UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
SCHEDULE 13D
Under the Securities Exchange Act of 1934
(Amendment No. 8)
-----------------------
INLAND RESOURCES INC.
(Name of Issuer)
COMMON STOCK, PAR VALUE $.001
(Title of Class of Securities)
90336P100
(CUSIP Number)
DAVID A. PERSING
885 THIRD AVENUE
NEW YORK, NEW YORK 10022
TEL. NO.: (212) 888-5500
(Name, Address and Telephone Number of
Person Authorized to Receive Notices
and Communications)
-----------------------
July 21, 1997
(Date of Event which Requires Filing
of this Statement)
If the filing person has previously filed a statement on Schedule 13G to report
the acquisition which is the subject of this Schedule 13D, and is filing this
schedule because of Rule 13d-1(e), 1(f) or 1(g), check the following box [ ].
Note: Schedules filed in paper format shall include a signed original and five
copies of the schedule, including all exhibits. See Rule 13d-1(a) for other
parties to whom copies are to be sent.
* The remainder of this cover page shall be filled out for a reporting person's
initial filing on this form with respect to the subject class of securities, and
for any subsequent amendment containing information which would alter
disclosures provided in a prior cover page.
The information required on the remainder of this cover page shall not be deemed
to be "filed" for the purpose of Section 18 of the Securities Exchange Act of
1934 ("Act") or otherwise subject to the liabilities of that section of the Act
but shall be subject to all other provisions of the Act (however, see the
Notes).
<PAGE>
90336P100 Page 2 of 22 Pages
1 NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Pengo Industries Inc.
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (A) [X]
(B) [ ]
3 SEC USE ONLY
4 SOURCE OF FUNDS
N.A.
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO
ITEMS 2(d) or 2(e) [ ]
6 CITIZENSHIP OR PLACE OF ORGANIZATION
Texas
7 SOLE VOTING POWER
NUMBER OF 4,129,269
SHARES
BENEFICIALLY OWNED 8 SHARED VOTING POWER
BY EACH REPORTING
PERSON -0-
WITH
9 SOLE DISPOSITIVE POWER
4,129,269
10 SHARED DISPOSITIVE POWER
-0-
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
4,129,269
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN
SHARES [ ]
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
49.4%
14 TYPE OF REPORTING PERSON
CO
<PAGE>
90336P100 Page 3 of 22 Pages
1 NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Pengo Securities Corp.
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (A) [X]
(B) [ ]
3 SEC USE ONLY
4 SOURCE OF FUNDS
WC
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO
ITEMS 2(d) or 2(e) [ ]
6 CITIZENSHIP OR PLACE OF ORGANIZATION
New York
7 SOLE VOTING POWER
NUMBER OF 4,129,269
SHARES
BENEFICIALLY OWNED 8 SHARED VOTING POWER
BY EACH REPORTING
PERSON -0-
WITH
9 SOLE DISPOSITIVE POWER
4,129,269
10 SHARED DISPOSITIVE POWER
-0-
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
4,129,269
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN
SHARES [ ]
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
49.4%
14 TYPE OF REPORTING PERSON
CO
<PAGE>
90336P100 Page 4 of 22 Pages
1 NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Randall D. Smith
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (A) [X]
(B) [ ]
3 SEC USE ONLY
4 SOURCE OF FUNDS
PF
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO
ITEMS 2(d) or 2(e) [ ]
6 CITIZENSHIP OR PLACE OF ORGANIZATION
New York
7 SOLE VOTING POWER
NUMBER OF 982,410
SHARES
BENEFICIALLY OWNED 8 SHARED VOTING POWER
BY EACH REPORTING
PERSON -0-
WITH
9 SOLE DISPOSITIVE POWER
982,410
10 SHARED DISPOSITIVE POWER
-0-
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
982,410
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN
SHARES [ ]
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
11.8%
14 TYPE OF REPORTING PERSON
IN
<PAGE>
90336P100 Page 5 of 22 Pages
1 NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
John W. Adams
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (A) [X]
(B) [ ]
3 SEC USE ONLY
4 SOURCE OF FUNDS
PF
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO
ITEMS 2(d) or 2(e) [ ]
6 CITIZENSHIP OR PLACE OF ORGANIZATION
New Jersey
7 SOLE VOTING POWER
NUMBER OF 163,735
SHARES
BENEFICIALLY OWNED 8 SHARED VOTING POWER
BY EACH REPORTING
PERSON -0-
WITH
9 SOLE DISPOSITIVE POWER
163,735
10 SHARED DISPOSITIVE POWER
-0-
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
163,735
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN
SHARES [ ]
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
2.0%
14 TYPE OF REPORTING PERSON
IN
<PAGE>
90336P100 Page 6 of 22 Pages
1 NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Jeffrey A. Smith
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (A) [X]
(B) [ ]
3 SEC USE ONLY
4 SOURCE OF FUNDS
PF
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO
ITEMS 2(d) or 2(e) [ ]
6 CITIZENSHIP OR PLACE OF ORGANIZATION
Texas
7 SOLE VOTING POWER
NUMBER OF 163,735
SHARES
BENEFICIALLY OWNED 8 SHARED VOTING POWER
BY EACH REPORTING
PERSON -0-
WITH
9 SOLE DISPOSITIVE POWER
163,735
10 SHARED DISPOSITIVE POWER
-0-
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
163,735
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN
SHARES [ ]
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
2.0%
14 TYPE OF REPORTING PERSON
IN
<PAGE>
90336P100 Page 7 of 22 Pages
AMENDMENT NO. 8 TO SCHEDULE 13D
-------------------------------
This Amendment No. 8 to Schedule 13D is filed by the undersigned to
amend Amendment No. 7, filed on September 10, 1998.
