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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Date of Report (Date of earliest event reported): July 1, 1998
INLAND RESOURCES INC.
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(Exact name of registrant as specified in its charter)
Washington 0-16487 91-1307042
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(State of incorporation) (Commission File No.) (IRS Employer
Identification No.)
410 17TH STREET, SUITE 700, DENVER, COLORADO 80202
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(Address of principal execute offices, including zip code)
(303) 893-0102
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(Registrant's telephone number, including area code)
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ITEM 5. OTHER EVENTS
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On July 1, 1998, Inland Resources Inc. ("Inland") entered into a Farmout
Agreement with Smith Management LLC ("Smith"), to be effective as of June 1,
1998, providing funds for Inland's anticipated drilling program in the Monument
Butte Field during the remainder of 1998. The drilling program contemplates the
drilling and completion of approximately 56 wells aggregating total expenditures
of approximately $20,000,000 (including management fees to be earned by a
subsidiary of Inland). Under the Farmout Agreement, Inland agreed to farmout to
Smith 40-acre drillsites and Smith agreed to fund 100% of the drilling and
completion costs for wells commenced prior to October 1, 1998 and 70% for wells
commenced after September 30, 1998. Smith agreed to take production proceeds
payments, at Inland's option, either in cash or in shares of common stock of
Inland priced at a 10% discount of the average bid side of the closing price for
each trading day during the month to which the payment relates. The Farmout
Agreement provides that Smith will reconvey all of the drillsites to Inland once
Smith has recovered from production an amount equal to 100% of its expenditures,
including management fees and severance and production taxes, plus an additional
sum equal to 18% per annum on such expended sums.
The Farmout Agreement with Smith satisfies Inland's obligation to its
senior lenders to obtain a capital infusion of at least $15 million under its
existing senior credit facilities.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
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(c) Exhibits - The following exhibit is filed herewith:
10.1 Farmout Agreement between Inland Resources Inc. and Smith
Management LLC dated effective as of June 1, 1998.
SIGNATURES
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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 hereunto duly authorized.
July 8, 1998
INLAND RESOURCES INC.
By: /s/ Michael J. Stevens
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Michael J. Stevens, Vice President
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EXHIBIT 10.1
FARMOUT AGREEMENT
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I. PARTIES
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Inland Production Company
410 17th Street, Suite 700
Denver, Colorado 80202
fax #: (303)893-0113
and
Inland Resources Inc.
410 17th Street, Suite 700
Denver, Colorado 80202
fax #: (303)893-0113
Herein collectively "Farmor"
Smith Management LLC
885 3rd Avenue, 34th Floor
New York, New York 10022
fax #: (212) 751-9502
Herein "Farmee"
and
Inland Production Company
410 17th Street, Suite 700
Denver, Colorado 80202
fax #: (303)893-0113
Herein "Operator"
II. CONTRACT AREA AND EARNED DRILLSITES
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The Farmor agrees to farmout, and Farmee agrees to farmin, a number of
drilling and injection well locations within the area of land described on
EXHIBIT A attached hereto and made a part hereof and which is referred to herein
as the "Contract Area".
Each well drilled pursuant to this Farmout Agreement shall be located
within a mutually approved 40-acre drillsite spacing unit within the Contract
Area. Farmor will submit to Farmee a
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proposed drillsite and unit for approval, along with a description of the
objective zone, its depth, and the estimated dry hole and completed cost in the
form of an AFE, and if not rejected by Farmee within fifteen (15) days after
submission, the drillsite and unit shall be deemed approved as submitted. At
such time as a well has been drilled on a 40-acre drillsite spacing unit to the
objective depth stated in Farmor's notice, and whether abandoned as a dry hole
or completed as a well capable of producing oil and/or gas and associated
hydrocarbons in paying quantities or as an injection well, such 40-acre
drillsite spacing unit will be thereafter referred to herein as an "Earned
Drillsite".
III. FARMOUT OPERATIONS
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Upon its execution hereof, Farmee shall be deemed to have agreed to provide
one hundred percent (100%) of the funds needed by Farmor to drill, complete (or
abandon) and equip through tanks any well spudded on an Earned Drillsite from
June 1 through September 30, 1998, and seventy percent (70%) of the funds needed
by Farmor to drill, complete (or abandon) and equip through tanks any well
spudded on an Earned Drillsite from October 1 through December 31, 1998,
pursuant to the drilling program set forth in this Farmout Agreement, all as
proportionately reduced to Farmor's undivided interest in the Earned Drillsite.
