous year. The decrease was the result of the financial restructuring performed in September 1999 when approximately $80.0 million of debt was converted to preferred stock. Borrowings during 2000 and 1999 were recorded at effective interest rates of 10.2% and 10.6%, respectively.
Other Income. Other income in 2000 and 1999 primarily represents interest earned on the investment of surplus cash balances.
Income Taxes. In 2000 and 1999, no income tax provision or benefit was recognized due to net operating losses incurred and the establishment of a full valuation allowance.
Discontinued Operations. During 1999, the Company operated the Woods Cross Refinery and incurred an operating loss of $1.8 million. On January 31, 2000, the refinery along with certain other assets were sold to Silver Eagle. Although the margins obtained for refined product sales in the Salt Lake City region were strong for most of the year, the Company suffered from inefficient operations since it was unable to secure sufficient quantities of feedstock due to its financial condition. After the Company's financial restructuring in September 1999, increasing crude oil costs reduced margins on refined product sales to unacceptable levels. These circumstances combined with the availability of alternative buyers for the Company's crude oil caused the Company to discontinue refinery operations in December 1999 and subsequently sell Refining on January 31, 2000. As a result of this activity, the accompanying consolidated financial statements for the current period and all prior periods have been adjusted to report refining operations as
discontinued operations. The Company recorded a charge of $14.5 million in 1999 to record the disposal of the refining business segment. The Company recorded an additional loss of $250,000 during 2000 to reflect adjustments to the refinery shut-down accruals.
Extraordinary Item. Effective September 21, 1999, the Company restructured an existing obligation to TCW and amended the terms of its farmout arrangement with Smith Energy Partnership. As a result of these transactions, unamortized debt issue costs of $556,000 were written off as an extraordinary loss.
Preferred Series C Stock Dividends. Inland's Preferred Series C Stock was exchanged for Common Stock and Preferred Series E Stock as part of the financial restructuring transaction on September 21, 1999. Prior to that time, the Preferred Series C Stock accrued dividends at 10% compounded quarterly. The amount accrued represents those dividends earned during 1999.
Preferred Series D Stock Dividends. Inland's Preferred Series D Stock accrued dividends at 11.25% compounded quarterly. The amount accrued represented those dividends earned during 2000 and the fourth quarter of 1999, respectively. As discussed under Note 5 to the Consolidated Financial Statements, the Company's Preferred Series D Stock was cancelled in exchange for the TCW subordinated notes and $2 million on August 2, 2001.
Preferred Series E Stock Dividends. Inland's Preferred Series E Stock accrued dividends at 11.5% compounded quarterly. The amount accrued represented those dividends earned during 2000 and the fourth quarter of 1999, respectively. As discussed under Note 5 to the Consolidated Financial Statements, the Company's Preferred Series E Stock was cancelled on August 2, 2001.
Preferred Series D Stock Discount. Inland's Preferred Series D Stock was initially recorded on the financial statements at a discount of $20.2 million and was being accreted to face value ($80.7 million) over the minimum mandatory redemption period which started on April 1, 2002 and ended on April 1, 2004. As discussed under Note 5 to the Consolidated Financial Statements, the Company's Preferred Series D Stock was cancelled in exchange for TCW subordinated notes and $2 million on August 2, 2001.
Preferred Series E Stock Discount. Inland's Preferred Series E Stock was initially recorded on the financial statements at a discount of $4.2 million and was being accreted to face value ($12.2 million) over the period to the minimum mandatory redemption date of April 1, 2004. As discussed under Note 5 to the Consolidated Financial Statements, the Company's Preferred Series E Stock was cancelled on August 2, 2001.
LIQUIDITY AND CAPITAL RESOURCES
FORTIS CREDIT AGREEMENT
Effective September 21, 1999, the Company entered into a credit agreement (the "Fortis Credit Agreement"). The current participants are Fortis Capital Corp. and U.S. Bank National Association (the "Senior Lenders"). At December 31, 2001, the Company had advanced all funds under its current borrowing base of $83.5 million. The borrowing base is calculated as the collateral value of proved reserves and is subject to redetermination on or before March 31, 2002 and with subsequent determinations to be made on each subsequent October 1 and April 1. If the borrowing base is lower than the outstanding principal balance then drawn, the Company must immediately pay the difference. The borrowing base was redetermined to be $83.5 million at March 26, 2002.
In conjunction with SOLVation financing, the Fortis Credit Agreement with the senior bank group was amended to change the maturity date to June 30, 2007 from April 1, 2002, or potentially earlier if the borrowing base is determined to be insufficient. Interest accrues under the Fortis Credit Agreement, at the Company's option, at either (i) 2% above the prime rate or (ii) at various rates above the LIBOR rate. The LIBOR rates will be determined by the senior debt to EBITDA ratios starting August 2, 2001. If the senior debt to EBITDA ratio is greater than 4.00 to 1.00, the rate is 3.25% above the LIBOR rate; if the senior debt to EBITDA ratio is equal to or less than 4.00 to 1.00 but greater than 3.00 to 1.00, the rate is 2.75% above the LIBOR rate; if the senior debt to EBITDA ratio is less than 3.00 to 1.00, the rate is 2.25% above the LIBOR rate. As of December 31, 2001, $83 million and $500,000 were borrowed under the LIBOR option at interest rates of 6.27% and 4.65%, respectively. The revolving termination date is June 30, 2004 at which time the loan converts into a term loan payable in 12 equal quarterly installments of principal, with accrued interest, beginning September 30, 2004. The Fortis Credit Agreement has covenants that restrict the payment of cash dividends, borrowings,
sale of assets, loans to others, investments, merger activity and hedging contracts without the prior consent of the lenders and requires the Company to maintain certain net worth, interest coverage and working capital ratios. The Company was in compliance of its bank covenants as of December 31, 2001. The Fortis Credit Agreement is secured by a first lien on substantially all assets of the Company. The Fortis Credit Agreement was amended on March 25, 2002.
SUBORDINATED UNSECURED DEBT TO SOLVATION INC.
On August 2, 2001, the Company closed two subordinated debt transactions totaling $10 million in aggregate with SOLVation Inc. The first of the two debt transactions with SOLVation was the issuance of a $5 million unsecured senior subordinated note to SOLVation due July 1, 2007. The interest rate is 11% per annum compounded quarterly. The interest payment is payable in arrears in cash subject to the approval from the senior bank group and accumulates if not paid in cash. The Company is not required to make any principal payments prior to the July 1, 2007 maturity date. However, the Company is required to make payments of principal and interest in the same amounts as any principal payment or interest payments on the TCW subordinated debt (described below). Prior to the July 1, 2007 maturity date, subject to the bank subordination agreement, the Company may prepay the senior subordinated note in whole or in part with no penalty.
The Company also issued a second $5 million unsecured junior subordinated note to SOLVation. The interest rate is 11% per annum compounded quarterly. The maturity date is the earlier of (i) 120 days after payment in full of the TCW subordinated debt or (ii) March 31, 2010. Interest is payable in arrears in cash subject to the approval from the senior bank group and accumulates if not paid in cash. The Company is not required to make any principal payments prior to the March 31, 2010 maturity date. Prior to the March 31, 2010 maturity date, subject to both bank and subordination agreements, the Company may prepay the junior subordinated note in whole or in part with no penalty. A portion of the proceeds from the senior and junior subordinated notes was used to fund a $2 million payment to TCW and other Company working capital needs.
SUBORDINATED UNSECURED DEBT TO TCW
In conjunction with the issuance of the two subordinated notes to SOLVation, the Series D Preferred and Series E Preferred stock held by Inland Holdings LLC, a company controlled by TCW, were exchanged for an unsecured subordinated note due September 30, 2009 and $2 million in cash from the Company. The note amount was for $98,968,964 that represented the face value plus accrued dividends of the Series D Preferred stock as of August 2, 2001. The interest rate is 11% per annum compounded quarterly. Interest shall be payable in arrears in cash subject to the approval from the senior bank group and accumulates if not paid in cash. Interest payments will be made quarterly, commencing on the earlier of September 30, 2005 or the end of the first calendar quarter after the senior bank debt has been reduced to $40 million or less, subject to both bank and senior subordination agreements. Beginning the earlier of two years prior to the maturity date or the first December 30 after the repayment in full of the senior bank debt, subject to both bank and senior subordination agreements, the Company will make equal annual principal payments of one third of the aggregate principal amount of the TCW subordinated note. Any unpaid principal or interest amounts are due in full on the September 30, 2009 maturity date. Prior to the September 30, 2009 maturity date, subject to both bank and senior subordination agreements, the Company may prepay the TCW subordinated note in whole or in part with no penalty.
CASH FLOW AND CAPITAL PROJECTS
During the year 2001, the Company generated $20.6 million of EBITDA (earnings before interest, taxes, depreciation and amortization) of which it used $22.3 million to continue development of the Field and $6.4 million to service interest on senior bank borrowings. Net proceeds of $8.7 million from the issuance of subordinated debt was generated to provide working capital to its operations and $2 million to retire the Series E preferred stock. Field development in year 2001 consisted of drilling 45 gross wells (35 net wells), converting 33 gross (25 net) wells to water injection and continued extension of the gas gathering and water delivery infrastructures.
The Company's net capital budget for development of the Field in year 2002 is estimated to be $10 to $12 million. The Company plans to drill 25 wells (20 net wells), complete 25 workovers or recompletion wells and convert 35 producing wells to water injection. Although there can be no assurance, the Company believes that cash on hand along with future cash to be generated from operations will be sufficient to implement its development plans for the next year. The level of these and other capital expenditures is largely discretionary, and the amount of funds devoted to any
particular activity may increase or decrease significantly depending on available opportunities, commodity prices, operating cash flows and development results, among other items. The Company's contractual cash obligations are listed in the following table:
On March 22, 2002, Questar Pipeline Company ("QPC") curtailed all gas producers in the Monument Butte Field, including Inland, for not meeting certain QPC specifications. After curtailment, Inland is producing and transporting approximately 50% of its total gas capacity. The Company is in the process of installing a gas liquid plant in the Field that would bring all of its gas up to QPC's pipeline specifications. The gas liquid plant will be operational in approximately 60 days. The Company believes that the current gas curtailment is not significant to the Company's operations.
RECENTLY ADOPTED ACCOUNTING STANDARDS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133") was issued, which establishes accounting and reporting standards for derivative instruments and hedging activity. 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 will be recognized currently in earnings unless specific hedge accounting criteria are met. Gains and losses on derivative hedging instruments must be recorded in either other comprehensive income or current earnings, depending on the nature and designation of the instrument. The impact of adopting SFAS No. 133 on January 1, 2001 resulted in recording a current liability of $1,927,000 and recording a cumulative effect of a change in accounting principle as accumulated comprehensive loss in the equity section of $1,972,000 and income recorded as a cumulative effect of a change in accounting principle of $45,000.
In June 2001, SFAS No. 141 "Business Combination" and SFAS No. 142 "Goodwill and Other Intangible Assets" were issued, which requires all business combinations to be accounted for using the purchase method and changes the treatment of goodwill created in a business combination. The adoption of these two statements did not have an impact on the Company.
Additionally, SFAS No. 143 "Accounting for Asset Retirement Obligations" was issued in July 2001. This standard requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes the cost by increasing the carrying amount of the related long-lived asset. The asset is then depreciated over the estimated useful life. The present value of the retirement obligation is adjusted each reporting period. The Company has not yet determined the impact of adopting this statement which becomes effective on January 1, 2003.
