<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period ___________________ to __________________
Commission file number 0-16487
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INLAND RESOURCES INC.
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(Exact name of small business issuer as specified in its charter)
Washington 91-1307042
- ----------------------------------------- ----------------
(State of incorporation or organization) (IRS Employer Identification No.)
475 17th Street, Suite 1500, Denver, Colorado 80202
- --------------------------------------------- ----------
(Address of principal executive offices) (ZIP Code)
Issuer's telephone number, including area code: (303) 292-0900
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(Former name, address and fiscal year, if changed, since last report)
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes XX No
----- -----
Number of shares of common stock, par value $.001 per share, outstanding as of
July 29, 1996: 5,461,925
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<PAGE>
PART 1. FINANCIAL INFORMATION
INLAND RESOURCES INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- -------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,846,747 $ 2,970,305
Accounts receivable and accrued sales 1,522,989 701,956
Inventory 856,817 417,665
Other current assets 446,263 19,338
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Total current assets 7,672,816 4,109,264
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Property and equipment, at cost:
Oil and gas properties (successful efforts method) 37,131,965 17,404,280
Accumulated depletion, depreciation and amortization (1,398,852) (585,590)
----------- -------------
35,733,113 16,818,690
Other property and equipment, net 748,076 593,106
Debt issue costs, net 389,974 401,803
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Total assets $ 44,543,979 $ 21,922,863
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----------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 3,229,243 $ 2,859,775
Current portion of long-term debt 600,000 48,021
Property reclamation costs, short-term 293,241 200,000
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Total current liabilities 4,122,484 3,107,796
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Long-term debt 16,454,213 4,436,225
Property reclamation costs, long-term 290,250 399,433
Stockholders' equity:
Preferred Class A stock, par value $.001; 20,000,000 shares
authorized, 100,983 and 106,850 shares of Series A issued
and outstanding; liquidation preference of $5,049,150 101 107
Additional paid-in capital - preferred 3,875,121 4,100,261
Common stock, par value $.001; 25,000,000 shares
authorized; issued and outstanding 5,461,925 and
4,092,800, respectively (see Note 4) 5,462 4,093
Additional paid-in capital - common 28,423,146 19,183,119
Accumulated deficit (8,626,798) (9,308,171)
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Total stockholders' equity 23,677,032 13,979,409
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Total liabilities and stockholders' equity $ 44,543,979 $ 21,922,863
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</TABLE>
The accompanying notes are an integral part of the financial statements
1
<PAGE>
PART 1. FINANCIAL INFORMATION (CONTINUED)
INLAND RESOURCES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------------------- -----------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales of oil and gas $2,552,714 $ 575,689 $ 3,244,696 $ 1,128,645
----------- ----------- ----------- -----------
Operating expenses:
Lease operating expenses 290,372 349,331 454,708 736,697
Production taxes 91,646 37,931 122,863 89,035
Exploration 3,422 2,665 13,203 14,592
Depletion, depreciation and amortization 690,233 257,044 885,262 510,709
General and administrative, net 394,800 473,354 671,544 779,785
----------- ----------- ----------- -----------
Total operating expenses 1,470,473 1,120,325 2,147,580 2,130,818
----------- ----------- ----------- -----------
Operating income (loss) 1,082,241 (544,636) 1,097,116 (1,002,173)
Interest expense (320,329) (245,502) (507,263) (421,408)
Other income, net 58,949 43,031 91,520 67,686
----------- ----------- ----------- -----------
Net income (loss) $ 820,861 $ (747,107) $ 681,373 $(1,355,895)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income (loss) per share - Primary $ 0.18 $ (0.26) $ 0.16 $ (0.47)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average common and common
equivalent shares outstanding - Primary 4,465,595 2,892,800 4,300,504 2,892,800
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income (loss) per share - Fully diluted $ 0.14 $ (0.26) $ 0.12 $ (0.47)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average common and common
equivalent shares outstanding - Fully diluted 5,681,227 2,892,800 5,516,135 2,892,800
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Dividends per share NONE NONE NONE NONE
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
2
<PAGE>
PART 1. FINANCIAL INFORMATION (CONTINUED)
INLAND RESOURCES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 681,373 $ (1,355,895)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Net cash used by discontinued operations (15,942) (157,980)
Depletion, depreciation and amortization 885,262 510,709
Amortization of debt issue costs and debt discount 42,229
Effect of changes in current assets and liabilities:
Accounts receivable and accrued sales (821,033) 707,571
Inventory (439,152) (16,653)
Other current assets (426,925) 43,236
Accounts payable and accrued expenses 369,468 (316,334)
------------ ------------
Net cash provided (used) by operating activities 275,280 (585,346)
------------ ------------
Cash flows from investing activities:
Development expenditures and equipment purchases (10,954,655) (2,770,748)
Change in restricted cash 160,658
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Net cash used by investing activities (10,954,655) (2,610,090)
------------ ------------
Cash flows from financing activities:
Proceeds from exercise of employee stock options 16,250
Proceeds from issuance of long-term debt 12,578,192 2,100,000
Payments of long-term debt (38,625) (79,778)
------------ ------------
Net cash provided by financing activities 12,555,817 2,020,222
------------ ------------
Net increase (decrease) in cash and cash equivalents 1,876,442 (1,175,214)
Cash and cash equivalents at beginning of period 2,970,305 1,691,156
------------ ------------
Cash and cash equivalents at end of period $ 4,846,747 $ 515,942
------------ ------------
------------ ------------
Noncash financing and investing activity:
Purchase of Farmout Inc. for common stock $ 9,000,000
------------
------------
Issuance of note payable for consulting services $ 87,500
------------
------------
Issuance of note payable for land purchase $ 203,000
------------
------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
3
<PAGE>
PART 1. FINANCIAL INFORMATION (CONTINUED)
INLAND RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. COMPANY ORGANIZATION:
Inland Resources Inc. (the "Company") was incorporated on August 12,
1985 in the State of Washington for the purpose of acquiring, exploring and
developing interests in mining properties. In 1987 the Company developed a
leased property (the "Toiyabe Mine") and began production of gold and
silver. Operations at the Toiyabe Mine have included open-pit mining,
crushing, agglomerations, heap leaching and gold and silver recovery
processes. Since 1993, the Company's mining operations have been limited to
the final detoxification, reclamation and closure of the Toiyabe Mine in
compliance with Nevada and federal laws.
Effective March 1, 1993, the Company acquired an undivided 50% interest in
certain oil and gas leases and other assets located in the Uinta Basin in
Duchesne County, Utah (the "Duchesne County Fields"). Accordingly, the
Company's business emphasis changed from precious metals mining to oil and
gas development and production.
Effective September 21, 1994, the Company acquired all the outstanding
common and preferred stock of Lomax Exploration Company, now known as
Inland Production Company ("IPC"). IPC is also engaged primarily in oil and
gas development and production activities in the Uinta Basin area of
Northeastern Utah, in the oil and gas field known as the Monument Butte
Field. IPC operates as a wholly-owned subsidiary of the Company.
Effective July 1, 1995, the Company sold its undivided interest in the
Duchesne County Fields. As a result, the Company is now focused on the
development of the Monument Butte Field where the Company controls
operations for the majority of its holdings and has a significant
infrastructure in place to conduct secondary recovery water flood
operations.
2. BASIS OF PRESENTATION:
The preceding financial information has been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC") and, in the opinion of the Company, includes all normal
and recurring adjustments necessary for a fair statement of the results of
each period shown. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
SEC rules and regulations. Management believes the disclosures made are
adequate to ensure that the financial information is not misleading, and
suggests that these financial statements be read in conjunction with the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1995.
3. RECLASSIFICATIONS:
Certain amounts for 1995 have been reclassified to conform with the 1996
financial statement presentation. The reclassifications had no impact on
net loss or the accumulated deficit.
4
<PAGE>
PART 1. FINANCIAL INFORMATION (CONTINUED)
INLAND RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. REVERSE STOCK SPLIT:
On May 22, 1996, the shareholders of the Company 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 100,000,000 to
10,000,000 shares and reduce outstanding common shares from 40,927,999 to
4,092,800 shares. The shareholders further approved an increase in the
number of post-split authorized shares from 10,000,000 to 25,000,000
shares. All earnings per share amounts and weighted average common and
common equivalent shares outstanding as reported on the Consolidated
Statement of Operations have been calculated based on post-reverse split
share amounts.
5. PURCHASE OF FARMOUT INC.:
Effective July 1, 1995, Randall D. Smith ("Smith"), the Company and IPC
entered into a Farmout Agreement pursuant to which IPC agreed to farmout to
Smith its interest in certain 40-acre drill sites and Smith agreed to drill
wells on such drill sites between July 1, 1995 and December 31, 1995.
Pursuant to the Farmout Agreement, 21 wells were drilled and funded by
Smith, 20 of which were producing wells and one of which was a
developmental dry hole.
Prior to June 1, 1996, Smith transferred a portion of his interests in the
farmout wells and the Farmout Agreement to two individuals (collectively,
with Smith, the "Farmout Stockholders"). The Farmout Stockholders
transferred all of said interests to Farmout Inc. prior to June 1, 1996.
On June 12, 1996, Smith Management Company, Inc., an affiliate of Smith,
Farmout Inc., the Farmout Stockholders, the Company and IPC entered into an
agreement pursuant to which the Farmout Stockholders transferred one
hundred percent (100%) of the outstanding capital stock of Farmout Inc. to
the Company in exchange for 1,309,880 shares of the Company's common stock.
Under the terms of the agreement, Inland will not issue or deliver the
common stock until January 2, 1997. Since no contingencies exist as to
their issuance, the 1,309,880 shares of common stock are considered
outstanding for purposes of reporting in the accompanying consolidated
financial statements of the Company. The purchase was valued at $9.0
million for accounting purposes. Farmout Inc. is a Utah corporation whose
assets include only the twenty producing farmout wells drilled and operated
by IPC during the period July 1, 1995 to May 31, 1996. Farmout Inc. had no
liabilities at the purchase date. Income tax liabilities arising prior to
June 12, 1996 are the responsibility of the Farmout Stockholders and income
tax liabilities from June 12, 1996 forward are the responsibility of the
Company. Smith and affiliated entities are collectively majority
shareholders of the Company. The acquisition of Farmout Inc. was accounted
for as a purchase, therefore, the assets and results of operations of
Farmout Inc. are included in the Company's consolidated financial
statements from the acquisition date forward. Farmout Inc. operates as a
wholly-owned subsidiary of the Company.
5
<PAGE>
PART 1. FINANCIAL INFORMATION (CONTINUED)
INLAND RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. PREFERRED STOCK:
The Company has entered into an agreement to sell to an affiliate of Smith
950,000 shares of a newly designated series of preferred stock of the
Company (the "Series B Preferred Stock") which will have 1,000,000 shares
designated in the series. A director of the Company who is also a Vice
President of Smith Management Company, Inc., entered into a similar
agreement with the Company pursuant to which he agreed to purchase the
remaining 50,000 shares of Series B Preferred Stock. The Series B Preferred
Stock is to be issued by the Company for cash of $10 per share (an
aggregate of $10.0 million) at a closing to take place on July 31, 1996.
Concurrently with the closing of the sale and issuance of the Series B
Preferred Stock, the Company intends to call for redemption its outstanding
Series A Convertible Preferred Stock. Upon receipt of notice of redemption,
each holder of Series A Convertible Preferred Stock will have the right to
elect to receive either (i) cash in the amount of $54.00, or (ii) 9.6726
shares of Common Stock, for each share of Series A Convertible Preferred
Stock held of record by such holder. Each holder of Series A Convertible
Preferred Stock will have 15 days after notice of redemption has been
delivered by the Company to decide whether to elect to receive cash or
Common Stock. To the extent holders of Series A Convertible Preferred Stock
elect to receive cash, the Company intends to use a portion of the proceeds
from the sale of the Series B Preferred Stock to pay such holders of Series
A Convertible Preferred Stock.
The Series B Preferred Stock will bear a dividend of 12% per annum on the
Redemption Price (defined below); will have a liquidation preference over
Common Stock equal to $10.00 per share plus any accumulated and unpaid
dividends; is redeemable at a "Redemption Price" equal to $10.00 per share,
plus accumulated and unpaid dividends; is convertible at a "conversion
price" of $6.27 per share (divided into the Redemption Price) subject to
certain anti-dilution adjustments; and is entitled to one vote per share of
Series B Preferred Stock on all matters submitted to the stockholders of
the Company and will vote with the Common Stock as one voting group or
class, and not as a separate voting group or class, except where required
by law or except with regard to various amendments to the Company's
Articles of Incorporation affecting the Series B Preferred Stock or
creating another series of preferred stock with rights equal to or greater
than the rights of the Series B Preferred Stock. In addition, if at any
time prior to July 31, 1998, (i) the Company sells all or substantially all
of its assets other than in the ordinary course of business, (ii) the
Company merges or consolidates with or into another person, (iii) a change
of control of the Company occurs or (iv) the Company is liquidated or
dissolved, the holders of Series B Preferred Stock will be entitled to a
full two years of accumulated dividends in calculating amounts payable upon
redemption or the number of shares of Common Stock issuable upon
conversion, as the case may be.
7. EARNINGS PER SHARE:
The computation of earnings per common and common equivalent share is based
upon the weighted average number of common shares outstanding during the
period plus the dilutive effect of shares issuable from the exercise of
stock options and warrants less the number of treasury shares assumed to be
purchased using the average market price for the period. The fully diluted
per share computation reflects additional dilution assuming full conversion
of the Series A Convertible Preferred Stock and the additional dilution
related to the exercise stock options and warrants less the number of
treasury shares assumed to be purchased using the market price at the end
of the period.
6
<PAGE>
PART 1. FINANCIAL INFORMATION (CONTINUED)
INLAND RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION:
GENERAL:
Effective March 1, 1993, the Company acquired an undivided 50% interest in the
Duchesne County Fields. This purchase changed the Company's business emphasis
from precious metals mining to oil and gas development and production. Effective
September 21, 1994, the Company further increased its oil and gas holdings by
acquiring all the outstanding common and preferred stock of IPC, a company with
significant oil and gas development and production activities in the Monument
Butte Field of Northeastern Utah. Effective July 1, 1995, the Company sold its
undivided interest in the Duchesne County Fields. As a result, the Company is
now focused on the development of the Monument Butte Field where the Company
controls operations for the majority of its holdings and has a significant
infrastructure in place to conduct secondary recovery water flood operations. On
June 12, 1996, the Company further increased its holdings in the Monument Butte
Field by acquiring Farmout Inc.; a company with twenty producing wells in the
Monument Butte Field.
The Company's strategy to continue the profitability experienced in the second
quarter of 1996 is to increase oil and gas production through acquisition of
existing oil and gas production in developed fields, and further developing such
existing production through development drilling, reworking existing wells and
engaging in secondary recovery enhancement operations. Increased production
levels has allowed for more efficient operations at the field level which in
turn has had a positive impact on the Company's equivalent per barrel lifting
costs. In addition, general and administrative costs have decreased in relation
to production since these costs are generally fixed in nature and thereby do not
increase proportionate to production. The Company also intends to continue to
protect the price it receives for a portion of its oil production by entering
into hedging arrangements. The ultimate success of the Company's plan to
continue to operate profitably is primarily dependent on locating and
purchasing properties on terms acceptable to the Company, continuing to secure
sufficient capital to acquire target properties and conduct extensive
development and secondary recovery operations, then successfully implementing
development and secondary recovery plans.
The Company does not generally intend to pursue exploratory drilling in
undeveloped oil and gas properties due to the industry's relatively high
historical failure rate relating to exploratory drilling and the resulting
higher associated finding costs. However, from time to time the Company may for
various reasons determine to drill exploratory wells in certain areas considered
strategic by the Company.
RESULTS OF OPERATIONS:
THREE MONTHS ENDED JUNE 30, 1996 AND 1995:
CONTINUING OPERATIONS. The Company sold the Duchesne County Fields effective
July 1, 1995. Accordingly, the results of operations for the second quarter of
1996 does not include any activity from the Duchesne County Fields while the
results of operations for the second quarter of 1995 includes three full months
of activity. In addition, the Company acquired Farmout Inc. June 12, 1996.
The results of operations of Farmout Inc. are consolidated as a component
of the Company's results of operations from the purchase date forward.
7
<PAGE>
PART 1. FINANCIAL INFORMATION (CONTINUED)
INLAND RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OIL AND GAS SALES - Oil and gas sales during the second quarter of 1996
exceeded the previous year second quarter by approximately $2.0 million, or
343%. The increase was attributable to increased oil sales volumes in the
Monument Butte Field and increased average oil sales prices as summarized below:
(Oil sales in Bbls, gas sales in Mcf) 1996 1995
-------- --------
Oil sales - Monument Butte Field 128,882 19,983
Oil sales - Duchesne County Fields -- 10,215
-------- --------
Total oil sales 128,882 30,198
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Average oil price per barrel sold $ 20.01 $ 17.79
Gas sales - Monument Butte Field 121,593 8,001
Gas sales - Duchesne County Fields -- 20,283
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Total gas sales 121,593 28,284
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Average gas price per Mcf sold $ 1.16 $ 1.49
The increased oil and gas sales volumes in the Monument Butte Field are
attributable to the thirty-one new wells that IPC drilled and put on production
during the first half of 1996. Oil sales as a percentage of total oil and gas
sales increased from 93% during the second quarter of 1995 to 95% in 1996. Crude
oil is expected to continue as the predominant product produced from the
Monument Butte Field.