Item 4. Purpose of Transaction.
All of the shares of Common Stock owned by Pengo Securities and the
Farmout Shareholders were acquired for investment purposes. Pengo Securities and
the Farmout Shareholders intend to review their investment in the Issuer on a
continuing basis and will take such actions as they deem appropriate to preserve
and enhance the value of their investment. Depending upon Pengo Securities' and
the Farmout Shareholders' evaluation of a variety of factors and future
developments (including, without limitation, the Issuer's business and
prospects, market prices of the Common Stock, availability and alternative uses
of funds, as well as general and economic conditions), Pengo Securities and the
Farmout Shareholders reserve the right to acquire additional shares of Common
Stock, to dispose of some or all of their shares of Common Stock or to formulate
other purposes, plans or proposals regarding the Issuer to the extent they deem
advisable.
Pursuant to the Subscription Agreement between the Issuer and Smith
Management dated May 12, 1994, Smith Management has the right to appoint two
representatives to the Issuer's Board of Directors. Three members of the
Issuer's Board of Directors are employees of Smith Management or its affiliates.
Pursuant to a Tagalong Agreement dated as of July 21, 1997 among Joint
Energy Development Investments Limited Partnership ("Joint Energy") and Pengo
Securities (filed as Exhibit 9 to this Amendment No. 8), if Pengo Securities or
an affiliate of Pengo Securities sells to any person, subject to certain
exceptions, any shares of Common Stock which constitute a majority of the shares
of Common Stock owned by Pengo Securities and its affiliates then Joint Energy
shall have the right to sell to such person a number of shares of Common Stock
equal to the product of (i) the number of shares of Common Stock owned, or
issuable upon conversion of preferred stock owned, by Joint Energy and (ii) a
fraction with a numerator equal to the number of shares of Common Stock being
sold by Pengo Securities or its affiliate and a denominator equal to the total
number of shares of Common Stock owned by Pengo Securities and its affiliates.
The Tagalong Agreement terminates on the earlier of (i) July 21, 2001 and (ii)
the day Pengo Securities and its affiliates own less than 25% of the issued and
outstanding shares of Common Stock.
Effective June 1, 1998, the Issuer entered into a Farmout Agreement
(filed as Exhibit 10 to this Amendment No. 8) with Smith Management providing
funds for the Issuer's anticipated drilling program in the Monument Butte Field
during the remainder of 1998. The program contemplates the drilling and
completion of 56
<PAGE>
90336P100 Page 8 of 22 Pages
wells aggregating total expenditures of approximately $20.0 million (including
management fees). Under the Farmout Agreement, Smith Management agreed to fund
100% of the drilling and completion costs for wells commenced prior to October
1, 1998 and 70% for wells commenced after September 30, 1998. Smith Management
also agreed to take production proceeds payments, at the Issuer's option, either
in cash or in shares of Common Stock priced at a 10% discount of the average bid
side of the closing price for each trading day during the month to which the
payment relates. The Farmout Agreement provides that Smith Management will
reconvey all drillsites to the Issuer 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.