In August 2001, SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" was issued. This Statement established a single accounting model, based on the framework of SFAS No. 121 ("Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"), for the long-lived assets to be disposed of by sale. The statement was adopted on January 1, 2002 and the Company did not have a material impact upon adoption.
DELISTING OF COMMON STOCK
Effective with the close of business July 28, 1999, the Company's Common Stock was delisted from the Nasdaq SmallCap Market. The Company was no longer able to satisfy the net tangible asset maintenance standard for continued listing. The Company's Common Stock is now traded on the NASD over-the-counter bulletin board under the same symbol "INLN".
INFLATION AND CHANGES IN PRICES
Inland's revenues and the value of its oil and gas properties have been and will be affected by changes in oil and gas prices. Inland'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 Inland's ability to control or predict. Although the level of inflation affects certain of Inland's costs and expenses, inflation did not have a significant effect on Inland's result of operations during 2001 or 2000.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Market risk generally represents the risk that losses may occur in the value of financial instruments as a result of movements in interest rates, foreign currency exchange rates and commodity prices.
INTEREST RATE RISK. Inland is exposed to some market risk due to the floating interest rate under the Fortis Credit Agreement. See Item 7. - "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 December 31, 2001, the Fortis Credit Agreement had a principal balance of $83.5 million locked in at various interest rates as described below:
The Company's total subordinated debt of $114 million outstanding at December 31, 2001 has a fixed interest rate of 11% per annum compounded quarterly and is not subject to rate increases. Assuming the principal is paid according to the terms of the loan, an increase in interest rates could result in an increase in interest expense on the existing principal balance for the remaining term of the loan, as shown by the following chart:
Increase in Interest Expense Without Hedge
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.
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 $5.5 million to the statement of operations to reflect ineffectiveness of the derivative contracts following the filing of Chapter 11 bankruptcy of ENAC. The amount that had been deferred in accumulated other comprehensive income will be reclassified to earnings based on the originally scheduled delivery period. Amounts expected to be reclassified to earnings in 2002 and 2003 are $3,993,000 and $1,510,000, respectively. On January 30, 2002, the Company terminated all of its hedging contracts with ENAC and determined a potential bankruptcy unsecured claim against ENAC in excess of $7.5 million.
On March 11, 2002, the Company hedged 30,000 net barrels per month with Equiva Trading Company for the April 2002 to December 2002 period using a swap with a settlement amount of $23.90 per barrel. The potential gains or (losses) on this contract based on a hypothetical average market price of equivalent product for this period is as follows:
Average NYMEX Per Barrel Market Price for the Contract Period
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this item begin at page hereof.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The following table provides information as of March 1, 2002, with respect to each of the Company's directors and executive officers:
(1) Member of the Audit Committee.
ARTHUR J. PASMAS. Mr. Pasmas has served as Vice President of Smith Management LLC (or affiliated entities), New York, New York, a private company engaged in various businesses and investments, including oil and gas, since 1984. He currently manages oil and gas investments as Vice President for Smith Management LLC from offices in Houston, Texas. He was appointed as a director and Chairman of the Board on August 2, 2001. He was also a director of the Company from 1994 until September 1999, and was Co-Chief Executive Officer of the Company from November 1998 until September 1999.
MARC MACALUSO. Mr. MacAluso was appointed as Chief Executive Officer and Chief Operating Officer on February 1, 2001, and has served as a director since October 14, 1999. He was Senior Vice President of TCW Asset Management Company in Houston, Texas from August 1994 through January 2001, where he was involved in all aspects of mezzanine financing for TCW's Energy Group. He joined TCW Asset Management Company after leading new business development at American Exploration Company. Prior to American Exploration Company, his experience includes various assignments with Shell Oil Company and Shell Western E&P, Inc.
BILL I. PENNINGTON. Mr. Pennington has served as Chief Financial Officer of the Company since September 21, 1994 and as President since November 16, 2000. He also served as Chief Executive Officer from September 23, 1999 until February 1, 2001 and as Vice President from March 22,1996 until September 23, 1999. He was appointed as a director of the Company on September 23, 1999. He served as a director of the Company from September 21, 1994 until September 25, 1996 and as Treasurer of the Company from September 21, 1994 until March 22, 1996. He also served as President, Chief Operating Officer and a Director of Lomax Exploration Company, now known as IPC, from May 1987 until the Company's acquisition of IPC on September 21, 1994. From March 1986 until May 1987, Mr. Pennington was a manager with the accounting firm of Coopers & Lybrand in Houston, Texas. Mr. Pennington is a certified public accountant.
BRUCE M. SCHNELWAR. Mr. Schnelwar has served as a director of the Company since March 22, 2001. He also was a director of the Company from February 1998 until September 1999. He has served since August 1994 as Executive Vice President and Chief Financial Officer of Smith Management LLC (or affiliated entities).
DEWEY A. STRINGER III. Mr. Stringer has been President of Petro-Guard Co., Inc., a private oil and gas exploration company located in Houston, Texas since July 1987.
WILLIAM T. WAR. Mr. War has served as Vice President of the Company since October 5, 1998. From September 1992 until his association with the Company, Mr. War was Project Manager for Louisiana Land & Exploration/Burlington Resource's Lost Cabin Gas Plant.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires the Company's officers and directors, and persons who beneficially own more than 10% of the Common Stock to file reports of ownership and changes in ownership with the Securities and Exchange Commission (the "Commission").
Based solely upon a review of Forms 3, 4 and 5 and amendments thereto furnished to the Company pursuant to Rule 16a-3(e) promulgated under the Exchange Act or upon written representations received by the Company, the Company is not aware of any failure by any officer, director or beneficial owner of more than 10% of the Company's Common Stock to timely file with the Commission any Form 3, 4 or 5 during 2001.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth the compensation earned by the Company's Chief Executive Officer and each of its three other most highly compensated executive officers for the year ended December 31, 2001 (collectively, the "Named Officers") in salary and bonus for services rendered in all capacities to the Company for the fiscal years ended December 31, 2001, 2000 and 1999:
(1) Mr. Pasmas was appointed as a director and Chairman on August 2, 2001. He was also a director of the Company from 1994 until September 1999, and was Co-Chief Executive Officer of the Company from November 1998 until September 1999. The $199,992 represents total compensation paid to Mr. Pasmas during 2001 for his consulting agreement terminated on August 2, 2001 and his compensation as the Chairman of the Board. The $199,992 and $80,779 for the years 2000 and 1999, respectively, were for consulting fees paid to Mr. Pasmas as a non officer and director.
(2) Mr. MacAluso was appointed Chief Executive Officer and Chief Operating Officer on February 1, 2001. He was not an officer of the Company prior to his appointment as Chief Executive Officer and Chief Operating Officer on February 1, 2001.
(3) Moving expenses in 2001 for Mr. MacAluso.
(4) Options issued to Mr. MacAluso and Mr. Pennington on February 1, 2001.
(5) Mr. Pennington was Chief Executive Officer until from September 23, 1999 until February 1, 2001.
(6) These options were mutually terminated by the Company and Mr. Pennington effective February 1, 2001.
Option/Warrant/SAR Grants. The following table sets forth certain information regarding options, warrants and SARs granted during 2001:
Option/Warrant/SAR Exercises and Year-End Value Table. The following table sets forth certain information regarding option exercises and the value of the outstanding options to purchase Common Stock held by the Named Officers at December 31, 2001:
(1) Value is based on the closing bid price of $1.35 per share on December 31, 2001.
Long-Term Incentive Plans. The following table sets forth certain information regarding long-term incentive awards granted during 2001 to the Named Officers:
(1) The Employment Agreements of Messrs. MacAluso and Pennington provide for a performance bonus of $50,000 and $50,000, respectively, for the December 31, 2001 year based on meeting or exceeding actual 2001 oil and gas net equivalent production barrels and either completing a merger with another company acceptable to the Board or a public offering of the Company's common stock. However, the 2001 performance goals were not met and no bonuses were paid.
Compensation of Directors. The members of the Board of Directors of the Company are entitled to reimbursement for their reasonable expenses in connection with their travel to and from, and attendance at, meetings of the Board of Directors or committees thereof. Effective September 23, 1999, members of the Board who are not employees of the Company are paid an annual fee of $25,000 and no additional meeting fees for meetings of the Board or any committee. The Board of Directors may grant discretionary options to directors.
Employment Agreements. Effective February 1, 2001, the Company entered into an employment agreement with Mr. MacAluso. The Company entered into new employment agreement with Mr. Pennington effective February 1, 2001, pursuant to which the Company and Mr. Pennington agreed to terminate his prior employment agreement. Mr. Pennington also agreed to cancel all outstanding options granted to him.
Pursuant to their employment agreements, dated effective February 1, 2001, the Company agreed to pay Messrs. MacAluso and Pennington base salaries of $250,000 and annual bonuses of up to $50,000 contingent upon the Company reaching or exceeding certain performance targets to be set by the Board for each year. Their employment agreements have an initial term of three years and automatically are extended for additional one year periods unless either party terminates the agreement prior to the end of the current term. The Company also agreed to grant each of them options to purchase 90,000 shares of the Company's Common Stock at an exercise price of $1.625 per share and options to purchase 60,000 shares of the Company's Common Stock at an exercise price of $2.84 per share, with such options vesting ratably over twelve fiscal quarters, with the first one-twelfth vesting on March 1, 2001. However, Mr. Pennington is fully vested in his 150,000 options due to change of control of the Company. The options for 90,000 shares are also subject to automatic increase upon the issuance of additional shares by the Company in a pro rata amount based on the percentage increase in the number of outstanding shares of the Company. The exercise price for such new
options would be the same as the issue price of the new shares issued by the Company. Their new employment agreements also entitle them to participate in all employee benefit plans and programs of the Company. Each agreement also provides that if the employee is permanently disabled during the term of the Agreement, he will continue to be employed at 50% of his base salary until the first to occur of his death, expiration of 12 months, or expiration of the employment agreement. Upon termination of employment by the Company without cause or after a subsequent change of control of the Company, any unvested portion of their options immediately vest. Upon termination of employment by the Company or the employee following a change of control of the Company, the Company agrees to pay the employee an amount equal to the greater of $250,000 or the remaining unpaid base salary for the remaining term of the employment agreement and agrees to continue all employee benefits for a period of one year. Additionally, they will be entitled to severance payments in accordance with the Company's severance policy which provide for a severance payment if the employee is terminated due to a change in control in an amount determined based on the number of years of employment, ranging from two weeks' base salary for one years' employment up to six months base salary for employment of five years or more. The Company also agreed to pay various temporary housing, commuting, moving and relocation expenses of Mr. MacAluso in connection with his transfer from Houston, Texas to Denver, Colorado. These expenses were $27,952. In addition, the Company agreed to purchase the equity in Mr. MacAluso's house in Houston for $141,000 (based on appraised value) and assumed the financial responsibility for its ultimate sale which was completed in April of 2001.