As further discussed in "Liquidity and Capital Resources" below, the Company has
entered into price protection agreements to hedge against the 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. Oil and gas sales were decreased by $168,000
and $7,700 during the second quarters of 1996 and 1995, respectively, due to
the recognition of hedging contract settlement losses and contract purchase
cost amortization.
LEASE OPERATING EXPENSES - Lease operating expense decreased $59,000, or
17%, between periods. Lease operating expense per barrel of oil equivalent
("BOE") sold decreased from $10.00 during the second quarter of 1995 to $1.95
during the second quarter of 1996. This reduction is primarily attributable to
increased sales volumes that allow for wider allocation of fixed operating
costs. The sale of the Duchesne County Fields has also positively contributed to
the reduction of lease operating expenses per BOE sold.
1996 1995
--------- ---------
MONUMENT BUTTE FIELD
Lease operating expense $ 290,372 $ 156,606
Lease operating expense per BOE $ 1.95 $ 7.35
DUCHESNE COUNTY FIELDS
Lease operating expense $ 192,725
Lease operating expense per BOE $ 14.18
8
<PAGE>
PART 1. FINANCIAL INFORMATION (CONTINUED)
INLAND RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company's policy is to expense the costs of water injection operations
during the start-up phase of secondary recovery water flood operations. These
expenses include the costs of purchasing water and operating water source wells,
water injection wells and water injection stations. As a result of this policy,
the Company's per barrel lifting costs will be higher than if the Company would
capitalize and deplete these costs as part of secondary recovery enhancement
projects.
Lease operating expense in the Monument Butte Field benefits from certain of the
Company's gas transportation contracts. Under the terms of the applicable
contracts, the Company is allowed to use natural gas produced from the Monument
Butte, Gilsonite and Boundary Units to power field operations throughout the
Monument Butte Field. As a result of this provision, the Company does not
recognize lease operating expense for natural gas used as lease fuel since their
is no charge to the Company for such usage and, if sold, the related gas
proceeds would not inure to the benefit of the Company. The Company estimates
the amount of natural gas used as lease fuel, net to the Company's interest, was
50,000 Mcf and 13,500 Mcf during the second quarters of 1996 and 1995,
respectively. The Company does not intend to renew these contracts when they
expire on October 31, 1997. After expiration of the contracts, natural gas
production from these areas will be the property of the Company causing natural
gas used as lease fuel to have a direct impact on the Company's natural gas
sales.
PRODUCTION TAXES - Production taxes as a percentage of sales decreased from
6.5% during the second quarter of 1995 to 3.4% during 1996. The decrease was
caused by the sale of the Duchesne County Fields where the effective production
tax rate was 12.6%. The higher tax rate for the Duchesne County Fields is due to
their location on the Reservation of the Ute Indian Tribe where an additional
Ute Indian severance tax is imposed. In addition, new wells drilled by the
Company in Utah are allowed a six month exemption from state severance taxes.
EXPLORATION - Exploration expense represents the Company's share of costs
to retain unproved acreage.
DEPLETION, DEPRECIATION AND AMORTIZATION - The decrease in depletion,
depreciation and amortization resulted from a decreased average depletion rate
offset by increased sales volumes. 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 reserves in the
periods presented. The Company's average depletion rate was $4.36 per BOE sold
during the second quarter of 1996 compared to $6.25 per BOE sold during the
second quarter of 1995. The decreased rate was due to the sale of the Duchesne
County Fields and the positive impact that the Company's recent drilling
activities combined with lower lease operating expenses had on total proved
reserves of the Company. After accounting for the Farmout Inc. purchase, the
Company's depletion rate for the third quarter of 1996 will be $4.87 per BOE.
GENERAL AND ADMINISTRATIVE, NET - General and administrative expense
decreased $78,500 or 17% on a net basis between quarters. General and
administrative expense is reported net of operator fees and reimbursements which
were $481,000 and $238,000 during the second quarter of 1996 and 1995,
respectively. The increase in reimbursements is primarily a function of the
level of operated drilling activity. During the second quarter of 1996, the
Company operated the drilling of 20 wells while in the same period of 1995 the
Company operated the drilling of only four wells. Gross general and
administrative expense increased from $711,000 in 1995 to $876,000 in 1996. The
increase is related to increased salaries, payroll taxes and employee benefits
as the Company's employee base grew from twenty-two employees at January 1, 1995
to forty-six employees at June 30, 1996. The increase in employees was required
to control the increased level of operated drilling activity during the last
half of 1995 and into 1996. The remaining increase is associated with the cost
of operating with a larger employee base.
9
<PAGE>
PART 1. FINANCIAL INFORMATION (CONTINUED)
INLAND RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
INTEREST EXPENSE - Borrowings during the second quarter of 1996 averaged
approximately $13.3 million at an average effective interest rate of 11.0%.
Borrowings during the second quarter of 1995 averaged approximately $5.8 million
at an average effective interest rate of 17.0%. The change in the effective
interest rate resulted from the debt refinancing performed on November 29, 1995
as further explained in "Liquidity and Capital Resources", below.
OTHER INCOME - Other income in the first quarter of 1996 and 1995 primarily
represents interest earned on the investment of surplus cash balances.
INCOME TAXES - No income tax provision or benefit has been recognized due
to past net operating losses incurred and the recording of a full valuation
allowance. The Company expects to begin recognizing deferred income tax expense
during the third quarter of 1996 due to the deferred tax impact of the Farmout
Inc. purchase.
SIX MONTHS ENDED JUNE 30, 1996 AND 1995:
CONTINUING OPERATIONS. The Company sold the Duchesne County Fields effective
July 1, 1995. Accordingly, the results of operations for the first half of 1996
does not include any activity from the Duchesne County Fields while the results
of operations for the first half of 1995 includes six full months of activity.
In addition, the Company acquired Farmout Inc. June 12, 1996. The results
of operations of Farmout Inc. are consolidated as a component of the
Company's results of operations from the purchase date forward.
OIL AND GAS SALES - Oil and gas sales during the first half of 1996
exceeded the comparable period in the previous year by approximately $2.1
million, or 187%. The increase was attributable to increased oil sales volumes
in the Monument Butte Field and increased average oil sales prices as summarized
below:
(Oil sales in Bbls, gas sales in Mcf) 1996 1995
------------------------------------- ------- -------
Oil sales - Monument Butte Field 169,398 36,898
Oil sales - Duchesne County Fields -- 22,116
------- -------
Total oil sales 169,398 59,014
------- -------
Average oil price per barrel sold $19.62 $ 17.37
Gas sales - Monument Butte Field 132,338 13,458
Gas sales - Duchesne County Fields -- 55,097
------- -------
Total gas sales 132,338 68,555
------- -------
Average gas price per Mcf sold $ 1.14 $ 1.36
The increased oil and gas sales volumes in the Monument Butte Field are
attributable to the thirty-one new wells that IPC drilled and put on production
during the first half of 1996. Oil and gas sales were decreased by $230,000 and
$7,700 during the first half of 1996 and 1995, respectively, due to the
recognition of hedging contract settlement losses and contract purchase cost
amortization.
10
<PAGE>
PART 1. FINANCIAL INFORMATION (CONTINUED)
INLAND RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
LEASE OPERATING EXPENSES - Lease operating expense decreased $282,000, or
38%, between six-month periods. Lease operating expense per barrel of oil
equivalent ("BOE") sold decreased from $10.46 during the first six months of
1995 to $2.38 during the same period in 1996. This reduction is primarily
attributable to increased sales volumes that allow for wider allocation of fixed
operating costs. The sale of the Duchesne County Fields has also positively
contributed to the reduction of lease operating expenses.
1996 1995
--------- ----------
MONUMENT BUTTE FIELD
Lease operating expense $ 454,708 $ 333,142
Lease operating expense per BOE $ 2.38 $ 8.51
DUCHESNE COUNTY FIELDS
Lease operating expense $ 403,555
Lease operating expense per BOE $12.89
As previously discussed, lease operating expense in the Monument Butte Field
benefits from certain of the Company's gas transportation contracts. The Company
estimates the amount of natural gas used as lease fuel, net to the Company's
interest, was 75,000 Mcf and 27,000 Mcf during the first six months of 1996 and
1995, respectively. Until October 1997, this usage will not lower the Company's
share of gas sales and will not impact lease operating expense.
PRODUCTION TAXES - Production taxes as a percentage of sales decreased from
7.8% during the first half of 1995 to 3.4% during 1996. The decrease was caused
by the sale of the Duchesne County Fields where the effective production tax
rate was 12.6%. The higher tax rate for the Duchesne County Fields is due to
their location on the Reservation of the Ute Indian Tribe where an additional
Ute Indian severance tax is imposed. In addition, new wells drilled by the
Company in Utah are allowed a six month exemption from state severance taxes.
EXPLORATION - Exploration expense represents the Company's share of costs
to retain unproved acreage.
DEPLETION, DEPRECIATION AND AMORTIZATION - The decrease in depletion,
depreciation and amortization resulted from a decreased average depletion rate
offset by increased sales volumes. 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 reserves in the
periods presented. The Company adjusts its depletion rate quarterly based on in-
house total proved reserve estimates. The Company's average depletion rate was
$4.25 per BOE sold year-to-date in 1996 compared to $6.25 per BOE sold in 1995.
The decreased rate was due to the sale of the Duchesne County Fields and the
positive impact that the Company's recent drilling activities combined with
lower lease operating expenses had on total proved reserves of the Company.
After accounting for the Farmout Inc. purchase, the Company's depletion rate for
the third quarter of 1996 will be $4.87 per BOE.
11
<PAGE>
PART 1. FINANCIAL INFORMATION (CONTINUED)
INLAND RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL AND ADMINISTRATIVE, NET - General and administrative expense
decreased $108,000 or 14% on a net basis between quarters. General and
administrative expense is reported net of operator fees and reimbursements which
were $877,000 and $463,000 during the six-month periods of 1996 and 1995,
respectively. The increase in reimbursements is primarily a function of the
level of operated drilling activity. During 1996, the Company operated the
drilling of 36 wells while in the same period of 1995 the Company operated the
drilling of only seven wells. Gross general and administrative expense increased
from $1,243,000 in 1995 to $1,548,000 in 1996. The increase is related to
increased salaries, payroll taxes and employee benefits as the Company's
employee base grew from twenty-two employees at January 1, 1995 to forty-six
employees at June 30, 1996. The increase in employees was required to control
the increased level of operated drilling activity during the last half of 1995
and into 1996. The remaining increase is associated with the cost of operating
with a larger employee base.
INTEREST EXPENSE - Borrowings during 1996 have averaged approximately $10.3
million at an average effective interest rate of 11.0%. Borrowings during 1995
averaged approximately $5.2 million at an average effective interest rate of
16.3%. The change in the effective interest rate resulted from the debt
refinancing performed on November 29, 1995 as further explained in "Liquidity
and Capital Resources", below.
OTHER INCOME - Other income in 1996 and 1995 primarily represents interest
earned on the investment of surplus cash balances.
INCOME TAXES - No income tax provision or benefit has been recognized due
to past net operating losses incurred and the recording of a full valuation
allowance. The Company expects to begin recognizing deferred income tax expense
during the third quarter of 1996 due to the deferred tax impact of the Farmout
Inc. purchase.
DISCONTINUED OPERATIONS. The Company classifies all mining operations as
discontinued operations. The only mining operation remaining is ongoing
reclamation activities at the Toiyabe Mine located near Crescent Valley, Nevada.
Since July 1992, reclamation activities have focused on rinsing the leach pads
with fresh water and recycled leaching solution. The goal of the rinsing
activity is to reduce concentrations of certain constituents to state drinking
water standards and to achieve "stabilization" of certain other elements, such
that their concentration would not be lowered with further rinsing. Based upon
ongoing testing results, the Company believes it has achieved its rinsing goals.
As a result, 1996 operations have focused on evaporation of all solutions
remaining in the contained circulation system, the submission of a Final Closure
Report to the Nevada Department of Environmental Protection (the "NDEP") and
certain other reclamation tasks. Assuming that the NDEP agrees Toiyabe's leach
pads are stabilized and that the Company's method to treat future stormwater
infiltration into the leach pads is sufficient, among other items, the Company
could be in a post-closure monitoring mode at the Toiyabe Mine by October 1997.
Based on the foregoing assumptions, the Company has established a reserve for
reclamation activities of $583,000 at June 30, 1996. Although the ultimate
future reclamation cost is dependent upon certain events which cannot be
precisely predicted, the Company believes that based on factors presently
known or anticipated, the current reserve will be adequate to fully reclaim
the Toiyabe Mine in compliance with Nevada and federal laws. However, should
unforeseen circumstances arise that that cause the closure timetable to be
delayed or additional labor, material and holding costs to be incurred,
future reclamation exposure could exceed $583,000.
12
<PAGE>
PART 1. FINANCIAL INFORMATION (CONTINUED)
INLAND RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
LIQUIDITY AND CAPITAL RESOURCES:
TCW LOAN AGREEMENT - On November 29, 1995, the Company entered into a Credit
Agreement (the "TCW Loan Agreement") with Trust Company of the West and
affiliated entities (collectively "TCW"), which provides a recourse loan
facility to the Company of up to $25.0 million for the development of the
Monument Butte Field. The TCW Loan Agreement bears interest at 10% per annum
payable quarterly. Commencing in March 1997, minimum payments of principal are
required in the following amounts per quarter: $275,000 in 1997, $550,000 in
1998, $1,300,000 in 1999, $1,400,000 in 2000, $1,200,000 in 2001, $750,000 in
2002, $425,000 in 2003, and $350,000 in 2004. Additional principal payments may
be due in certain circumstances out of excess cash flow, as defined in the TCW
Loan Agreement. The Company also granted TCW an initial 7% overriding royalty
interest, proportionately reduced by the Company's working interest in the oil
and gas properties, which continues until TCW earns a 16% rate of return at
which time it reduces to 3%, proportionately reduced by the Company's interest
in the oil and gas properties, until TCW earns a 22% rate of return. The TCW
Loan Agreement also subjects the Company to penalties on the overriding royalty
interests to achieve a 16% and 22% rate of return if the loan is prepaid prior
to November 29, 1997. The Company is required to meet certain minimum ratios, is
subject to covenants not to engage in various activities without TCW's prior
consent, and may not pay any dividends or make any other distributions without
TCW's prior written consent. The agreement also contains a provision that if any
material adverse change occurs in the Company's financial condition that is not
remedied within 60 days, TCW has the right to declare the Company in default.
The TCW Loan Agreement is collateralized by the Company's interest in
substantially all of its oil and gas and other properties.
During the first half of 1996, the Company borrowed an additional $12.5 million
under the TCW Loan Agreement increasing total advanced funds to $17.5 million at
June 30, 1996. The additional $12.5 million was used to drill and complete 36
gross (34 net) development wells within the Monument Butte Field and further
expand the water delivery and gas gathering infrastructure. The Company intends
on drilling an additional 40 gross (36 net) wells in 1996 with the remaining
availability under the TCW Loan Agreement, cash on hand and cash generated from
future operations. Approximately eight of the newly drilled wells are expected
to be converted to water injection during 1996 depending on connectivity with
surrounding wells, sand porosity, sand permeability and overall injection
patterns. Development will also include the conversion of existing producing
wells to water injection wells, the expansion of the water delivery
infrastructure and the expansion of the gas gathering infrastructure, among
other things. Based on results to date, the Company believes it will be able to
meet the terms of the TCW Loan Agreement and advance the entire $7.5 million of
remaining availability by September 30, 1996. Should the Company experience
unfavorable drilling results, it is possible the Company may not be able to draw
down the remaining $7.5 million. Although less borrowings could potentially slow
the development of the Company's properties in the Monument Butte Field and
associated cash flow, the Company believes it will be able to meet all of its
financial obligations during the next year. Through July 29, 1996, the Company
had borrowed $19.0 million under the TCW Loan Agreement.
13
<PAGE>
PART 1. FINANCIAL INFORMATION (CONTINUED)
INLAND RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
WORKING CAPITAL AND CASH HOLDINGS - The Company increased its cash position
by $1,876,000 and its working capital position by $2,549,000 during the first
half of 1996. The Company's working capital and cash positions are primarily
dependent on the timing of advances under the TCW Loan Agreement and payment of
drilling obligations. The Company is required to cover reclamation costs of the
Toiyabe Mine, net general and administrative expenses, lease operating expenses,
production taxes, undeveloped acreage holding costs and discretionary capital
expenditures out of cash generated from operations and its current cash
holdings. The Company believes that cash sources and holdings will be sufficient
to cover such costs and meet its working capital needs throughout 1997.
On July 31, 1996, the Company expects to further increase its cash and working
capital position by closing on a $10.0 million private placement of equity. The
Company has entered into an agreement to sell to an affiliate of Smith
Management Company, Inc. 950,000 shares of a newly designated Series B Preferred
Stock which will have 1,000,000 shares designated in the series. A director of
the Company, who is also a Vice President of Smith Management Company, Inc.,
entered into a similar agreement pursuant to which he agreed to purchase the
remaining 50,000 shares of Series B Preferred Stock. The Series B Preferred
Stock is to be issued by the Company for cash of $10 per share (an aggregate of
$10.0 million) at a closing to take place on July 31, 1996. Concurrently with
the closing of the issuance and sale of the Series B Preferred Stock, the
Company intends to call for redemption its outstanding Series A Convertible
Preferred Stock. Upon receipt of notice of redemption, each holder of Series A
Convertible Preferred Stock will have the right to elect to receive either (i)
cash in the amount of $54.00, or (ii) 9.6726 shares of Common Stock, for each
share of Series A Convertible Preferred Stock held of record by such holder.
