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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
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
INLAND RESOURCES INC.
(Name of small business issuer in its charter)
WASHINGTON 91-1307042
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
410 17TH STREET, SUITE 700, DENVER, COLORADO 80202
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (303) 893-0102
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.001 per share
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the issuer was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
YES X NO
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained herein, and none will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ X ]
The issuer's revenues for its most recent fiscal year were: $17,181,842
The aggregate market value of the voting and non-voting common stock held by
non-affiliates of the issuer, based on the average bid and asked price of such
stock, was $25,040,000 as of January 31, 1998.
At January 31, 1998, the registrant had outstanding 8,359,830 shares of par
value $.001 common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-KSB incorporates certain
information by reference from the definitive Proxy Statement for the
registrant's Annual Meeting of Stockholders scheduled to be held on June 30,
1998.
Transitional Small Business Disclosure Format (check one):
Yes No X
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TABLE OF CONTENTS
PART I
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ITEM 1. DESCRIPTION OF BUSINESS................................................................ 1
General................................................................................ 1
Merger with Inland Production Company (formerly known as Lomax Exploration Company).... 1
Mining Operations...................................................................... 2
Sale of Duchesne County Fields......................................................... 2
Acquisition of Federal Leases.......................................................... 2
Acquisition of Farmout Wells........................................................... 3
Acquisition of Enserch Properties...................................................... 3
Acquisition of EREC Properties......................................................... 3
Acquisition of Woods Cross Refinery.................................................... 4
Forward Looking Statements............................................................. 4
Oil and Gas Operations................................................................. 4
Operations. ................................................................... 4
Secondary Recovery Enhancement Activities...................................... 5
Gas Gathering and Transportation Systems....................................... 5
Markets........................................................................ 6
Regulation..................................................................... 6
Environmental.................................................................. 7
Competition.................................................................... 8
Operational Hazards and Insurance.............................................. 8
Title to Properties............................................................ 8
Refining Operations.................................................................... 8
Refinery....................................................................... 8
Crude Oil Supply............................................................... 9
Marketing...................................................................... 9
Scheduled Maintenance and Capital Improvements
Competition.................................................................... 10
Volatility of Crude Oil Prices and Refining Margins............................ 10
Seasonality.................................................................... 11
Regulatory, Environmental and Other Matters Affecting Refining Operations...... 11
Employees.............................................................................. 13
ITEM 2. DESCRIPTION OF PROPERTY................................................................ 13
Oil and Gas............................................................................ 13
Acreage....................................................................... 13
Productive Oil and Gas Wells.................................................. 13
Reserves...................................................................... 14
Volumes, Prices and Production Cos............................................ 15
Drilling Activities........................................................... 16
Delivery Commitments................................................................... 17
Other Property......................................................................... 17
ITEM 3. LEGAL PROCEEDINGS...................................................................... 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................... 17
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............................... 18
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.............................. 19
General................................................................................ 19
Results of Operations Fiscal 1997 Compared to 1996..................................... 19
Liquidity and Capital Resources........................................................ 21
Year 2000 Issues....................................................................... 24
Inflation and Changes in Prices........................................................ 24
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Forward Looking Statements............................................................. 25
ITEM 7. FINANCIAL STATEMENTS................................................................... 25
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON....................................... 25
ACCOUNTING AND FINANCIAL DISCLOSURE.................................................... 25
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT*
ITEM 10. EXECUTIVE COMPENSATION*
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT*
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS*
ITEM 13. EXHIBITS AND REPORTS ON FORM 8K........................................................ 25
_________________________
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* Incorporated by reference to Proxy Statement.
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INLAND RESOURCES INC.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
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GENERAL
Inland Resources Inc. ("Inland" or the "Company") is an independent energy
company engaged in the acquisition, development, and enhancement of oil and gas
properties in the United States. Substantially all of Inland's property
interests are located in the Monument Butte Field within the Uinta Basin of
Northeastern Utah. The Company is also engaged in the business of crude oil
refining and wholesale marketing of refined petroleum products, including
various grades of gasoline, kerosene, diesel fuel, waxes and asphalt. Since its
entry into the oil and gas business in 1993, Inland has drilled 198 gross (147
net) wells and consummated certain other significant property acquisitions. As
a result of these successful efforts, the Company has experienced significant
growth in proved reserves, production and revenue. At December 31, 1997, the
Company's estimated net proved reserves totaled 49.7 million barrels of oil
equivalent, having a pre-tax present value discounted at 10% using constant
prices of $93.8 million. The Company also acquired an oil refinery in Woods
Cross, Utah on December 31, 1997. References to "Inland" or the "Company"
herein shall include its subsidiaries, Inland Production Company ("IPC") and
Inland Refining, Inc. ("Refining"), on a consolidated basis, unless the context
clearly indicates otherwise.
The Company intends to pursue a balanced strategy of development drilling
and acquisitions, focusing on enhancing operating efficiency and reducing
capital costs through the concentration of assets in selected geographic areas.
Currently, the Company's operations are focused on the full development of the
Monument Butte Field where the Company operates 510 gross (423 net) wells.
Inland pioneered the secondary water flood recovery processes used in the
Monument Butte Field and currently operates 16 approved secondary recovery
projects in the area. Budgeted development expenditures for 1998 in the
Monument Butte Field are $36.0 million net to the Company. The Company also has
budgeted $2.4 million for refinery upgrades.
Inland does not generally intend to pursue exploratory drilling due to the
industry's high failure rate and the resulting higher associated finding costs.
However, Inland may occasionally drill exploratory wells in certain areas it
considers strategic.
The Company's oil refinery in Woods Cross, Utah is owned by Refining. The
refinery has an overall crude capacity of approximately 12,500 barrels per day
("BPD"), but its current effective crude capacity is approximately 8,500 BPD due
to the mix of crude feedstocks being processed.
All references to shares of Inland's common stock, par value $.001 per
share ("Inland Common Stock" or "Common Stock"), and share prices in this Form
10-KSB have been adjusted to give effect to the 1 for 10 reverse stock split
effected June 3, 1996.
MERGER WITH INLAND PRODUCTION COMPANY (FORMERLY KNOWN AS LOMAX EXPLORATION
COMPANY)
Consistent with its strategy of increasing reserves and production through
acquisition of existing oil and gas production in developed fields, effective
September 21, 1994, Inland acquired by triangular merger (the "Merger") all of
the common and preferred stock of Lomax Exploration Company, now known as Inland
Production Company ("IPC"), in exchange for 770,451 shares of Inland Common
Stock and 107,546 shares of Inland Series A convertible preferred stock, par
value $.001 per share (each share of which was convertible into 9.6726 shares of
Inland Common Stock) ("Inland Series A Preferred Stock"). Such shares of Inland
Common Stock and Inland Series A Preferred Stock were issued pursuant to a
registration statement on Form S-4, Commission file no. 33-80392 (the "Form S-4
Registration Statement"), filed with the Securities and Exchange Commission
("Commission") that became effective
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August 3, 1994, and following approvals of the transactions by the stockholders
of both Inland and IPC at special meetings held August 29, 1994. The Inland
Series A Preferred Stock bore a dividend of 8% per annum on the Redemption Price
(defined below); had a liquidation preference over Inland Common Stock equal to
$50.00 per share plus any accumulated and unpaid dividends; was redeemable at
the option of the Company at a "Redemption Price" equal to $50.00 per share
during the first year after the effective date of the Merger, $54.00 per share
during the second year and $58.32 per share, plus accumulated and unpaid
dividends, during the third year or thereafter; was convertible at a "Conversion
Price" of $6.00 per share (divided into the applicable Redemption Price then in
effect) subject to certain anti-dilution adjustments; and was initially entitled
to elect three of the seven members of the Board of Directors of Inland. On July
31, 1996, Inland delivered notice to the holders of Series A Preferred Stock
that Inland intended to redeem the shares of Series A Preferred Stock in
accordance with Inland's Articles of Incorporation, except those shares which
the holders elected to convert into Inland Common Stock. The redemption was
closed on August 20, 1996. During 1996, 87% of holders elected to convert
into 900,831 shares of Inland Common Stock. Inland paid $739,708 to the
non-converting holders of the remaining shares of Series A Preferred Stock.
MINING OPERATIONS
On December 30, 1996, Placer Dome U.S. Inc. ("Placer") acquired all of
Inland's rights in the Toyiabe Mine, and assumed all past, present and future
environmental and reclamation liabilities associated with the Toyiabe Mine. In
consideration of the assumption of such liabilities, Inland paid $500,000 to
Placer. Upon closing this sale, Inland has divested itself of any remaining
business activities related to mining of precious metals. Inland recorded a
charge of $30,000 against 1996 revenues relating to this disposition. See Item
6 - "Management's Discussion and Analysis or Plan of Operations -- Results of
Operations -- Fiscal 1997 Compared to 1996."