Mr. War's employment agreement was also amended effective November 16, 2000 to eliminate the $75,000 termination payment payable by the Company if his employment was terminated by the Company without cause or following a change in control, and the $75,000 severance payment if he was terminated without cause. Under the amended employment agreement, Mr. War was paid a bonus of $50,000 in January 2001 upon execution of the amendment and paid another $25,000 in December 2001. Additionally, he will be entitled to six months' base salary ($70,000) pursuant to the Company's severance policy if his employment is terminated following a change in control prior to expiration of the term of his employment agreement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company has no compensation committee and the full Board of Directors determines the compensation to be paid to executive officers of the Company, subject to approval by TCW Asset Management Company. Messrs. MacAluso and Pennington participated in deliberations by the Board of Directors concerning executive officer compensation during 2001.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership of Common Stock as of March 13, 2002, by each stockholder known to the Company to own beneficially more than five percent of the outstanding Common Stock, each current director, each Named Officer, and all executive officers and directors of the Company as a group, based on information provided to the Company by such persons. Except as otherwise stated, each such person has sole investment and voting power with respect to the shares set forth in the table:
* Less than 1%
(1) JWA Investments IV LLC is the managing member of Hampton Investments and may be deemed to also beneficially own these shares and John W. Adams is the sole member of JWA Investments and may be deemed to beneficially own these shares.
(2) Inland Holdings LLC ("Holdings") owns these shares of record and beneficially. The members of Holdings are Trust Company of the West, as Sub-Custodian for Mellon Bank for the benefit of Account No. CPFF 873-3032 ("Fund V"), and TCW Portfolio No. 1555 DR V Sub-Custody Partnership, L.P. ("Portfolio"). TCW Asset Management Company has the power to vote and dispose of the shares owned by Holdings and may be deemed to beneficially own such shares.
(3) Includes shares issuable under outstanding stock options and warrants granted to Messrs. MacAluso, Pennington and War and all executive officers and directors appointees as a group for 150,000, 152,167, 25,000 and 329,158 shares, respectively.
(4) Each of Messrs. Pasmas and Schnelwar are officers of Smith Management LLC, an affiliate of Hampton Investments, but each of them disclaims beneficial ownership of any of the shares owned by Hampton Investments.
In connection with Items 1 and 2 "Business and Properties - Recent Developments - - Change of Control and Recapitalization", Holdings and Hampton Investments with their respective affiliates have agreed to vote to ensure that (i) the Company and Subsidiary Boards each consist of six members, subject to certain exceptions, (ii) as long as Hampton Investments and its affiliates hold at least a majority of the Common Stock of the Company, Hampton Investments and its affiliates have the right to appoint at least two members to the Company and Subsidiary Boards or, if greater, at least one-third of the members of the Board, and (iii) as long as the provisions in the Exchange and Note Issuance Agreement relating to Board representation are applicable, the Requisite Holders have the right to have one or
more individuals designated for election to, and be elected to, the Company and Subsidiary Boards, as provided in the Exchange and Note Issuance Agreement and discussed above. Hampton Investments have appointed Messrs. Pasmas and Stringer as representatives on the Board.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Exchange of Preferred Stock for Subordinated Debt. As discussed in Items 1 and 2 "Business and Properties - Recent Developments - Change of Control and Recapitalization," the Company exchanged its Series D Preferred Stock and Series E Preferred Stock with Inland Holdings for the TCW Subordinated Notes in the principal amount of $98,968,964 and for a $2 million payment by the Company to Inland Holdings.
$10 million of Subordinated Debt. As discussed in Items 1 and 2 "Business and Properties - Recent Developments - Change of Control and Recapitalization," SOLVation entered into the Senior Subordinated Note Agreement ($5 million) and the Junior Subordinated Note Agreement ($5 million) and loaned the Company $10 million.
Amended and Restated Registration Rights Agreement. In connection with the Exchange Agreement discussed under Items 1 and 2 "Business and Properties - Recent Developments - Change of Control and Recapitalization," pursuant to an Amended and Restated Registration Rights Agreement (the "Registration Rights Agreement"), dated August 2, 2001, by and among Inland Holdings, the Company and Hampton Investments, the Company granted certain demand and piggyback registration rights to Hampton Investments and Inland Holdings in respect of Common Stock held by them. Under the Registration Rights Agreement, Hampton Investments may require the Company to effect three demand registrations and Inland Holdings may require the Company to effect one demand registration. Each of Inland Holdings and Hampton Investments is entitled to include their shares on any registration statement filed by the Company under the Securities Act of 1933, subject to standard underwriters' kick-out clauses and other conditions. The Company will be responsible for paying the costs and expenses associated with all registration statements, including the fees of one law firm acting as counsel to the holders requesting registration but excluding underwriting discounts and commissions and any other expenses of the party requesting registration.
Farmout Agreement. The Company entered into a Farmout Agreement with Smith Management LLC ("Smith Management") effective June 1, 1998. As of December 31, 1998, SEP, an affiliate of Smith Management, received 152,220 pre-split (15,222 post-split) shares of Common Stock as payment of proceeds under the Farmout Agreement. Effective November 1, 1998, an Amendment to the Farmout Agreement was executed that suspended future drilling rights under the Farmout Agreement until such time as the Company, Smith Management and the Company's senior lenders agreed to recommence such rights. In addition, a provision was added that gave Smith Management the option to receive cash rather than Common Stock if the average stock price was calculated at less than $3.00 per share, such cash only to be paid if the Company's senior lenders agreed to such payment. The Farmout Agreement was further amended on September 21, 1999 as part of the Recapitalization to eliminate this option, to provide for cash payments only effective June 1, 1999, and to allow the Company to retain all proceeds under the Farmout Agreement accrued from November 1, 1998 through May 31, 1999. The Farmout Agreement provides that Smith Management will reconvey all drillsites to the Company once Smith Management has recovered from production an amount equal to 100% of its expenditures, including management fees and production taxes, plus an additional sum equal to 18% per annum on such expended sums.
Consulting Agreement. The Company entered into a Consulting Agreement with Arthur J. Pasmas on September 21, 1999 pursuant to which Mr. Pasmas was to receive $200,000 annually for consulting services to be provided to the Company until September 21, 2002. The Company mutually terminated this Consulting Agreement on August 2, 2001 with Mr. Pasmas when he was appointed Chairman of the Board of the Company. The Company has agreed to pay Mr. Pasmas $200,000 annually for serving as Chairman of the Board. Mr. Pasmas has been Vice President of Smith Management (or affiliated entities) since 1985.
All transactions set forth above have been approved by disinterested members of the Board of Directors of Inland, and are considered to be fair and reasonable to the Company.
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PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report or incorporated by reference:
1. Financial Statements
See "Index to Consolidated Financial Statements" on page of this Annual Report.
2. Financial Statement Schedules
None. All financial statement schedules are omitted because the information is not required, is not material or is otherwise included in the consolidated financial statements or notes thereto included elsewhere in this Annual Report.
3. (a) Exhibits
Item Number Description - ------ -----------
2.1 Agreement and Plan of Merger between Inland Resources Inc. ("Inland"), IRI Acquisition Corp. and Lomax Exploration Company (exclusive of all exhibits) (filed as Exhibit 2.1 to Inland's Registration Statement on Form S-4, Registration No. 33-80392, and incorporated herein by this reference).
3.1 Amended and Restated Articles of Incorporation, as amended through December 14, 1999 (filed as Exhibit 3.1 to Inland's Current Report on Form 8-K dated September 21, 1999, and incorporated herein by reference).
3.2 By-Laws of Inland (filed as Exhibit 3.2 to Inland's Registration Statement on Form S-18, Registration No. 33-11870-F, and incorporated herein by reference).
3.2.1 Amendment to Article IV, Section 1 of the Bylaws of Inland adopted February 23, 1993 (filed as Exhibit 3.2.1 to Inland's Annual Report on Form 10-K for the year ended December 31, 1992, and incorporated herein by reference).
3.2.2 Amendment to the Bylaws of Inland adopted April 8, 1994 (filed as Exhibit 3.2.2 to Inland's Registration Statement on Form S-4, Registration No. 33-80392, and incorporated herein by reference).
3.2.3 Amendment to the Bylaws of Inland adopted April 27, 1994 (filed as Exhibit 3.2.3 to Inland's Registration Statement on Form S-4, Registration No. 33-80392, and incorporated herein by reference).
4.1 Credit Agreement dated September 23, 1997 between Inland Production Company ("IPC"), Inland, ING (U.S.) Capital Corporation, as Agent, and Certain Financial Institutions, as banks (filed as Exhibit 4.1 to Inland's Current Report on Form 8-K dated September 23, 1997, and incorporated herein by reference).
4.1.1 Third Amendment to Credit Agreement entered into as of April 22, 1998, amending Exhibit 4.1 (filed as Exhibit 4.1.1 to Inland's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, and incorporated herein by reference).
4.1.2 Amended and Restated Credit Agreement dated as of September 11, 1998 amending and restating Exhibit 4.1 (filed as Exhibit 4.1.2 to Inland's Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated herein by reference).
4.1.3 First Amendment to Amended and Restated Credit Agreement dated as of March 5, 1999 amending Exhibit 4.1.2 (filed as Exhibit 4.1.3 to Inland's Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated herein by reference).
4.1.4 Second Amended and Restated Credit Agreement dated September 15, 1999, but effective as of September 21, 1999, amending and restating Exhibit 4.1 (without exhibits or schedules) (filed as Exhibit 4.1 to Inland's Current Report on Form 8-K dated September 21, 1999, and incorporated herein by reference).
4.2 Credit Agreement dated September 23, 1997, among IPC, Inland, Trust Company of the West, and TCW Asset Management Company, in the capacities described therein (filed as Exhibit 4.2 to Inland's Current Report on Form 8-K dated September 23, 1997, and incorporated herein by reference).
4.2.1 Second Amendment to Credit Agreement entered into as of April 22, 1998, amending Exhibit 4.2 (filed as Exhibit 4.2.1 to Inland's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, and incorporated herein by reference).
4.2.2 Amended and Restated Credit Agreement dated as of September 11, 1998, amending and restating Exhibit 4.2 (filed as Exhibit 4.2.2 to Inland's Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated herein by reference).
4.2.3 First Amendment to Amended and Restated Credit Agreement dated as of March 5, 1999, amending Exhibit 4.2.2 (filed as Exhibit 4.2.3 to Inland's Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated herein by reference).
4.2.4 Exchange Agreement dated as of September 21, 1999 by and between Inland, IPC, Refining, Trust Company of the West, a California trust company, as Sub-Custodian for Mellon Bank for the benefit of Account No. CPFF 873-3032, Inland Holdings LLC, TCW Portfolio No. 1555 DR V Sub-Custody Partnership, L.P. and Joint Energy Development Investments II Limited Partnership (without exhibits or schedules), terminating Exhibits 4.2 and 4.3, as previously amended, and Exhibits 4.4, 4.5, 10.10 and 10.11 (filed as Exhibit 10.1 to Inland's Current Report on Form 8-K dated September 21, 1999, and incorporated herein by reference).
4.3 Intercreditor Agreement dated September 23, 1997, between IPC, TCW Asset Management Company, Trust Company of the West and ING (U.S.) Capital Corporation (filed as Exhibit 4.3 to Inland's Current Report on Form 8-K dated September 23, 1997, and incorporated herein by reference).
4.3.1 Third Amendment to Intercreditor Agreement entered into as of April 22, 1998, amending Exhibit 4.3 (filed as Exhibit 4.3.1 to Inland?s Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, and incorporated herein by reference).
4.3.2 Amended and Restated Intercreditor Agreement dated as of September 11, 1998, amending and restating Exhibit 4.3 (filed as Exhibit 4.3.2 to Inland's Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated herein by reference).