Pengo Securities and the Farmout Shareholders entered into a letter
agreement dated September 8, 1998 (filed as Exhibit 8 to Amendment No. 7) with
KRM Acquisition Corp. ("KRM") granting KRM the exclusive right until October 15,
1998 (extendible upon certain payments being made by KRM to Pengo Securities and
the Farmout Shareholders until October 31, 1998) to act as placement agent for
the purpose of finding a person or persons (which may include KRM) to purchase
all of the shares of Common Stock held by Pengo Securities and the Farmout
Shareholders. Subject to conditions set forth in the letter agreement, Pengo
Securities and the Farmout Shareholders are obligated to execute a definitive
purchase agreement with a purchaser identified by KRM.
Except as set forth above, Pengo Securities has no present plans or
proposals which relate to or would result in any matter of the type described in
clauses (a) through (j) of Item 4 of Schedule 13D.
Item 6. Contracts, Arrangements, Understandings or Relationships with Respect
to Securities of the Issuer.
There are no contracts, arrangements, understandings, or relationships
(legal or otherwise) among the reporting persons or between the reporting
persons and any person with respect to any securities of the Issuer other than
the agreements filed as Exhibits pursuant to Item 7 below.
Item 7. Material to be Filed as Exhibits.
1. Subscription Agreement dated May 12, 1994 between Smith Management
Company and the Issuer. (Previously filed.)
2. Amendment to Subscription Agreement dated September 16, 1994 between
Smith Management Company and the Issuer. (Previously filed.)
<PAGE>
90336P100 Page 9 of 22 Pages
3. Registration Rights Agreement dated September 21, 1994 between
Energy Management Corporation and the Issuer. (Previously filed.)
4. Subscription Agreement between Inland Resources Inc. and Pengo
Securities Corp. dated October 23, 1995. (Previously filed.)
5. Registration Rights Agreement dated as of November 6, 1995 between
Inland Resources, Inc. and Pengo Securities Corp. (Previously filed.)
6. Agreement dated June 12, 1996 by and between Smith Management,
Farmout Inc., Randall D. Smith, Jeffrey A. Smith, John W. Adams, the Issuer and
Inland Production Company. (Previously filed.)
7. Registration Rights Agreement dated as of June 12, 1996 by and
between the Issuer, Smith Management, Randall D. Smith, Jeffrey A. Smith and
John W. Adams. (Previously filed.)
8. Letter Agreement dated September 8, 1998 by and among Pengo
Securities Corp., Randall D. Smith, Jeffrey A. Smith, John W. Adams and KRM
Acquisition Corp. (Previously filed.)
9. Tagalong Agreement dated as of July 21, 1997 among Joint Development
Investments Limited Partnership and Pengo Securities Corp.
10. Farmout Agreement effective June 1, 1998 by and among Inland
Production Company, the Issuer and Smith Management.
<PAGE>
90336P100 Page 10 of 22 Pages
SIGNATURES
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
Dated as of September 18, 1998.
PENGO INDUSTRIES, INC.
By: /s/ David A. Persing
------------------------
Name: David A. Persing
Title: Senior Vice President
PENGO SECURITIES CORP.
By: /s/ David A. Persing
------------------------
Name: David A. Persing
Title: Senior Vice President
/s/ Randall D. Smith
--------------------
Randall D. Smith
/s/ John W. Adams
-----------------
John W. Adams
/s/ Jeffrey A. Smith
--------------------
Jeffrey A. Smith
90336P100 Page 11 of 22 Pages
Exhibit 9
TAGALONG AGREEMENT
------------------
This Agreement is made and entered into as of July 21, 1997, among
Joint Energy Development Investments Limited Partnership ("Purchaser"), Pengo
Securities Corp., a Delaware corporation ("Pengo").
Whereas, Purchaser has agreed to purchase 100,000 shares of Series C
Cumulative Convertible Preferred Stock of Inland Resources Inc. ("Inland"),
which is convertible into shares of common stock of Inland ("Common Stock"),
pursuant to a Securities Purchase Agreement dated as of July 21, 1997 between
Inland and Purchaser (the "Securities Purchase Agreement").
Whereas, as of the date hereof, Pengo owns 2,250,401 shares of Common
Stock before giving effect to the conversion of Series B Preferred Stock into
Common Stock, which conversion will occur concurrently with the issuance of the
Series C Cumulative Convertible Preferred Stock into Common Stock, and
Whereas, in order to induce Purchaser to enter into the Securities
Purchase Agreement, Pengo agreed to entered into this Agreement.