Each holder of Series A Convertible Preferred Stock will have 15 days after
notice of redemption has been delivered by the Company to decide whether to
elect to receive cash or Common Stock. To the extent holders of Series A
Convertible Preferred Stock elect to receive cash, the Company intends to use a
portion of the proceeds from the sale of the Series B Preferred Stock to pay
such holders of Series A Convertible Preferred Stock.
The Series B Preferred Stock will bear a dividend of 12% per annum on the
Redemption Price (defined below); will have a liquidation preference over Common
Stock equal to $10.00 per share plus any accumulated and unpaid dividends; is
redeemable at a "Redemption Price" equal to $10.00 per share, plus accumulated
and unpaid dividends; is convertible at a "conversion price" of $6.27 per share
(divided into the Redemption Price) subject to certain anti-dilution
adjustments; and is entitled to one vote per share of Series B Preferred Stock
on all matters submitted to the stockholders of the Company and will vote with
the Common Stock as one voting group or class, and not as a separate voting
group or class, except where required by law or except with regard to various
amendments to the Company's Articles of Incorporation affecting the Series B
Preferred Stock or creating another series of preferred stock with rights equal
to or greater than the rights of the Series B Preferred Stock. In addition, if
at any time prior to July 31, 1998, (i) the Company sells all or substantially
all of its assets other than in the ordinary course of business, (ii) the
Company merges or consolidates with or into another person, (iii) a change of
control of the Company occurs or (iv) the Company is liquidated or dissolved,
the holders of Series B Preferred Stock will be entitled to a full two years of
accumulated dividends in calculating amounts payable upon redemption or the
number of shares of Common Stock issuable upon conversion, as the case may be.
The Company has agreed to register the shares of Common Stock issuable upon
conversion of the Series B Preferred Stock and to pay all expenses of such
registration.
14
<PAGE>
PART 1. FINANCIAL INFORMATION (CONTINUED)
INLAND RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
HEDGING ACTIVITY - The Company has entered into price protection agreements
to hedge against the volatility in crude oil prices and to help insure the
repayment of indebtedness. The Company has a hedge in place with Enron Capital
and Trade Resources Corp. (an affiliate of Enron Corp.) (the "Enron Hedge") to
hedge crude oil production over a five year period beginning January 1, 1996 in
monthly amounts escalating from 8,500 Bbls in January 1996 to 14,000 Bbls in
December 2000. The hedge is structured as a cost free collar whereby if the
average monthly price (based on NYMEX Light Sweet Crude Oil Futures Contracts)
(the "Average Price") is between $18.00 and $20.55 per barrel, no payment is due
under the contract. If the Average Price is less than $18.00, the Company is
paid the difference between $18.00 and the Average Price, multiplied by the
barrels of crude oil hedged that month. Similarly, should the Average Price
exceed $20.55 per barrel, the Company is required to pay the difference between
$20.55 and the Average Price, multiplied by the barrels of crude oil hedged that
month. Since hedged quantities are based on expected future development in the
Monument Butte Field and because hedging activities do not affect the actual
sales price for the Company's crude oil, there exists risk to the Company's
financial position and results of operations should the Average Price rise
significantly above the ceiling prices of $18.20 and $20.55, respectively, and
development activities not produce the expected results or progress on a slower
than expected timetable. The Company is aware of and continually evaluates this
financial risk and has the ability to enter into commodity contracts to mitigate
potential financial loss should risk factors begin to materialize.
In order to further protect the price the Company receives for crude oil
production, on January 18, 1996 the Company entered into three additional
contracts with Enron Capital and Trade Resources Corp. The effect of two of the
contracts was to lower the floor under the Enron Hedge from $18.00 to $16.50
during the eleven month period from February 1996 to December 31, 1996. The
Company received $52,400 as a result of this restructuring. Under the third
contract, the Company purchased for $149,000 an additional 257,000 put options
with a strike price of $16.50 covering the period February 1996 through December
1996 in monthly amounts escalating from 10,000 barrels to 35,000 during the
contract period. On July 8, 1996, the Company purchased for $133,200 an
additional 720,000 put options with a strike price of $15.00 covering the period
January 1997 through December 1997 which settles in monthly amounts of 60,000
barrels during the contract period. The net cost of these additional contracts
and the monthly settlement net gain or loss will be included as an adjustment
to crude oil revenue in the period the related oil is sold.
ACQUISITION FINANCING - The Company continues to aggressively seek other
opportunities to acquire existing oil and gas production in developed fields.
The Company will attempt to finance such acquisitions through (i) seller
financing, whenever possible; (ii) joint operating agreements with industry
partners where the Company may sell part of its position to provide acquisition
and development funds; (iii) sales of equity or debt of the Company; or (iv)
traditional bank lines of credit, although the Company currently has no existing
bank lines of credit or arrangements with any bank to loan funds.
ENVIRONMENTAL DISCUSSION - The Company is subject to numerous federal and
state laws and regulations relating to environmental matters. Increasing focus
on environmental issues nationally has lead the Company to continue to evaluate
its responsibilities to the environment. The Company believes it is in
compliance in all material respects with applicable federal, state and local
environmental regulations. There are no environmental proceedings pending
against the Company. At June 30, 1996, the Company had recognized a liability of
$583,000 to cover the future costs of reclaiming the Toiyabe Mine.
FORWARD LOOKING STATEMENTS - Certain statements included in this
Management's Discussion and Analysis are forward looking statements that
predict the future development of the Company. The realization of these
predictions will be subject to a number of variable contingencies, and there
is no assurance that they will occur in the time frame proposed. The risks
associated with the potential actualization of the Company's plans include;
contractor delays, regulatory approvals, the availability and cost of
financing, to name a few.
15
<PAGE>
PART II. OTHER INFORMATION
INLAND RESOURCES INC.
Items 1, 2, 3 and 5 are omitted from this report as inapplicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
On May 22, 1996, the Company held its Annual Meeting of Stockholders. During
this meeting, the stockholders voted on the following items:
(1) The holders of Common Stock voted on the election of four members, and
the holders of Series A Preferred Stock voted on the election of three members,
of the Board of Directors to serve until the 1997 annual meeting of stockholders
or until their respective successors are duly elected and qualified;
Item (1) was approved by an affirmative vote of approximately 81% of the total
outstanding shares of Common Stock and 86% of the total outstanding shares of
Series A Preferred Stock, respectively.
(2) To consider and act upon a unified proposal (the "Proposal") to
approve (i) an amendment to the Company's Articles of Incorporation ("Articles")
to decrease the number of shares of Common Stock from 100,000,000 shares to
10,000,000 shares (without affecting par value), (ii) a 1-for-10 reverse stock
split of the presently issued and outstanding shares of Common Stock, and (iii)
an amendment to the Company's Articles, following the effective date of the
reverse split, to increase the post-split number of authorized shares of Common
Stock from 10,000,000 shares to 25,000,000 shares (without affecting par value).
Only the holders of outstanding shares of Common Stock were entitled to consider
and vote upon the Proposal;
Item (2) was approved with 33,181,784 shares voting For the item, 377,973 shares
voting Against, and 45,000 shares Abstaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Quarterly Report on
Form 10-QSB.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- -------- ----------------------
3.1 Amended and Restated Articles of Incorporation, as amended
through July 31, 1996.*
3.2 Bylaws of the Company (filed as Exhibit 3.2 to the Company's
Registration Statement of 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 the
Company adopted February 23, 1993 (filed as Exhibit 3.2.1 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1992, and incorporated herein by reference).
3.2.2 Amendment to the Bylaws of the Company adopted April 8, 1994
(filed as Exhibit 3.2.2 to the Company's Registration Statement
of Form S-4, Registration No. 33-80392, and incorporated herein
by reference).
3.2.3 Amendment to the Bylaws of the Company adopted April 27,
1994 (filed as Exhibit 3.2.3 to the Company's Registration
Statement of Form S-4, Registration No. 33-80392, and
incorporated herein by reference).
16
<PAGE>
PART II. OTHER INFORMATION (CONTINUED)
INLAND RESOURCES INC.
10.1 "Automatic Adjustment to Number of Shares Covered by Amended
1988 Option Plan" executed effective June 3, 1996.*
10.2 Employment Agreement between the Company and Kyle R. Miller
dated June 1, 1996.*
10.3 Employment Agreement between the Company and Bill I.
Pennington dated June 1, 1996.*
10.4 Employment Agreement between the Company and John E. Dyer
dated June 1, 1996.*
27.1 Financial Data Schedule required by Item 601 of Regulation
S-B.
______________________
* Filed herewith.
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K dated June 25, 1996,
reporting an event dated June 12, 1996, which Form 8-K covered the
following items:
Item 2 - Acquisition or Disposition of Assets
Item 5 - Other Events
Item 7 - Financial Statements and Exhibits
17
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INLAND RESOURCES INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INLAND RESOURCES INC.
(Registrant)
Date: July 29, 1996 By: /s/ Kyle R. Miller
------------- ---------------------------
Kyle R. Miller
Chief Executive Officer
Date: July 29, 1996 By: /s/ Michael J. Stevens
------------- ---------------------------
Michael J. Stevens
Controller (Principal Accounting
Officer)
18
<PAGE>
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
INLAND RESOURCES INC.
I, the undersigned person of the age of twenty-one (21) years or more,
acting as incorporator of a Corporation under the Washington Business
Corporation Act, adopt the following Articles of Incorporation for such
Corporation:
ARTICLE I - NAME
The name of this Corporation shall be Inland Resources Inc.
ARTICLE II - DURATION
The duration of this Corporation is perpetual.
ARTICLE III - PURPOSES
The purposes for which this Corporation is organized are as follows:
1. To carry on the business of mining, milling, concentrating,
converting, smelting, treating, preparing for market, manufacturing, buying,
selling, exchanging, and otherwise producing and dealing in gold, silver,
copper, lead, zinc, brass, iron, steel and all kinds of ores, metals and
minerals, and the products and by-products thereof every kind and description
and by whatsoever process the same can be or may hereafter be produced, and
generally and without limit as to amount, to buy, sell, exchange, lease, acquire
and deal in lands, mines, and mineral rights and claims, and to conduct all
business appertaining thereto; to purchase, lease or otherwise acquire, mining
rights, timber rights, oil and gas rights, mines, buildings, dwellings, plants,
machinery, tools and other properties whatsoever which this Corporation may from
time to time find to be for its advantage and purposes; to mine and market any
mineral or other product that may be found in or on such lands, and to explore,
work exercise, develop or turn to account the same; and to conduct all other
business appertaining to any of the aforesaid.
2. To carry on and to engage in any lawful business and related activity
through the powers now or hereafter conferred by the laws of the State of
Washington upon corporations organized pursuant to the laws under which the
Corporation is organized and any and all acts amendatory thereof and
supplemental thereto.
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ARTICLE IV - CAPITAL STOCK
1. The aggregate number of shares which this Corporation shall have
authority to issue is 25,000,000 shares of common stock having a par value of
$0.001 per share, and 20,000,000 shares of Class A preferred stock having a par
value of $0.001 per share. Fully paid stock of this Corporation shall not be
liable to any further call or assessment.
2. 107,546 shares of Class A preferred stock, par value $0.001 per share,
shall be designated Series A Convertible Preferred Stock ("Series A Preferred
Stock"). The Series A Preferred Stock shall have the following voting powers,
preferences and relative, participating, optional and other special rights,
qualifications, limitations and restrictions:
(i) DIVIDENDS. Commencing August 29, 1997, the Series A Preferred
Stock shall bear dividends at the rate of 8% per annum on the Redemption Price
thereof, payable semi-annually to the record holders of Series A Preferred Stock
on the Corporation's books on August 29th and February 28th (the "Record Dates")
of each year, with the first Record Date on February 28, 1998, subject to the
Board's election hereinafter set forth in this paragraph (i). At the election
of the Corporation's Board of Directors (the "Board"), (a) such dividends may be
paid in cash or (b) such dividends may be accumulated and shall be payable in
cash when and as declared by the Board, provided, such accumulated dividends
shall compound semi-annually at an annual rate of eight percent (8%) until paid
in cash. When paid, such dividends shall be payable out of funds legally
available therefor within twenty (20) days after the Board's election or
declaration. No dividends shall be paid or declared, and no distribution (of
securities of the Corporation or any other property) shall be made, on any
Junior Securities (as defined below) while any dividends on the Series A
Preferred Stock shall remain accumulated and unpaid (including any compounded
portion thereof). "Junior Securities" means any of the Corporation's equity
securities other than the Series A Preferred Stock.
(ii) LIQUIDATION RIGHTS.
(a) In the event of any liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, the holder of each share
of Series A Preferred Stock then outstanding shall be entitled to be paid out of
the assets of the Corporation available for distribution to its stockholders,
whether such assets are capital, surplus or earnings, before any payment or
declaration and setting apart for payment of any amount shall be made in respect
of any Junior Securities, an amount in cash equal to fifty dollars ($50.00) for
each share of such Series A Preferred Stock, together with any accumulated and
compounded dividends thereon (the "Liquidation Value").
(b) After the payment or distribution to the holders of Series A
Preferred Stock of the full preferential amounts aforesaid, the holders of
Common Stock then outstanding shall together be entitled to receive ratably all
the remaining assets of the Corporation.
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(c) A consolidation or merger of the Corporation with or into
any other corporation or corporations shall not be deemed to be a liquidation,
dissolution or winding up of the Corporation as those terms are used in this
paragraph (ii).
(d) If upon any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the assets to be distributed
among the holders of Series A Preferred Stock pursuant to subparagraph (a) shall
be insufficient to permit the payment to such stockholders of the full
preferential amounts required by such subparagraph, then all of the assets of
the Corporation to be distributed shall be distributed ratably to the holders of
outstanding Series A Preferred Stock based on the number of shares held by each
holder, and the holders of Junior Securities shall receive no distribution upon
such liquidation, dissolution or winding up of the Corporation.
(iii) REDEMPTION OF SERIES A PREFERRED STOCK. The Series A
Preferred Stock may be redeemed at the "Redemption Price" (as defined below)
at any time by the Corporation prior to liquidation, dissolution or winding
up of the Corporation upon fifteen (15) days advance written notice by the
Corporation to the record holders of such Series A Preferred Stock on the
books of the Corporation. The holders of Series A Preferred Stock shall be
deemed to have received written notice of such redemption five (5) days after
Company's mailing of the notice of redemption by certified or registered
mail, return receipt requested, postage prepaid, and addressed to each holder
of record at such holder's address appearing on the books of the Corporation.
The "Redemption Price" shall be equal to (i) fifty dollars ($50.00) per share
of Series A Preferred Stock if redeemed prior to August 29, 1995, (ii) fifty
four dollars ($54.00) per share if redeemed on or after August 29, 1995 but
prior to August 29, 1996, and (iii) fifty eight and 32/100 dollars ($58.32)
per share if redeemed on or after August 29, 1996, provided, however, that if
redeemed after August 29, 1997, the Redemption Price shall also include any
accumulated dividends (including any compounded portion thereof). Any record
holder of Series A Preferred Stock may convert all or a portion of its, his
or her Series A Preferred Stock in accordance with the provisions of
paragraph (iv) prior to such date of redemption by delivering written notice
to the Corporation of such holder's election to convert all or a portion of
such shares of Series A Preferred Stock held of record by such holder. The
Redemption Price payable to the holders of Series A Preferred Stock who have
not elected to convert their shares shall be payable by the Corporation
within ten (10) days after expiration of the aforementioned fifteen (15) day
notice period.
(iv) CONVERSION. The holders of Series A Preferred Stock shall have
the following conversion rights (the "Conversion Rights"):
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(a) RIGHT TO CONVERT. Each share of Series A Preferred Stock
shall be convertible, at the option of the holder thereof, at any time after the
date of issuance of such share, at the office of the Corporation or any transfer
agent for the Series A Preferred Stock or Common Stock, into the number of
shares of Common Stock which result from dividing the Redemption Price then in
effect by the "Conversion Price" per share (as defined herein) in effect at the
time of such conversion. The initial "Conversion Price" per share shall be
$0.60, and such initial Conversion Price shall be subject to adjustment from
time to time as provided herein.
(b) MECHANICS OF CONVERSION. Before any holder of Series A
Preferred Stock shall be entitled to convert the same into shares of Common
Stock, such holder shall surrender the certificate or certificates therefor,
duly endorsed, at the office of the Corporation or of any transfer agent for the
Series A Preferred Stock or Common Stock, and shall give written notice to the
Corporation at such office that such holder elects to convert the same and shall
state therein the number of shares of Series A Preferred Stock being converted.
Thereupon the Corporation shall promptly issue and deliver at such office to
such holder of Series A Preferred Stock a certificate or certificates for the
number of shares of Common Stock to which such holder shall be entitled as
aforesaid. Such conversion shall be deemed to have been made immediately prior
to the close of business on the date of such surrender of the shares of Series A
Preferred Stock to be converted, and the person or persons whom the
Corporation's records indicate are entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock on such date. The
certificate or certificates representing the shares of Common Stock issued upon
such conversion shall contain the same restrictive legends, if any, included on
the certificate or certificates of Series A Preferred Stock surrendered, unless
the shares of Common Stock issuable upon such conversion have been registered
under the Securities Act of 1933, as amended, and applicable state securities
laws, in which case they will not be legended.
(c) ADJUSTMENT FOR STOCK SPLITS AND COMBINATIONS. If the
Corporation shall at any time or from time to time after August 29, 1994 (the
"Commitment Date") effect a subdivision of the outstanding Common Stock, the
Conversion Price then in effect immediately before the subdivision shall be
proportionately decreased, and conversely, if the Corporation shall at any time
or from time to time after the Commitment Date combine the outstanding shares of
Common Stock, the Conversion Price then in effect immediately before the
combination shall be proportionately increased. Any adjustment under this
subparagraph (c) shall become effective at the close of business on the date the
subdivision or combination becomes effective.