4.3.3 First Amendment to Amended and Restated Intercreditor Agreement dated as of March 5, 1999, amending Exhibit 4.3.2 (filed as Exhibit 4.3.3 to Inland's Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated herein by reference).
4.4 Warrant Agreement by and between Inland and TCW Portfolio No. 1555 DR V Sub-Custody Partnership, L.P. dated September 23, 1997 (filed as Exhibit 4.4 to
Inland's Current Report on Form 8-K dated September 23, 1997, and incorporated herein by reference).
4.5 Warrant issued by Inland pursuant to the Warrant Agreement, dated September 23, 1997, representing the right to purchase 100,000 shares of Inland's Common Stock (filed as Exhibit 4.5 to Inland's Current Report on Form 8-K dated September 23, 1997, and incorporated herein by reference). 10.1 1988 Option Plan of Inland Gold and Silver Corp. (filed as Exhibit 10(15) to Inland's Annual Report on Form 10-K for the year ended December 31, 1988, and incorporated herein by reference).
10.1.1 Amended 1988 Option Plan of Inland Gold and Silver Corp. (filed as Exhibit 10.10.1 to Inland's Annual Report on Form 10-K for the year ended December 31, 1992, and incorporated herein by reference).
10.1.2 Amended 1988 Option Plan of Inland, as amended through August 29, 1994 (including amendments increasing the number of shares to 212,800 and changing "formula award") (filed as Exhibit 10.1.2 to Inland's Annual Report on Form 10-KSB for the year ended December 31, 1994, and incorporated herein by reference).
10.1.3 Automatic Adjustment to Number of Shares Covered by Amended 1988 Option Plan executed effective June 3, 1996 (filed as Exhibit 10.1 to Inland's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1996, and incorporated herein by reference).
10.2 Letter agreement dated October 30, 1996 between Inland and Johnson Water District (filed as Exhibit 10.41 to Inland's Annual Report on Form 10-KSB for the year ended December 31, 1996, and incorporated herein by reference).
10.3 Interest Rate Cap Agreement dated April 30, 1998 between IPC and Enron Capital and Trade Resources Corp. (filed as Exhibit 10.4 to Inland?s Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, and incorporated herein by reference).
10.4 Farmout Agreement between Inland and Smith Management LLC dated effective as of June 1, 1998 (filed as Exhibit 10.1 to Inland?s Current Report on Form 8-K dated June 1, 1998, and incorporated herein by reference).
10.5 Warrant Agreement dated as of March 5, 1999 between Inland Resources Inc. and TCW Portfolio No. 1555 DR V Sub-Custody Partnership, L.P. (filed as Exhibit 10.20 to Inland's Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated herein by reference).
10.6 Warrant Certificate dated March 5, 1999 between Inland and TCW Portfolio No. 1555 DR V Sub-Custody Partnership, L.P. representing 5,852 shares (filed as Exhibit 10.21 to Inland's Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated herein by reference).
10.7 Shareholders Agreement dated as of September 21, 1999 between Inland, Holdings, Fund V, JEDI and Pengo Securities Corp., Smith Energy Partnership, Randall D. Smith, Jeffrey A. Smith, Barbara Stovall Smith, John W. Adams and Arthur J. Pasmas (collectively, the "Smith Group") (filed as Exhibit 10.2 to Inland's Current Report on Form 8-K dated September 21, 1999, and incorporated herein by reference).
10.8 Registration Rights Agreement dated as of September 21, 1999 between Inland, Holdings, Portfolio, JEDI and the Smith Group filed as Exhibit 10.3 to Inland's Current Report on Form 8-K dated September 21, 1999, and (incorporated herein by reference).
10.9 Severance Agreement between Inland and John E. Dyer dated November 18, 1999 (filed as Exhibit 10.13 to Inland?s Annual Report on Form 10-K for the year ended December 31, 1999, and incorporated herein by reference).
10.10 Employment Agreement between Inland and William T. War dated effective as of October 1, 1999 (filed as Exhibit 10.14 to Inland?s Annual Report on Form 10-K for the year ended December 31, 1999, and incorporated herein by reference).
10.11 Stock Option Agreement between Inland and William T. War dated October 1, 1999 10.11 representing 25,000 post-split shares of Common Stock (filed as Exhibit 10.15 to Inland?s Annual Report on Form 10-K for the year ended December 31, 1999, and incorporated herein by reference).
10.12 Amendment to Employment Agreement between Inland and William T. War, amending the Employment Agreement filed as Exhibit 10.10.
10.13 Employment Agreement between Inland and Michael J. Stevens dated effective as of February 1, 2001.
10.14 Employment Agreement between Inland and Marc MacAluso dated effective as of February 1, 2001.
10.15 Stock Option Agreement between Inland and Marc MacAluso dated effective as of February 1, 2001 representing 150,000 post-split shares of Common Stock.
10.16 Employment Agreement between Inland and Bill I. Pennington dated effective as of February 1, 2001.
10.17 Stock Option Agreement between Inland and Bill I. Pennington dated effective as of February 1, 2001 representing 150,000 post-split shares of Common Stock.
10.18 Oil Purchase and Delivery Agreement dated November 7, 2000.
10.19 Common Stock Purchase Agreement dated August 2, 2001 by and between Inland Holdings, LLC ("Inland Holdings") and Hampton Investments LLC ("Hampton Investments")(without exhibits or schedules)(filed as Exhibit 10.1 to the Company's Current Report on Form 8-K dated August 2, 2001, and incorporated herein by reference).
10.20 Contribution Agreement dated August 2, 2001 by and among Park Hampton Holdings LLC ("Hampton Holdings"), Pengo Securities Corp. ("Pengo"), Smith Energy Partnership ("SEP"), the five individuals and Hampton Investments (filed as Exhibit 10.2 to the Company's Current Report on Form 8-K dated August 2, 2001, and incorporated herein by reference).
10.21 Series E Preferred Stock Purchase Agreement dated as of August 2, 2001 by and between Hampton Investments and Inland Holdings (without exhibits or schedules)(filed as Exhibit 10.3 to the Company's Current Report on Form 8-K dated August 2, 2001, and incorporated herein by reference).
10.22 Termination Agreement dated as of August 2, 2001 by and between Hampton Investments and Inland (without exhibits or schedules)(filed as Exhibit 10.4 to the Company's Current Report on Form 8-K dated August 2, 2001, and incorporated herein by reference).
10.23 Exchange and Note Issuance Agreement dated August 2, 2001 by and among Inland, Production and Inland Holdings (without exhibits or schedules)(filed as Exhibit 10.5 to the Company's Current Report on Form 8-K dated August 2, 2001, and incorporated herein by reference).
10.24 Termination Agreement dated as of August 2, 2001 by and among Inland and Inland Holdings (without exhibits or schedules)(filed as Exhibit 10.6 to the Company's Current Report on Form 8-K dated August 2, 2001, and incorporated herein by reference).
10.25 Amended and Restated Registration Rights Agreement dated as of August 2, 2001 by and among Inland, Inland Holdings and Hampton Investments (without exhibits or schedules)(filed as Exhibit 10.7 to the Company's Current Report on Form 8-K dated August 2, 2001, and incorporated herein by reference).
10.26 Amended and Restated Shareholders Agreement dated as of August 2, 2001 by and among Inland, Inland Holdings and Hampton Investments (without exhibits or schedules)(filed as Exhibit 10.8 to the Company's Current Report on Form 8-K dated August 2, 2001, and incorporated herein by reference).
10.27 Senior Subordinated Note Purchase Agreement dated as of August 2, 2001 by and among Inland, Production and SOLVation (without exhibits or schedules)(filed as Exhibit 10.9 to the Company's Current Report on Form 8-K dated August 2, 2001, and incorporated herein by reference).
10.28 Junior Subordinated Note Purchase Agreement dated as of August 2, 2001 by and among Inland, Production and SOLVation (without exhibits or schedules)(filed as Exhibit 10.10 to the Company's Current Report on Form 8-K dated August 2, 2001, and incorporated herein by reference).
*21.1 Subsidiaries of Inland.
*23.1 Consent of Arthur Andersen LLP.
*23.2 Consent of Ryder Scott Company, L.P.
*99.1 Letter to Securities and Exchange Commission dated March 26, 2002 concerning Arthur Andersen LLP.
* Filed herewith
(b) Reports on Form 8-K
None.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, Inland has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
INLAND RESOURCES INC. March 26, 2002 By: /s/ MARC MACALUSO -------------------------------------------- Marc MacAluso Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints Bill I. Pennington as his attorney-in-fact to sign on his behalf and in the capacity stated below and to file all amendments to this Annual Report, which amendment or amendments may make such changes and additions thereto as such attorney-in-fact may deem necessary or appropriate.
March 26, 2002 /s/ ARTHUR J. PASMAS Arthur J. Pasmas Chairman of the Board
March 26, 2002 /s/ MARC MACALUSO Marc MacAluso Director, Chief Executive Officer and Chief Operating Officer (Principal Executive Officer)
March 26, 2002 /s/ BILL I. PENNINGTON Bill I. Pennington Director, President and Chief Financial Officer (Principal Financial Officer)
March 26, 2002 /s/ BRUCE M. SCHNELWAR Bruce M. Schnelwar Director
March 26, 2002 /s/ DEWEY A. STRINGER III Dewey A. Stringer III Director
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Inland Resources Inc.:
We have audited the accompanying consolidated balance sheets of Inland Resources Inc. (a Washington corporation) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' deficit and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Inland Resources Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.
As explained in Note 3 to the consolidated financial statements, the Company changed its method of accounting for derivative instruments and hedging activities on January 1, 2001.
/S/ ARTHUR ANDERSEN LLP
Denver, Colorado, March 26, 2002.
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INLAND RESOURCES INC.
CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts)
The accompanying notes are an integral part of the consolidated balance sheets.
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INLAND RESOURCES INC.
CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts)
The accompanying notes are an integral part of the consolidated balance sheets.
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INLAND RESOURCES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
The accompanying notes are an integral part of the consolidated financial statements.
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INLAND RESOURCES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
The accompanying notes are an integral part of the consolidated financial statements.
INLAND RESOURCES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (In thousands, except share amounts)
The accompanying notes are an integral part of the consolidated financial statements.
INLAND RESOURCES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (See Note 10) (In thousands)
The accompanying notes are an integral part of the consolidated financial statements.
INLAND RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Business
Inland Resources Inc. ("Inland" or the "Company") is an independent energy company with substantially all of its producing oil and gas property interests located in the Monument Butte Field within the Uinta Basin of Northeastern Utah. During the period from December 31, 1997 to January 31, 2000, the Company also operated a crude oil refinery located in Woods Cross, Utah (the "Woods Cross Refinery"). The refinery had a processing capacity of approximately 10,000 barrels per day and tankage capacity of 485,000 barrels. On December 10, 1999, the Company's board of directors voted to sell the Woods Cross Refinery operations and a nonoperating refinery pursuant to a plan of dissolution. The sale of the Woods Cross Refinery and the nonoperating refinery closed on January 31, 2000. Certain current assets were excluded from the sale and were liquidated pursuant to the plan of dissolution in 2000.
Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All significant intercompany accounts and transactions of continuing operations have been eliminated in consolidation.