Now, therefore, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged by each of the parties to this
Agreement, Purchaser and Pengo hereby agree as follows:
SECTION 1. TAGALONG. (a) If Pengo or any affiliate of Pengo (a
"Transferor") sells, other than in an offering pursuant to a registration
statement or pursuant to Rule 144 under the Securities Act of 1933, any shares
of Common Stock owned by the Transferor to any individual or entity (a
"Transferee") in one transaction or a Series of related transactions which
constitute a majority of the shares of Common Stock owned by Pengo and its
affiliates (collectively, the "Smith Group"), Purchaser shall have the right to
sell to the Transferee, on the same terms and conditions as provided with
respect to the sale by the Transferor to such Transferee the number of shares of
Common Stock (rounded to the newest whole share) equal to the product of (i) the
total number of shares of Common Stock which Purchaser then owns that were
acquired upon conversion of the Series C Cumulative Convertible Preferred Stock
and the number of shares Purchaser may acquire upon conversion of the Series C
Cumulative Convertible Preferred Stock Purchaser then owns and (ii) a fraction
with a numerator equal to the number of shares of Common Stock then being sold
by the Transferor and a denominator equal to the total number of shares of
Common Stock owned by the Transferor and the other members of the Smith Group.
The right of the Transferor to sell shall be subject to the condition that the
Transferor shall cause the Transferee that proposes to purchase the shares of
the Transferor to offer to purchase, on such terms (including closing date),
such number
<PAGE>
90336P100 Page 12 of 22 Pages
of shares from Purchaser; provided, however, that if the Transferee is for any
reason unwilling or unable to purchase the aggregate number of shares from the
Transferor and Purchaser contemplated by the foregoing, the number of shares to
be sold by each shall be reduced to such number as, when taken with the numbers
of shares to be sold by each other such party, shall be equal to the number of
shares which such Transferee is willing or able to purchase and shall comply
with the first sentence of this Section 1 (a). Purchaser may only sell shares of
Common Stock hereunder that it has acquired upon conversion of Series C
Cumulative Convertible Preferred Stock.
(b) The Transferor shall give written notice to Purchaser at least 3
business days prior to any proposed sale of Common Stock subject to this
Agreement. The notice shall specify the proposed Transferee, the number of
shares of Common Stock to be sold, the amount and type of consideration to be
received therefor, and the place and date on which the sale is to be
consummated. If Purchaser desires to include shares of Common Stock in such sale
pursuant to Section 1(a), Purchaser shall notify the Transferor not more than 2
business days after its receipt of the notice from Transferor.
(c) If Pengo proposes to transfer, or an affiliate of Pengo proposes to
transfer, to a Transferee, whether by merger, consolidation, sale or otherwise,
all or substantially all the outstanding equity securities or assets of Pengo or
such affiliate, then Pengo or such affiliate shall, as a condition to the
exercise of such right of transfer, cause such Transferee to agree to be bound
by the provisions hereof.
(d) Pengo agrees that if any shares of Common Stock owned by it are
transferred to one of its affiliates, it will obtain the agreement of such
affiliate to be bound by the provisions hereof.
(e) If Pengo or any affiliate of Pengo should distribute Common Stock
in kind, as a dividend, a distribution in full or partial liquidation or
otherwise without consideration, Pengo or such affiliate will require, as a
condition to effectuation of such distribution, that each recipient thereof
shall agree to be bound by the provisions of Section 1 of this Agreement as
fully as Pengo and any such affiliate, and, in that regard and for purposes only
of interpretation of such Section 1, each such recipient shall be deemed to be
an affiliate of Pengo.
SECTION 2. MISCELLANEOUS. (a) Except to the extent otherwise provided
herein, the provisions of this Agreement shall be binding upon and accrue to the
benefit of the parses hereto and their respective heirs, legal representatives,
successors and assigns. If Purchaser transfers all the Common Stock it then owns
to any person or entity other than in a public distribution, such transferee
shall be deemed thereafter to be the Purchaser for purposes of this Agreement.
(b) The provisions of this Agreement may not be amended, modified or
supplemented without the written agreement of Purchaser and Pengo.
<PAGE>
90336P100 Page 13 of 22 Pages
(c) This Agreement may be executed in any number of counterparts and by
the parties hereto in separate counterparts, each of which when so executed
shall be deemed to be an original and all of which taken together shall
Constitute one and the same agreement.
(d) This Agreement shall be governed by and construed in accordance
with the laws of the State of Texas applicable to contacts made and to be
performed wholly within that State.