SALE OF DUCHESNE COUNTY FIELDS
On September 19, 1995, Inland sold its undivided 50% interest in the
Duchesne County Fields to Petroglyph Gas Partners, L.P. ("PGP"). The purchase
price paid by PGP was (i) $3 million in cash (less $53,000 in net closing
adjustments among the parties); (ii) the assumption by PGP of Inland's liability
under its Loan Agreement, dated August 24, 1994, with Joint Energy Development
Investments Limited Partnership ("JEDI"), a nonrecourse loan having an
outstanding balance at September 19, 1995 of $2.5 million (the "JEDI Loan
Agreement"); and (iii) the assignment by PGP to Inland of PGP's undivided 38.23%
interest in 8,277 gross acres of oil and gas leases located within the Monument
Butte Field in Duchesne County, Utah (the "Ashley Federal Unit") bringing
Inland's total interest in the Ashley Federal Unit to 76.47%. The sale was
effective July 1, 1995. JEDI consented to the sale and the assumption of the
JEDI Loan Agreement by PGP, therefore, Inland has no further liability or
obligation under the JEDI Loan Agreement.
ACQUISITION OF FEDERAL LEASES
In November 1995, IPC entered into four oil and gas leases (the "Utah
Federal Leases") with the Department of Interior covering 6,200 gross acres
(5,861 net acres) located within the Monument Butte Field. The aggregate
purchase price for the Utah Federal Leases was $7,157,646, which was paid in
cash from funds on hand. Two leases are held by production and provide for
payment of a royalty of 12.5%, and two leases are held by payment of annual
rentals of $2 per acre and will be subject to a 12.5% royalty upon commencement
of production. The Utah Federal Leases did not have any producing wells at the
purchase date. A portion of the purchase price for the Utah Federal Leases was
obtained from a sale on November 6, 1995 by Inland of 1,200,000 shares of Common
Stock to Pengo Securities Corp. ("Pengo"), an affiliate of Randall D. Smith, for
consideration of $6.0 million in cash ($5.00 per share). Pengo and Mr. Smith
presently beneficially own approximately 5,111,681 shares of Common Stock, or
approximately 61% of the issued and outstanding shares of Common Stock.
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ACQUISITION OF FARMOUT WELLS
Effective July 1, 1995, Randall D. Smith ("Smith"), Inland and IPC, entered
into a Farmout Agreement pursuant to which IPC agreed to farmout to Smith 40-
acre drill sites and Smith agreed to expend approximately $6.8 million 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 dry hole. IPC earned a supervisory
fee of $25,000, proportionately reduced to IPC's working interest ownership in
the drill site, for each well drilled, for an aggregate of $326,178 in
supervisory fees in 1995. The Farmout Agreement provided that Smith would
reconvey the drill sites to IPC once Smith had recovered from production an
amount equal to 100% of his expenditures, including supervisory fees and
severance and production taxes, plus an additional sum equal to an annual 22%
rate of return on all such sums expended by Smith ("Payout"). On November 22,
1995, Inland, IPC and Smith entered into an Option Agreement pursuant to which
Smith granted to IPC the option to reacquire the drill sites on March 10, 1997
by issuing that number of shares of Common Stock valued at $5.00 per share,
which, based upon such valuation, would equal the amount necessary for Smith to
achieve Payout. If Inland and IPC failed to exercise such option, Smith was
given an option, exercisable prior to expiration of the third business day
following March 10, 1997, to purchase that number of shares of Inland Common
Stock which, based on a valuation of $5.00 per share, would equal an amount that
would cause Smith to achieve Payout. In the event Smith elected to purchase
such shares, Inland agreed to register the shares upon Smith's request and to
pay all expenses of such registration. Prior to June 1, 1996, Smith transferred
a portion of his interests in the farmout wells, the Farmout Agreement and
Option Agreement to Jeffrey A. Smith, and John W. Adams (collectively, with
Smith, the "Farmout Stockholders"). The Farmout Stockholders transferred all of
said interests to Farmout Inc. ("Farmout") prior to June 1, 1996.
On June 12, 1996, Smith Management Company, Inc. ("Smith Management") (an
affiliate of Smith), Farmout, the Farmout Stockholders, Inland and IPC entered
into an agreement (the "Purchase Agreement") pursuant to which the Farmout
Stockholders transferred one hundred percent (100%) of the outstanding capital
stock of Farmout to Inland in exchange for 1,309,880 shares (the "Farmout
Shares") of Inland Common Stock, with such transfer to be effective June 12,
1996, but with the Farmout Shares not to be delivered by Inland to the Farmout
Stockholders until January 2, 1997. The effect of the Purchase Agreement was to
accelerate the March 10, 1997 acquisition date for the 20 producing wells which
IPC had the right to acquire under the Option Agreement. Consequently, Inland
has, through its acquisition of the outstanding stock of Farmout, indirectly
acquired these wells. Inland also has agreed to register the Farmout Shares
upon the request of the Farmout Stockholders and to pay all expenses of such
registration.
ACQUISITION OF ENSERCH PROPERTIES
On August 15, 1997, the Company acquired the "Enserch Properties" from
Enserch Exploration, Inc. ("Enserch") for $10.4 million in cash. The Enserch
Properties consist of 153 gross (46.9 net) oil and gas wells, 9,600 net
undeveloped acres, water rights and a water transportation and distribution
system. The undeveloped acreage provides the Company with approximately 240
additional drillsites in the Monument Butte Field. The acquisition of the
Enserch Properties also included operating rights to two approved water flood
units (encompassing 42 of the wells acquired). The Enserch Properties are
geographically concentrated in proximity to the Company's properties in the
Monument Butte Field, thereby enabling the Company to operate the properties
without incurring significant incremental general and administrative expenses.
Of the 153 gross wells acquired, the Company already operated 43 of the wells
and Enserch operated 52 of the wells so that the Company now operates 95 of the
wells. The Company financed the acquisition of the Enserch Properties with a
portion of the proceeds of its former credit facility with Canadian Imperial
Bank of Commerce.
ACQUISITION OF EREC PROPERTIES
On September 30, 1997, the Company acquired the Utah assets (the "EREC
Properties") of Equitable Resources Energy Company ("EREC") for $56.0 million in
cash. The EREC Properties consist of 279 gross (184 net) oil and gas wells,
23,400 net undeveloped acres, water rights, a water transportation and
distribution system and a gas gathering system. The undeveloped acreage
provides the Company with approximately 585 additional drillsites in the
Monument Butte Field. The acquisition of the EREC Properties also included
operating rights to four approved water flood units
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(encompassing 142 of the wells acquired). The EREC Properties are also
geographically concentrated in proximity to the Company's properties in the
Monument Butte Field, thereby enabling the Company to operate the properties
without incurring significant incremental general and administrative expenses.
Of the 279 gross wells acquired, the Company already operated 48 of the wells
and EREC operated 227 of the wells so that the Company now operates 275 of the
wells. The Company financed the acquisition of the EREC Properties with a
portion of the proceeds of its new credit facility with Trust Company of the
West and TCW Asset Management Company, in their capacities as noteholder and
agent (collectively "TCW").
ACQUISITION OF WOODS CROSS REFINERY
On December 31, 1997, Refining acquired from Crysen Refining, Inc.
("Crysen") the oil refinery and related assets, inventory and receivables owned
by Crysen in Woods Cross, Utah (the "Woods Cross Refinery") for a purchase price
of $18.65 million (including costs and expenses associated with the acquisition,
and subject to post closing adjustments); and acquired from Sound Refining, Inc.
("Sound") all of Sound's inventories and accounts receivable relating to Sound's
oil refinery in Tacoma, Washington (the "Sound Refinery") for a purchase price
of $4.25 million.
The purchase price for the Woods Cross Refinery and associated receivables,
inventory and other assets, and the purchase price for the inventory and
accounts receivable relating to the Sound Refinery, were funded $9.25 million
from the Company's existing senior credit facility with ING (U.S.) Capital
Corporation, U.S. Bank National Association (d/b/a Colorado National Bank) and
Meespierson Capital Corp. (the "Senior Lenders") and $12.5 million from a new
credit facility entered into by Refining with Banque Paribas, which was also
closed on December 31, 1997 (the "Paribas Credit Agreement"). Refining also
assumed certain contractual relationships of Crysen and Sound relating to the
purchased assets. The Woods Cross Refinery and related assets, receivables and
inventory, as well as the receivables and inventory purchased by Refining
relating to the Sound Refinery, are pledged as collateral to secure payment of
the Paribas Credit Agreement.
Neither Inland nor IPC has guaranteed or is otherwise responsible for
repayment of any loans made pursuant to the Paribas Credit Agreement, but Inland
has pledged its stock in Refining to Banque Paribas as additional collateral for
the Paribas Credit Agreement. Inland and IPC have agreed with Banque Paribas
that if they receive proceeds of any equity or capital markets financial
transaction, they will cause to be contributed as additional capital to Refining
sufficient portions thereof to allow Refining to make certain prepayments
required to be made under the Paribas Credit Agreement.