Reverse Split
On December 10, 1999, the Company's stockholders approved a 1-for-10 reverse stock split of the Company's common stock. The effect of the stock split was to lower the authorized common shares from 25,000,000 shares to 2,500,000 shares and reduce outstanding common shares from 23,093,689 shares to 2,309,441 shares. The stockholders further approved an increase in the number of post-split authorized shares from 2,500,000 shares to 25,000,000. Par value remained at $0.001 per common share. All per share disclosures including loss per share and weighted average common and common equivalent shares outstanding as reported on the consolidated balance sheet, consolidated statement of operations and consolidated statement of stockholders' deficit have been calculated based on post-reverse split share amounts.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The impact of oil and gas prices has a significant influence on estimates made by management. Changes in oil and gas prices and production rates directly affect the economics of estimated oil and gas reserves. These economics have significant effects upon predicted reserve quantities and valuations. These estimates are the basis for the calculation of depletion, depreciation and amortization for the Company's oil and gas properties and the need for an assessment as
to whether an impairment is required. Overall oil and gas pricing estimates factor into estimated future cash flow projections used in assessing impairment for the oil and gas properties.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and amounts due from banks and other investments with original maturities of less than three months.
Concentrations of Credit Risk
The Company regularly has cash held by a single financial institution, that exceeds depository insurance limits. The Company places such deposits with institutions that management believes are of high credit quality. The Company has not experienced any credit losses. Substantially all of the Company's receivables are within the oil and gas industry, primarily from its oil and gas purchasers and joint interest owners. Although diversified within many companies, collectibility is dependent upon the general economic conditions of the industry.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, trade receivables, trade payables, accrued liabilities, long-term debt and derivative instruments. The carrying value of cash and cash equivalents, trade receivables and trade payables are considered to be representative of their fair market value, due to the short maturity of these instruments. The fair value of variable interest rate long-term debt approximates fair value. The fixed rate debt is unique to the Company, as such, the fair value is not readily determinable. The estimated fair value of derivative contracts are estimated based on market conditions in effect at the end of each reporting period.
Inventories
Inventories consist of tubular goods valued at the lower of average cost or market. Materials and supplies inventories are stated at cost and are charged to capital or expense, as appropriate, when used.
Accounting for Oil and Gas Operations
The Company follows the successful efforts method of accounting for oil and gas operations. The use of this method results in the capitalization of those costs associated with the acquisition, exploration and development of properties that produce revenue or are anticipated to produce future revenue. The Company does not capitalize general and administrative expenses directly identifiable with such activities or lease operating expenses associated with secondary recovery startup projects. Costs of unsuccessful exploration efforts are expensed in the period it is determined that such costs are not recoverable through future revenues. Geological and geophysical costs are expensed as incurred. The cost of development wells are capitalized whether productive or nonproductive. Upon the sale of proved properties, the cost and accumulated depletion are removed from the accounts. Any gain or loss is recorded in the results of operations. Interest is capitalized during the drilling and completion period of wells and on other major projects.
The provision for depletion, depreciation and amortization of developed oil and gas properties is based on the units of production method. This method utilizes proved oil and gas reserves determined using market prices at the end of each reporting period. Dismantlement, restoration and abandonment costs are, in management's opinion, offset by residual values of lease and well equipment. As a result, no accrual for such costs is provided.
Impairment Review
The Company reviews and evaluates its long-lived assets for impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. An impairment loss is measured as the amount by which asset carrying value exceeds fair value. A calculation of the aggregate before-tax undiscounted future net revenues is performed for the oil and gas properties. The Company utilizes an estimated price scenario based on its budget and future estimates of oil and gas prices from industry projections and quoted futures prices. The assumptions used at December 31, 2001 were based on an average oil price of $16.84 per barrel and $2.23 per Mcf over the remaining estimated life of the properties.
The Company also periodically assesses unproved oil and gas properties for impairment. Impairment represents management's estimate of the decline in realizable value experienced during the period for leases not expected to be utilized by the Company.
In August 2001, SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" was issued. The statement established a single accounting model, based on the framework of SFAS No. 121 ("Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"), for the long-lived assets to be disposed of by sale. The statement was adopted on January 1, 2002 and the Company did not have any material impact upon adoption.
Property and Equipment
Property and equipment is recorded at cost. Replacements and major improvements are capitalized, while maintenance and repairs are charged to expense as incurred. Upon sale or retirement, the asset cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in operations. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets, generally ranging from three to thirty years. Maintenance and repairs are expensed as incurred. Major improvements are capitalized and the assets replaced are retired.
Income Taxes
The Company uses the liability method of accounting for income taxes. Under the liability method, deferred income taxes are recorded for differences between the book and tax basis of assets and liabilities at tax rates in effect when the balances are expected to reverse. A valuation allowance against deferred tax assets is recorded when the conclusion by Company management is reached that the tax benefits, based on available evidence, are not expected to be realized.
Revenue Recognition
Sales of crude oil and natural gas are recorded upon delivery to purchasers.
Loss Per Share
Net loss per share is presented for basic and diluted net loss and, if applicable, for net loss from discontinued operations and extraordinary losses. Basic earnings per share is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares for the period. The computation of diluted earnings per share includes the effects of additional common shares that would have been outstanding if potentially dilutive common shares had been issued. As the Company was in a net loss available to common stockholders position for each of the periods presented, all outstanding options were considered antidilutive.
Comprehensive Income (Loss)
In addition to net income (loss), comprehensive loss includes all changes in equity during a period, except those resulting from investments by and distributions to owners. Beginning January 1, 2001, with the adoption of SFAS No. 133, the portion of changes in fair value of derivative instruments that qualify or had qualified for cash flow hedges is included in accumulated comprehensive income (loss).
Recently Adopted Accounting Standards
In June 2001, SFAS No. 141 "Business Combination" and SFAS No. 142 "Goodwill and Other Intangible Assets" were issued, which requires all business combinations to be accounted for using the purchase method and also changes the treatment of goodwill created in a business combination to discontinue amortization of goodwill. The adoption of these two statements did not have an impact on the Company's financial position or results of operations.
Additionally, SFAS No. 143 "Accounting for Asset Retirement Obligations" was issued in July 2001. This standard requires entities to record the discounted fair value of a liability for an asset retirement obligation as a liability. When the liability is initially recorded, the entity capitalizes the cost by increasing the carrying amount of the related long-lived asset. The carrying amount of the liability is accreted to its full liability as interest expense, and the asset previously recorded is then depreciated over the estimated useful life. The present value of the retirement obligation is adjusted each reporting period. The Company has not yet determined the impact of adopting this statement, which will be required on January 1, 2003.
2. COMPREHENSIVE INCOME (LOSS):
Comprehensive loss of the Company for the year ended December 31, 2001 is as follows:
For years ended December 31, 2000 and 1999, comprehensive income (loss) was equal to net income (loss).
Reclassifications
Certain amounts in prior years have been reclassified to conform to the 2001 presentation.
3. 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 loss 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. The Company entered into all of its hedging contracts with Enron North America Corp. ("ENAC").
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133") was issued. This statement establishes accounting and reporting standards for derivative instruments and hedging activity. SFAS No. 133 requires recognition of all derivative instruments on the balance sheet as either assets or liabilities measured at fair value. Changes in the derivative's fair value are recognized currently in earnings unless specific hedge accounting criteria are met. Gains and losses on derivative hedging instruments must be recorded in either other comprehensive income or current earnings, depending on the nature and designation of the instrument. The impact of adopting SFAS No. 133 on January 1, 2001 resulted in recording a current liability of $1,927,000 and recording a cumulative effect of a change in accounting principle as accumulated comprehensive loss in the equity section of $1,972,000 and income recorded as a cumulative effect of a change in accounting principle of $45,000.
On December 2, 2001, ENAC filed for Chapter 11 bankruptcy . The ENAC bankruptcy caused a default on all of the Company's hedging contracts from November 2001 through September 30, 2003. The Company recorded a non-cash loss of $5.5 million to the statement of operations to reflect ineffectiveness of the derivative contracts following the filing of Chapter 11 bankruptcy of ENAC. The amount that had been deferred in accumulated other comprehensive income will be reclassified to earnings based on the originally scheduled settlement periods of the contracts. Non-cash amounts expected to be reclassified to earnings in 2002 and 2003 are $3,993,000 and $1,510,000, respectively. On January 30, 2002, the Company terminated all of its hedging contracts with ENAC and determined a potential bankruptcy claim against ENAC in excess of $7.5 million.
Crude Oil Hedging Activities
As mentioned above, the Company terminated all of its hedging contracts with ENAC on January 30, 2002 for the years 2002 and 2003.
During the year 2001, the Company hedged 990,000 net barrels of crude oil production under various collars and swaps from ENAC. The Company recorded a reduction of revenue of $2.9 million under these contracts upon settlement. During the year 2000, the Company hedged 720,000 net barrels of crude oil production under various collars from ENAC. The Company recorded a reduction of revenue of $6.1 million under these contracts. During the period April 1, 1999 to December 31, 1999, the Company hedged oil production under two contracts from ENAC. The contracts were structured as swaps covering 80,000 net barrels per month at an average strike price of $14.28. The Company recorded a reduction to revenue of $4.9 million under these contracts during 1999.
On March 11, 2002, the Company hedged 30,000 net barrels per month with Equiva Trading Company for the April 2002 to December 2002 period using a swap with a settlement amount of $23.90 per barrel.
4. LOSS PER SHARE:
The calculation of loss per share for the years ended December 31, 2001, 2000 and 1999 is as follows (in thousands, except per share data):
5. RESTRUCTURING TRANSACTIONS:
1999 Exchange Agreement
On September 21, 1999, the Company entered into an Exchange Agreement (the "Exchange Agreement") with Trust Company of the West and affiliated entities ("TCW") and Joint Energy Development Investments II Limited Partnership ("JEDI") pursuant to which TCW agreed to exchange certain indebtedness and warrants to purchase Common Stock, for shares of Common Stock and two new series of Preferred Stock of the Company, and JEDI agreed to exchange 100,000 shares of Series C Preferred Stock of the Company for shares of Common Stock and a third new series of Preferred Stock of the Company.
Pursuant to the Exchange Agreement, TCW agreed to exchange $75.0 million of subordinated indebtedness plus accrued interest of $5.7 million and warrants to purchase 15,852 shares of Common Stock for the following securities of the Company: (i) 10,757,747 shares of newly designated Series D Redeemable Preferred Stock of the Company ("Series D Preferred Stock"), (ii) 5,882,901 shares of newly designated Series Z Convertible Preferred Stock of the Company ("Series Z Preferred Stock") and (iii) 1,164,295 shares of Common Stock. On December 14, 1999, all shares of Series Z Preferred Stock were converted into 588,291 shares of Common Stock. In addition, JEDI agreed to exchange 100,000 shares ($10.0 million par value) of the Company's Series C Cumulative Convertible Preferred Stock ("Series C Preferred Stock") owned by JEDI, together with $2.2 million of accumulated dividends thereon, for (i) 121,973 shares of newly designated Series E Redeemable Preferred Stock of the Company ("Series E Preferred Stock") and (ii) 292,098 shares of Common Stock.