(e) In the event that any one or more of the provisions contained
herein, or application thereof in any circumstances, is held invalid, illegal or
unenforceable in any respect, any reason, the validity, legality and
enforceability of any such provision in every other respect of the remaining
provisions contained herein shall not be in any way impaired thereby, it being
intended that all of the rights and privileges of the parties hereto shall be
enforceable to the full extent permitted by law.
(f) For purposes of this Agreement, "affiliate" shall have the meaning
given such term in Rule 405 under the Securities Act of 1933, as amended.
(g) This Agreement shall terminate on the earlier of (i) July 21, 2001
and (ii) first date that the Smith Group's fully diluted ownership of Common
Stock is less than 25%.
(h) Pengo agrees that it will cause all of the other members of the
Smith Group including Randall D. Smith, to abide by the terms of this Agreement.
(i) Pengo agrees that Purchaser shall have the piggyback registration
right set forth in the Registration Rights Agreement referred to in the
Securities Purchase Agreement.
<PAGE>
90336P100 Page 14 of 22 Pages
IN WITNESS WHEREOF, the parties hereto have signed this Tagalong
Agreement as of the date first written above.
JOINT ENERGY DEVELOPMENT
INVESTMENTS LIMITED PARTNERSHIP
By: Enron Capital Management Limited
Partnership, its General Partner
By: Enron Capital Corp., its General
Partner
By: /s/ Clifford P. Hickey
--------------------------
Name: Clifford P. Hickey
Title: President
PENCO SECURITIES CORP.
By: /s/ David A. Persing
------------------------
90336P100 Page 15 of 22 Pages
Exhibit 10
FARMOUT AGREEMENT
I. PARTIES
Inland Production Company
410 17th Street, Suite 700
Denver, Colorado 80202
fax #: (303) 893-0113
and
Inland Resources Inc.
410 17th Street, Suite 700
Denver, Colorado 80202
fax #: (303) 893-0113
Herein collectively "Farmor"
Smith Management LLC
885 3rd Avenue, 34th Floor
New York, New York 10022
fax #: (212) 751-9502
Herein "Farmee"
and
Inland Production Company
410 17th Street, Suite 700
Denver, Colorado 80202
fax #: (303) 893-0113
Herein "Operator"
II. CONTRACT AREA AND EARNED DRILLSITES
The Farmor agrees to farmout, and Farmee agrees to farmin, a number of
drilling and injection well locations within the area of land described on
Exhibit A attached hereto and made a part hereof and which is referred to herein
as the "Contract Area."
Each well drilled pursuant to this Farmout Agreement shall be located
within a mutually approved 40-acre drillsite spacing unit within the Contract
Area.
<PAGE>
90336P100 Page 16 of 22 Pages
Farmor will submit to Farmee a proposed drillsite and unit for approval, along
with a description of the objective zone, its depth, and the estimated dry hole
and completed cost in the form of an AFE, and if not rejected by Farmee within
fifteen (15) days after submission, the drillsite and unit shall be deemed
approved as submitted. At such time as a well has been drilled on a 40-acre
drillsite spacing unit to the objective depth stated in Farmor's notice, and
whether abandoned as a dry hole or completed as a well capable of producing oil
and/or gas and associated hydrocarbons in paying quantities or as an injection
well, such 40-acre drillsite spacing unit will be thereafter referred to herein
as an "Earned Drillsite."
III. FARMOUT OPERATIONS
Upon its execution hereof, Farmee shall be deemed to have agreed to
provide one hundred percent (100%) of the funds needed by Farmor to drill,
complete (or abandon) and equip through tanks any well spudded on an Earned
Drillsite from June 1 through September 30, 1998, and seventy percent (70%) of
the funds needed by Farmor to drill, complete (or abandon) and equip through
tanks any well spudded on an Earned Drillsite from October 1 through December
31, 1998, pursuant to the drilling program set forth in this Farmout Agreement,
all as proportionately reduced to Farmor's undivided interest in the Earned
Drillsite. The funds provided by Farmee shall be used by Operator to pay all of
Farmee's costs associated with drilling, completing, and equipping wells within
drillsite spacing units, whether such wells are completed as dry holes, wells
capable of producing hydrocarbons in paying quantities, or as injection wells
that benefit lands within the Contract Area.
The drilling program contemplated by this Farmout Agreement shall begin
effective as of June 1, 1998, and will run through December 31, 1998, and
contemplates the drilling of all wells to be drilled by Farmor in the Contract
Area during such period, consisting of approximately 56 wells and aggregating
total expenditures of approximately $20,000,000.00 by Farmee (including
"management fees" payable to Operator). All operations on wells commenced during
this period for the account of Farmee shall be carried out in a good and
workmanlike manner.