FORWARD LOOKING STATEMENTS
This Form 10-KSB includes certain statements that are not historical facts
and are deemed to be "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. See Item 6 -"Management's
Discussion and Analysis or Plan of Operations -- Forward Looking Statements" for
a further discussion of these "forward-looking statements".
OIL AND GAS EXPLORATION AND PRODUCTION OPERATIONS
OPERATIONS. Presently, all oil and gas acreage, wells, gas gathering
systems, water delivery, injection and disposal systems and other oil and gas
related tangible assets are owned by IPC. IPC serves as operator for the
drilling, completion and operation of the majority of wells in which it has an
interest within the Monument Butte Field area. John E. Dyer, Vice President and
Chief Operating Officer of Inland, evaluates drilling, exploration, reworking
and secondary recovery operations for the Company. Field operations of the
Company are performed from a production office located in Roosevelt Utah.
Inland will actively seek to acquire other producing oil and gas properties
upon terms considered to be attractive by Inland. Generally, Inland does not
plan to engage in oil and gas exploration and development in new or unproven
areas, and plans to focus its acquisition efforts on proven properties with a
history of ongoing production. However, from time to time Inland may for various
reasons determine to purchase unproven properties or drill exploratory wells in
certain areas considered strategic by Inland.
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The Company has an existing credit facility with the Senior Lenders, under
which the Company had $10.0 million available to fund additional drilling and
exploration at December 31, 1997. See Item 6 - "Management's Discussion and
Analysis or Plan of Operations -- Liquidity and Capital Resources."
SECONDARY RECOVERY ENHANCEMENT ACTIVITIES. Inland presently engages in
secondary recovery enhancement operations in the Monument Butte Field through
water flooding. Water flooding consists of drilling a water injection well or
converting an existing producing well into a water injection well and then
pumping volumes of water at acceptable pressures and injection rates into the
well and into the oil producing horizons of the reservoir to maintain higher
reservoir pressures and increase production in other producing wells connected
to that reservoir. The repressurization process may take months or years
depending on the level of reservoir depletion through prior production. The
Company proved that the geology of certain portions of the Monument Butte Field
is susceptible to such flooding techniques.
The Company has been engaged in secondary recovery water flood operations
in the Monument Butte Field since 1987 and currently operates 16 approved water
flood units or areas; the Monument Butte Unit, the Gilsonite Unit, the Travis
Expansion Unit, the Boundary Unit, the Ashley Unit, the Monument Butte Northeast
Area, the Monument Butte East Area, the Castle Draw Area, the Pleasant Valley
Unit, the Beluga Unit, the Jonah Unit, the Humpback Unit, the Hawkeye Unit, the
Sand Wash Unit, the Wells Draw Unit and the Coyote Basin Unit. The Company
continued development of water flood operations in 1997 by initiating injection
in 15 wells, and purchasing 69 injection wells from other operators in the
area. At December 31, 1997, the Company had 111 wells injecting an aggregate of
17,500 barrels of water per day. During 1997, the Company purchased and
installed over 52 miles of water pipelines to handle low pressure water delivery
and high pressure water injection and purchased or built five new injection
plants. In addition, the company installed low pressure water return pipeline
systems in certain parts of the field. At December 31, 1997 the Company owned
and operated 80 miles of water pipelines and nine water injection plants. The
Company has experienced stabilized or increasing production in many wells
offsetting its water injection operations and intends to continue to
aggressively develop secondary recovery water flood operations by extending
infrastructure and initiating injection in as many as 50 wells in the Monument
Butte Field during 1998.
On January 12, 1989, the Company entered into an agreement (amended on
October 30, 1996) with the Johnson Water District to take up to 12,000 barrels
of water per day ("BWPD"), subject to availability, from their water pipeline to
provide water for the Company's water flood injection operations in the Monument
Butte Field until such time as the Company terminates the agreement. In
addition, through the acquisition of producing properties from EREC the Company
acquired additional rights of up to 25,000 BWPD from the Johnson Water District.
The Company also purchased rights to approximately 7,000 BWPD from the Upper
Country Water District located in northern Duchesne County. Furthermore, the
Company acquired water rights to approximately 20,000 BWPD from the Green River
in eastern Uinta County through its acquisition of producing properties from
Enserch. All water rights are subject to various terms and conditions including
State and Federal environmental regulations and system availability. Inland
believes that the agreement with the Johnson Water District, Upper Country Water
District, and the State of Utah will provide sufficient water to facilitate
significant water flood operations.
In October 1992, the Company and the U. S. Department of Energy ("DOE")
signed a three year cooperative agreement to further develop oil production and
reserves in the Monument Butte Field by using secondary water flood recovery.
The agreement was a cost sharing program pursuant to which the DOE reimburses
the Company and its working interest partners 41.5% of the total project
expenditures. Total project expenditures were $4.4 million, of which the DOE's
share was approximately $1.8 million. As of December 31, 1996, all expenditures
under this program were incurred, and substantially all reimbursements from the
DOE were received. The Company has also contracted with the University of Utah
to conduct certain research for the Company regarding its water flood
techniques.
GAS GATHERING AND TRANSPORTATION SYSTEMS. During 1996, the Company
installed a gas gathering, transportation and compression system consisting of
approximately 60 miles of gas gathering and fuel pipelines and four gas
compression and dehydration units, and during 1997, the Company installed over
76 miles of additional pipelines and upgraded its compression and dehydration
units. In addition, through the acquisition of the EREC Properties the Company
acquired a gas gathering system consisting of approximately 108 miles of
pipeline. The Company also owns an undivided 83.86% partnership interest in the
West Monument Butte Pipeline Company, which owns a portion of the "Travis
Expansion Unit" gas gathering and transportation system. Utilizing these
systems, the Company collects and markets approximately 80% of its operated gas
production.
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MARKETS. The availability of a ready market and the prices obtained for
the Company's oil and gas depend on many factors beyond the Company's control,
including the extent of domestic production and imports of oil and gas, the
proximity and capacity of natural gas pipelines and other transportation
facilities, fluctuating demands for oil and gas, the marketing of competitive
fuels, and the effects of governmental regulation of oil and gas production and
sales. Future decreases in the prices of oil and gas would have an adverse
effect on the Company's proved reserves, revenues, profitability and cash flow,
although the Company has somewhat mitigated this risk by entering into certain
hedging arrangements. The oil produced from the Monument Butte Field is called
"Black Wax" and is sold at the posted field price (an industry term for the fair
market value of oil in a particular field) less a deduction of approximately
$0.85 to $1.00 per barrel for oil quality adjustments. The posted field price
paid by Chevron ("Chevron Black Wax Posting") ranged from $14.00 to $24.25
during 1997 and $17.00 to $24.75 during 1996, and was $14.25 per barrel on
December 31, 1997. During the period from April 1, 1997 to December 31, 1997
the Company sold crude oil from the properties acquired from EREC and Enserch to
Amoco. The posted field price paid by Amoco during this period ranged from
$13.50 to $18.75 and was $13.50 on December 31, 1997. The Company receives the
posted filed price, less $1.00 and an adjustment for oil quality, under its
contract with Amoco. As the quantity of Black Wax produced within the Monument
Butte Field grows, physical limitations within the regional refineries, located
in Salt Lake City, Utah, will limit the amount of Black Wax that can be
processed. One of the reasons for acquiring the Woods Cross Refinery was to
provide a refining source, if needed, for the Company's Black Wax production
following certain upgrades to the refinery necessary to accommodate increased
Black Wax production. The Company has also held discussions with the other Salt
Lake City refineries to inform them of the outlook for Black Wax production in
this region so that they can also propose solutions to existing plant
configurations. Until the upgrading of the Woods Cross Refinery is finished or
refinery modifications at one or more of the other refineries are accomplished,
there may be short-term downward pressure on Black Wax pricing. See "Refining
Operations" below for a discussion of the Woods Cross Refinery.
The natural gas produced by the Company not subject to gas purchase
agreements is sold on a month-to-month basis in the spot market, the price of
which ranged from $1.61 to $4.91 per Mcf of gas during 1997 and from $1.10 to
$3.93 per Mcf of gas during 1996, and was $2.63 per Mcf of gas for December
1997. All spot market sales during 1997 were made to Wasatch Energy Corporation
("Wasatch").
Pursuant to certain gas purchase agreements entered into with Interline
Resources Corporation ("Interline"), the Company dedicated its gas production
from the "Monument Butte Unit", the "Monument Butte East Unit", the "Boundary
Unit", and the "Gilsonite Unit" to Interline. Effective October 31, 1997, the
Company canceled this gas purchase agreement and now gathers this gas using its
own gas gathering and transportation system. Under the old contract, the
Company was paid for gas sold to Interline in the amount by which the price
received by Interline for its gas resales exceeded $1.65 per MMBTU. The price of
gas under this contract did not exceed $1.65 per MMBTU during the last three
years.