The Series D Preferred Stock accrued dividends at a rate of $0.16875 per share per quarter (9% annual rate) if paid in cash on a current basis or $0.2109375 per share per quarter (11.25% annual rate compounded quarterly) if accumulated and not paid on a current basis. No dividends were paid on Common Stock or any other series of preferred stock as there were accrued and unpaid dividends on the Series D Preferred Stock. The Series D Preferred Stock also had liquidation preference over all other classes and series of stock, in an amount equal to $7.50 per share ($80.7 million). The difference between the book value and the liquidation value of the Series D Preferred Stock at the exchange date ($20.2
million) was being accreted over the minimum redemption period beginning on April 1, 2002, and resulted in a charge against earnings available for common stockholders until it was exchanged on August 2, 2001 as discussed below.
The Series E Preferred Stock accrued dividends at a rate of $2.3125 per share per quarter (9.25% annual rate) if paid in cash on a current basis or $2.875 per share per quarter (11.5% annual rate compounded quarterly) if accumulated and not paid on a current basis. No dividends were paid on Common Stock as there were accrued and unpaid dividends on the Series E Preferred Stock. The Series E Preferred Stock also had liquidation preference over all other classes and series of stock, except the Series D Preferred Stock, in an amount equal to $100.00 per share ($12.2 million). The difference between the book value and the liquidation value of the Series E Preferred Stock at the exchange date ($4.2 million) was being accreted over the minimum redemption period to April 1, 2004, and resulted in a charge against earnings available for common stockholders until exchanged on August 2, 2001, as discussed below.
One of the conditions to closing the Exchange Agreement in 1999 was that Inland's senior lenders would enter into a restructuring of the senior credit facility acceptable to TCW, JEDI and the Company. As a result, effective as of September 21, 1999, the Company entered into the Second Amended and Restated Credit Agreement (the "Fortis Credit Agreement") whose current participants are Fortis Capital Corp. and U.S. Bank National Association (the "Senior Lenders") pursuant to which the Senior Lenders agreed to increase the borrowing base from $73.25 million to $83.5 million, inclusive of a sublimit for letters of credit of $4.0 million.
The Company also amended its Farmout Agreement with Smith Energy Partnership ("Smith") in conjunction with the financial restructuring on September 21, 1999. As a result of this Amendment, and the fact that the Company has no further obligations in relation to these properties, the production loan previously recorded by the Company was no longer considered outstanding. The $5.8 million gain recognized upon the removal of previously recorded account balances was charged directly to equity due to the related-party nature of the transaction. The Farmout Agreement continues to provide that Smith will reconvey all drillsites to the Company once Smith has recovered from production an amount equal to 100% of its expenditures, including management fees and production taxes, plus an additional sum equal to 18% per annum on such expended sums.
March 2001 Transaction
On March 20, 2001, Hampton Investments LLC ("Hampton") an affiliate of Smith Management LLC, 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, TCW owned at that time 1,752,586 shares of Common Stock, representing approximately 60.5% of the outstanding shares of Common Stock, and Hampton owned at that time 292,098 shares of Common Stock, representing approximately 10.1% of the outstanding shares of Common Stock. Various persons and entities that may be considered related to Hampton owned an additional 548,338 shares of Common Stock, so that together with Hampton such persons, entities and Hampton, owned an aggregate of 840,436 shares of Common Stock at the time of the March 2001 transaction.
August 2001 Transaction
On August 2, 2001, the Company closed two subordinated debt transactions totaling $10 million in aggregate with SOLVation Inc. ("SOLVation"), a company affiliated with Smith Management LLC, and entered into other restructuring transactions as described below. The first of the two debt transactions with SOLVation was the issuance of a $5 million unsecured senior subordinated note to SOLVation due July 1, 2007. The interest rate is 11% per annum compounded quarterly.
The Company also issued a second $5 million unsecured junior subordinated note to SOLVation. The interest rate is 11% per annum compounded quarterly. The maturity date is the earlier of (i) 120 days after payment in full of the TCW subordinated debt or (ii) March 31, 2010. Interest is payable in arrears in cash subject to the approval from the senior bank group and accumulates if not paid in cash.
In conjunction with the issuance of the two subordinated notes to SOLVation, the Series D Preferred and Series E Preferred stock held by Inland Holdings LLC, a company controlled by TCW were exchanged for an unsecured subordinated note due September 30, 2009 and $2 million in cash from the Company. The note amount was for $98,968,964 that represented the face value plus accrued dividends of the Series D Preferred stock as of August 2, 2001. The interest rate on this debt is 11% per annum compounded quarterly. 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 TCW, and the aggregate liquidation value of the Series D and Series E Preferred Stock plus accrued dividends, was recorded as an increase of $13,083,000 to additional paid-in capital.
As part of this restructuring, TCW also sold to Hampton 1,455,390 shares of common stock in the Company held by TCW (consequently, Hampton now controls approximately 80% of the issued and outstanding shares of the Company), 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. However, TCW 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 TCW that Hampton will have the right to appoint at least two members to the Board.
6. DISCONTINUED OPERATIONS:
Pursuant to a decision by the Company's Board of Directors on December 10, 1999 to dispose of the Company's refinery operations, 100% of the stock in Inland Refining, Inc., a wholly owned subsidiary, was sold on January 31, 2000 to Silver Eagle Refining, Inc. ("Silver Eagle"). This subsidiary owned the Woods Cross Refinery and a nonoperating refinery located in Roosevelt, Utah. The Woods Cross Refinery was originally purchased on December 31, 1997 for $22.9 million and the Roosevelt refinery was originally purchased on September 16, 1998 for $2.25 million. The sales price was $500,000 together with the assumption by Silver Eagle of refinery assets, liabilities and obligations including all environmental related liabilities. Prior to the sale, the Company transferred the existing inventory, cash, accounts receivable and a note receivable to another wholly owned subsidiary of the Company. This subsidiary also agreed to satisfy various accounts payable and accrued liabilities not assumed by Silver Eagle. These assets and liabilities were disposed of during 2000.
As a result of this sale, the Company is no longer involved in the refining of crude oil or the sale of refined products. As a result, all refining operations have been classified as discontinued operations in the accompanying consolidated financial statements. To account for the sale, the Company recorded a loss on sale of discontinued operations of $14.5 million at December 31, 1999. The Company recorded an additional loss of $250,000 to reflect adjustments to the final disposal costs associated with the refinery. In addition, certain prior year amounts were reclassified as discontinued operations, with no net effect on net loss or accumulated deficit as previously reported. Revenue from discontinued operations was $70.3 million during the year ended December 31, 1999.
7. OTHER PROPERTY AND EQUIPMENT:
8. LONG-TERM DEBT (See Note 5):
Fortis Credit Agreement
Effective September 21, 1999, the Company entered into a credit agreement (the "Fortis Credit Agreement") whose current participants are Fortis Capital Corp. and U.S. Bank National Association (the "Senior Lenders").
In conjunction with the August 2, 2001 SOLVation financing, the Senior Lenders amended the Fortis Credit Agreement 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 London Interbank Offering Rate ("LIBOR") rate. The LIBOR rates will be determined by the senior debt to EBITDA ratios starting August 2, 2001. If the senior debt to EBITDA ratio is greater than 4.00 to 1.00, the rate is 3.25% above the LIBOR rate; if the senior debt to EBITDA ratio is equal to or less than 4.00 to 1.00 but greater than 3.00 to 1.00, the rate is 2.75% above the LIBOR rate; if the senior debt to EBITDA ratio is less than 3.00 to 1.00, the rate is 2.25% above the LIBOR rate. As of December 31, 2001, $83 million and $500,000 were borrowed under the LIBOR option at interest rates of 6.27% and 4.65%, respectively. The revolving termination date is June 30, 2004 at which time the loan converts into a term loan payable in 12 equal quarterly installments of principal, with accrued interest, beginning September 30, 2004. The Fortis Credit Agreement 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 borrowing base is calculated as the collateral value of proved reserves. The borrowing base is subject to ongoing redeterminations on or before March 31, 2002 and with subsequent determinations to be made on each subsequent October 1 and April 1. The April 1, 2002 determination was received on March 26, 2002 and was $83.5 million. If the borrowing base is lower than the outstanding principal balance then drawn, the Company must immediately pay the difference. The Company was in compliance of its bank covenants as December 31, 2001. The Fortis Credit Agreement is secured by a first lien on substantially all assets of the Company. At December 31, 2001, the Company had advanced all funds under its current borrowing base of $83.5 million. The Fortis Credit Agreement was amended on March 25, 2002.
Subordinated Unsecured Debt to SOLVation Inc.
As discussed in Note 5, on August 2, 2001, the Company closed two subordinated debt transactions totaling $10 million in aggregate with SOLVation Inc. The first of the two debt transactions with SOLVation was the issuance of a $5 million unsecured senior subordinated note to SOLVation due July 1, 2007. The interest rate is 11% per annum compounded quarterly. The interest payment is payable in arrears in cash subject to the approval from the senior bank group and accumulates if not paid in cash. The Company is not required to make any principal payments prior to the July 1, 2007 maturity date. However, the Company is required to make payments of principal and interest in the same amounts as any principal payment or interest payments on the TCW subordinated debt (described below). Prior to the July 1, 2007 maturity date, subject to the bank subordination agreement, the Company may prepay the senior subordinated note in whole or in part with no penalty.
The Company also issued a second $5 million unsecured junior subordinated note to SOLVation. The interest rate is 11% per annum compounded quarterly. The maturity date is the earlier of (i) 120 days after payment in full of the TCW subordinated debt or (ii) March 31, 2010. Interest is payable in arrears in cash subject to the approval from the senior bank group and accumulates if not paid in cash. The Company is not required to make any principal payments prior to the March 31, 2010 maturity date. Prior to the March 31, 2010 maturity date, subject to both bank and subordination agreements, the Company may prepay the junior subordinated note in whole or in part with no penalty. A portion of the proceeds from the senior and junior subordinated notes was used to fund a $2 million payment to TCW and other Company working capital needs.
Subordinated Unsecured Debt to TCW
As discussed in Note 5, in conjunction with the issuance of the two subordinated notes to SOLVation, the Series D Preferred and Series E Preferred stock held by Inland Holdings LLC, a company controlled by TCW, were exchanged for an unsecured subordinated note due September 30, 2009 and $2 million in cash from the Company. The note amount was for $98,968,964 that represented the face value plus accrued dividends of the Series D Preferred stock as of August 2, 2001. The interest rate is 11% per annum compounded quarterly. Interest shall be payable in arrears in cash subject to the approval from the senior bank group and accumulates if not paid in cash. Interest payments will be made quarterly, commencing on the earlier of September 30, 2005 or the end of the first calendar quarter after the senior bank debt has been reduced to $40 million or less, subject to both bank and senior subordination agreements. Beginning the earlier of two years prior to the maturity date or the first December 30 after the repayment in full of the senior bank debt, subject to both bank and senior subordination agreements, the Company will make equal annual principal payments of one third of the aggregate principal amount of the TCW subordinated note. Any unpaid principal or interest amounts are due in full on the September 30, 2009 maturity date. Prior to the September 30, 2009 maturity date, subject to both bank and senior subordination agreements, the Company may prepay the TCW subordinated note in whole or in part with no penalty.