(d) ADJUSTMENT FOR CERTAIN DIVIDENDS AND DISTRIBUTIONS. In the
event the Corporation at any time, or from time to time, after the Commitment
Date shall make or issue, or fix a record date for the determination of holders
of Common Stock entitled to receive, a dividend or other distribution payable in
shares of Common Stock, then and in each such event the Conversion Price then in
effect shall be decreased as of the time of such issuance or in the event such a
record date shall have been fixed, as of the close of business on such record
date, by multiplying the Conversion Price then in effect by a fraction:
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(i) the numerator of which shall be the total number of
shares of Common Stock issued and outstanding immediately prior to the time of
such issuance or the close of business on such record date; and
(ii) the denominator of which shall be the total number of
shares of Common Stock issued and outstanding immediately prior to the time of
such issuance or the close of business on such record date plus the number of
shares of Common Stock issuable in payment of such dividend or distribution;
provided, however, that if such record date shall have been fixed and such
dividend is not fully paid or if such distribution is not fully made on the date
fixed therefore the Conversion Price shall be recomputed accordingly as of the
close of business on such record date and thereafter the Conversion Price shall
be adjusted pursuant to this subparagraph (d) as of the time of actual payment
of such dividends or distributions.
(e) ADJUSTMENTS FOR OTHER DIVIDENDS AND DISTRIBUTIONS. In the
event the Corporation at any time or from time to time after the Commitment Date
shall make or issue or fix a record date for the determination of holders of
Common Stock entitled to receive a dividend or other distribution payable in
securities of the Corporation other than shares of Common Stock, then and in
each such event provision shall be made so that the holders of Series A
Preferred Stock shall receive upon conversion thereof in addition to the number
of shares of Common Stock receivable thereupon, the amount of securities of the
Corporation which they would have received had their Series A Preferred Stock
been converted into Common Stock on the date of such event and had they
thereafter, during the period from the date of such event to and including the
Conversion Date, retained such securities receivable by them as aforesaid during
such period, giving application to all adjustments called for during such period
under this paragraph (iv) with respect to the rights of the holders of the
Series A Preferred Stock.
(f) ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE AND SUBSTITUTION.
If the Common Stock issuable upon the conversion of the Series A Preferred Stock
shall be changed into the same or different number of shares of any class or
classes of stock, whether by capital reorganization, reclassification or
otherwise (other than a subdivision or combination of shares or stock dividend
provided for above, or a reorganization, merger, consolidation or sale of assets
provided for elsewhere in this paragraph (iv)), then and in each such event the
holders of each share of Series A Preferred Stock shall have the right
thereafter to convert such share into the kind and amount of shares of stock and
other securities and property receivable upon such reorganization,
reclassification or other change by holders of the number of shares of Common
Stock into which such share of Series A Preferred Stock might have been
converted immediately prior to such reorganization, reclassification or other
change, all subject to further adjustment as provided herein.
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(g) REORGANIZATION, MERGERS, CONSOLIDATIONS OR SALES OF ASSETS.
If at any time or from time to time there shall be a capital reorganization of
the Common Stock (other than a subdivision, combination, reclassification or
exchange of shares provided for elsewhere in this paragraph (iv)) or a merger or
consolidation of the Corporation with or into another corporation, or the sale
of all or substantially all of the Corporation's properties and assets to any
other person, then, as a part of such reorganization, merger, consolidation or
sale, provision shall be made so that the holders of Series A Preferred Stock
shall thereafter be entitled to receive, upon conversion of Series A Preferred
Stock, the number of shares of stock or other securities or property to which a
holder of the Common Stock deliverable upon such conversion would have been
entitled in connection with such reorganization, merger, consolidation or sale.
In any such case, appropriate adjustment shall be made in the application of the
provisions of this paragraph (iv) with respect to the rights of the holders of
Series A Preferred Stock after the reorganization, merger, consolidation or sale
to the end that the provisions of this paragraph (iv) (including provisions for
the adjustment of the Conversion Price then in effect and the number of shares
purchasable upon conversion of the Series A Preferred Stock) shall be applicable
after that event and be as nearly equivalent to the provisions hereof as is
practicable.
(h) ADJUSTMENT FOR ISSUANCE OF COMMON STOCK AT LESS THAN
CONVERSION PRICE. If the Corporation at any time after the Commitment Date (i)
issues any shares of Common Stock (other than pursuant to the Subscription
Agreement of Smith Management Company, or its designee, dated May 12, 1994, the
Employment Agreement and Warrant Agreement, both dated February 23, 1993, by and
between the Corporation and Kyle R. Miller, warrants to purchase 2,008,894
shares of Common Stock granted to Petroglyph Gas Partners, L.P. pursuant to an
agreement dated January 31, 1994 and options to purchase 300,000 shares of
Common Stock granted to Dwight Moorhead pursuant to an agreement dated December
15, 1993, for a per share consideration or price less than the Conversion Price
then in effect hereunder, or (ii) issues any rights, warrants or options to
acquire, or securities convertible into, shares of Common Stock (other than
options to purchase no more than 2,128,358 shares of Common Stock pursuant to
the Corporation's 1988 Option Plan and similar benefit plans subsequently
adopted by the Corporation for the benefit of its employees, or warrants granted
to Kyle R. Miller pursuant to the Employment Agreement and Warrant Agreement,
both dated February 23, 1993, by and between the Corporation and Kyle R. Miller,
warrants to purchase 2,008,894 shares of Common Stock granted to Petroglyph Gas
Partners, L.P. pursuant to an agreement dated January 31, 1994 and options to
purchase 300,000 shares of Common Stock granted to Dwight Moorhead pursuant to
an agreement dated December 15, 1993, that permit exercise or conversion for a
per share consideration less than the Conversion Price then in effect hereunder,
then effective automatically on the date of such issuance the Conversion Price
hereunder shall automatically be adjusted as follows: the number of shares of
the Corporation's Common Stock outstanding (or deemed to be outstanding as
hereinafter provided) immediately prior to such issue shall be multiplied by the
Conversion Price in effect at the time of such issue and there shall be added to
the product so obtained the aggregate consideration, if any, (a) received by the
Corporation upon such issue of additional shares of Common Stock pursuant to (i)
and (b) received by the Corporation, or which will be received by the
Corporation, pursuant to (ii) upon the issue and upon the subsequent exercise or
conversion of any such additional rights,
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warrants, options or convertible securities. The sum so obtained shall be
divided by the number of shares of the Corporation's Common Stock outstanding
(or deemed to be outstanding as hereinafter provided) immediately after such
issue (including, for this purpose, the shares to be subsequently issued
under any rights, warrants, options or convertible securities which triggered
the requirement to apply this adjustment to the Conversion Price), and the
resulting quotient shall be the adjusted Conversion Price. For purposes of
determining outstanding shares of Common Stock for applying the foregoing
formula, all options, rights, warrants and securities convertible into Common
Stock outstanding as of the date hereof shall be deemed to be outstanding
shares of Common Stock, and any options, rights, warrants or convertible
securities issued after the date hereof pursuant to (ii), above, which have
resulted in a previous adjustment of the Conversion Price shall be considered
outstanding shares of Common Stock for all subsequent applications of the
formula to arrive at subsequent adjustments of the Conversion Price.
(i) ACCOUNTANTS' CERTIFICATE OF ADJUSTMENT. In each case of an
adjustment or readjustment of the Conversion Price or the number of shares of
Common Stock or other securities issuable upon conversion of Series A Preferred
Stock, the Corporation, at its expense, shall cause independent public
accountants of recognized standing selected by the Corporation (who may be the
independent public accountants then auditing the books of the Corporation) (or
the chief financial officer of the Corporation at the Board's option) to compute
such adjustment or readjustment in accordance with the Corporation's Articles of
Incorporation and prepare a certificate showing such adjustment or readjustments
and shall mail such certificate, by first class mail, postage prepaid, to each
registered holder of Series A Preferred Stock at the holder's address as shown
in the Corporation's books. The certificate shall set forth such adjustment or
readjustment, showing in detail the facts upon which such adjustment or
readjustment is based.
(j) NOTICES OF RECORD DATE. In the event (i) any taking by the
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend or other distribution, or (ii) any capital reorganization of the
Corporation, any reclassification or recapitalization of the capital stock of
the Corporation or any transfer of all or substantially all of the assets of the
Corporation to, or any merger or consolidation with, any other corporation, or
any other entity or person, or any voluntary or involuntary dissolution,
liquidation or winding up of the Corporation, the Corporation shall mail to each
holder of Series A Preferred Stock at least thirty (30) days prior to the record
date specified therein, a notice specifying (A) the date on which any such
record is to be taken for the purpose of such dividend or distribution and a
description of such dividend or distribution, (B) the date on which any such
reorganization, reclassification or recapitalization, transfer, consolidation,
merger, dissolution, liquidation or winding up is expected to become effective
and a description of such transaction, and (C) the time, if any, that is to be
fixed as to when the holders of record of Common Stock (or other securities)
shall be entitled to exchange their shares of Common Stock (or other securities)
for securities or other property deliverable upon such reorganization,
reclassification or recapitalization, transfer, consolidation, merger,
dissolution, liquidation or winding up.
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(k) FRACTIONAL SHARES. No fractional shares of Common Stock
shall be issued upon conversion of Series A Preferred Stock. In lieu of any
fractional shares to which the holder would otherwise be entitled, the
Corporation shall pay cash equal to the product of such fraction multiplied by
the fair market value of one share of the Corporation's Common Stock on the date
of conversion, as determined by the closing "bid" price on the day prior to the
date of conversion.
(l) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. As of the
Commitment Date, the Corporation does not have sufficient authorized shares of
Common Stock to issue shares of Common Stock upon conversion of the Series A
Preferred Stock. The Corporation shall use its best efforts to cause its
Articles of Incorporation to be amended to increase the number of authorized
shares of Common Stock in an amount which will allow for such reservation and
for the Corporation to engage in subsequent capital transactions with its Common
Stock. If the Articles of Incorporation are amended to provide for a
sufficient number of authorized shares of Common Stock for conversion of the
Series A Preferred Stock, the Corporation shall at all times thereafter reserve
and keep available out of such authorized but unissued shares of Common Stock
solely for the purpose of effecting the conversion of shares of Series A
Preferred Stock such number of its shares of Common Stock as shall from time to
time be sufficient to effect the conversion of all outstanding shares of Series
A Preferred Stock; and if at any time thereafter the number of authorized but
unissued shares of Common Stock shall not be sufficient to effect the conversion
of all then outstanding shares of Series A Preferred Stock, the Corporation will
take such corporate action as may, in the opinion of its counsel, be necessary
to increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purpose.
(m) NOTICES. Any notice required by the provisions of this
paragraph (iv) to be given to the holders of shares of Series A Preferred Stock
shall be deemed given five (5) business days after the same has been deposited
in the United States mail, certified or registered mail, return receipt
requested, postage prepaid, and addressed to each holder of record at such
holder's address appearing on the books of the Corporation.
(n) PAYMENT OF TAXES. The Corporation will pay all taxes and
other governmental charges, other than income, estate or gift taxes, that may be
imposed in respect of the issue or delivery of shares of Common Stock upon
conversion of shares of Series A Preferred Stock.
(v) VOTING RIGHTS.
(a) For as a long as at least 25% of the shares of Series A
Preferred Stock remain outstanding, holders of Series A Preferred Stock, acting
as a separate voting group, shall have the limited voting rights provided in
this paragraph (v)(a). For as long as at least 75% of the shares of Series A
Preferred Stock remain outstanding, the Series A Preferred Stock shall have the
right, by majority vote, to elect three of the directors of the Corporation at
any stockholders' meeting at which directors of the Corporation are to be
elected, unless the
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Corporation has not paid dividends after August 29, 1997 (whether required to
be paid or accumulated) on the Series A Preferred Stock in cash for more than
one year, in which case they will elect four directors until the Corporation
has paid in cash all dividends required to be paid or accumulated on each
share of Series A Preferred Stock in excess of $4.67 per share. For as long
as less than 75% but more than 50% of shares of Series A Preferred Stock
remain outstanding, the Series A Preferred Stock shall have the right, by
majority vote, to elect two of the directors of the Corporation at any
stockholders' meeting at which directors of the Corporation are to be
elected, unless the Corporation has not paid dividends after August 29, 1997
(whether required to be paid or accumulated) on the Series A Preferred Stock
in cash for more than one year, in which case they will elect four directors
until the Corporation has paid in cash all dividends required to be paid or
accumulated on each share of Series A Preferred Stock in excess of $4.67 per
share. For as long as less than 50% but more than 25% of the shares of
Series A Preferred Stock remain outstanding, the Series A Preferred Stock
shall have the right, by majority vote, to elect one director of the
Corporation at any stockholders' meeting at which directors of the
Corporation are to be elected, unless the Corporation has not paid dividends
after August 29, 1997 (whether required to be paid or accumulated) on the
Series A Preferred Stock in cash for more than one year, in which case they
will elect two directors until the Corporation has paid in cash all dividends
required to be paid or accumulated on each share of Series A Preferred Stock
in excess of $4.67 per share. For as long as at least 25% of the shares of
Series A Preferred Stock remain outstanding, the number of directors of the
Corporation shall continue to be seven unless an increase is approved by at
least five of the members of the Board including two of the members elected
by the holders of Series A Preferred Stock (unless there is only one member
elected by the holders of Series A Preferred Stock, in which case such an
increase shall be approved by that one director). Except as expressly set
forth herein or expressly mandated and required by Washington law, any vote
by the holders of Series A Preferred Stock as a separate voting group shall
be effective if approved by a majority of the outstanding shares of Series A
Preferred Stock. Each holder of shares of Series A Preferred Stock shall be
entitled to one vote for each share thereof held.
(b) If at any time the number of outstanding shares of Series A
Preferred Stock falls below 25% of the original shares issued, holders of Series
A Preferred Stock shall, from and after such time, be entitled to one vote for
each share of Series A Preferred Stock held and shall vote as a single class or
voting group with holders of Common Stock held on all matters presented to the
stockholders; and Series A Preferred Stock shall not vote as a separate voting
group or class on any matter whatsoever except as set forth in paragraph (v)(c),
below, and as expressly mandated and required by Washington law.
(c) In addition to the foregoing voting rights, the Series A
Preferred Stock shall have the right at any time and from time to time, by a
two-thirds (2/3) vote of holders of Series A Preferred Stock voting as a
separate class, (1) to approve any merger, consolidation or liquidation
involving the Corporation in which the Corporation does not survive, (2) to
approve a sale of all or substantially all of the assets of the Corporation, and
(3) to approve the issuance of any class or series of stock with rights pari
passu or senior to the rights of the Series A Preferred Stock.
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(d) Except as expressly provided in paragraphs (v)(a), (v)(b)
or (v)(c) or as expressly mandated and required by Washington law, the holders
of shares of Series A Preferred Stock shall not have voting rights. Cumulative
voting by holders of Series A Preferred Stock is expressly denied.
(e) The directors elected by the Series A Preferred Stock can
only be removed by the Series A Preferred Stock. Any vacancy in the office of a
director elected by the holders of the Series A Preferred Stock may be filled by
a vote of such holders voting as a separate class, or, in the absence of a
stockholder vote, such vacancy may be filled by the remaining director or
directors elected by the holders of Series A Preferred Stock.
(vi) PREEMPTIVE RIGHTS. Except as provided in paragraph (iv), no
holder of any shares of Series A Preferred Stock shall be entitled as a matter
of right to subscribe or receive additional shares of any class of stock of the
Corporation, whether now or hereafter authorized, or any bonds, debentures or
other securities convertible into such stock, but such additional shares of
stock or other securities convertible into stock may be issued or disposed of by
the Board to such persons and on such terms as in the Board's discretion the
Board shall deem advisable.
(vii) NO REISSUANCE OF SERIES A PREFERRED STOCK. No share or
shares of Series A Preferred Stock acquired by the Corporation by reason of
redemption, purchase, conversion or otherwise shall be reissued, and all such
shares shall be canceled, retired and eliminated from the shares of Series A
Preferred Stock which the Corporation shall be authorized to issue.
(viii) INFORMATION REQUIREMENTS. If the Corporation is not subject
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), the Corporation shall mail to the holders
of Series A Preferred Stock, (i) within 15 days after it would have been
required to file such information with the Commission, financial statements,
including any notes thereto (and, with respect to annual reports, an auditors'
report by an independent certified public accounting firm of established
national reputation), and a "Management's Discussion and Analysis of Financial
Condition and Results of Operations," each comparable to that which the
Corporation would have been required to include in any annual or quarterly
reports, information, documents or other reports if the Corporation was subject
to the requirements of such Section 13 or 15(d) of the Exchange Act, and to the
extent not otherwise included in the annual and quarterly reports to be
delivered to the holders of Series A Preferred Stock pursuant to this sentence,
the Corporation's consolidated balance sheet as of the last day of each annual
and quarterly fiscal period of the Corporation, and the Corporation's
consolidated balance sheet as of the last day of each annual and quarterly
fiscal period of the Corporation, and the Corporation's consolidated income
statement and statement of cash flows, in each case for each annual and
quarterly fiscal period of the Corporation and (ii) promptly from the time after
the occurrence of an event required to be therein reported, such other reports
containing information required to be contained in Form 8-K promulgated under
the Exchange Act, or substantially the same information required to be contained
in any successor form.