Operator shall invoice Farmee on a monthly basis in the approximate sum
to be borne by Farmee on behalf of Farmor during the upcoming month pursuant to
this drilling program. The bills, except for the first bill for the month of
June 1998, shall be delivered to Farmee before the beginning of the month for
which the expenditures relate. The billings shall require pre-payment for
expenses estimated to be incurred during that month, and any funds not expended
from a prior month's billing and payment shall be credited in the next ensuing
month's invoice. Each month's billings shall be conducted likewise, with all
prior month's surplus rolling forward to the next ensuing billing. Each month's
billing shall be paid by Farmee to Farmor by wire transfer within five (5)
business days of Farmee's receipt of such billing.
<PAGE>
90336P100 Page 17 of 22 Pages
For each well drilled pursuant to this Farmout Agreement, Farmee will
pay to Operator a one-time "management fee" in the amount of $30,000.00. It is
understood and acknowledged that Farmee does not have land, geological,
engineering and oil and gas accounting staff currently on hand, and thus, Farmee
desires these services to be provided by Operator for Farmee's benefit.
Operator's management services shall include all land, geological, engineering
and accounting services required to initiate, complete and account for the
operations contemplated hereby through completion and abandonment of the well if
it is a dry hole. The management fee will be payable when a well reaches its
total objective depth, and will be in lieu of, and not in addition to, the COPAS
drilling rate charges customarily allowed an operator pursuant to a joint
operating agreement with respect to drilling (but not operating) periods.
Any funds previously advanced by Farmee which have not been spent by
Operator as of January 1, 1999 shall be promptly returned to Farmee unless there
are drilling, completion, or equipping activities which are still ongoing as of
January 1, 1999, on wells the drilling of which was commenced prior thereto. In
such event, these activities will be wound up in the ordinary course of
business, and Farmor shall be entitled to its "management fee" with respect to
all such wells, and any excess funds remaining thereafter shall be promptly
returned to Farmee, together with a final reconciliation.
IV. RIGHTS EARNED
A. ASSIGNMENTS
Prior to the commencement of drilling any well that will potentially
result in an Earned Drillsite, Farmor will assign to Farmee one hundred percent
(100%) of its interest in wells drilled or commenced prior to October 1, 1998,
and seventy percent (70%) of its interest in wells commenced after September 30,
1998 [and Farmor may retain the other thirty percent (30%)], of Farmor's
interest in the drillsite spacing unit from the surface of the earth to the base
of the Green River formation, free of any overriding royalty interest in favor
of Farmor; subject to the release of such Earned Drillsite from the liens held
thereon by Farmor's "Senior Lenders" (as herein defined). Assignments will be
made without warranty of title, either express or implied, except by, through,
and under Farmor, but not otherwise. If for any reason, this well is either not
drilled, or does not result in Farmee obtaining an Earned Drillsite, then Farmee
agrees to reassign its entire interest in this affected acreage to Farmor free
and clear of, and warranting title against, all liens or other encumbrances
created by, through or under Farmee. "Senior Lenders" shall mean (i) the Agent
and Banks (as defined therein) under that certain Credit Agreement dated as of
September 23, 1997 between Farmor and ING (U.S.) Capital Corporation (as amended
prior to the date hereof); and (ii) the "Noteholder," "Agent" and "Collateral
Agent" (as defined therein) under that certain Credit Agreement between Farmor,
Trust Company of the West and TCW Asset Management Company dated as of
<PAGE>
90336P100 Page 18 of 22 Pages
September 23, 1997 (as amended prior to the date hereof). The Senior Lenders
will release such Earned Drillsites from their liens, such release to be
evidenced by individual releases, individual subordinations, blanket releases or
blanket subordinations of their liens for the Earned Drillsites, at their
discretion.
B. AFTER PAYOUT REVERSION
At such time as Farmee has reached Payout, as hereinafter deferred,
Farmee shall reconvey all of its interest in all Earned Drillsites and affected
leases as received from Farmor, back to Farmor free and clear, and warranting
title against all liens or other encumbrances created by, through or under
Farmee. "Payout" as used herein shall mean that point in time when Farmee has
recovered from production attributable to its net working interest in all Earned
Drillsites and affected leases one hundred percent (100%) of Farmee's cost of
dealing, testing, completing, equipping, and producing and operating the wells
located on such Earned Drillsites and affected leases during the Payout period.