A summary of the Company's long-term debt (including accrued unpaid interest) follows (in thousands):
9. INCOME TAXES:
In 2001, 2000 and 1999, no income tax provision or benefit was recognized due to the effect of net operating losses and the recording of a valuation allowance against portions of the deferred tax assets that did not meet the utilization criteria of more likely than not. Deferred income taxes reflect the impact of temporary differences between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. The tax effect of the temporary differences and carryforwards giving rise to the Company's deferred tax assets and liabilities at December 31, 2001 and 2000 is as follows (in thousands):
A valuation allowance is to be provided if it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Company's ability to realize the benefit of its tax assets depends on the generation of future taxable income through profitable operations and expansion of the Company's oil and gas producing properties. The market, capital and environmental risks associated with that growth requirement caused the Company to conclude that a valuation allowance should be provided, except to the extent that the benefit of operating loss carryforwards can be used to offset future reversals of existing deferred tax liabilities. The Company will continue to monitor the need for the valuation allowance that has been provided.
Income tax expense for 2001, 2000 and 1999 differed from amounts computed by applying the statutory federal income tax rate as follows (in thousands):
No state or federal income taxes are payable at December 31, 2001 or 2000, and the Company did not pay any income taxes in 2001, 2000 or 1999. At December 31, 2001, the Company had tax basis net operating loss carryforwards available to offset future regular and alternative taxable income of $86 million that expire from 2002 to 2021. Utilization of the net operating loss carryforwards are limited under the change of ownership tax rules.
10. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest during 2001, 2000 and 1999 was approximately $6,428,000, $7,857,000 and $6,112,000, respectively.
As a result of the restructuring discussed in Note 5, the Company converted Preferred Stock to debt in the amount of $98,968,964, during 2001.
In 2000, the Company sold surface land to a former officer of the Company for the assumption of a note payable of $167,000, by the former officer, that had previously been recorded on the Company's financial statements.
As part of the Smith Farmout restructuring described in Note 5, the following accounts were impacted in 1999:
11. COMMITMENTS AND CONTINGENCIES:
Lease Commitments
The Company leases 16,500 square feet of office space under a noncancellable operating lease that expires in 2002. Future payments under this lease are estimated at $300,000 for 2002. Total lease expense during 2001, 2000 and 1999 was $299,000, $300,000 and $264,000, respectively.
401(k) Plan
The Company provides a voluntary 401(k) employee savings plan which covers all full-time employees who meet certain eligibility requirements. Voluntary contributions are made to the 401(k) plan by participants. In addition, the Company matches 100% of the first 6% of salary contributed by each employee. During the period January 1, 1999 to September 30, 1999, the Company match was reduced to 100% of the first 2% of salary contributed. Matching contributions of $224,000, $191,000 and $104,000 were made by the Company during 2001, 2000 and 1999, respectively.
Legal Proceedings
The Company is from time to time involved in various legal proceedings characterized as normally incidental to the business. Management believes its defenses to any existing litigation will be meritorious and any adverse decisions in any pending or threatened proceedings or any amounts which it may be required to pay by reason thereof will not have a material adverse effect on its financial condition or results of operations.
Consulting and Employment Agreements
The Company entered into a consulting agreement on September 21, 1999 with a former director of the Company that was also an officer of Smith Management pursuant to which this individual will receive $200,000 annually, paid in equal monthly installments for consulting services to be provided to the Company until September 21, 2002. The consulting agreement was terminated as part of the SOLVation transaction as described in Note 5.
The Company has employment agreement with certain employees of the Company which provide for payment to the employees upon termination following a change in control.
12. STOCK OPTIONS:
1988 Stock Option Plan
On August 25, 1988, the Company's Board of Directors adopted an incentive stock option plan (the "1988 Plan") for the benefit of key employees and directors of the Company. A total of 21,280 shares of common stock are reserved for issuance under the 1988 Plan. All options under the 1988 Plan are granted, exercisable and expire 10 years from the date of grant.
1997 Stock Option Plan
On April 30, 1997, the Company's Board of Directors adopted an incentive stock option plan (the "1997 Plan") for the benefit of key employees and directors of the Company. Options under the 1997 Plan vest based upon the determination made by the Company's Compensation Committee at the time of grant, and expire 10 years from the date of grant. The Company reserved 50,000 shares for grant under the 1997 Plan of which 41,850 options were granted through December 31, 2001 at prices equal to the market
value of the Company's stock on the date of grant. All granted options are vested. There are 8,150 shares available for grant as of December 31, 2001.
A summary of option grants, exercises and average prices under both the 1988 Plan and the 1997 Plan is presented below:
Non-Plan Grants
From time to time the Company grants nonqualified ("Non-Plan") options to purchase common stock to its executive officers. The grants have vesting periods of three to five years. These grants were made at fair value. The grants' lives are six to eight years. The table below summarizes the activities associated with these grants to executive officers:
The following table summarizes information for options outstanding as of December 31, 2001 for all Plan and Non-Plan options.
All options cancelled and reissued are subject to the criteria of the FASB Interpretation No. 44 "Accounting for Certain Transactions Involving Stock Compensation - an Interpretation of APB Opinion No. 25" ("FIN 44"). In 1999, 33,500 options were cancelled and reissued at market price. These options are being accounted for as a variable option grant based on the market price on July 1, 2000. These options have been marked-to-market with gains and losses recorded in income for each reporting period subsequent to July 1, 2000 to the extent there are increases in the Company's stock price above the market rate value of the stock on July 1, 2000. There was no adjustment made for these options in the years ended December 31, 2001 and 2000 as the stock price has not exceeded the stock price in effect on July 1, 2000. During 2001, 116,700 Non-Plan options at an exercise price of $9.38 were cancelled and 300,000 new Non-Plan options were granted. The grant price for the new options was $1.63 for 180,000 and $2.84 for 120,000. These options are accounted for as variable option grants. There were no adjustments made for these options in the year ended December 31, 2001, as the market rate of the Company's stock has not exceeded the grant price of the options.
The Company has elected to account for grants of 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 Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the Company's net loss and loss per share ("LPS") would have been the following pro forma amounts (in thousands, except per share data):
The pro forma adjustments are calculated using an estimate of the fair value of each option on the date of grant. The options granted in 2001 and 1999 were estimated using the following weighted average assumptions. No options were granted during 2000.
13. OIL AND GAS PRODUCING ACTIVITIES:
Major Customers
Sales to the following companies represented 10% or more of the Company's revenues, not including effects of hedging, (in thousands):
Cost Incurred in Oil and Gas Producing Activities (in thousands):
Net Capital Costs
Net capitalized costs related to the Company's oil and gas producing activities are summarized as follows (in thousands):
Standardized Measure of Discounted Future Net Cash Flows (Unaudited)
SFAS No. 69 "Disclosures about Oil and Gas Producing Activities" ("SFAS No. 69") prescribes guidelines for computing a standardized measure of future net cash flow and changes therein relating to estimated proved reserves. The Company has followed these guidelines which are briefly discussed below.
Future cash inflows and future production and development costs are determined by applying yearend prices and costs to the estimated quantities of oil and gas to be produced. Estimated future income taxes are computed using current statutory income tax rates including consideration for estimated future statutory depletion. The resulting future net cash flows are reduced to present value amounts by applying a 10% ("PV10%") annual discount factor.
The assumptions used to compute the standardized measure are those prescribed by the Financial Accounting Standards Board and, as such, do not necessarily reflect the Company's expectations of actual revenues to be derived from those reserves nor their present worth. The limitations inherent in the reserve quantity estimation process are equally applicable to the standardized measure computations since these estimates are the basis for the valuation process.
The following summary sets forth the Company's future net cash flows relating to proved oil and gas reserves based on the standardized measure prescribed in SFAS No. 69 (in thousands):
The principal sources of changes in the standardized measure of discounted future net cash flows are as follows for the years ended December 31, 2001, 2000 and 1999 (in thousands):
Oil and Gas Reserve Quantities (Unaudited)
The reserve information presented below is based upon reports prepared by the Company's in-house petroleum engineer. The independent petroleum engineering firm of Ryder Scott Company, L.P. reviewed 80% of the PV10% value of the reserves. The Company emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise than those of producing oil and gas properties. As a result, revisions to previous estimates are expected to occur as additional production data becomes available or economic factors change.
Proved oil and gas reserves are estimated quantities of crude oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed oil and gas reserves are those expected to be recovered through existing wells with existing equipment and operating methods. The fluctuation of oil and gas prices has a significant impact on the standardized measure. Future increases or decreases in oil or gas prices increase or decrease the value of the standardized measure accordingly. As of December 31, 2001, the Company used prices of $16.84 per Bbl and $2.23 per Mcf which is reflective of the market price at yearend. Prices used by the Company in 2000 were $23.78 per Bbl and $7.73 per Mcf. Prices used by the Company in 1999 were $21.56 per Bbl and $1.83 per Mcf.
Presented below is a summary of the changes in estimated proved reserves of the Company, all of which are located in the United States, for the years ended December 31, 2001, 2000 and 1999:
14. QUARTERLY EARNINGS (UNAUDITED):
Summarized unaudited quarterly financial data for 2001 and 2000 is as follows (in thousands, except per share data):
(1) Operating income and net income for the quarter ended March 31, 2001 were adjusted for the reversal of a non-cash charge related to the stock option repricing discussed in Note 12.
(2) Includes a non-cash loss of $5.5 million related to the loss of effectiveness of derivative contracts following the filing of Chapter 11 bankruptcy of ENAC, as discussed in Note 3.
15. SUBSEQUENT EVENT (UNAUDITED):
On March 22, 2002, Questar Pipeline Company ("QPC") curtailed all gas producers in the Monument Butte Field, including Inland, for not meeting certain QPC specifications. After curtailment, Inland is producing and transporting approximately 50% of its total gas capacity. The Company is in the process of installing a gas liquid plant in the Field that would bring all of its gas up to QPC's pipeline specifications. The gas liquid plant will be operational in approximately 60 days. The Company believes that the current gas curtailment is not significant to the Company's operations.
Exhibit Index
Item Number Description - ------ -----------
2.1 Agreement and Plan of Merger between Inland Resources Inc. ("Inland"), IRI Acquisition Corp. and Lomax Exploration Company (exclusive of all exhibits) (filed as Exhibit 2.1 to Inland's Registration Statement on Form S-4, Registration No. 33-80392, and incorporated herein by this reference).
3.1 Amended and Restated Articles of Incorporation, as amended through December 14, 1999 (filed as Exhibit 3.1 to Inland's Current Report on Form 8-K dated September 21, 1999, and incorporated herein by reference).
3.2 By-Laws of Inland (filed as Exhibit 3.2 to Inland's Registration Statement on Form S-18, Registration No. 33-11870-F, and incorporated herein by reference).
3.2.1 Amendment to Article IV, Section 1 of the Bylaws of Inland adopted February 23, 1993 (filed as Exhibit 3.2.1 to Inland's Annual Report on Form 10-K for the year ended December 31, 1992, and incorporated herein by reference).
3.2.2 Amendment to the Bylaws of Inland adopted April 8, 1994 (filed as Exhibit 3.2.2 to Inland's Registration Statement on Form S-4, Registration No. 33-80392, and incorporated herein by reference).
3.2.3 Amendment to the Bylaws of Inland adopted April 27, 1994 (filed as Exhibit 3.2.3 to Inland's Registration Statement on Form S-4, Registration No. 33-80392, and incorporated herein by reference).
4.1 Credit Agreement dated September 23, 1997 between Inland Production Company ("IPC"), Inland, ING (U.S.) Capital Corporation, as Agent, and Certain Financial Institutions, as banks (filed as Exhibit 4.1 to Inland's Current Report on Form 8-K dated September 23, 1997, and incorporated herein by reference).