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(ix) COMMON STOCK. The term "Common Stock", as used herein, means
the Corporation's $.001 par value Common Stock and any capital stock of any
class of the Corporation authorized after the date the Series A Preferred Stock
is established which is not limited to a fixed sum or percentage of par or
stated value in respect of the rights of holders thereof to participate in
dividends or in the distribution of assets upon any liquidation, dissolution or
winding up of the Corporation.
(ix) AMENDMENTS. There shall be no amendment, modification or waiver
of the terms hereof without the prior written consent of holders of at least a
majority of the Series A Preferred Stock outstanding at such time, provided,
however, that no amendment, modification or waiver of paragraph (v)(c) hereof
shall be made without the consent of the holders of at least two-thirds of the
Series A Preferred Stock outstanding at such time.
3. 1,000,000 shares of Class A preferred stock, par value $0.001 per
share, shall be designated Series B Convertible Preferred Stock ("Series B
Preferred Stock"). The Series B Preferred Stock shall have the following voting
powers, preferences and relative, participating, optional and other special
rights, qualifications, limitations and restrictions:
(i) DIVIDENDS. The Series B Preferred Stock shall bear dividends at
the rate of 12% per annum on the Redemption Price thereof, accumulating daily,
whether or not declared, and payable quarterly in cash or common stock, at the
option of the holder, to the record holders of Series B Preferred Stock on the
Corporation's books on the last day of each calendar quarter in each calendar
year (the "Record Dates"), with the first Record Date on September 30, 1996,
subject to the Board's election hereinafter set forth in this paragraph (i). At
the election of the Corporation's Board of Directors (the "Board"), (a) such
dividends may be paid in cash or (b) such dividends may be accumulated and shall
be payable in cash when and as declared by the Board, provided, the holders of
Series B Preferred Stock may, by written notice to the Corporation delivered
within ten (10) days following each Record Date, elect to take dividends in the
form of Common Stock at the Conversion Price (defined in paragraph (iv), below).
Notwithstanding the foregoing, in the event that the holder of Series B
Preferred Stock does not elect during such ten day period to receive dividends
in the form of Common Stock, the holder will continue to have the right to take
such accumulated dividends in the form of Common Stock until such time, if any,
as the Board of Directors declares that such accumulated dividends shall be paid
in cash and establishes a dividend payment date therefor. When paid in cash,
such dividends shall be payable out of funds legally available therefor within
twenty (20) days after the Board's election or declaration. No dividends shall
be paid or declared, and no distribution (of securities of the Corporation or
any other property) shall be made, on any Junior Securities (as defined below)
while any dividends on the Series B Preferred Stock shall remain accumulated and
unpaid. "Junior Securities" means any of the Corporation's equity securities
other than the Series B Preferred Stock and the Corporation's Series A Preferred
Stock, which is being called for redemption (or conversion, at the election of
the holders thereof) concurrently with the filing of these Articles of Amendment
designating the Series B Preferred Stock, it being understood, therefore, that
no shares of Series A Preferred
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Stock will be issued and outstanding as of the first Record Date for Series B
Preferred Stock, but until said Series A Preferred Stock is actually redeemed
or converted in accordance with such call for redemption, the Series A
Preferred Stock shall have preference over the Series B Preferred Stock and
the Series B Preferred Stock shall be deemed subordinate to the Series A
Preferred Stock.
(ii) LIQUIDATION RIGHTS.
(a) In the event of any liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, the holder of each share
of Series B Preferred Stock then outstanding shall be entitled to be paid out of
the assets of the Corporation available for distribution to its stockholders,
whether such assets are capital, surplus or earnings, before any payment or
declaration and setting apart for payment of any amount shall be made in respect
of any Junior Securities (but expressly subordinate to the rights of the holders
of Series A Preferred Stock until it is redeemed or converted as noted in
paragraph (i), above), an amount in cash equal to ten dollars ($10.00) for each
share of such Series B Preferred Stock, together with any accumulated dividends
thereon, provided, if such liquidation, dissolution or winding up of the
Corporation occurs prior to July 31, 1998, the holders of Series B Preferred
Stock shall be entitled to the full amount of dividends that would have been
accumulated through such date (the "Liquidation Value").
(b) After the payment or distribution to the holders of Series B
Preferred Stock of the full preferential amounts aforesaid, the holders of
Common Stock then outstanding shall together be entitled to receive ratably all
the remaining assets of the Corporation.
(c) A consolidation or merger of the Corporation with or into
any other corporation or corporations shall not be deemed to be a liquidation,
dissolution or winding up of the Corporation as those terms are used in this
paragraph (ii).
(d) If upon any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the assets to be distributed
among the holders of Series B Preferred Stock pursuant to subparagraph (a) shall
be insufficient to permit the payment to such stockholders of the full
preferential amounts required by such subparagraph, then all of the assets of
the Corporation to be distributed shall be distributed ratably to the holders of
outstanding Series B Preferred Stock based on the number of shares held by each
holder, and the holders of Junior Securities shall receive no distribution upon
such liquidation, dissolution or winding up of the Corporation.
(iii) REDEMPTION OF SERIES B PREFERRED STOCK. Subject to the
rights of the holders of Series A Preferred Stock until redeemed or converted as
noted in paragraph (i), above, the Series B Preferred Stock may be redeemed at
any time by the Corporation prior to liquidation, dissolution or winding up of
the Corporation upon fifteen (15) days advance written notice by the Corporation
to the record holders of such Series B Preferred Stock on the books of the
Corporation, by paying to the holders of Series B Preferred Stock an amount
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equal to $10.00 per outstanding share (the "Redemption Price") plus accumulated
and unpaid dividends thereon. The holders of Series B Preferred Stock shall be
deemed to have received written notice of such redemption five (5) days after
the Corporation's mailing of the notice of redemption by certified or registered
mail, return receipt requested, postage prepaid, and addressed to each holder of
record at such holder's address appearing on the books of the Corporation. Upon
redemption of the Series B Preferred Stock, each holder shall be entitled to
payment of the Redemption Price and any accumulated dividends, provided, if such
redemption occurs prior to July 31, 1998, the holders of Series B Preferred
Stock shall be entitled to the full amount of dividends that would have been
accumulated through such date. Any record holder of Series B Preferred Stock
may convert all or a portion of its, his or her Series B Preferred Stock in
accordance with the provisions of paragraph (iv) prior to such date of
redemption by delivering written notice to the Corporation of such holder's
election to convert all or a portion of such shares of Series B Preferred Stock
(and dividends payable thereon) held of record by such holder. The Redemption
Price (and dividends payable thereon) payable to the holders of Series B
Preferred Stock who have not elected to convert their shares shall be payable by
the Corporation within ten (10) days after expiration of the aforementioned
fifteen (15) day notice period.
Any designee of Smith Management Company, Inc. ("Smith Management") on the
Corporation's Board, or any replacements thereof or any other subsequent
nominees by Smith Management, shall not be entitled to vote on the redemption of
the Series B Preferred Stock.
The Corporation must exercise its redemption rights granted pursuant to
this paragraph (iii) if a "Corporate Transaction" (as hereinafter defined)
occurs. "Corporate Transaction" means the occurrence of any of the following:
(i) the sale by the Corporation of all or substantially all of its assets other
than in the ordinary course of business, (ii) a merger of the Corporation with
or into another person or a consolidation of the Corporation with another
person, or (iii) any person or "group" (within the meaning of Section 13(d)(3)
of the Securities Exchange Act of 1934, as amended) (other than Pengo Securities
Corp. and its affiliates), acquires voting securities of the Corporation
representing a majority of the total votes that may be cast in the election of
the Corporation's directors.
The Corporation shall be prohibited from redeeming any Junior Securities
unless the Corporation shall also redeem all of the Series B Preferred Stock in
conjunction therewith, or holders of at least a majority of the Series B
Preferred Stock outstanding at such time have voted to allow redemption of such
Junior Securities without redemption of the Series B Preferred Stock.
Notwithstanding the foregoing, the Corporation shall be entitled to redeem the
Series A Preferred Stock without further notice to, or action by, the holders of
Series B Preferred Stock.
(iv) CONVERSION. The holders of Series B Preferred Stock shall have
the following conversion rights (the "Conversion Rights"):
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(a) RIGHT TO CONVERT. Each share of Series B Preferred Stock
shall be convertible, at the option of the holder thereof, at any time after the
date of issuance of such share, at the office of the Corporation or any transfer
agent for the Series B Preferred Stock or Common Stock, into the number of
shares of Common Stock which result from dividing the Redemption Price (plus any
accumulated dividends) by the "Conversion Price" per share (as defined herein)
in effect at the time of such conversion; provided, if the conversion is elected
by the holder after the Corporation has issued a notice of redemption, or in
connection with a liquidation, dissolution, or winding up of the Corporation,
prior to July 31, 1998, the accumulated dividends into which the Conversion
Price shall be divided shall include the full amount of dividends that would
have been accumulated through July 31, 1998. The initial "Conversion Price" per
share shall be $6.27, and such initial Conversion Price shall be subject to
adjustment from time to time as provided herein.
(b) MECHANICS OF CONVERSION. Before any holder of Series B
Preferred Stock shall be entitled to convert the same into shares of Common
Stock, such holder shall surrender the certificate or certificates therefor,
duly endorsed, at the office of the Corporation or of any transfer agent for the
Series B Preferred Stock or Common Stock, and shall give written notice to the
Corporation at such office that such holder elects to convert the same and shall
state therein the number of shares of Series B Preferred Stock being converted.
Thereupon the Corporation shall promptly issue and deliver at such office to
such holder of Series B Preferred Stock a certificate or certificates for the
number of shares of Common Stock to which such holder shall be entitled as
aforesaid. Such conversion shall be deemed to have been made immediately prior
to the close of business on the date of such surrender of the shares of Series B
Preferred Stock to be converted, and the person or persons whom the
Corporation's records indicate are entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock on such date. The
certificate or certificates representing the shares of Common Stock issued upon
such conversion shall contain the same restrictive legends, if any, included on
the certificate or certificates of Series B Preferred Stock surrendered, unless
the shares of Common Stock issuable upon such conversion have been registered
under the Securities Act of 1933, as amended, and applicable state securities
laws, in which case they will not be legended.
(c) ADJUSTMENT FOR STOCK SPLITS AND COMBINATIONS. If the
Corporation shall at any time or from time to time after the issuance of the
Series B Preferred Stock (the "Commitment Date") effect a subdivision of the
outstanding Common Stock, the Conversion Price then in effect immediately before
the subdivision shall be proportionately decreased, and conversely, if the
Corporation shall at any time or from time to time after the Commitment Date
combine the outstanding shares of Common Stock, the Conversion Price then in
effect immediately before the combination shall be proportionately increased.
Any adjustment under this subparagraph (c) shall become effective at the close
of business on the date the subdivision or combination becomes effective.
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(d) ADJUSTMENT FOR CERTAIN DIVIDENDS AND DISTRIBUTIONS. In the
event the Corporation at any time, or from time to time, after the Commitment
Date shall make or issue, or fix a record date for the determination of holders
of Common Stock entitled to receive, a dividend or other distribution payable in
shares of Common Stock, then and in each such event the Conversion Price then in
effect shall be decreased as of the time of such issuance or in the event such a
record date shall have been fixed, as of the close of business on such record
date, by multiplying the Conversion Price then in effect by a fraction:
(i) the numerator of which shall be the total number of
shares of Common Stock issued and outstanding immediately prior to the time of
such issuance or the close of business on such record date; and
(ii) the denominator of which shall be the total number of
shares of Common Stock issued and outstanding immediately prior to the time of
such issuance or the close of business on such record date plus the number of
shares of Common Stock issuable in payment of such dividend or distribution;
provided, however, that if such record date shall have been fixed and such
dividend is not fully paid or if such distribution is not fully made on the date
fixed therefore the Conversion Price shall be recomputed accordingly as of the
close of business on such record date and thereafter the Conversion Price shall
be adjusted pursuant to this subparagraph (d) as of the time of actual payment
of such dividends or distributions.
(e) ADJUSTMENTS FOR OTHER DIVIDENDS AND DISTRIBUTIONS. In the
event the Corporation at any time or from time to time after the Commitment Date
shall make or issue or fix a record date for the determination of holders of
Common Stock entitled to receive a dividend or other distribution payable in
securities of the Corporation other than shares of Common Stock, then and in
each such event provision shall be made so that the holders of Series B
Preferred Stock shall receive upon conversion thereof in addition to the number
of shares of Common Stock receivable thereupon, the amount of securities of the
Corporation which they would have received had their Series B Preferred Stock
been converted into Common Stock on the date of such event and had they
thereafter, during the period from the date of such event to and including the
Conversion Date, retained such securities receivable by them as aforesaid during
such period, giving application to all adjustments called for during such period
under this paragraph (iv) with respect to the rights of the holders of the
Series B Preferred Stock.
(f) ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE AND SUBSTITUTION.
If the Common Stock issuable upon the conversion of the Series B Preferred Stock
shall be changed into the same or different number of shares of any class or
classes of stock, whether by capital reorganization, reclassification or
otherwise (other than a subdivision or combination of shares or stock dividend
provided for above, or a reorganization, merger, consolidation or sale of assets
provided for elsewhere in this paragraph (iv)), then and in each such event the
holders of each share of Series B Preferred Stock shall have the right
thereafter to convert such share into the kind and amount of shares of stock and
other securities and property receivable
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upon such reorganization, reclassification or other change by holders of the
number of shares of Common Stock into which such share of Series B Preferred
Stock might have been converted immediately prior to such reorganization,
reclassification or other change, all subject to further adjustment as
provided herein.
(g) REORGANIZATION, MERGERS, CONSOLIDATIONS OR SALES OF ASSETS.
Subject to the Corporation's obligation to redeem the Series B Preferred Stock
in connection with the occurrence of a Corporate Transaction as provided in
paragraph (iii), if at any time or from time to time there shall be a capital
reorganization of the Common Stock (other than a subdivision, combination,
reclassification or exchange of shares provided for elsewhere in this paragraph
(iv)) or a merger or consolidation of the Corporation with or into another
corporation, or the sale of all or substantially all of the Corporation's
properties and assets to any other person, then, as a part of such
reorganization, merger, consolidation or sale, provision shall be made so that
the holders of Series B Preferred Stock shall thereafter be entitled to receive,
upon conversion of Series B Preferred Stock, the number of shares of stock or
other securities or property to which a holder of the Common Stock deliverable
upon such conversion would have been entitled in connection with such
reorganization, merger, consolidation or sale (provided, however, if any such
reorganization, merger, consolidation or sale of assets occurs prior to July 31,
1998, the holders of Series B Preferred Stock shall be entitled to convert the
full amount of dividends that would have been accumulated through such date).
In any such case, appropriate adjustment shall be made in the application of the
provisions of this paragraph (iv) with respect to the rights of the holders of
Series B Preferred Stock after the reorganization, merger, consolidation or sale
to the end that the provisions of this paragraph (iv) (including provisions for
the adjustment of the Conversion Price then in effect and the number of shares
purchasable upon conversion of the Series B Preferred Stock) shall be applicable
after that event and be as nearly equivalent to the provisions hereof as is
practicable.
(h) ADJUSTMENT FOR ISSUANCE OF COMMON STOCK AT LESS THAN
CONVERSION PRICE. If the Corporation at any time after the Commitment Date (i)
issues any shares of Common Stock (other than pursuant to the Agreement dated
effective June 12, 1996 between Smith Management Company, Inc., Farmout Inc.,
Randall D. Smith, Jeffrey A. Smith, John W. Adams, Inland Production Company and
the Corporation, or other than pursuant to warrants, options or convertible
securities outstanding as of the Commitment Date, or other than pursuant to the
Corporation's Amended 1988 Option Plan), for a per share consideration or price
less than the Conversion Price then in effect hereunder, or (ii) issues any
rights, warrants or options to acquire, or securities convertible into, shares
of Common Stock (other than options to purchase Common Stock pursuant to options
which may be granted under the Corporation's Amended 1988 Option Plan and
similar benefit plans subsequently adopted by the Corporation for the benefit of
its employees), that permit exercise or conversion for a per share consideration
less than the Conversion Price then in effect hereunder, then effective
automatically on the date of such issuance the Conversion Price hereunder shall
automatically be adjusted as follows: the number of shares of the Corporation's
Common Stock outstanding (or deemed to be outstanding as hereinafter provided)
immediately prior to such issue shall be multiplied by the Conversion Price in
effect at the time of such issue and
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there shall be added to the product so obtained the aggregate consideration,
if any, (a) received by the Corporation upon such issue of additional shares
of Common Stock pursuant to (i) and (b) received by the Corporation, or which
will be received by the Corporation, pursuant to (ii) upon the issue and upon
the subsequent exercise or conversion of any such additional rights,
warrants, options or convertible securities. The sum so obtained shall be
divided by the number of shares of the Corporation's Common Stock outstanding
(or deemed to be outstanding as hereinafter provided) immediately after such
issue (including, for this purpose, the shares to be subsequently issued
under any rights, warrants, options or convertible securities which triggered
the requirement to apply this adjustment to the Conversion Price), and the
resulting quotient shall be the adjusted Conversion Price. For purposes of
determining outstanding shares of Common Stock for applying the foregoing
formula, all options, rights, warrants and securities convertible into Common
Stock outstanding as of the date hereof shall be deemed to be outstanding
shares of Common Stock, and any options, rights, warrants or convertible
securities issued after the date hereof pursuant to (ii), above, which have
resulted in a previous adjustment of the Conversion Price shall be considered
outstanding shares of Common Stock for all subsequent applications of the
formula to arrive at subsequent adjustments of the Conversion Price.