Prior to April 1, 1996, Interline compressed and marketed the "Travis
Expansion Unit" gas production. Commencing April 1, 1996, IPC began to compress
and market the gas produced from the "Travis Expansion Unit" using its own
gathering and transportation system.
During 1997 and 1996, the Company sold approximately 89% and 100%,
respectively, of its oil production to Chevron U.S.A. During these same
periods, the Company sold approximately 86% and 95%, respectively, of its gas
production to Wasatch. Inland believes that the loss of either Chevron or
Wasatch as a purchaser of its production would not have a material adverse
effect on its results of operations due to the availability of other purchasers
in the area and the Company's ownership of the Woods Cross Refinery.
REGULATION. The Company's oil and gas exploration, production and related
operations are subject to extensive rules and regulations promulgated by federal
and state agencies. Failure to comply with such rules and regulations can
result in substantial penalties. The regulatory burden on the oil and gas
industry increases the Company's cost of doing business and affects its
profitability. Because such rules and regulations are frequently amended or
interpreted, Inland is unable to predict the future cost or impact of complying
with such laws. These laws and regulations include state and federal regulation
of oil and gas production, federal regulation of gas sold in interstate and
intrastate commerce, regulations governing environmental quality and pollution
control, state limits on allowable rates of production by a well or proration
unit, the amount of oil and gas available for sale, the availability of adequate
pipeline and other transportation and processing facilities and the marketing of
competitive fuels. For example, a productive gas well may be "shut-in" because
of an over-supply of gas or lack of an available gas pipeline in the areas in
which Inland may
-6-
<PAGE>
conduct operations. State and federal regulations generally are intended to
prevent waste of oil and gas, protect rights to produce oil and gas between
owners in a common reservoir, control the amount of oil and gas produced by
assigning allowable rates of production and control contamination of the
environment. Pipelines are subject to the jurisdiction of various federal, state
and local agencies.
Many state authorities require permits for drilling operations, drilling
bonds and reports concerning operations and impose other requirements relating
to the exploration and production of oil and gas. Such states also have
ordinances, statutes or regulations addressing conservation matters, including
provisions for the unitization or pooling of oil and gas properties, the
regulation of spacing, plugging and abandonment of such wells, and limitations
establishing maximum rates of production from oil and gas wells. However, no
Utah regulations provide such production limitations with respect to the
Monument Butte Field.
Inland does not expect compliance with any of the foregoing ordinances or
regulations to have any material adverse effect on its oil and gas production
and secondary recovery enhancement activities.
ENVIRONMENTAL. The Company is subject to numerous laws and regulations
governing the discharge of materials into the environment or otherwise relating
to environmental protection. These laws and regulations may require the
acquisition of a permit before drilling commences, restrict the types,
quantities and concentration of various substances that can be released into the
environment in connection with drilling and production activities, limit or
prohibit drilling activities on certain lands lying within wilderness, wetlands
and other protected areas, and impose substantial liabilities for pollution
resulting from Inland's operations.
There is a trend toward stricter standards in environmental legislation and
regulation that is likely to continue. For instance, legislation has been
proposed in Congress from time to time that would reclassify certain oil and gas
production wastes as "hazardous wastes," which reclassification would make such
wastes subject to much more stringent handling, disposal and clean-up
requirements. If such legislation were to be enacted, it could have a
significant impact on the operating costs of the Company, as well as the oil and
gas industry in general. The Company does not presently anticipate that it will
be required in the near future to expend amounts relating to its oil and gas
production operations that are material in relation to its total capital
expenditure program by reason of environmental laws and regulations, but because
such laws and regulations are frequently changed, the Company is unable to
predict the ultimate cost of such compliance.
The Company is subject to the requirements of the federal Occupational
Safety and Health Act ("OSHA") and comparable state statutes. The OSHA hazard
communication standard, the EPA community right-to-know regulations under Title
III of the federal Superfund Amendment and Reauthorization Act and similar state
statutes require the Company to organize information about hazardous materials
used or produced in its operations. Certain of this information must be
provided to employees, state and local governmental authorities and local
citizens. The Company is also subject to the requirements and reporting set
forth in OSHA workplace standards. The Company provides safety training and
personal protective equipment to its employees, and annually reports its
hazardous materials usage to state and local agencies for public review.
The Company's operations involve the injection of water into the subsurface
to enhance oil recovery. Under the Safe Drinking Water Act ("SDWA"), oil and
gas operators, such as the Company, must obtain a permit for the construction
and operation of underground Class II enhanced recovery underground injection
wells. To protect against contamination of drinking water, EPA and the State of
Utah require that mechanical integrity tests be performed by the well operator
every five years. The Company has obtained the necessary permits for the Class
II injection wells it operates, and has developed a schedule to conduct
mechanical integrity tests for each well every five years.
A substantial portion of the Company's operations occur on federal
leaseholds. During 1996, the Vernal, Utah office of the Bureau of Land
Management ("BLM") undertook the preparation of an Environmental Assessment
("EA") to evaluate the environmental and socioeconomic impacts of the Company's
proposed drilling plan within certain areas of the Monument Butte Field. The
Company reduced its activities on these lands during the last six months of 1996
and January 1997 pending issuance of a Record of Decision on the EA by the BLM,
which was issued on February 3, 1997. The Record of Decision identified surface
stipulations and mitigation measures that the Company must implement to protect
various surface resources, including protected and sensitive plant and wildlife
species, soils and watersheds. The Company has been successfully complying with
the surface stipulations and
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<PAGE>
mitigation measures, and increased its drilling rate on federal leaseholds
significantly in 1997. The Company believes it will be able to continue to
comply with the Record of Decision without causing a material impact on its
future drilling plans in the Monument Butte Field.
COMPETITION. Many companies and individuals are engaged in the oil and
gas business. Inland is faced with strong competition from major oil and gas
companies and other independent operators attempting to acquire prospective oil
and gas leases, producing oil and gas properties and other mineral interests.
Some competitors are very large, well-established companies with substantial
capabilities and long earnings records. Inland may be at a disadvantage in
acquiring oil and gas prospects since it must compete with individuals and
companies which have greater financial resources and larger technical staffs
than Inland.
OPERATIONAL HAZARDS AND INSURANCE. Inland's operations are subject to the
usual hazards incident to the drilling and production of oil and gas, such as
blowouts, cratering, explosions, uncontrollable flows of oil, gas or well
fluids, fires, pollution and other environmental risks. These hazards can cause
personal injury and loss of life, severe damage to and destruction of property
and equipment, pollution or environmental damage and suspension of operations.
The Company maintains insurance of various types to cover its operations.
The Company is also required under various operating agreements to maintain
certain insurance coverage on existing wells and all new wells drilled during
drilling operations, and to name others as additional insureds thereunder. The
occurrence of a significant adverse event, the risks of which are not fully
covered by insurance, could have a material adverse effect on Inland's financial
condition and results of operations. Moreover, no assurances can be given that
the Company will be able to maintain adequate insurance in the future at rates
it considers reasonable.
TITLE TO PROPERTIES. The Company has obtained title opinions on
substantially all of its producing properties. The Company believes that it has
satisfactory title to all of its properties in accordance with standards
generally accepted in the oil and gas industry. As is customary in the oil and
gas industry, the Company performs a minimal title investigation before
acquiring undeveloped properties. A title opinion is obtained prior to the
commencement of drilling operations on such properties. The Company's
properties are subject to customary royalty interests, liens incident to
operating agreements, liens for current taxes and other burdens which Inland
believes do not materially interfere with the use of or affect the value of such
properties.
REFINING OPERATIONS
REFINERY. The Company's refining operations are conducted through its
wholly owned subsidiary, Refining. The refining facilities are located on
approximately 42 acres in the northern sector of the Salt Lake City metropolitan
area in Woods Cross, Utah, on property owned by Refining. The Woods Cross
Refinery has an overall crude capacity of approximately 12,500 BPD, but its
current effective crude capacity is approximately 8,500 BPD due to the mix of
crude feedstocks being processed. The Woods Cross Refinery is a relatively
simple, hydroskimming plant, consisting of atmospheric and vacuum distillation,
catalytic reforming, distillate dewaxing and desulfurization and asphalt
blending and oxidizing. It does not have a catalytic cracker. Consequently, it
is able to process approximately 30% of a barrel of the Company's Black Wax
crude into high end petroleum products (e.g., gasoline, diesel) with the
remaining approximately 70% being processed into low end petroleum products
(e.g., waxes, tar, asphalt). The Woods Cross Refinery currently processes
Wyoming Sweet, Black Wax, Yellow Wax, Nevada Asphaltic, and Canadian crudes, and
its products produced include all grades of motor gasoline, kerosene, #1 diesel,
#2 diesel, waxes, heavy vacuum gas oil, residual fuels, road asphalt, air blown
asphalt and polymerized asphalt. The refinery has the capability to receive and
ship crude and product by rail car and truck, receives crude oil via the Amoco
and Chevron pipelines, and ships product via the Chevron pipeline. The refinery
has a 485,000 barrel capacity of tankage on site.