4.1.1 Third Amendment to Credit Agreement entered into as of April 22, 1998, amending Exhibit 4.1 (filed as Exhibit 4.1.1 to Inland's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, and incorporated herein by reference).
4.1.2 Amended and Restated Credit Agreement dated as of September 11, 1998 amending and restating Exhibit 4.1 (filed as Exhibit 4.1.2 to Inland's Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated herein by reference).
4.1.3 First Amendment to Amended and Restated Credit Agreement dated as of March 5, 1999 amending Exhibit 4.1.2 (filed as Exhibit 4.1.3 to Inland's Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated herein by reference).
4.1.4 Second Amended and Restated Credit Agreement dated September 15, 1999, but effective as of September 21, 1999, amending and restating Exhibit 4.1 (without exhibits or schedules) (filed as Exhibit 4.1 to Inland's Current Report on Form 8-K dated September 21, 1999, and incorporated herein by reference).
4.2 Credit Agreement dated September 23, 1997, among IPC, Inland, Trust Company of the West, and TCW Asset Management Company, in the capacities described therein (filed as Exhibit 4.2 to Inland's Current Report on Form 8-K dated September 23, 1997, and incorporated herein by reference).
4.2.1 Second Amendment to Credit Agreement entered into as of April 22, 1998, amending Exhibit 4.2 (filed as Exhibit 4.2.1 to Inland's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, and incorporated herein by reference).
4.2.2 Amended and Restated Credit Agreement dated as of September 11, 1998, amending and restating Exhibit 4.2 (filed as Exhibit 4.2.2 to Inland's Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated herein by reference).
4.2.3 First Amendment to Amended and Restated Credit Agreement dated as of March 5, 1999, amending Exhibit 4.2.2 (filed as Exhibit 4.2.3 to Inland's Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated herein by reference).
4.2.4 Exchange Agreement dated as of September 21, 1999 by and between Inland, IPC, Refining, Trust Company of the West, a California trust company, as Sub-Custodian for Mellon Bank for the benefit of Account No. CPFF 873-3032, Inland Holdings LLC, TCW Portfolio No. 1555 DR V Sub-Custody Partnership, L.P. and Joint Energy Development Investments II Limited Partnership (without exhibits or schedules), terminating Exhibits 4.2 and 4.3, as previously amended, and Exhibits 4.4, 4.5, 10.10 and 10.11 (filed as Exhibit 10.1 to Inland's Current Report on Form 8-K dated September 21, 1999, and incorporated herein by reference).
4.3 Intercreditor Agreement dated September 23, 1997, between IPC, TCW Asset Management Company, Trust Company of the West and ING (U.S.) Capital Corporation (filed as Exhibit 4.3 to Inland's Current Report on Form 8-K dated September 23, 1997, and incorporated herein by reference).
4.3.1 Third Amendment to Intercreditor Agreement entered into as of April 22, 1998, amending Exhibit 4.3 (filed as Exhibit 4.3.1 to Inland?s Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, and incorporated herein by reference).
4.3.2 Amended and Restated Intercreditor Agreement dated as of September 11, 1998, amending and restating Exhibit 4.3 (filed as Exhibit 4.3.2 to Inland's Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated herein by reference).
4.3.3 First Amendment to Amended and Restated Intercreditor Agreement dated as of March 5, 1999, amending Exhibit 4.3.2 (filed as Exhibit 4.3.3 to Inland's Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated herein by reference).
4.4 Warrant Agreement by and between Inland and TCW Portfolio No. 1555 DR V Sub-Custody Partnership, L.P. dated September 23, 1997 (filed as Exhibit 4.4 to
Inland's Current Report on Form 8-K dated September 23, 1997, and incorporated herein by reference).
4.5 Warrant issued by Inland pursuant to the Warrant Agreement, dated September 23, 1997, representing the right to purchase 100,000 shares of Inland's Common Stock (filed as Exhibit 4.5 to Inland's Current Report on Form 8-K dated September 23, 1997, and incorporated herein by reference). 10.1 1988 Option Plan of Inland Gold and Silver Corp. (filed as Exhibit 10(15) to Inland's Annual Report on Form 10-K for the year ended December 31, 1988, and incorporated herein by reference).
10.1.1 Amended 1988 Option Plan of Inland Gold and Silver Corp. (filed as Exhibit 10.10.1 to Inland's Annual Report on Form 10-K for the year ended December 31, 1992, and incorporated herein by reference).
10.1.2 Amended 1988 Option Plan of Inland, as amended through August 29, 1994 (including amendments increasing the number of shares to 212,800 and changing "formula award") (filed as Exhibit 10.1.2 to Inland's Annual Report on Form 10-KSB for the year ended December 31, 1994, and incorporated herein by reference).
10.1.3 Automatic Adjustment to Number of Shares Covered by Amended 1988 Option Plan executed effective June 3, 1996 (filed as Exhibit 10.1 to Inland's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1996, and incorporated herein by reference).
10.2 Letter agreement dated October 30, 1996 between Inland and Johnson Water District (filed as Exhibit 10.41 to Inland's Annual Report on Form 10-KSB for the year ended December 31, 1996, and incorporated herein by reference).
10.3 Interest Rate Cap Agreement dated April 30, 1998 between IPC and Enron Capital and Trade Resources Corp. (filed as Exhibit 10.4 to Inland?s Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, and incorporated herein by reference).
10.4 Farmout Agreement between Inland and Smith Management LLC dated effective as of June 1, 1998 (filed as Exhibit 10.1 to Inland?s Current Report on Form 8-K dated June 1, 1998, and incorporated herein by reference).
10.5 Warrant Agreement dated as of March 5, 1999 between Inland Resources Inc. and TCW Portfolio No. 1555 DR V Sub-Custody Partnership, L.P. (filed as Exhibit 10.20 to Inland's Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated herein by reference).
10.6 Warrant Certificate dated March 5, 1999 between Inland and TCW Portfolio No. 1555 DR V Sub-Custody Partnership, L.P. representing 5,852 shares (filed as Exhibit 10.21 to Inland's Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated herein by reference).
10.7 Shareholders Agreement dated as of September 21, 1999 between Inland, Holdings, Fund V, JEDI and Pengo Securities Corp., Smith Energy Partnership, Randall D. Smith, Jeffrey A. Smith, Barbara Stovall Smith, John W. Adams and Arthur J. Pasmas (collectively, the "Smith Group") (filed as Exhibit 10.2 to Inland's Current Report on Form 8-K dated September 21, 1999, and incorporated herein by reference).
10.8 Registration Rights Agreement dated as of September 21, 1999 between Inland, Holdings, Portfolio, JEDI and the Smith Group filed as Exhibit 10.3 to Inland's Current Report on Form 8-K dated September 21, 1999, and (incorporated herein by reference).
10.9 Severance Agreement between Inland and John E. Dyer dated November 18, 1999 (filed as Exhibit 10.13 to Inland?s Annual Report on Form 10-K for the year ended December 31, 1999, and incorporated herein by reference).
10.10 Employment Agreement between Inland and William T. War dated effective as of October 1, 1999 (filed as Exhibit 10.14 to Inland?s Annual Report on Form 10-K for the year ended December 31, 1999, and incorporated herein by reference).
10.11 Stock Option Agreement between Inland and William T. War dated October 1, 1999 10.11 representing 25,000 post-split shares of Common Stock (filed as Exhibit 10.15 to Inland?s Annual Report on Form 10-K for the year ended December 31, 1999, and incorporated herein by reference).
10.12 Amendment to Employment Agreement between Inland and William T. War, amending the Employment Agreement filed as Exhibit 10.10.
10.13 Employment Agreement between Inland and Michael J. Stevens dated effective as of February 1, 2001.
10.14 Employment Agreement between Inland and Marc MacAluso dated effective as of February 1, 2001.
10.15 Stock Option Agreement between Inland and Marc MacAluso dated effective as of February 1, 2001 representing 150,000 post-split shares of Common Stock.
10.16 Employment Agreement between Inland and Bill I. Pennington dated effective as of February 1, 2001.
10.17 Stock Option Agreement between Inland and Bill I. Pennington dated effective as of February 1, 2001 representing 150,000 post-split shares of Common Stock.
10.18 Oil Purchase and Delivery Agreement dated November 7, 2000.
10.19 Common Stock Purchase Agreement dated August 2, 2001 by and between Inland Holdings, LLC ("Inland Holdings") and Hampton Investments LLC ("Hampton Investments")(without exhibits or schedules)(filed as Exhibit 10.1 to the Company's Current Report on Form 8-K dated August 2, 2001, and incorporated herein by reference).
10.20 Contribution Agreement dated August 2, 2001 by and among Park Hampton Holdings LLC ("Hampton Holdings"), Pengo Securities Corp. ("Pengo"), Smith Energy Partnership ("SEP"), the five individuals and Hampton Investments (filed as Exhibit 10.2 to the Company's Current Report on Form 8-K dated August 2, 2001, and incorporated herein by reference).
10.21 Series E Preferred Stock Purchase Agreement dated as of August 2, 2001 by and between Hampton Investments and Inland Holdings (without exhibits or schedules)(filed as Exhibit 10.3 to the Company's Current Report on Form 8-K dated August 2, 2001, and incorporated herein by reference).
10.22 Termination Agreement dated as of August 2, 2001 by and between Hampton Investments and Inland (without exhibits or schedules)(filed as Exhibit 10.4 to the Company's Current Report on Form 8-K dated August 2, 2001, and incorporated herein by reference).
10.23 Exchange and Note Issuance Agreement dated August 2, 2001 by and among Inland, Production and Inland Holdings (without exhibits or schedules)(filed as Exhibit 10.5 to the Company's Current Report on Form 8-K dated August 2, 2001, and incorporated herein by reference).
10.24 Termination Agreement dated as of August 2, 2001 by and among Inland and Inland Holdings (without exhibits or schedules)(filed as Exhibit 10.6 to the Company's Current Report on Form 8-K dated August 2, 2001, and incorporated herein by reference).
10.25 Amended and Restated Registration Rights Agreement dated as of August 2, 2001 by and among Inland, Inland Holdings and Hampton Investments (without exhibits or schedules)(filed as Exhibit 10.7 to the Company's Current Report on Form 8-K dated August 2, 2001, and incorporated herein by reference).
10.26 Amended and Restated Shareholders Agreement dated as of August 2, 2001 by and among Inland, Inland Holdings and Hampton Investments (without exhibits or schedules)(filed as Exhibit 10.8 to the Company's Current Report on Form 8-K dated August 2, 2001, and incorporated herein by reference).
10.27 Senior Subordinated Note Purchase Agreement dated as of August 2, 2001 by and among Inland, Production and SOLVation (without exhibits or schedules)(filed as Exhibit 10.9 to the Company's Current Report on Form 8-K dated August 2, 2001, and incorporated herein by reference).
10.28 Junior Subordinated Note Purchase Agreement dated as of August 2, 2001 by and among Inland, Production and SOLVation (without exhibits or schedules)(filed as Exhibit 10.10 to the Company's Current Report on Form 8-K dated August 2, 2001, and incorporated herein by reference).
*21.1 Subsidiaries of Inland.
*23.1 Consent of Arthur Andersen LLP.
*23.2 Consent of Ryder Scott Company Petroleum Engineers.
*99.1 Letter to Securities and Exchange Commission dated March 26, 2002 concerning Arthur Andersen LLP.
* Filed herewith