(i) ACCOUNTANTS' CERTIFICATE OF ADJUSTMENT. In each case of an
adjustment or readjustment of the Conversion Price or the number of shares of
Common Stock or other securities issuable upon conversion of Series B Preferred
Stock, the Corporation, at its expense, shall cause independent public
accountants of recognized standing selected by the Corporation (who may be the
independent public accountants then auditing the books of the Corporation) (or
the chief financial officer of the Corporation at the Board's option) to compute
such adjustment or readjustment in accordance with the Corporation's Articles of
Incorporation and prepare a certificate showing such adjustment or readjustments
and shall mail such certificate, by first class mail, postage prepaid, to each
registered holder of Series B Preferred Stock at the holder's address as shown
in the Corporation's books. The certificate shall set forth such adjustment or
readjustment, showing in detail the facts upon which such adjustment or
readjustment is based.
(j) NOTICES OF RECORD DATE. In the event (i) any taking by the
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend or other distribution, or (ii) any capital reorganization of the
Corporation, any reclassification or recapitalization of the capital stock of
the Corporation or any transfer of all or substantially all of the assets of the
Corporation to, or any merger or consolidation with, any other corporation, or
any other entity or person, or any voluntary or involuntary dissolution,
liquidation or winding up of the Corporation, the Corporation shall mail to each
holder of Series B Preferred Stock at least thirty (30) days prior to the record
date specified therein, a notice specifying (A) the date on which any such
record is to be taken for the purpose of such dividend or distribution and a
description of such dividend or distribution, (B) the date on which any such
reorganization, reclassification or recapitalization, transfer, consolidation,
merger, dissolution, liquidation or winding up is expected to become effective
and a description of such transaction, and (C) the time, if any, that is to be
fixed as to when the holders of record of Common Stock (or other
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<PAGE>
securities) shall be entitled to exchange their shares of Common Stock (or
other securities) for securities or other property deliverable upon such
reorganization, reclassification or recapitalization, transfer,
consolidation, merger, dissolution, liquidation or winding up.
(k) FRACTIONAL SHARES. No fractional shares of Common Stock
shall be issued upon conversion of Series B Preferred Stock. In lieu of any
fractional shares to which the holder would otherwise be entitled, the
Corporation shall pay cash equal to the product of such fraction multiplied by
the fair market value of one share of the Corporation's Common Stock on the date
of conversion, as determined by the closing "bid" price on the day prior to the
date of conversion.
(l) RESERVATION OF STOCK ISSUABLE UPON CONVERSION OR FOR
DIVIDENDS. The Corporation shall at all times reserve and keep available out of
the authorized but unissued shares of Common Stock, solely for the purpose of
effecting the conversion of shares of Series B Preferred Stock and to cover
dividends that may be issuable in Common Stock pursuant to paragraph (iii), such
number of its shares of Common Stock as shall from time to time be sufficient to
effect the conversion of all outstanding shares of Series B Preferred Stock and
to cover dividends that may be issuable in Common Stock pursuant to paragraph
(iii); and if at any time thereafter the number of authorized but unissued
shares of Common Stock shall not be sufficient to effect the conversion of all
then outstanding shares of Series B Preferred Stock or payment of such
dividends, the Corporation will take such corporate action as may, in the
opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purpose.
(m) NOTICES DEEMED GIVEN. Any notice required by the provisions
of this paragraph (iv) to be given to the holders of shares of Series B
Preferred Stock shall be deemed given five (5) business days after the same has
been deposited in the United States mail, certified or registered mail, return
receipt requested, postage prepaid, and addressed to each holder of record at
such holder's address appearing on the books of the Corporation.
(n) PAYMENT OF TAXES. The Corporation will pay all taxes and
other governmental charges, other than income, estate or gift taxes, that may be
imposed in respect of the issue or delivery of shares of Common Stock upon
conversion of shares of Series B Preferred Stock.
(v) VOTING RIGHTS. Each holder of any share of Series B Preferred
Stock shall be entitled to vote on all matters and shall be entitled to one vote
for each share of Series B Preferred Stock held. Each holder of shares of any
of the Common Stock shall be entitled to one vote on all matters and shall be
entitled to one vote for each share of Common Stock held. Except as otherwise
expressly provided herein or as mandated by law, the holders of shares of Common
Stock and Series B Preferred Stock shall vote together and not as separate
voting groups or classes. In the event voting as a separate voting group by the
holders of Series B Preferred Stock is expressly provided herein or mandated and
required by Washington law, any vote by the holders of Series B Preferred Stock
as a separate voting group shall be effective if approved by a majority of the
outstanding shares of Series B Preferred Stock.
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Cumulative voting by holders of Series B Preferred Stock and holders of
Common Stock is expressly denied.
(vi) PREEMPTIVE RIGHTS. Except as provided in paragraph (iv), no
holder of any shares of Series B Preferred Stock shall be entitled as a matter
of right to subscribe or receive additional shares of any class of stock of the
Corporation, whether now or hereafter authorized, or any bonds, debentures or
other securities convertible into such stock, but such additional shares of
stock or other securities convertible into stock may be issued or disposed of by
the Board to such persons and on such terms as in the Board's discretion the
Board shall deem advisable.
(vii) NO REISSUANCE OF SERIES B PREFERRED STOCK. No share or
shares of Series B Preferred Stock acquired by the Corporation by reason of
redemption, purchase, conversion or otherwise shall be reissued, and all such
shares shall be canceled, retired and eliminated from the shares of Series B
Preferred Stock which the Corporation shall be authorized to issue and all such
shares shall be returned to authorized but unissued shares of Class A preferred
stock, par value $0.001 per share, of the Corporation and may be issued or
further designated, as determined by the Board in accordance with the Articles
of Incorporation and applicable law.
(viii) COMMON STOCK. The term "Common Stock", as used herein, means
the Corporation's $.001 par value Common Stock and any capital stock of any
class of the Corporation authorized after the date the Series B Preferred Stock
is established which is not limited to a fixed sum or percentage of par or
stated value in respect of the rights of holders thereof to participate in
dividends or in the distribution of assets upon any liquidation, dissolution or
winding up of the Corporation.
(ix) AMENDMENTS. There shall be no amendment, modification or waiver
of the terms hereof without the prior written consent of holders of at least a
majority of the Series B Preferred Stock outstanding at such time. The
designation by the Board of one or more additional series of Class A preferred
stock of the Corporation with dividend, liquidation, voting or conversion rights
pari passu with or having priority over or having greater or more beneficial
rights per share than the Series B Preferred Stock shall be deemed to constitute
an amendment to the Articles of Incorporation of the Corporation for which the
holders of shares of Series B Preferred Stock are entitled to vote hereunder as
a separate voting group. Except as otherwise expressly provided in this
paragraph (ix), any changes or amendments to the Articles of Incorporation of
the Corporation may be made in accordance with applicable law.
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ARTICLE V - REGISTERED OFFICE AND REGISTERED AGENT
The address of the Corporation's initial registered office is:
Suite 241
First Interstate Bank Building
North 9 Post Street
Spokane, WA 99201
The name of its initial registered agent at such address is:
Janice E. Duval
ARTICLE VI - DIRECTORS
1. The number of directors of the Corporation shall be fixed as provided
by the Bylaws and may be changed from time to time by amending the Bylaws, as
then provided, but the number of directors shall be not less than three (3).
2. If the office of any director becomes vacant by reason of death,
resignation, removal, disqualification, or otherwise, the directors may, by the
affirmative vote of the majority of the remaining directors, though less than a
quorum, choose a successor or successors who shall hold office for the unexpired
term.
The Board of Directors are authorized to increase the number of persons to
comprise the Board of Directors in any period between annual shareholders'
meetings by the affirmative vote of a majority of the directors; provided,
however, that without the unanimous consent of all directors, the number of
directors who comprise the Board of Directors shall not be increased by more
than two (2) persons within any twelve (12) month period.
If the Board of Directors is divided into classes and in the event of any
increase or decrease in the authorized number of directors, (1) each director
then serving as such shall nevertheless continue as a director of the class of
which he is a member until the expiration of his term, or upon his earlier
resignation, removal from office, or death, (2) the newly created or eliminated
directorships resulting from such increase or decrease shall be allocated by the
Board of Directors among the three classes of directors so as to maintain equal
classes to the extent possible, and (3) in the event such decrease in the
authorized number of directors makes the total number of directors less than
nine (9), then the Board of Directors shall become declassified and the
directors remaining in office shall continue their terms until the next annual
meeting of shareholders, at which time all of said remaining directors shall be
re-elected to one year terms or until their successors are duly elected and
qualified.
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3. When the Board of Directors shall consist of nine (9) or more members,
in lieu of electing the entire number of directors annually, the Board of
Directors of the Corporation shall be divided into three classes. The method of
classification shall be to assign the longest terms to those directors with the
most seniority as directors. In the event there are more directors with
identical seniority than there are class positions to be filled, choices shall
be made by drawing of lots. The classes shall be as follows: Class 1, Class 2,
and Class 3, which classifications shall be effective on the 1st day of the
month following the shareholders' meeting during which the number of members of
the Board of Directors is increased to nine (9) or more. In such an event, the
term of office of directors in Class I shall expire at the first annual meeting
of shareholders after their election, that of Class 2 shall expire at the second
annual meeting after their election, and that of Class 3 shall expire at the
third annual meeting after their election. At each annual meeting of
shareholders after such classification, the number of directors equal to the
number of the class whose term expires at the time of such meeting shall be
elected to hold office until the third succeeding annual meeting. No
classification of directors shall be effective in the event the number of
members of the Board is reduced to fewer than nine (9).
4. In furtherance of and not in limitation of the powers conferred by the
laws of the State of Washington, the Board of Directors is expressly authorized
to make, alter, and repeal the Bylaws of the Corporation, subject to the power
of the shareholders of the Corporation to change or repeal such Bylaws.
5. The Corporation may enter into, contract, and otherwise transact
business as vendor, purchaser, or otherwise with its directors, officers, and
shareholders, and with the Corporation's association with firms and entities of
which they are or may become interested as directors, officers, shareholders,
members, or otherwise, as freely as if those such adverse interests did not
exist, even though the vote, action, or presence of such directors, officers, or
shareholders may be necessary to obligate the Corporation under such contracts
or transactions; and in the absence of fraud, no such contracts or transactions
shall be avoided and no such director, officer, or shareholder shall be held
liable to account to the Corporation, by reason of such adverse interests or by
reason of any fiduciary relationship to the Corporation arising out of such
office or stock ownership, for any profit or benefit realized by him through any
such contract or transaction; provided that in the case of directors and
officers of the Corporation (but not in the case of shareholders who are not
directors or officers), the nature of the interest of such directors or officers
be disclosed or known to the Board of Directors of the Corporation at the
meeting thereof at which such contract or transaction was authorized or
confirmed. A general notice that a director or officer of the Corporation is
interested in any Corporation, association, firm, or entity, shall be sufficient
disclosure as to such director or officer with respect to all contracts and
transactions with the Corporation, association, fin-n, or entity.
6. Except as otherwise expressly set forth in these Articles, any
contract, transaction, or act of the Corporation or of the directors or of any
officers of the Corporation which shall be ratified by a quorum of the
shareholders of the Corporation at any annual meeting or any special meeting
called for such purpose, shall be as valid and binding as though ratified by
every shareholder of the Corporation.
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7. A director of the Corporation shall not be personally liable to the
Corporation or its shareholders for monetary damages arising from any conduct as
a director, except this limitation on liability shall not apply to (i) acts or
omissions involving intentional misconduct by the director or a knowing
violation of law by the director, (ii) conduct violating Section 23A.08.450 of
the Washington Business Corporation Act, or (iii) any transaction from which the
director will personally receive a benefit in money, property, or services to
which the director is not legally entitled. If the Washington Business
Corporation Act is amended to authorize corporate action further eliminating or
limiting the personal liability of directors, then the liability of a director
of the Corporation shall be eliminated or limited to the fullest extent
permitted by the Washington Business Corporation Act, as so amended. Any repeal
or modification of the foregoing paragraph by the shareholders of the
corporation shall not adversely affect any right or protection of a director of
the Corporation existing at the time of such repeal or modification.
The Corporation has the power to indemnify, and to purchase and maintain
insurance for, its directors, officers, trustees, employees, and other persons
and agents. Without limiting the generality of the foregoing, the Corporation
shall indemnify its directors against all liability, damages, and costs or
expenses (including attorney's fees) arising from or in connection with service
for employment by, or other affiliation with this Corporation to the maximum
extent and under all circumstances permitted by law.
8. The number of directors constituting the initial Board of Directors of
this Corporation is three (3). The names and addresses of persons who are to
serve as directors until the first annual meeting of stockholders, or until
their successors are elected and qualified are:
NAME ADDRESS
---- -------
Hobart Tenet East 214 High Drive
Spokane, Washington 99203
John C. Crabb P.O. Box 207
Gonzales Road
Maderia Park British Columbia VON 2HO
James F. Etter South 2811 Needham Drive
Veradale, Washington 99037
9. The Board of Directors shall have authority to divide any or all
classes of shares into series and to fix and determine the relative rights and
preferences of the shares of any series so established or established hereby.
All shares of the same class shall be identical except as to the following
relative rights and preferences as to which there may be variations between
different series:
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a. The rate of dividend.
b. Whether shares may be redeemed and, if so, the redemption price
and the terms and conditions of redemption.
C. The amount payable upon shares in event of voluntary and
involuntary liquidation.
d. Sinking fund provision, if any, for the redemption or purchase of
shares.
e. The terms and conditions, if any, on which shares may be
converted.
f. Voting rights, if any.
The name and address of the Incorporator is:
NAME ADDRESS
---- -------
Janice E. Duval Suite 241
North 9 Post Street
Spokane, Washington 99201
ARTICLES VII - PREEMPTIVE RIGHTS
The shareholders of the Corporation shall be denied preemptive rights.
ARTICLE VIII - CUMULATIVE VOTING
Shareholders of the Corporation shall be denied the right to cumulate their
votes at the election of directors of the Corporation.
ARTICLE IX
The provisions of Section 6 of Substitute Senate Bill 3580 as enacted by
the 49th Legislature of the State of Washington in the 1985 regular session
shall not apply to this Corporation.
IN WITNESS WHEREOF, these Articles of Incorporation have been executed in
duplicate.
Janice E. Duvall
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<PAGE>
AUTOMATIC ADJUSTMENT TO NUMBER
OF SHARES COVERED BY AMENDED 1988 OPTION PLAN
OF
INLAND RESOURCES INC.
Inland Resources Inc. (the "Company") hereby acknowledges that a 1-for-10
reverse stock split of its common stock, par value $.001 per share ("Common
Stock"), became effective June 3, 1996. As a result, pursuant to Section 12 of
the Amended 1988 Option Plan (the "Plan") of the Company, the total number of
shares of Common Stock reserved for issuance under the Plan is reduced from
2,128,000 to 212,800, and all outstanding options shall also be deemed
immediately and automatically adjusted so that the number of shares covered by
each such option is equal to 1/10th of the number of shares covered thereby
prior to the date hereof, and the exercise price for each such option is
increased ten times.
EXECUTED effective as of June 3, 1996.
INLAND RESOURCES INC.
By:
---------------------------------
Kyle R. Miller, President
and Chief Executive Officer
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is entered into by and between INLAND
RESOURCES, INC. (hereinafter referred to as "Employer") and KYLE R. MILLER
(hereinafter referred to as "Employee").
WHEREAS, Employer has employed Employee as its President and Chief
Executive Officer under that certain Employment Agreement effective February 23,
1993 (the "Employment Agreement"),
WHEREAS, Employer desires to retain Employee as its President and Chief
Executive Officer and Employee desires to accept such employment; and
WHEREAS, Employer and Employee also entered into a Warrant Agreement
contemporaneously with the Employment Agreement that Employer and Employee
desire to terminate;
NOW, THEREFORE, in consideration of the mutual promises herein contained,
and etrier good and valuable consideration. the receipt and sufficiency of which
are hereby acknowledged, Employer and Employee agree as follows:
1. EMPLOYMENT. Employer hereby employs Employee to serve as President
and Chief Executive Officer of Employer.
2. DUTIES. During his employment, Employee shall devote all of his
working time, energies and skills to the management of Employer's business.
Employee agrees to serve Employer diligently and to the best of his ability.
Employee shall render services consistent with those of a person in his position
and shall perform all duties incident to such office and all such further
similar duties that may, from time to time, be assigned to him by Employer.
Employee's duties include finding further business opportunities for Employer
and Employee agrees to bring to Employer for acceptance or rejection all
business opportunities located by or made available to Employee.
3. COMPENSATION. Employee's compensation for services performed under
this Agreement shall be as follows:
(a) BASE SALARY. Employer shall pay Employee a base salary
("Base Salary") of One Hundred Eighty Thousand and No/100 Dollars
($180,000.00) per year. In addition, the Compensation Committee of
the Board of Directors of Employer (the "Committee") shall, in good
faith, consider granting increases in such salary based upon such
factors as Employee's performance and the growth and/or profitability
of Employer, but it shall have no obligation to grant any such
increases in compensation. Such Base Salary shall be payable in equal
semi-
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<PAGE>
monthly installments on the fifteenth day and the last working
day of the month, or at such other times and in such installments as
may be agreed upon between Employer and Employee. All payments shall
be subject to the deduction of payroll taxes and similar assessments
as required by law.
(b) BONUS. In addition to the Base Salary, Employee shall be
eligible to receive bonus compensation in such amounts and at such
times as the Committee shall, from time to time, determine.
(c) CAR ALLOWANCE. Employee shall receive a car allowance of
$1,000 per month. This shall be inclusive of fuel, repairs, insurance
and depreciation on the car of Employee's choice.