The Woods Cross Refinery currently has capacity to process approximately
2,500 BPD of Black Wax crude. The Company estimates it would take approximately
three months and approximately $300,000 to upgrade the facility to allow it to
process up to 6,000 BPD of Black Wax. The Company is considering whether to make
these upgrades to provide an additional processing source for its Black Wax
production from the Monument Butte Field. At December 31, 1997, the Company
produced approximately 5,400 BPD of Black Wax from the Monument Butte Field.
-8-
<PAGE>
CRUDE OIL SUPPLY. In recent years, crude oil supply in the Salt Lake City
area has been tight due to a decrease in production of local crudes and limited
pipeline capacities and access to crude outside the region. The completion of
the Express pipeline in March 1997 has increased the access to outside crudes
and made Canadian crudes available to the area. Crude is also imported into
the area by tank truck or rail car, but these transportation methods are more
expensive than the pipelines.
Crude oil is acquired by Refining from a number of sources, including major
oil companies and small independent producers, under arrangements which contain
market-responsive pricing provisions. Many of these arrangements are subject to
cancellation by either party or have terms that are not in excess of one year.
Refining obtains its supply of Wyoming Sweet crude via the Amoco and
Chevron pipelines, comprising approximately 25% of its feedstock during calendar
1997, pursuant to contracts with oil producers and Amoco that are generally
terminable by either party on 30 days' notice. Refining obtains its Yellow Wax
crude, comprising approximately 25% of calendar 1997 feedstock, from Pennzoil
pursuant to a processing agreement terminable by either party upon 12 months'
notice under which Pennzoil supplies Yellow Wax crude to Refining and purchases
the resulting wax distillate and vacuum tower bottoms. Refining also obtains
additional barrels of Yellow Wax from Pennzoil and other sources pursuant to
month-to-month purchase contracts. Yellow Wax is delivered to the Salt Lake
City area by insulated tank truck. Refining purchases Nevada ashphalitic crude
from various small producers pursuant to month-to-month contracts and moves it
to the Woods Cross Refinery by tank truck. Nevada asphaltac crude comprised
approximately 10% of calendar 1997 feedstock. The production of Nevada
asphaltic crudes has been steadily decreasing so Refining has supplemented its
supply with other feedstocks purchased from other refineries.
Although Black Wax crude only comprised approximately 3% of 1997 feedstock,
Refining has expended approximately $200,000 already in 1998 to upgrade its
capacity to process Black Wax crude from approximately 1,000 BPD to 2,500 BPD,
and anticipates that it will start processing additional quantities of Black Wax
crude produced by the Company from the Monument Butte Field. Also, the Company
is considering whether to make expenditures of an additional approximately
$300,000 to further upgrade the facility to allow it to process up to 6,000 BPD
of Black Wax to provide an additional processing source for the Company's Black
Wax production. Black Wax is transported to the Refinery by insulated tank
truck.
In addition to crude, Refining purchases other feedstocks, including
asphalt hardstock, finished gasoline and diesel and MTBE. Asphalt hardstock is
purchased from other refineries as a component for asphalt, with the Exxon
refinery in Billings, Montana being the largest supplier to Refining
(approximately 90% of calendar 1997 feedstock). Finished gasoline and diesel is
purchased from other area refineries or suppliers to meet contractual
obligations during refinery downtimes or slowdowns, or when profitable resale
opportunities arise. MTBE is a gasoline blendstock component used in the
production of gasoline and is supplied to Refining by Murex pursuant to a month-
to-month contract.
The Company believes an adequate supply of crude oil and other feedstocks
will be available from local producers, crude oil sourced through common carrier
pipelines and other sources to sustain refinery operations for the foreseeable
future at substantially the levels currently being experienced. However, there
is no assurance that this situation will continue. The Company continues to
evaluate other supplemental crude oil supply alternatives for its refinery on
both a short-term and long-term basis. Among other alternatives, the Company
has considered making additional equipment modifications to increase its ability
to use alternative crude oils, including making the upgrades noted above to
increase its capacity for processing Black Wax. If additional supplemental
crude oil becomes necessary, the Company intends to implement then available
alternatives as necessary and as is most advantageous under then prevailing
conditions. Implementation of supplemental supply alternatives may result in
additional raw material costs, operating costs, capital costs, or a combination
thereof in amounts which are not presently ascertainable by the Company but
which will vary depending on factors such as the specific alternative
implemented, the quantity of supplemental feedstocks required, and the date of
implementation. Implementation of some supply alternatives requires the consent
or cooperation of third parties and other considerations beyond the control of
the Company.
MARKETING. Refining owns no retail outlets for its gasoline and diesel
products so they are sold on a wholesale basis to a broad base of independent
retailers, jobbers and major oil companies in the region. Prices are determined
by local market conditions at the "terminal rack" located at the refinery and
the customer typically supplies his own truck transportation. No single
purchaser of the Company's gasoline and diesel accounted for more than 10%
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<PAGE>
of the Company's revenues from refining operations during calendar 1997 or 1996.
However, a large local independent jobber is purchasing increasing volumes of
gasoline pursuant to a month-to-month contract and depending on the level of
such purchases, the loss of such jobber as a customer could have a short-term
material adverse effect on Refining until replacement purchasers were obtained.
The Company sells its road asphalt and roofing asphalt to a broad base of
customers in the Salt Lake City area, Nevada and northern California at prices
determined by local market conditions. No single purchaser of the Company's
asphalt products accounted for more than 10% of the Company's revenues from
refining operations during calendar year 1997 or 1996.
During calendar year 1997 and 1996, the Company's sales of its Yellow Wax
products to Pennzoil constituted substantially all of its Yellow Wax production
but did not represent more than 10% of the Company's revenues from refining
operations during either such year.
SCHEDULED MAINTENANCE AND CAPITAL IMPROVEMENTS. Each refinery operating
unit requires regular maintenance and repair shutdowns (referred to as
"turnarounds"), during which it is not in operation. Turnaround cycles vary for
different units. In general, Refining will manage refinery turnarounds so that
some units continue to operate while others are down for scheduled maintenance.
Maintenance turnarounds are implemented using refinery personnel as well as some
additional contract labor. Turnaround work proceeds on a continuous 24-hour
basis in order to minimize unit down time. The Company expenses current
maintenance charges and capitalizes turnaround costs which are then amortized
over the estimated period until the next turnaround which is generally two to
four years depending on the unit involved.
The Company plans to expend approximately $1.9 million during 1998
implementing various necessary repairs and maintenance and environmental
upgrades, in addition to the approximately $300,000 in upgrades it may elect to
expend to increase the refinery's capacity to process Black Wax.
The Company's refinery operations are subject to significant interruption
if the refinery were to experience a major accident or fire or if it were
damaged by severe weather or other natural disaster. A substantial portion, but
not all, of such loss would be covered by business interruption, property or
other insurance carried by Refining. Refining's safety measures substantially
mitigate but do not eliminate the risk of damage to the refinery or the
environment and personal injury should a major adverse event occur. The
occurrence of a significant event that is not fully insured against could have a
material adverse effect on the Company and its financial position and results of
operations.
COMPETITION. The refining and marketing businesses are highly competitive.
The principal competitive factors affecting the Company's refining and marketing
operations are the quality, quantity and delivered costs of crude oil and other
refinery feedstocks, refinery processing efficiencies, refined product mix,
refined product selling prices and the cost of delivering refined products to
markets. Other competitive factors include the ability of competitors to
deliver refined products into the Company's primary market area by pipeline.
There are four other refineries located in the Salt Lake City Metropolitan area
against which the Company competes directly for crude oil and feedstock
acquisitions and finished product sales. These refineries are owned by Amoco,
Chevron, Flying J and Phillips Petroleum, each of which is a large, integrated
oil company which, because of their more diverse operations, larger refineries,
stronger capitalization and better brand name recognition, may be better able
than the Company to withstand volatile industry conditions, including shortages
or excesses of crude oil or refined products or intense price competition at the
wholesale and retail level. These competitors have financial and other
resources substantially greater than those of the Company. Amoco's refinery has
a capacity of 48,000 BPD, Chevron's has a capacity of 52,000 BPD, Flying J's has
17,000 BPD and Phillips has 28,000 BPD capacity. Each refinery is more
sophisticated than the Woods Cross Refinery and, therefore, more capable of
producing higher end gasoline products, as well as the asphalt and wax
distillates produced by Refining.