Such costs shall also include Operator's management fees and applicable
severance and production taxes, plus an additional sum equal to an annual
eighteen percent (18%) rate of return on all the sums spent by Farmee and
attributable to this Farmout Agreement during the Payout period. The rate of
return and status of Payout shall be calculated monthly, Payout shall be
effective the first day of the month following occurrence of Payout. Payments
shall be made in amounts equal to one hundred percent (100%) or seventy percent
(70%), as applicable, of the net proceeds received from sales of hydrocarbons
from the wells drilled under the drilling program, less all costs of production
and sales, including Operator's management fees. Payments will be made within
forty-five (45) days after the end of each month based on the proceeds received
for such month (the "Production Month"). Payments will be made, at Farmor's
option, either (i) in cash, provided such payments in cash do not result in a
default or event of default under either Credit Agreement with the Senior
Lenders, or (ii) in shares of common stock of Inland Resources, Inc. priced at a
ten percent (10%) discount of the average of the bid side of the closing price
for each trading day during the Production Month for which the payment is made.
Further, at any time after February 1, 2000, Farmor shall have the right to make
one lump sum cash payment in an amount necessary to achieve Payout, thereby
causing all wells to revert to Farmor, provided such payment does not result in
a default or event of default under either Credit Agreement with the Senior
Lenders.
V. ACCESS OF INFORMATION
Farmee and its representatives will have free access at its own risk to
the Contract Area and drillsite spacing, and will have the right to inspect and
make copies of all information and records pertaining to the operations
conducted hereunder. Additionally, as and when requested by Farmee, Operator
will furnish by telephone, telecopier or mail, as the case may be: daily
drilling reports, copies of all electrical
<PAGE>
90336P100 Page 19 of 22 Pages
survey logs and other logs which may be taken during the course of drilling or
testing; and copies of results of all tests run.
VI. DELAY RENTALS AND SHUT-IN WELL PAYMENTS
During the term of this Farmout Agreement, Operator will make a bona
fide effort to pay the annual delay rentals that may come due on any lease
affecting the Contract Area, but Operator will not be liable for any loss
resulting from a "good faith" failure to pay said rentals, or for improper
payment through clerical oversight. If a rental is due and paid by Operator
regarding any lease affecting one or more Earned Drillsites, Farmee shall
reimburse Operator for its allocable share of such rental in accordance with
Farmee's working interest in said lease.
In the event any well is completed on an Earned Drillsite as a gas
well, as determined by state or federal regulatory authorities, and if the well
is shut-in for any reason allowed by the affected oil and gas lease(s), Operator
will make such shut-in royalty payments as are necessary under the terms of the
affected oil and gas lease(s) necessary to keep such lease(s) in force and
effect, and Farmee shall reimburse Operator for such payments in accordance with
the working interest then owned by Farmee in the affected Earned Drillsite.
VII. OPERATING AGREEMENT
Each well drilled in accordance with this Farmout Agreement shall be
drilled pursuant to a joint operating agreement. If no agreement exists as to an
intended drillsite spacing unit, then the parties will execute, and operations
will be conducted in accordance with, the AAPL 1989 Model Form Operating
Agreement attached hereto and made a part hereof as Exhibit B. In the event a
joint operating agreement already exists as to an intended drillsite spacing
unit, then Farmee will be subject to the terms and conditions thereof and, if
appropriate, will become a party thereto. Should Farmee fail or refuse to become
a party thereto within thirty (30) days after the agreement has been delivered
to Farmee for signature, Farmee hereby appoints Operator as its agent and
attorney-in-fact to execute such agreement on its behalf, providing the terms
and conditions thereof do not differ substantially from those set forth in the
model agreement at Exhibit B.
If there exists any conflict between the provisions of this Farmout
Agreement and those of any existing or future joint operating agreement, then as
between Farmor, Farmee, and Operator, the provisions of this Farmout Agreement
shall control.
VIII. INDEMNIFICATION
Operator will indemnify and hold Farmee harmless from and against any
and all claims of any nature whatsoever, including personal injury and death,
and
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90336P100 Page 20 of 22 Pages
including reasonable attorney's fees and costs, and whether such claims are
based on negligence or otherwise, in connection with Operator's Operations on
the Contract Area. Operator shall obtain and at all times maintain insurance
coverage consistent with the insurance exhibit to the Model Form Operating
Agreement attached hereto as Exhibit B, and Farmee shall be listed as an
additional insured.
Farmor and Operator shall keep Earned Drillsites free and clear of
liens and encumbrances of every kind or character. Farmee shall keep Earned
Drillsites free and clear of liens and encumbrances of every kind or character.