4. EXPENSES AND BENEFITS. Employee is authorized to incur reasonable
expenses in connection with the business of Employer, including expenses for
entertainment, travel and similar matters. Employer will reimburse Employee for
such expenses upon presentation by Employee of such accounts and records as
Employer shall, from time to time, require. Employer also agrees to provide
Employee with the following benefits:
(a) EMPLOYEE BENEFITS PLANS. Employee shall be entitled to
participate in employee benefit plans or programs of Employer, if any,
to the extent that his position, tenure, salary, age, health and other
qualifications make him eligible to participate, subject to the rules
and regulations applicable thereto. Such additional benefits shall
include, subject to the approval of the Board of Directors, full
medical, dental and disability income insurance.
(b) OTHER. Such items and benefits as Employer shall, from time
to time, consider necessary or appropriate to assist Employee in the
performance of his duties.
(c) VACATIONS. Employee shall be entitled (in addition to the
usual public holidays) to a paid vacation for a period in each
calendar year not exceeding three (3) weeks, to be taken at such times
as may be approved by Employer.
5. TERM. The term of this Agreement shall be for one (1) year, beginning
from the effect date hereof, and shall be automatically renewed for successive
one (1) years terms. In addition, this Agreement shall terminate as provided
for in Section 7 or upon the death of Employee.
6. DISABILITY. In the event that Employee becomes Permanently Disabled
(as hereafter defined) during the term of this Agreement and while engaged in
the scope of his employment by Employer, Employee shall continue in the employ
of Employer but his compensation hereunder shall be reduced to one-half (1/2) of
the Base Salary then in effect, as
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set forth in Section 3(a) hereof, commencing upon the determination of
Employee's Permanent Disability and continuing thereafter until the first to
occur of (a) twelve (12) months or (b) the death of Employee or (c) the
expiration of the term of this Agreement; and during such period of time,
Employee shall not be entitled to payment of expenses or benefits specified
in Section 4 hereof (except for reimbursement of expenses incurred by
Employee prior to becoming Permanently Disabled), except that Employer shall
continue to provide Employee with the insurance benefits specified in Section
4(a) hereof. In addition, any compensation payable to Employee by Employer
shall be reduced by any amount which Employee is eligible to receive from
workers compensation, social security or disability insurance provided by
Employer. If Employee becomes Permanently Disabled while not engaged in the
scope of his employment by Employer, such disability may be cause for
termination for "Cause" under Section 7 hereof.
(a) DEFINITION OF DISABILITY. For purposes of this Agreement,
the terms "Permanent Disability" or "Permanently Disabled" shall mean
three (3) months of substantially continuous disability. Disability
shall be deemed "substantially continuous" if, as a practical matter,
Employee, by reason of his mental or physical health, is unable to
sustain reasonably long periods of substantial performance of his
duties. Frequent long illnesses, though different from the preceding
illness and though separated by relatively short periods of
performance, shall be deemed to be "substantially continuous".
Disability shall be determined in good faith by the Board of Directors
whose decision shall be final and binding upon Employee. Employee
hereby consents to medical examinations by such physicians and medical
consultants as Employer shall, from time to time, require.
7. TERMINATION BY EMPLOYER. Employer shall have the right to terminate
Employee's employment as hereinafter provided.
(a) TERMINATION BY EMPLOYER FOR CAUSE. The Board of Directors
shall have the right to terminate Employee's employment under this
Agreement for Cause, in which event no compensation shall be paid or
other benefits furnished to Employee after termination for Cause.
Termination for Cause shall be effective immediately upon notice sent
or given to Employee.
(i) DEFINITION OF CAUSE. For purposes of this
Agreement, the term "Cause" shall mean and be strictly
limited to: (1) conviction of a crime constituting a felony
under state or federal law; (2) determination by the Board
of Directors that Employee has committed any material act of
dishonesty against Employer; (3) gross negligence by
Employee in carrying out his duties; (4) material breach of
this Agreement by Employee; (5) gross misconduct by
Employee, such as intoxication on the job, use of drugs on
the job for non-medical purposes or other misconduct which
has a substantial adverse effect on the business of
Employer; or (6) Employee becoming Permanently Disabled
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<PAGE>
while not engaged in the scope of his employment by
Employer.
(b) TERMINATION BY EMPLOYER WITHOUT CAUSE. The Board
of Directors shall have the right to terminate Employee's
employment under this Agreement without Cause at any time by
giving written notice of termination to Employee. In such
event, Employer will pay Employee a sum equal to the total
of one hundred fifty percent (150%) of the Base Salary and
bonus, if any, paid to Employee during the last calendar
year ending before the date of such termination. Such
payment will be made to Employee by Employer on the date of
such termination.
8. NON-COMPETITION AND CONFIDENTIALITY.
(a) NON-COMPETITION. Employee recognizes and understands that
in performing the responsibilities of his employment, he will occupy a
position of fiduciary trust and confidence, pursuant to which he will
develop and acquire experience and knowledge with respect to
Employer's business. It is the expressed intent and agreement of
Employee and Employer that such knowledge and experience shall be used
exclusively in the furtherance of the interests of Employer and not in
any manner which would be detrimental to Employer's interests.
Employee further understands and agrees that Employer conducts its
business within a specialized market segment in its geographic region,
and that it would be detrimental to the interests of Employer if
Employee used the knowledge and experience which he currently
possesses or which he acquires pursuant to his employment hereunder
for the purpose of directly or indirectly competing with Employer, or
for the purpose of aiding other persons or entities in so competing
with Employer, anywhere in such region. Employee therefore agrees
that so long as he is employed by Employer, unless Employee first
secures the written consent of Employer, Employee will not directly or
indirectly invest, engage or participate in or become employed by any
entity in direct or indirect competition with Employer's business.
Employee further agrees upon termination of Employee's employment
either (i) by Employer with or without cause or (ii) by Employee,
unless Employee first secures the written consent of Employer,
Employee will not for a period of one year after such termination
directly or indirectly invest, engage or participate in or become
employed by any entity in direct or indirect competition with Employer
in any mine or oil or gas property located anywhere within a 100 mile
radius of any mine or oil or gas property owned or operated (wholly or
partially) by Employer at the time of termination of Employee's
employment hereunder. This non-competition provision is not to be
construed to prohibit Employee from being employed in the mining or
oil or gas industry, but rather to permit him to be so employed so
long as such employment does not involve Employee's direct or indirect
participation in a property within such 100 mile radius. In the event
that the provisions of this Section 8 should
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<PAGE>
ever be deemed to exceed the time or geographic limitations permitted by
applicable laws, then such provisions shall be reformed to the maximum
time or geographic limitations permitted by applicable laws.
Notwithstanding the foregoing, Employer acknowledges and consents to
Employee's interest in Evertson Oil Company, Inc. and indirect interest
in the Antelope Creek Field and the Duchesne Field, located in Duchesne
County, Utah.
(b) REMEDIES. Employee acknowledges that the restrictions
contained in Section 8(a), in view of the nature of the business in
which Employer is engaged, are reasonable and necessary to protect the
legitimate interests of Employer. Employee understands that the
remedies at law for his violations of any of the covenants or
provisions of Section 9(a) will be inadequate, that such violation
will cause irreparable injury within a short period of time, and that
Employer shall be entitled to preliminary injunctive relief and other
injunctive relief against such violation. Such injunctive relief
shall be in addition to, and in no way in limitation of, any and all
other remedies Employer shall have in law and equity for the
enforcement of those covenants and provisions.
9. EXTENSION OF WARRANTS AND TERMINATION OF WARRANT AGREEMENT.
(a) TERMINATION OF WARRANT AGREEMENT. Employee and Employer
hereby terminate that certain Warrant Agreement entered into effective
February 23, 1993, between Employee and Employer (the "Warrant
Agreement'). Employer and Employee acknowledge that Employee is
entitled to and has received Warrant Certificates pursuant to the
terms of the Warrant Agreement entitling Employee to purchase
2,019,107 shares of common stock of Employer at the price per share
specified in each such Warrant Certificate. Employee and Employer
agree and acknowledge that such Warrant Certificates are validly
issued and effective and that the termination of the Warrant Agreement
will have no effect upon such Warrant Certificates and Employee's
rights and Employer's obligations with respect thereto.
(b) MODIFICATION OF WARRANT CERTIFICATES EXPIRATION DATE.
Employee's Warrant Certificates all contain different termination or
expiration dates depending upon the date of their respective issuance.
Employer and Employee hereby agree to amend such Warrant Certificates
to provide that each of such Warrant Certificates will have a
termination or expiration date of June 1, 2003. Employee will
surrender his current Warrant Certificates to the Secretary of
Employer who will reissue such Warrant Certificates with the
expiration or termination date specified above.
10. GENERAL PROVISIONS.
(a) NOTICES. Any notices to be given hereunder by either party
to the
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other may be effected by personal delivery, in writing or by
mail, registered or certified, postage prepaid with return receipt
requested. Mailed notices shall be addressed to the parties at the
addresses set forth below, but each party may change his or its
address by written notice in accordance with this Section 10(a).
Notices delivered personally shall be deemed communicated as of the
actual receipt; mailed notices shall be deemed communicated as of
three (3) days after mailing.
IF TO EMPLOYEE:
475 Seventeenth Street, Suite 1500
Denver, Colorado 80203
IF TO EMPLOYER:
Board of Directors
Inland Resources Inc.
475 Seventeenth Street, Suite 1500
Denver, Colorado 80202
(b) PARTIAL INVALIDITY. If any provision in this Agreement is
held by a court of competent jurisdiction to be invalid, void, or
unenforceable, the remaining provisions shall, nevertheless, continue
in full force without being impaired or invalidated in any way.
(c) LAW GOVERNING AGREEMENT. This Agreement shall be governed
by and construed in accordance with the laws of the State of
Washington.
(d) ATTORNEY'S FEES AND COSTS. If any action at law or in
equity is necessary to enforce or interpret the terms of this
Agreement, the prevailing party shall be entitled to reasonable
attorney's's fees, costs and necessary disbursements in addition to
any other relief to which he or it may be entitled.
(e) ASSIGNMENT. This Agreement shall inure to the benefit of
and bind the parties hereto and their respective legal
representatives, successors and assigns.
(f) ENTIRE AGREEMENT. This Agreement supersedes any and all
other agreements, either oral or in writing, between the parties
hereto with respect to the employment of Employee by Employer and
contain all of the covenants and agreements between the parties with
respect to such employment. Each party to this Agreement acknowledges
that no representations, inducements, or agreements, oral or
otherwise, have been made by any party, or anyone acting on behalf of
any party, which are not embodied herein, and no other agreement,
statement or promise not contained in this Agreement shall be valid or
binding.
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<PAGE>
Any modification of this Agreement will be effected only if it is in
writing signed by the party to be charged.
IN WITNESS WHEREOF, the parties have executed this Agreement to be
effective the first day of June, 1996.
EMPLOYER:
INLAND RESOURCES INC.
By: /s/ BILL I. PENNINGTON
----------------------------------
Bill I. Pennington
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<PAGE>
EMPLOYEE:
/s/ Kyle R. Miller
-------------------------------------
KYLE R. MILLER
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<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is entered into by and between INLAND
RESOURCES INC. (hereinafter referred to as "Employer") and BILL I.
PENNINGTON (hereinafter referred to as "Employee").
WHEREAS, Employer desires to employ Employee as its Vice President
and Chief Financial Officer and Employee desires to accept such
employment.
NOW, THEREFORE, in consideration of the mutual promises herein
contained, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Employer and Employee
agree as follows:
1. EMPLOYMENT. Employer hereby employs Employee to serve as Vice
President and Chief Financial Officer of Employer.
2. DUTIES. During his employment, Employee shall devote all of
his working time, energies and skills to the management of Employer's
business. Employee agrees to serve Employer diligently and to the best
of his ability. Employee shall render services consistent with those of
a person in his position and shall perform all duties incident to such
office and all such further similar duties that may, from time to time,
be assigned to him by Employer. Employee's duties include finding
further business opportunities for Employer and Employee agrees to bring
to Employer for acceptance or rejection all business opportunities
located by or made available to Employee.
3. COMPENSATION. Employee's compensation for services performed
under this Agreement shall be as follows:
(a) BASE SALARY. Employer shall pay Employee a base salary ("Base
Salary") of One Hundred Thirty Seven Thousand Five Hundred and No/100
Dollars ($137,500.00) per year. In addition, the Board of Directors of
Employer (the "Board of Directors") shall, in good faith, consider
granting increases in such salary based upon such factors as Employee's
performance and the growth and/or profitability of Employer, but it
shall have no obligation to grant any such increases in compensation.
Such Base Salary shall be payable in equal semi-monthly installments on
the fifteenth day and the last working day of the month, or at such
other times and in such installments as may be agreed upon between
Employer and Employee. All payments shall be subject to the deduction
of payroll taxes and similar assessments as required by law.
(b) BONUS. In addition to the Base Salary, Employee shall be
eligible to receive bonus compensation in such amounts and at such times
as the Board
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<PAGE>
of Directors shall, from time to time, determine.
4. EXPENSES AND BENEFITS. Employee is authorized to incur reasonable
expenses in connection with the business of Employer, including expenses for
entertainment, travel and similar matters. Employer will reimburse Employee
for such expenses upon presentation by Employee of such accounts and records
as Employer shall, from time to time, require. Employer also agrees to
provide Employee with the following benefits:
(a) EMPLOYEE BENEFIT PLANS. Employee shall be entitled to
participate in employee benefit plans or programs of Employer, if any,
to the extent that his position, tenure, salary, age, health and other
qualifications make him eligible to participate, subject to the rules
and regulations applicable thereto. Such additional benefits shall
include, subject to the approval of the Board of Directors, full
medical, dental and disability income insurance.
(b) OTHER. Such items and benefits as Employer shall, from time
to time, consider necessary or appropriate to assist Employee in the
performance of his duties.
(c) VACATIONS. Employee shall be entitled (in addition to the
usual public holidays) to a paid vacation for a period in each calendar
year not exceeding three (3) weeks, to be taken at such times as may be
approved by Employer.
5. TERM. The term of this Agreement shall commence on the effective
date hereof and shall continue for two years; provided, however, that this
Agreement shall be deemed to have been renewed (and the original term hereof
to have been extended) daily for successive two-year terms beginning on the
date hereof such that there shall at all times be two years remaining in the
term of each employment; provided, further, however, that this Agreement
shall also be subject to termination at any time by either party by giving at
least one (1) year prior written notice, and shall terminate as provided for
in Section 7 or upon the death of Employee.
6. DISABILITY. In the event that Employee becomes Permanently
Disabled (as hereafter defined) during the term of this Agreement and while
engaged in the scope of his employment by Employer, Employee shall continue
in the employ of Employer but his compensation hereunder shall be reduced to
one half (1/2) of the Base Salary then in effect, as set forth in Section 3(a)
hereof, commencing upon the determination of Employee's Permanent Disability
and continuing thereafter until the first to occur of (a) twelve (12) months
or (b) the death of Employee or (c) the expiration of the term of this
Agreement; and during such period of time, Employee shall not be entitled to
payment of expenses or benefits specified in Section 4 hereof (except for
reimbursement of expenses incurred by Employee prior to becoming Permanently
Disabled), except that Employer shall continue to provide Employee with the
insurance benefits specified in Section 4(a) hereof. In addition, any
compensation payable to Employee by Employer shall be reduced by any amount
which Employee is eligible to receive from workers compensation, social
security or disability insurance provided by Employer. If Employee becomes
Permanently Disabled while not engaged in the scope of his employment by
Employer, such disability may be cause for termination for "Cause" under
Section 7 hereof.
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<PAGE>
(a) DEFINITION OF DISABILITY. For purposes of this Agreement, the
terms "Permanent Disability" or "Permanently Disabled" shall mean three
(3) months of substantially continuous disability. Disability shall be
deemed "substantially continuous" if, as a practical matter, Employee,
by reason of his mental or physical health, is unable to sustain
reasonably long periods of substantial performance of his duties.
Frequent long illnesses, though different from the preceding illness and
though separated by relatively short periods of performance, shall be
deemed to be "substantially continuous". Disability shall be determined
in good faith by the Board of Directors whose decision shall be final
and binding upon Employee. Employee hereby consents to medical
examinations by such physicians and medical consultants as Employer
shall, from time to time, require.
7. TERMINATION BY EMPLOYER. Employer shall have the right to terminate
Employee's employment as hereinafter provided.
(a) TERMINATION BY EMPLOYER FOR CAUSE. The Board of Directors
shall have the right to terminate Employee's employment under this
Agreement for Cause, in which event no compensation shall be paid or
other benefits furnished to Employee after termination for Cause.
Termination for Cause shall be effective immediately upon notice sent or
given to Employee.
(i) DEFINITION OF CAUSE. For purposes of this
Agreement, the term "Cause" shall mean and be strictly
limited to: (1) conviction of a crime constituting a
felony under state or federal law; (2) determination by
the Board of Directors that Employee has committed any
material act of dishonesty against Employer; (3) gross
negligence by Employee in carrying out his duties; (4)
material breach of this Agreement by Employee; (5) gross
misconduct by Employee, such as intoxication on the job,
use of drugs on the job for non-medical purposes or other
misconduct which has a substantial adverse effect on the
business of Employer; or (6) Employee becoming
Permanently Disabled while not engaged in the scope of
his employment by Employer.
(b) TERMINATION BY EMPLOYER WITHOUT CAUSE. The Board of Directors
shall have the right to terminate Employee's employment under this
Agreement without Cause at any time, by giving written notice of
termination to Employee. In such event, Employer will continue to pay
Employee the full Base Salary for twelve (12) months together with a
prorated monthly bonus in an amount equal to the most recent annual
bonus, if any, paid to Employee divided by twelve (12).