VOLATILITY OF CRUDE OIL PRICES AND REFINING MARGINS. The Company's cash
flow from refining operations will be primarily dependent upon producing and
selling quantities of refined products at refinery margins sufficient to cover
fixed and variable expenses. In recent years, crude oil costs and prices of
refined products have fluctuated substantially. These costs and prices depend
on numerous factors, including the demand for crude oil, gasoline and other
refined products, which in turn depend on, among other factors, changes in the
economy, the level of foreign
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<PAGE>
and domestic production of crude oil and refined products, the availability of
imports of crude oil and refined products, the marketing of alternative and
competing fuels and the extent of government regulation.
Refining's crude oil requirements are supplied from sources which include
major oil companies, large independent producers and smaller local producers.
Crude oil supply contracts are generally relatively short-term contracts with
market-responsive pricing provisions. The prices received by Refining for its
refined products are affected by additional local factors such as product
pipeline capacity, local market conditions and the level of operations of out of
state refineries. A large rapid increase in crude oil prices would adversely
affect Refining's operating margins if the increased cost of raw materials could
not be passed along to Refining's customers. Refining generally does not hedge
a significant portion of its feedstock purchases or refined product sales.
However, the ability of the Company to sell its Black Wax production to Refining
for processing and resale should help to level the effects of fluctuating prices
on a consolidated basis.
SEASONALITY. Refining experiences seasonal fluctuations with its gasoline,
roofing asphalt and road asphalt products, with demand for such products being
significantly stronger during the spring, summer and early fall due to increased
tourist travel with respect to gasoline and increased construction activity with
respect to the Company's asphalt products.
REGULATORY, ENVIRONMENTAL AND OTHER MATTERS AFFECTING REFINING OPERATIONS.
The Company's refining and marketing operations are subject to a variety of
federal, state and local health and environmental laws and regulations governing
the discharge of pollutants into the air and water, product specifications, and
the generation, treatment, storage, transportation and disposal of solid and
hazardous waste and materials. The Company believes that the refinery is
capable of processing currently utilized feedstocks in substantial compliance
with existing environmental laws and regulations. However, environmental laws
and regulations are becoming increasingly stringent, and the Company is aware of
regulations which will become effective in the future which may affect the
refining and marketing industry. The following currently appear to be the most
significant of such laws and regulations as they relate to the Company's
operations. Where possible, the Company has attempted to estimate a range of
its costs of compliance based upon its current understanding of such laws and
regulations. The current estimates of costs provided are preliminary only and
actual costs may differ significantly from these estimates.
Refining is subject to additional environmental regulations adopted by the
Environmental Protection Agency ("EPA") and state and local environmental
agencies to implement the Clean Air Act ("CAA"), as amended in 1990. Among other
things, the CAA requires all major sources of hazardous air pollutants, as well
as major sources of certain other criteria pollutants, to obtain state operating
permits. The permits must contain applicable federal and state emission
limitations and standards as well as satisfy other statutory requirements. All
sources subject to the permit program must pay an annual permit fee. Refining
received a consolidated error permit Approval Order from the State of Utah in
January 1998. Although additional costs will be incurred in connection with
these permits, the Company does not believe these costs will be material.
The CAA also requires the EPA to adopt emission standards for categories of
hazardous air pollutant sources. In accordance with this directive, the EPA has
adopted emission standards that apply to hazardous air pollutants emitted by
petroleum refineries. The standards are applicable to emissions from, among
other things, process vents, storage vessels, equipment leaks, wastewater
operations and gasoline loading racks. The Company is in the process of
inventorying its hazardous air pollutant emissions to evaluate compliance
strategies for this regulation. At this time, the Company does not believe its
compliance costs will be material, although there can be no assurance until such
evaluation is completed.
The EPA's reformulated gasoline anti-dumping rules are designed to prevent
lower-quality feedstocks being sent from areas where reformulated fuels are
required to areas where they are not required, thus transferring potential air
pollutant emissions instead of lowering them. The 1990 emissions baseline for
Refining was made with a JP-4 exemption that took into account the pending
replacement of JP-4 with JP-8 as military fuel. The EPA's new Complex Model for
1998 shows a potential accedence for certain air pollutant emissions if this
exemption applies. This problem could be alleviated if the JP-4 exemption did
not exist. Therefore, the Company has applied to the EPA to remove the JP-4
exemption from its emissions baseline. Initial response from the EPA has been
that while the exemption may be removed, it will be retroactive to 1995. This
would cause the refinery to be non-compliant for 1995. The potential cost
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of this period of noncompliance, if the exemption is removed, is uncertain at
this time. This issue is still being discussed with the EPA.
Risk Management Planning is another new regulatory program under the CAA
that Refining will be required to comply with in 1998. The focus of this
regulatory program is emergency response preparedness in the event of an
accidental release of flammables or toxics that have the potential to impact
public health. Refining currently has an oil Spill Prevention Contingency and
Countermeasures ("SPCC") Plan and a Stormwater Pollution Prevention ("SWPP")
Plan. In 1998, Refining will revise and update these plans and combine them
with a new Risk Management Plan in an Integrated Contingency Plan ("ICP") that
will meet all federal, state, and local contingency planning requirements. The
Federal Oil Pollution Act of 1990 ("OPA 90") requires that certain refinery
operations also maintain a Facility Response Plan for responding to an
accidental release of oil. This planning requirement also will be incorporated
into the comprehensive ICP. The Company does not believe the cost of developing
the ICP will be material, although there can be no assurance until it is
completed.
During 1997, the EPA issued a proposed new rule regarding regional haze.
Comments were extensive, and only one state supported the proposal. Potential
problems with the proposal include the lack of coordination with the EPA's
National Ambient Air Quality Standards ("NAAQS") implementation schedule, the
failure to consider recommendations of the Grand Canyon Visibility Transport
Commission, methods of funding and measuring improvement, and lack of program
flexibility. A final rule may be issued in 1998. The impact on Refining from
this rule is not yet known.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without regard
to fault or the legality of the original conduct, on certain classes of persons
who are considered to have contributed to the release of a "hazardous substance"
into the environment. These persons include the owner or operator of the
disposal site or sites where the release occurred and companies that disposed or
arranged for the disposal of the hazardous substances under CERCLA and may be
subject to joint and several liability for the costs of cleaning up the
hazardous substances that have been released into the environment and for
damages to natural resources. It is not uncommon for neighboring landowners and
other third parties to file claims for personal injury and property damage
allegedly caused by the hazardous substances released into the environment.
Refining periodically disposes of hazardous waste off site at licensed disposal
facilities. The Company is not presently aware of any potential adverse claims
in this regard.
Refining from time to time needs to obtain new environmental permits or
modifications to existing permits. Although there can be no guarantee that
Refining will be able to obtain all required permits, the Company does not
presently anticipate any unusual problems in Refining obtaining the necessary
permits and permit modifications, nor does it anticipate any significant
problems in connection with the renewal of existing permits prior to their
expiration.
The Company cannot predict what additional health and environmental
legislation or regulations will be enacted or become effective in the future or
how existing or future laws or regulations will be administered or interpreted
with respect to products or activities to which they have not been previously
applied. Compliance with more stringent laws or regulations, as well as more
vigorous enforcement policies of regulatory agencies, could have an adverse
effect on the financial position and the results of operations of the Company
and could require substantial expenditures by Refining for the installation and
operation of pollution control systems and equipment not currently possessed by
Refining.
Refining, pipeline, trucking and marketing operations are inherently
subject to accidental spills, discharges or other releases of petroleum or
hazardous substances which may give rise to liability to governmental entities
or private parties under federal, state or local environmental laws, as well as
under common law. Accidental discharges of contaminants have occurred from time
to time during the normal course of operations of Refining's refinery. Refining
has undertaken or intends to undertake all investigative or remedial work thus
far required by governmental agencies to address potential contamination by
Refining. Future expenditures related to health and environmental matters
cannot be reasonably quantified in many circumstances for various reasons,
including the speculative nature of remediation and cleanup cost estimates and
methods, imprecise and conflicting data regarding the hazardous nature of
various types of substances, the number of other potentially responsible parties
involved, various defenses which
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may be available to Refining and changing environmental laws and interpretations
of environmental laws. However, the Company anticipates that Refining will
expend approximately $1.5 million in 1998 for capital expenditures for
environmental control purposes.
EMPLOYEES
At January 31, 1998, the Company had 168 employees, consisting of four
executive officers, 28 clerical and administrative employees and 60 field
operations staff involved in the Company's oil and gas operations in Utah and 76
employees employed in the refining operations at the Wood Cross Refinery.