The funds provided by Farmee shall be used by Operator to pay all of Farmee's
costs associated with drilling, completing, and equipping wells within drillsite
spacing units, whether such wells are completed as dry holes, wells capable of
producing hydrocarbons in paying quantities, or as injection wells that benefit
lands within the Contract Area.
The drilling program contemplated by this Farmout Agreement shall begin
effective as of June 1, 1998, and will run through December 31, 1998, and
contemplates the drilling of all wells to be drilled by Farmor in the Contract
Area during such period, consisting of approximately 56 wells and aggregating
total expenditures of approximately $20,000,000.00 by Farmee (including
"management fees" payable to Operator). All operations on wells commenced
during this period for the account of Farmee shall be carried out in a good and
workmanlike manner.
Operator shall invoice Farmee on a monthly basis in the approximate sum to
be borne by Farmee on behalf of Farmor during the upcoming month pursuant to
this drilling program. The bills, except for the first bill for the month of
June 1998, shall be delivered to Farmee before the beginning of the month for
which the expenditures relate. The billings shall require pre-payment for
expenses estimated to be incurred during that month, and any funds not expended
from a prior month's billing and payment shall be credited in the next ensuing
month's invoice. Each month's billings shall be conducted likewise, with all
prior month's surplus rolling forward to the next ensuing billing. Each month's
billing shall be paid by Farmee to Farmor by wire transfer within five (5)
business days of Farmee's receipt of such billing.
For each well drilled pursuant to this Farmout Agreement, Farmee will pay
to Operator a one time "management fee" in the amount of $30,000.00. It is
understood and acknowledged that Farmee does not have land, geological,
engineering and oil and gas accounting staff currently on hand, and thus, Farmee
desires these services to be provided by Operator for Farmee's benefit.
Operator's management services shall include all land, geological, engineering
and accounting services required
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to initiate, complete and account for the operations contemplated hereby through
completion and abandonment of the well if it is a dry hole. The management fee
will be payable when a well reaches its total objective depth, and will be in
lieu of, and not in addition to, the COPAS drilling rate charges customarily
allowed an operator pursuant to a joint operating agreement with respect to
drilling (but not operating) periods.
Any funds previously advanced by Farmee which have not been spent by
Operator as of January 1, 1999 shall be promptly returned to Farmee unless there
are drilling, completion, or equipping activities which are still ongoing as of
January 1, 1999, on wells the drilling of which was commenced prior thereto. In
such event, these activities will be wound up in the ordinary course of
business, and Farmor shall be entitled to its "management fee" with respect to
all such wells, and any excess funds remaining thereafter shall be promptly
returned to Farmee, together with a final reconciliation.
IV. RIGHTS EARNED
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A. ASSIGNMENTS
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Prior to the commencement of drilling any well that will potentially
result in an Earned Drillsite, Farmor will assign to Farmee one hundred percent
(100%) of its interest in wells drilled or commenced prior to October 1, 1998,
and seventy percent (70%) of its interest in wells commenced after September 30,
1998 [and Farmor may retain the other thirty percent (30%)], of Farmor's
interest in the drillsite spacing unit from the surface of the earth to the base
of the Green River formation, free of any overriding royalty interest in favor
of Farmor; subject to the release of such Earned Drillsite from the liens held
thereon by Farmor's "Senior Lenders" (as herein defined). Assignments will be
made without warranty of title, either express or implied, except by, through,
and under Farmor, but not otherwise. If for any reason, this well is either not
drilled, or does not result in Farmee obtaining an Earned Drillsite, then Farmee
agrees to reassign its entire interest in this affected acreage to Farmor free
and clear of, and warranting title against, all liens or other encumbrances
created by, through or under Farmee. "Senior Lenders" shall mean (i) the Agent
and Banks (as defined therein) under that certain Credit Agreement dated as of
September 23, 1997 between Farmor and ING (U.S.) Capital Corporation (as amended
prior to the date hereof); and (ii) the "Noteholder", "Agent" and "Collateral
Agent" (as defined therein) under that certain Credit Agreement between Farmor,
Trust Company of the West and TCW Asset Management Company dated as of September
23, 1997 (as amended prior to the date hereof). The Senior Lenders will release
such Earned Drillsites from their liens, such release to be evidenced by
individual releases, individual subordinations, blanket releases or blanket
subordinations of their liens for the Earned Drillsites, at their discretion.