IX. TERM
This Farmout Agreement shall remain in full force and effect until
Payout his occurred and all wells have reverted to Farmor, but Farmee's
obligation to fund the drilling and completion of operations contemplated hereby
shall cease at the close of business on December 31, 1998, except as to wells on
which drilling commenced prior thereto, and unless otherwise extended or
previously terminated in accordance with the terms hereof. Farmee will have the
right to suspend or cease the drilling operations in the event of receipt by
Farmor of any notice of default issued by Farmor's lenders. In the event Farmee
shall elect (for the reasons provided in the preceding sentence) at any time to
curtail or terminate further drilling operations, then Farmee shall so notify
Farmor in writing, and thereafter the operations shall be wound down in a
businesslike manner.
X. BONDING
The costs of any bonds that Farmee is required to obtain shall be borne
solely by Farmee, but allocated as additional drilling costs. To the extent
possible, Farmee will be joined on either Farmor's or Operator's bonds that are
now in existence.
XI. REASSIGNMENT
If, during the time that Farmee owns an interest in an Earned
Drillsite, Farmee elects to surrender, let expire, abandon, or releases all or
any part of its rights in an Earned Drillsite, Farmee will notify Farmor not
less than sixty (60) days in advance of such surrender, expiry, abandonment, or
release. At Farmor's request, Farmee will then immediately reassign its rights
in such affected Earned Drillsite to Farmor free and clear of, and warranting
title against, any liens or other encumbrances by, through or under Farmee, and,
upon receipt of that reassignment, Farmor will pay Farmee the reasonable salvage
value of any material or equipment received.
<PAGE>
90336P100 Page 21 of 22 Pages
XII. FARMEE'S OPTION FOR ADDITIONAL FARMOUTS
Farmee will have the option, exercisable not later than sixty (60) days
before the end of 1998 and 1999, respectively, to enter into like-kind Farmout
Agreements with Farmor for the years 1999 and 2000, respectively, unless (a) a
"change of control" (as hereinafter defined) of Inland Resources Inc. has
occurred or (b) Farmee shall have failed to exercise timely its option with
respect to year 1999, in which event any unexercised option will immediately and
automatically expire. For purposes of this Farmout Agreement, a "change of
control" shall mean Farmee and its affiliates shall cease to beneficially own at
least a majority of the outstanding shares of voting capital stock of Inland
Resources Inc.
XIII. GENERAL
A. NOTICE
Any notice required under the terms of this Farmout Agreement will be
given to Farmor, Farmee, and/or Operator at the addresses and fax numbers listed
above.
B. INUREMENT
This Farmout Agreement is binding upon the successors and assigns of
the parties. Farmee may assign this Farmout Agreement to affiliates without
Farmor's consent, but upon prior written notice to Farmor, but any such
assignment by Farmee shall not release it from its liabilities, duties and
obligations hereunder. This Farmout Agreement may not otherwise be assigned by
Farmee or Farmor without the prior written consent of the other party, which
consent will not be unreasonably withheld.
C. ENTIRE AGREEMENT
This Farmout Agreement constitutes the entire agreement by and between
the parties, and may not be modified except by a written instrument signed by
all parties hereto.
D. GOVERNING LAW
This Farmout Agreement shall be governed by the laws of the state of
Colorado, except that any real property issue shall be governed by the laws of
the state where such property is located. Venue for any action involving this
Farmout Agreement shall exclusively lie in the District Court for the City and
County of Denver, Colorado.
<PAGE>
90336P100 Page 22 of 22 Pages
This Farmout Agreement is dated the date of acknowledgment for each of
the undersigned, effective June 1, 1998, at Denver, Colorado.
FARMOR:
INLAND PRODUCTION COMPANY
ATTEST:
/s/ Michael Stevens By: /s/ Kyle R. Miller
- ------------------- ----------------------
Secretary Kyle R. Miller, President
INLAND RESOURCES INC.
ATTEST:
/s/ Michael Stevens By: /s/ Kyle R. Miller
- ------------------- ----------------------
Secretary Kyle R. Miller, President
FARMEE:
SMITH MANAGEMENT LLC
By: /s/ Bruce M. Schnelwar
--------------------------
Bruce M. Schnelwar,
Senior Vice President
OPERATOR:
INLAND PRODUCTION COMPANY
ATTEST:
/s/ Michael Stevens By: /s/ Kyle R. Miller
- ------------------- ----------------------
Secretary Kyle R. Miller, President