ITEM 2. DESCRIPTION OF PROPERTY
- --------------------------------
OIL AND GAS
ACREAGE. The following table reflects the developed and undeveloped
acreage that the Company held as of December 31, 1997:
<TABLE>
<CAPTION>
Developed Acreage/(1)(2)/ Undeveloped Acreage/(1)(3)/
------------------------- ---------------------------
Gross Net Gross Net
Location Acres Acres Acres Acres
------- ------ ----- ----- -----
<S> <C> <C> <C> <C>
Utah 21,600 16,000 133,000 96,000
Other/(4)/ 80 35 9,400 54
------ ------ ------- -------
Total 21,680 16,035 142,400 104,750
====== ====== ======= =======
</TABLE>
________________________
(1) A gross acre is an acre in which the Company holds any working interest
without adjustment to reflect the actual percentage interest held therein
by the Company. Net acres is the sum of the actual percentage working
interest owned by the Company in gross acres.
(2) Developed acreage is acreage included in the spacing unit for or assignable
to productive wells.
(3) Undeveloped acreage is acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial
quantities of oil and gas, regardless of whether or not such acreage
contains proved reserves. Undeveloped acreage includes 62,100 gross
(44,800 net) acres held by production at December 31, 1997.
(4) As of December 31, 1997, there were two producing oil or gas wells on the
Company's other acreage but the Company had no reserves attributed to such
acreage.
________________________
As of January 31, 1998, the undeveloped acreage not held by production involves
306 leases with remaining terms of up to 10 years, with leases covering
approximately 3,200 net acres expiring in 1998. The Company intends to renew
expiring leases in areas considered to have good development potential. The
Company also intends to continue to pay delay rentals and minimum royalties
necessary to maintain a lease (an expense of approximately $20,000 in 1998), in
the event the Company decides to develop the acreage subject to such lease prior
to expiration of the lease term. To the extent that wells cannot be drilled in
time to hold a lease which the Company desires to retain, the Company may
negotiate a farm out arrangement of such lease retaining an override or back-end
interest.
PRODUCTIVE OIL AND GAS WELLS. The following table reflects the number of
productive oil and gas wells in which the Company held a working interest as of
December 31, 1997:
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<TABLE>
<CAPTION>
Productive Wells/(1)/
---------------------------------------------------
Gross/(2)/ Net/(2)/
---------------------- ----------------------
Water Water
Location Oil/(1)/ Injection Oil/(1) Injection
- -------- -------- --------- -------- ---------
<S> <C> <C> <C> <C>
Utah 413 114 332.5 93
Other 2 - .5 -
--- --- ----- --
Total 415 114 333 93
=== === ===== ==
</TABLE>
________________________
(1) Productive wells are producing wells or wells capable of production.
Multiple completions have been counted as one well. Substantially all of
the wells have multiple completions, and all of the wells include both oil
completions and gas completions. However, pursuant to the rules of the
Securities and Exchange Commission ("Commission"), all wells are shown as
oil wells since one of the multiple completions in each well is an oil
completion. The Company is an operator of 510 gross wells (423 net) and a
non-operator with respect to 19 gross (3 net) wells.
(2) A gross well is a well in which the Company holds a working interest,
without adjustment to reflect the actual percentage interest held therein
by the Company. Net wells represent the sum of the actual percentage
working interests owned by the Company in gross wells at December 31, 1997.
________________________
RESERVES. The following tables set forth the Company's estimated
quantities of proved oil and gas reserves and the estimated future net cash
inflows (by reserve categories) discounted to present value at an annual rate of
10%. Future income tax expenses have not been taken into account in estimating
future net cash inflows. These estimates were prepared by the Company, with
certain portions having been reviewed by Ryder Scott Company, an independent
reservoir engineer. The review by Ryder Scott Company consisted of properties
which comprised approximately 80% of the total present worth of future net
income discounted at 10% as of December 31, 1997. The total proved net reserves
estimated by the Company were within 10% of those reviewed and estimated by
Ryder Scott Company; however, on a well by well basis, differences of greater
than 10% may exist. See, also, the Supplemental Oil and Gas Disclosures
appearing on pages F-27 through F-30 of this Form 10-KSB.
Net proved reserves at December 31, 1997:
<TABLE>
<CAPTION>
Proved Developed Proved Undeveloped Total Proved
---------------- ------------------- ------------
Location Oil Gas Oil Gas Oil Gas
- ----------- (MBbls)* (MMcf)* (MBbls)* (MMcf)* (MBbls)* (MMcf)*
-------- ------- --------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Utah/(1)/ 12,980 15,224 24,155 60,259 37,135 75,483
====== ====== ====== ====== ====== ======
</TABLE>
_______________
* "MBbls" means one thousand barrels and "Bbls" means barrels, "MMcf" means one
million cubic feet of gas and "Mcf" means one thousand cubic feet of gas.
-14-
<PAGE>
(1) The Company has no proven reserves in any other location.
_______________
Discounted future net cash inflows before income taxes at December 31,
1997:
<TABLE>
<CAPTION>
Location Proved Developed Proved Undeveloped Total Proved
- ---------- ---------------- ------------------ ------------
<S> <C> <C> <C>
Utah $71,459,000 $22,380,000 $93,839,000
=========== =========== ===========
</TABLE>
Future net cash inflows from reserves at December 31, 1997 were calculated
on the basis of average prices in effect on that date and approximated $13.33
per barrel of oil and $2.63 per Mcf of gas. The value of the estimated proved
gas reserves are net of a deduction for normal shrinkage and for natural gas
estimated to be required to power future field operations.
The future net revenue attributable to the Company's estimated proved
undeveloped reserves at December 31, 1997, and the $22.38 million value thereof,
have been calculated assuming the Company will expend approximately $229.0
million to drill 781 wells during the period 1998 through 2004. The amount and
timing of these expenditures will depend on a number of factors, including
actual drilling results, product prices and the availability of capital.
The foregoing estimated pretax discounted future net cash inflow figures
relate only to the reserves tabulated above. The estimates were prepared
without consideration of income taxes and indirect costs such as interest and
administrative expenses, and are not to be construed as representative of the
fair market values of the properties to which they relate.
Reserve estimates are imprecise and may be expected to change as additional
information becomes available. Furthermore, estimates of oil and gas reserves,
of necessity, are projections based on engineering data, and there are
uncertainties inherent in the interpretation of such data as well as the
projection of future rates of production and the timing of development
expenditures. Reserve engineering is a subjective process of estimating
underground accumulations of oil and gas that cannot be measured in an exact
way, and the accuracy of any reserve estimate is a function of the quality of
available data and of engineering and geological interpretation and judgment.
Accordingly, there can be no assurance that the reserves set forth herein will
ultimately be produced nor can there be assurance that the proved undeveloped
reserves will be developed within the periods anticipated. The Company
emphasizes with respect to its estimated proved reserves that the discounted
future net cash inflows should not be construed as representative of the fair
market value of the proved oil and gas properties belonging to the Company,
since discounted future net cash inflows are based upon projected cash inflows
which do not provide for changes in oil and gas prices nor for escalation of
expenses and capital costs. The meaningfulness of such estimates is highly
dependent upon the accuracy of the assumptions upon which they were based.
No major discovery or other favorable or adverse event is believed to have
caused a significant change in these estimates of the Company's proved reserves
since January 1, 1998.
No estimates of total proven net oil and gas reserves have been filed by
the Company with, or included in any report to, any United States authority or
agency pertaining to the Company's individual reserves since the beginning of
the Company's last fiscal year.
VOLUMES, PRICES AND PRODUCTION COSTS. The following table sets forth on
an actual basis certain information regarding the production volumes of, average
sales prices received for, and average production costs for the sales of oil and
gas by the Company. Average sales prices have been computed without
consideration for the effects of
-15-
<PAGE>
hedging transactions. See, also, the Supplemental Oil and Gas Disclosures
appearing on pages F-27 through F-30 of this Form 10-KSB.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1996 1995
--------- ------- -------
<S> <C> <C> <C>
Net Production:
Oil (Bbls)................ 854,945 501,908 104,564
Gas (Mcf)................. 1,636,758 710,436 108,927
Total (BOE*)......... 1,127,738 620,314 122,718
Average Sale Price:
Oil (per Bbl)........ $ 16.17 $ 20.18 $ 17.10
Gas (per Mcf)(1)........... $ 2.19 $ 1.56 $ 1.21
Average Production Cost:
($/BOE)(2)............ $ 3.69 $ 2.31 $ 8.23
- ---------------
</TABLE>
* "BOE" means equivalent barrels of oil. In reference to natural gas,
natural gas equivalents are determined using the ratio of six Mcf of
natural gas to one Bbl of crude oil, condensate or natural gas liquids.
(1) Includes natural gas liquids.
(2) Includes direct lifting costs (labor, repairs and maintenance, materials
and supplies) and the administrative costs of production offices, insurance
and property taxes.