B. AFTER PAYOUT REVERSION
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At such time as Farmee has reached Payout, as hereinafter defined,
Farmee shall reconvey all of its interest in all Earned Drillsites and affected
leases as received from Farmor, back
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to Farmor free and clear of, and warranting title against, all liens or other
encumbrances created by, through or under Farmee. "Payout" as used herein shall
mean that point in time when Farmee has recovered from production attributable
to its net working interest in all Earned Drillsites and affected leases one
hundred percent (100%) of Farmee's cost of drilling, testing, completing,
equipping, and producing and operating the wells located on such Earned
Drillsites and affected leases during the Payout period. Such costs shall also
include Operator's management fees and applicable severance and production
taxes, plus an additional sum equal to an annual eighteen percent (18%) rate of
return on all the sums spent by Farmee and attributable to this Farmout
Agreement during the Payout period. The rate of return and status of Payout
shall be calculated monthly. Payout shall be effective the first day of the
month following occurrence of Payout. Payments shall be made in amounts equal to
one hundred percent (100%) or seventy percent (70%), as applicable, of the net
proceeds received from sales of hydrocarbons from the wells drilled under the
drilling program, less all costs of production and sales, including Operator's
management fees. Payments will be made within forty-five (45) days after the end
of each month based on the proceeds received for such month (the "Production
Month"). Payments will be made, at Farmor's option, either (i) in cash, provided
such payments in cash do not result in a default or event of default under
either Credit Agreement with the Senior Lenders, or (ii) in shares of common
stock of Inland Resources Inc. priced at a ten percent (10%) discount of the
average of the bid side of the closing price for each trading day during the
Production Month for which the payment is made. Further, at any time after
February 1, 2000, Farmor shall have the right to make one lump sum cash payment
in an amount necessary to achieve Payout, thereby causing all wells to revert to
Farmor, provided such payment does not result in a default or event of default
under either Credit Agreement with the Senior Lenders.
V. ACCESS OF INFORMATION
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Farmee and its representatives will have free access at its own risk to the
Contract Area and drillsite spacing, and will have the right to inspect and make
copies of all information and records pertaining to the operations conducted
hereunder. Additionally, as and when requested by Farmee, Operator will furnish
by telephone, telecopier or mail, as the case may be: daily drilling reports,
copies of all electrical survey logs and other logs which may be taken during
the course of drilling or testing; and copies of results of all tests run.
VI. DELAY RENTALS AND SHUT-IN WELL PAYMENTS
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During the term of this Farmout Agreement, Operator will make a bona fide
effort to pay the annual delay rentals that may come due on any lease affecting
the Contract Area, but Operator will not be liable for any loss resulting from a
"good faith" failure to pay said rentals, or for improper payment through
clerical oversight. If a rental is due and paid by Operator regarding any lease
affecting one or more Earned Drillsites, Farmee shall reimburse Operator for its
allocable share of such rental in accordance with Farmee's working interest in
said lease.
In the event any well is completed on an Earned Drillsite as a gas well, as
determined by state or federal regulatory authorities, and if the well is
shut-in for any reason allowed by the affected oil
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and gas lease(s), Operator will make such shut-in royalty payments as are
necessary under the terms of the affected oil and gas lease(s) necessary to keep
such lease(s) in force and effect, and Farmee shall reimburse Operator for such
payments in accordance with the working interest then owned by Farmee in the
affected Earned Drillsite.
VII. OPERATING AGREEMENT
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Each well drilled in accordance with this Farmout Agreement shall be
drilled pursuant to a joint operating agreement. If no agreement exists as to
an intended drillsite spacing unit, then the parties will execute, and
operations will be conducted in accordance with, the AAPL 1989 Model Form
Operating Agreement attached hereto and made a part hereof as Exhibit B. In the
event a joint operating agreement already exists as to an intended drillsite
spacing unit, then Farmee will be subject to the terms and conditions thereof
and, if appropriate, will become a party thereto. Should Farmee fail or refuse
to become a party thereto within thirty (30) days after the agreement has been
delivered to Farmee for signature, Farmee hereby appoints Operator as its agent
and attorney-in-fact to execute such agreement on its behalf, providing the
terms and conditions thereof do not differ substantially from those set forth in
the model agreement at Exhibit B.
If there exists any conflict between the provisions of this Farmout
Agreement and those of any existing or future joint operating agreement, then as
between Farmor, Farmee, and Operator, the provisions of this Farmout Agreement
shall control.
VIII. INDEMNIFICATION
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Operator will indemnify and hold Farmee harmless from and against any
and all claims of any nature whatsoever, including personal injury and death,
and including reasonable attorney's fees and costs, and whether such claims are
based on negligence or otherwise, in connection with Operator's operations on
the Contract Area. Operator shall obtain and at all times maintain insurance
coverage consistent with the insurance exhibit to the Model Form Operating
Agreement attached hereto as Exhibit B, and Farmee shall be listed as an
additional insured.