8. NON COMPETITION AND CONFIDENTIALITY.
(a) NON COMPETITION. Employee recognizes and understands that in
performing the responsibilities of his employment, he will occupy a
position of fiduciary trust and confidence, pursuant to which he will
develop and acquire
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<PAGE>
experience and knowledge with respect to Employer's business. It is the
expressed intent and agreement of Employee and Employer that such
knowledge and experience shall be used exclusively in the furtherance of
the interests of Employer and not in any manner which would be
detrimental to Employer's interests. Employee further understands and
agrees that Employer conducts its business within a specialized market
segment in its geographic region, and that it would be detrimental to
the interests of Employer if Employee used the knowledge and experience
which he currently possesses or which he acquires pursuant to his
employment hereunder for the purpose of directly or indirectly competing
with Employer, or for the purpose of aiding other persons or entities in
so competing with Employer, anywhere in such region. Employee therefore
agrees that so long as he is employed by Employer, unless Employee first
secures the written consent of Employer, Employee will not directly or
indirectly invest, engage or participate in or become employed by any
entity in direct or indirect competition with Employer's business.
Employee further agrees upon termination of Employee's employment either
(i) by Employer with or without cause or (ii) by Employee, unless
Employee first secures the written consent of Employer, Employee will
not for a period of one year after such termination directly or
indirectly invest, engage or participate in or become employed by any
entity in direct or indirect competition with Employer in any mine or
oil or gas property located anywhere within a 100 mile radius of any
mine or oil or gas property owned or operated (wholly or partially) by
Employer at the time of termination of Employee's employment hereunder.
This non-competition provision is not to be construed to prohibit
Employee from being employed in the mining or oil or gas industry, but
rather to permit him to be so employed so long as such employment does
not involve Employee's direct or indirect participation in a property
within such 100 mile radius. In the event that the provisions of this
Section 8 should ever be deemed to exceed the time or geographic
limitations permitted by applicable laws, then such provisions shall be
reformed to the maximum time or geographic limitations permitted by
applicable laws.
(b) REMEDIES. Employee acknowledges that the restrictions
contained in Section 8(a), in view of the nature of the business in
which Employer is engaged, are reasonable and necessary to protect the
legitimate interests of Employer. Employee understands that the remedies
at law for his violations of any of the covenants or provisions of
Section 8(a) will be inadequate, that such violation will cause
irreparable injury within a short period of time, and that Employer
shall be entitled to preliminary injunctive relief and other injunctive
relief against such violation. Such injunctive relief shall be in
addition to, and in no way in limitation of, any and all other remedies
Employer shall have in law and equity for the enforcement of those
covenants and provisions.
9. GENERAL PROVISIONS.
(a) NOTICES. Any notices to be given hereunder by either party to
the other may be effected by personal delivery, in writing or by mail,
registered or certified, postage prepaid with return receipt requested.
Mailed notices shall be
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<PAGE>
addressed to the parties at the addresses set forth below, but each
party may change his or its address by written notice in accordance with
this Section 9(a). Notices delivered personally shall be deemed
communicated as of the actual receipt; mailed notices shall be deemed
communicated as of three (3) days after mailing.
IF TO EMPLOYEE:
Inland Resources Inc.
475 17th Street, Suite 1500
Denver, Colorado 80202
IF TO EMPLOYER:
Inland Resources Inc.
475 17th Street, Suite 1500
Denver, Colorado 80202
(b) PARTIAL INVALIDITY. If any provision in this Agreement is
held by a court of competent jurisdiction to be invalid, void, or
unenforceable, the remaining provisions shall, nevertheless, continue in
full force without being impaired or invalidated in any way.
(c) LAW GOVERNING AGREEMENT. This Agreement shall be governed by
and construed in accordance with the laws of the State of Colorado.
(d) ATTORNEYS' FEES AND COSTS. If any action at law or in equity
is necessary to enforce or interpret the terms of this Agreement, the
prevailing party shall be entitled to reasonable attorneys' fees, costs
and necessary disbursements in addition to any other relief to which he
or it may be entitled.
(e) ASSIGNMENT. This Agreement shall inure to the benefit of and
bind the parties hereto and their respective legal representatives,
successors and assigns.
(f) ENTIRE AGREEMENT. This Agreement supersedes any and all other
agreements, either oral or in writing, between the parties hereto with
respect to the employment of Employee by Employer and contain all of the
covenants and agreements between the parties with respect to such
employment. Each party to this Agreement acknowledges that no
representations, inducements, or agreements, oral or otherwise, have
been made by any party, or anyone acting on behalf of any party, which
are not embodied herein, and no other agreement, statement or promise
not contained in this Agreement shall be valid or binding. Any
modification of this Agreement will be effected only if it is in
writing signed by the party to be charged.
IN WITNESS WHEREOF, the parties have executed this Agreement to be
effective the 1st day of June, 1996.
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<PAGE>
EMPLOYER:
INLAND RESOURCES INC.
By: /s/ Kyle R. Miller
---------------------------------
Kyle R. Miller,
President and Chief Executive
Officer
EMPLOYEE:
/s/ Bill I. Pennington
------------------------------------
Bill I. Pennington
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<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is entered into by and between INLAND
RESOURCES INC. (hereinafter referred to as "Employer") and JOHN E. DYER
(hereinafter referred to as "Employee").
WHEREAS, Employer desires to employ Employee as its Vice President and
Chief Operating Officer and Employee desires to accept such employment.
NOW, THEREFORE, in consideration of the mutual promises herein
contained, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Employer and Employee agree as
follows:
1. EMPLOYMENT. Employer hereby employs Employee to serve as Vice
President and Chief Operating Officer of Employer.
2. DUTIES. During his employment, Employee shall devote all of his
working time, energies and skills to the management of Employer's business.
Employee agrees to serve Employer diligently and to the best of his ability.
Employee shall render services consistent with those of a person in his
position and shall perform all duties incident to such office and all such
further similar duties that may, from time to time, be assigned to him by
Employer. Employee's duties include finding further business opportunities
for Employer and Employee agrees to bring to Employer for acceptance or
rejection all business opportunities located by or made available to Employee.
3. COMPENSATION. Employee's compensation for services performed under
this Agreement shall be as follows:
(a) BASE SALARY. Employer shall pay Employee a base salary
("Base Salary") of One Hundred Twenty Thousand and No/100 Dollars
($120,000.00) per year. In addition, the Board of Directors of
Employer (the "Board of Directors") shall, in good faith, consider
granting increases in such salary based upon such factors as Employee's
performance and the growth and/or profitability of Employer, but it
shall have no obligation to grant any such increases in compensation.
Such Base Salary shall be payable in equal semi-monthly installments
on the fifteenth day and the last working day of the month, or at such
other times and in such installments as may be agreed upon between
Employer and Employee. All payments shall be subject to the deduction
of payroll taxes and similar assessments as required by law.
(b) BONUS. In addition to the Base Salary, Employee shall be
eligible to receive bonus compensation in such amounts and at such times
as the Board
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<PAGE>
of Directors shall, from time to time, determine.
4. EXPENSES AND BENEFITS. Employee is authorized to incur reasonable
expenses in connection with the business of Employer, including expenses for
entertainment, travel and similar matters. Employer will reimburse Employee
for such expenses upon presentation by Employee of such accounts and records
as Employer shall, from time to time, require. Employer also agrees to
provide Employee with the following benefits:
(a) EMPLOYEE BENEFIT PLANS. Employee shall be entitled to
participate in employee benefit plans or programs of Employer, if
any, to the extent that his position, tenure, salary, age, health
and other qualifications make him eligible to participate, subject
to the rules and regulations applicable thereto. Such additional
benefits shall include, subject to the approval of the Board of
Directors, full medical, dental and disability income insurance.
(b) OTHER. Such items and benefits as Employer shall, from
time to time, consider necessary or appropriate to assist Employee
in the performance of his duties.
(c) VACATIONS. Employee shall be entitled (in addition to the
usual public holidays) to a paid vacation for a period in each
calendar year not exceeding three (3) weeks, to be taken at such
times as may be approved by Employer.
5. TERM. The term of this Agreement shall commence on the effective
date hereof and shall continue for two years; provided, however, that this
Agreement shall be deemed to have been renewed (and the original term hereof
to have been extended) daily for successive two-year terms beginning on the
date hereof such that there shall at all times be two years remaining in the
term of each employment; provided, further, however, that this Agreement
shall also be subject to termination at any time by either party by giving at
least one (1) year prior written notice, and shall terminate as provided for
in Section 7 or upon the death of Employee.
6. DISABILITY. In the event that Employee becomes Permanently Disabled
(as hereafter defined) during the term of this Agreement and while engaged in
the scope of his employment by Employer, Employee shall continue in the
employ of Employer but his compensation hereunder shall be reduced to one
half (1/2) of the Base Salary then in effect, as set forth in Section 3(a)
hereof, commencing upon the determination of Employee's Permanent Disability
and continuing thereafter until the first to occur of (a) twelve (12) months
or (b) the death of Employee or (c) the expiration of the term of this
Agreement; and during such period of time, Employee shall not be entitled to
payment of expenses or benefits specified in Section 4 hereof (except for
reimbursement of expenses incurred by Employee prior to becoming Permanently
Disabled), except that Employer shall continue to provide Employee with the
insurance benefits specified in Section 4(a) hereof. In addition, any
compensation payable to Employee by Employer shall be reduced by any amount
which Employee is eligible to receive from workers compensation, social
security or disability insurance provided by Employer. If Employee becomes
Permanently Disabled while not engaged in the scope of his employment by
Employer, such disability may be cause for termination for "Cause" under
Section 7 hereof.
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<PAGE>
(a) DEFINITION OF DISABILITY. For purposes of this Agreement,
the terms "Permanent Disability" or "Permanently Disabled" shall mean
three (3) months of substantially continuous disability. Disability
shall be deemed "substantially continuous" if, as a practical matter,
Employee, by reason of his mental or physical health, is unable to
sustain reasonably long periods of substantial performance of his
duties. Frequent long illnesses, though different from the preceding
illness and though separated by relatively short periods of
performance, shall be deemed to be "substantially continuous".
Disability shall be determined in good faith by the Board of Directors
whose decision shall be final and binding upon Employee. Employee
hereby consents to medical examinations by such physicians and medical
consultants as Employer shall, from time to time, require.
7. TERMINATION BY EMPLOYER. Employer shall have the right to terminate
Employee's employment as hereinafter provided.
(a) TERMINATION BY EMPLOYER FOR CAUSE. The Board of Directors shall
have the right to terminate Employee's employment under this Agreement for
Cause, in which event no compensation shall be paid or other benefits
furnished to Employee after termination for Cause. Termination for Cause
shall be effective immediately upon notice sent or given to Employee.
(i) DEFINITION OF CAUSE. For purposes of this Agreement,
the term "Cause" shall mean and be strictly limited to: (1)
conviction of a crime constituting a felony under state or
federal law; (2) determination by the Board of Directors that
Employee has committed any material act of dishonesty against
Employer; (3) gross negligence by Employee in carrying out his
duties; (4) material breach of this Agreement by Employee; (5)
gross misconduct by Employee, such as intoxication on the job,
use of drugs on the job for non-medical purposes or other
misconduct which has a substantial adverse effect on the business
of Employer; or (6) Employee becoming Permanently Disabled while
not engaged in the scope of his employment by Employer.
(b) TERMINATION BY EMPLOYER WITHOUT CAUSE. The Board of Directors
shall have the right to terminate Employee's employment under this
Agreement without Cause at any time, by giving written notice of
termination to Employee. In such event, Employer will continue to pay
Employee the full Base Salary for twelve (12) months together with a
prorated monthly bonus in an amount equal to the most recent annual bonus,
if any, paid to Employee divided by twelve (12).
8. NON-COMPETITION AND CONFIDENTIALITY.
(a) NON-COMPETITION. Employee recognizes and understands that in
performing the responsibilities of his employment, he will occupy a
position of fiduciary trust and confidence, pursuant to which he will
develop and acquire
-3-
<PAGE>
experience and knowledge with respect to Employer's business. It is the
expressed intent and agreement of Employee and Employer that such knowledge
and experience shall be used exclusively in the furtherance of the
interests of Employer and not in any manner which would be detrimental to
Employer's interests. Employee further understands and agrees that Employer
conducts its business within a specialized market segment in its geographic
region, and that it would be detrimental to the interests of Employer if
Employee used the knowledge and experience which he currently possesses or
which he acquires pursuant to his employment hereunder for the purpose of
directly or indirectly competing with Employer, or for the purpose of
aiding other persons or entities in so competing with Employer, anywhere in
such region. Employee therefore agrees that so long as he is employed by
Employer, unless Employee first secures the written consent of Employer,
Employee will not directly or indirectly invest, engage or participate in
or become employed by any entity in direct or indirect competition with
Employer's business. Employee further agrees upon termination of Employee's
employment either (i) by Employer with or without cause or (ii) by
Employee, unless Employee first secures the written consent of Employer,
Employee will not for a period of one year after such termination directly
or indirectly invest, engage or participate in or become employed by any
entity in direct or indirect competition with Employer in any mine or oil
or gas property located anywhere within a 100 mile radius of any mine or
oil or gas property owned or operated (wholly or partially) by Employer at
the time of termination of Employee's employment hereunder. This
non-competition provision is not to be construed to prohibit Employee from
being employed in the mining or oil or gas industry, but rather to permit
him to be so employed so long as such employment does not involve
Employee's direct or indirect participation in a property within such 100
mile radius. In the event that the provisions of this Section 8 should
ever be deemed to exceed the time or geographic limitations permitted by
applicable laws, then such provisions shall be reformed to the maximum
time or geographic limitations permitted by applicable laws.
(b) REMEDIES. Employee acknowledges that the restrictions contained
in Section 8(a), in view of the nature of the business in which Employer
is engaged, are reasonable and necessary to protect the legitimate
interests of Employer. Employee understands that the remedies at law for
his violations of any of the covenants or provisions of Section 8(a) will
be inadequate, that such violation will cause irreparable injury within a
short period of time, and that Employer shall be entitled to preliminary
injunctive relief and other injunctive relief against such violation.
Such injunctive relief shall be in addition to, and in no way in limitation
of, any and all other remedies Employer shall have in law and equity for
the enforcement of those covenants and provisions.
9. GENERAL PROVISIONS.
(a) NOTICES. Any notices to be given hereunder by either party to
the other may be effected by personal delivery, in writing or by mail,
registered or certified, postage prepaid with return receipt requested.
Mailed notices shall be
-4-
<PAGE>
addressed to the parties at the addresses set forth below, but each party
may change his or its address by written notice in accordance with this
Section 9(a). Notices delivered personally shall be deemed communicated
as of the actual receipt; mailed notices shall be deemed communicated as
of three (3) days after mailing.
If to Employee:
Inland Resources Inc.
475 17th Street, Suite 1500
Denver, Colorado 80202
If to Employer:
Inland Resources Inc.
475 17th Street, Suite 1500
Denver, Colorado 80202
(b) PARTIAL INVALIDITY. If any provision in this Agreement is held
by a court of competent jurisdiction to be invalid, void, or unenforceable,
the remaining provisions shall, nevertheless, continue in full force
without being impaired or invalidated in any way.
(c) LAW GOVERNING AGREEMENT. This Agreement shall be governed by
and construed in accordance with the laws of the State of Colorado.
(d) ATTORNEYS' FEES AND COSTS. If any action at law or in equity
is necessary to enforce or interpret the terms of this Agreement, the
prevailing party shall be entitled to reasonable attorneys' fees, costs and
necessary disbursements in addition to any other relief to which he or it
may be entitled.
(e) ASSIGNMENT. This Agreement shall inure to the benefit of and
bind the parties hereto and their respective legal representatives,
successors and assigns.
(f) ENTIRE AGREEMENT. This Agreement supersedes any and all other
agreements, either oral or in writing, between the parties hereto with
respect to the employment of Employee by Employer and contain all of the
covenants and agreements between the parties with respect to such
employment. Each party to this Agreement acknowledges that no
representations, inducements, or agreements, oral or otherwise, have been
made by any party, or anyone acting on behalf of any party, which are not
embodied herein, and no other agreement, statement or promise not contained
in this Agreement shall be valid or binding. Any modification of this
Agreement will be effected only if it is in writing signed by the party to
be charged.
IN WITNESS WHEREOF, the parties have executed this Agreement to be
effective the 1st day of June, 1996.
-5-
<PAGE>
EMPLOYER:
INLAND RESOURCES INC.
By: /s/ Kyle R. Miller
----------------------------------
Kyle R. Miller, President
and Chief Executive Officer
EMPLOYEE:
/s/ John E. Dyer
-------------------------------------
John E. Dyer
-6-
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<PAGE>
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 4,846,747
<SECURITIES> 0
<RECEIVABLES> 1,522,989
<ALLOWANCES> 0
<INVENTORY> 856,817
<CURRENT-ASSETS> 7,672,816
<PP&E> 38,116,429
<DEPRECIATION> 1,635,240
<TOTAL-ASSETS> 44,543,979
<CURRENT-LIABILITIES> 4,122,484
<BONDS> 16,454,213
0
3,875,222
<COMMON> 28,428,608
<OTHER-SE> (8,626,798)
<TOTAL-LIABILITY-AND-EQUITY> 44,543,979
<SALES> 3,244,696
<TOTAL-REVENUES> 3,244,696
<CGS> 577,571
<TOTAL-COSTS> 2,147,580
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<INTEREST-EXPENSE> 507,263
<INCOME-PRETAX> 681,373
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<INCOME-CONTINUING> 681,373
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<EXTRAORDINARY> 0
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