Farmor and Operator shall keep Earned Drillsites free and clear of
liens and encumbrances of every kind or character. Farmee shall keep Earned
Drillsites free and clear of liens and encumbrances of every kind or character.
IX. TERM
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This Farmout Agreement shall remain in full force and effect until
Payout has occurred and all wells have reverted to Farmor, but Farmee's
obligation to fund the drilling and completion of operations contemplated hereby
shall cease at the close of business on December 31, 1998, except as to wells on
which drilling commenced prior thereto, and unless otherwise extended or
previously terminated in accordance with the terms hereof. Farmee will have the
right to suspend or cease the drilling operations in the event of receipt by
Farmor of any notice of default issued by Farmor's
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lenders. In the event Farmee shall elect (for the reasons provided in the
preceding sentence) at any time to curtail or terminate further drilling
operations, then Farmee shall so notify Farmor in writing, and thereafter the
operations shall be wound down in a businesslike manner.
X. BONDING
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The costs of any bonds that Farmee is required to obtain shall be
borne solely by Farmee, but allocated as additional drilling costs. To the
extent possible, Farmee will be joined on either Farmor's or Operator's bonds
that are now in existence.
XI. REASSIGNMENT
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If, during the time that Farmee owns an interest in an Earned
Drillsite, Farmee elects to surrender, let expire, abandon, or releases all or
any part of its rights in an Earned Drillsite, Farmee will notify Farmor not
less than sixty (60) days in advance of such surrender, expiry, abandonment, or
release. At Farmor's request, Farmee will then immediately reassign its rights
in such affected Earned Drillsite to Farmor free and clear of, and warranting
title against, any liens or other encumbrances by, through or under Farmee, and,
upon receipt of that reassignment, Farmor will pay Farmee the reasonable salvage
value of any material or equipment received.
XII. FARMEE'S OPTION FOR ADDITIONAL FARMOUTS
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Farmee will have the option, exercisable not later than sixty (60)
days before the end of 1998 and 1999, respectively, to enter into like-kind
Farmout Agreements with Farmor for the years 1999 and 2000, respectively, unless
(a) a "change of control" (as hereinafter defined) of Inland Resources Inc. has
occurred or (b) Farmee shall have failed to exercise timely its option with
respect to year 1999, in which event any unexercised option will immediately and
automatically expire. For purposes of this Farmout Agreement, a "change of
control" shall mean Farmee and its affiliates shall cease to beneficially own at
least a majority of the outstanding shares of voting capital stock of Inland
Resources Inc.
XIII. GENERAL
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A. NOTICE
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Any notice required under the terms of this Farmout Agreement will be
given to Farmor, Farmee, and/or Operator at the addresses and fax numbers listed
above.
B. INUREMENT
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This Farmout Agreement is binding upon the successors and assigns of
the parties. Farmee may assign this Farmout Agreement to affiliates without
Farmor's consent, but upon prior written notice to Farmor, but any such
assignment by Farmee shall not release it from its liabilities,
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duties and obligations hereunder. This Farmout Agreement may not otherwise be
assigned by Farmee or Farmor without the prior written consent of the other
party, which consent will not be unreasonably withheld.
C. ENTIRE AGREEMENT
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This Farmout Agreement constitutes the entire agreement by and between
the parties, and may not be modified except by a written instrument signed by
all parties hereto.
D. GOVERNING LAW
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This Farmout Agreement shall be governed by the laws of the state of
Colorado, except that any real property issue shall be governed by the laws of
the state where such property is located. Venue for any action involving this
Farmout Agreement shall exclusively lie in the District Court for the City and
County of Denver, Colorado.
This Farmout Agreement is dated the date of acknowledgment for each of
the undersigned, effective June 1, 1998, at Denver, Colorado.
FARMOR:
INLAND PRODUCTION COMPANY
ATTEST:
____________________________ By:_______________________________________
Secretary Kyle R. Miller, President
INLAND RESOURCES INC.
ATTEST:
____________________________ By:_______________________________________
Secretary Kyle R. Miller, President
FARMEE:
SMITH MANAGEMENT LLC
By:_______________________________________
Its:______________________________________
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OPERATOR:
INLAND PRODUCTION COMPANY
ATTEST:
____________________________ By:_______________________________________
Secretary Kyle R. Miller, President
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