_______________
DRILLING ACTIVITIES. The following table sets forth the number of oil and
gas wells drilled in which the Company had an interest during 1997, 1996 and
1995.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
1997 1996 1995
------------------- --------------------- -----------------
Gross/(1)/ Net/(1)/ Gross/(1)/ Net/(1)/ Gross Net/(1)/
---------- -------- ----------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Development wells:
- ------------------
Oil(2)........... 73 64.0 57 50.1 33 6.8
Water Injection.. - - 4 2.8 1 .2
Dry.............. 5 4.8 2 2.0 1
-- ---- --- ---- --- ----
Total......... 78 68.8 63 54.9 35 7.0
== ==== === ==== === ====
Exploratory wells:
- ------------------
Oil(2)........... 2 2 - - 4 3.9
Dry.............. - - 1 1 1 1
-- ---- --- ---- --- ----
Total......... 2 2 1 1 5 4.9
== ==== === ==== === ====
Total wells:
- ------------
Oil(2)........... 75 66.0 57 50.1 37 10.7
Water Injection.. - - 4 2.8 1 .2
Dry.............. 5 4.8 3 3.0 2 1
-- ---- --- ---- --- ----
Total......... 80 70.8 64 55.9 40 11.9
== ==== === ==== === ====
</TABLE>
-16-
<PAGE>
_____________________________
(1) 1995 development wells gross column includes the drilling of 21 wells under
the Farmout Agreement. Since the Company had no working interest in the
Farmout wells at December 31, 1995, these wells are not included in the
1995 development wells net column. On June 12, 1996, the Company acquired
the working interest in the 20 producing wells drilled under the Farmout
Agreement.
(2) All of the completed wells have multiple completions, including both oil
completions and gas completions. Consequently, pursuant to the rules of the
Commission each well is classified as an oil well.
___________________________
The information contained in the foregoing table should not be considered
indicative of future drilling performance nor should it be assumed that there is
any necessary correlation between the number of productive wells drilled and the
amount of oil and gas that may ultimately be recovered by the Company.
The Company does not own any drilling rigs and all of its drilling
activities are conducted by independent contractors on a day rate or footage
basis under standard drilling contracts. From December 31, 1997 to March 15,
1998, the Company drilled 26 gross (20.6 net) development oil wells.
DELIVERY COMMITMENTS
Approximately 50% of the natural gas produced by the Company at December
31, 1997 was subject to fixed quantity gas purchase agreements with Wasatch
Energy Corporation ("Wasatch") all of which expire in 1998. Approximately 20% of
the natural gas produced by the Company is sold pursuant to contracts expiring
through 1999 which do not obligate the Company to deliver a fixed quantity of
natural gas, but require it to deliver all of its production from the wells, net
of lease fuel used, subject to such contracts. The remainder of the Company's
production is sold on a month-to-month basis in the spot market.
The Company has also entered into various price protection agreements to
hedge against volatility in crude oil prices and to help insure the repayment of
indebtedness. These agreements are discussed at Item 6 -"Management's
Discussion and Analysis or Plan of Operation -- Liquidity and Capital
Resources."
OTHER PROPERTY
The Company's principal executive office is located in Denver, Colorado.
The Company leases approximately 16,500 square feet pursuant to a lease which
expires in December 2002 and provides for a rental rate of $22,000 per month.
The Company owns the Woods Cross Refinery located in Woods Cross, Utah.
The Woods Cross Refinery is subject to a mortgage in favor of Banque Paribas.
See Item 1 - "Description of Business -- Refining Operations" for a description
of the Woods Cross Refinery.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None.
-17-
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -----------------------------------------------------------------
The Company's Common Stock is quoted on the National Association of
Securities Dealer's Automated Quotation System ("NASDAQ"). The ticker symbol is
"INLN".
As of March 15, 1998 there were 485 holders of record of the Company's
Common Stock and one holder of the Company's Series C Preferred Stock. The
following table sets forth the range of high and low bid prices as reported by
NASDAQ for the periods indicated. The quotations reflect inter-dealer prices
without retail mark-up, mark-down or commission, and may not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
1997 1996
---- ----
High Bid Low Bid High Bid Low Bid
-------- ------- -------- -------
<S> <C> <C> <C> <C>
First Quarter $11.00 $ 8.38 $5.00 $3.75
Second Quarter 10.25 8.13 9.38 3.75
Third Quarter 12.63 8.75 7.94 5.50
Fourth Quarter 12.63 10.00 9.25 6.13
</TABLE>
The above prices have been adjusted to reflect a 1 for 10 reverse split of
the Common Stock that occurred on June 3, 1996.
Inland has not paid cash dividends on Inland's Common Stock during the last
two years and the Board of Directors of Inland does not currently intend to pay
cash dividends on Common Stock in the foreseeable future. The Company may not
declare or pay dividends on Common Stock if there are accumulated and unpaid
dividends on Inland's Series C Preferred Stock. Until redeemed by the Company,
the 100,000 outstanding shares of Series C Preferred Stock bears a 10%
dividend per annum, which equals an annual dividend of $1,000,000 as long as all
100,000 shares are outstanding. These dividends accumulate and are payable only
(i) in connection with the liquidation, dissolution or winding up of the
Company, (ii) in connection with the redemption of Series C Preferred Stock or
(iii) at such time as the Company and the holders of a majority of the Series C
Preferred Stock shall otherwise agree. Accrued but unpaid dividends accrue
additional dividends at the rate of 10% per annum, compounded quarterly. All
accrued dividends are payable in full prior to any distributions on Common
Stock. Inland Series C Preferred Stock is redeemable at any time by Inland
after July 21, 2000 by payment of a redemption price of $100.00 per share, plus
accrued and unpaid dividends, unless converted by the holders of Series C
Preferred Stock at a conversion price of $12.00 per share (subject to certain
antidillution adjustments). If the Series C Preferred Stock is not converted by
the holder or redeemed for cash by the Company prior to the later of (a) July
21, 2005 or (b) six months following maturity of any long-term debt financing in
the aggregate amount of at least $25 million obtained after July 21, 1997 (which
includes the ING Credit Agreement and the TCW II Credit Agreement discussed at
Item 6 - "Management's Discussion and Analysis or Plan of Operations --
Liquidity and Capital Resources -- Debt Financing"), the Company must redeem the
Series C Preferred Stock and all accrued dividends for cash or, at the Company's
election, by issuing Common Stock issued at 80% of the market price of the
Common Stock on the day of redemption. The Series C Preferred Stock must also
be redeemed by the Company if it enters into any new line of business (other
than exploration, development and production of oil and gas) and holders of
Series C Preferred Stock elect to be redeemed at such time (the holders did not
elect to be redeemed in connection with the acquisition of the Woods Cross
Refinery), or the Company proposes to enter into a merger, consolidation or
share exchange pursuant to which holders of Common Stock would receive cash or
other property (rather than stock in the surviving company) in a per share
amount less than the effective conversion price for the Series C Preferred
Stock.
Both the ING Credit Agreement and the TCW II Credit Agreement expressly
prohibit Inland from paying any cash dividends on Common Stock or Series C
Preferred Stock while any amounts owing under either the ING
-18-
<PAGE>
Credit Agreement or the TCW II Credit Agreement remain unpaid, unless the Senior
Lenders and TCW consent to such dividend. Likewise, the ING Credit Agreement and
the TCW II Credit Agreement prohibit Inland from redeeming or repurchasing any
shares of Common Stock or Series C Preferred Stock without the Senior Lenders'
and TCW's prior consent.
On November 10, 1997, the Company granted options to its four executive
officers giving them the right to purchase an aggregate of 600,000 shares of
Inland Common Stock, vesting over six years. The exercise price for the first
300,000 options vesting is $11.00 per share, and the exercise price for the last
300,000 shares vesting is $16.00 per share. The first 300,000 shares vest in
equal annual amounts on the first, second and third anniversary dates as long as
the officer continues to be employed by the Company or a subsidiary on such
dates. The remaining 300,000 shares vest equally on the fourth, fifth and sixth
anniversary dates provided such officer continues to be employed on such dates
and provided that the Company has net income before deductions for interest,
income taxes, depreciation and amortization equal to $40,000,000 for the twelve
months ending on the October 31 immediately preceding each such vesting date.
The Company relied on the exemption provided by Section 4(2) of the Securities
Act of 1933, as amended, for the grant of such options.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
- ------------------------------------------------------------------
GENERAL
Effective September 1, 1997, Inland Resources Inc. (the "Company") acquired
153 gross (46.9 net) wells from Enserch Exploration Company ("Enserch") for
$10.4 million. Effective September 30, 1997, the Company acquired 279 gross (184
net) wells from Equitable Resources Energy Company ("EREC") for $56.0 million.
These acquisitions were accounted for as purchases, therefore, the assets and
results of operations are included in the Company's financial statements from
the effective acquisition dates forward. In addition, on December 31, 1997, the
Company closed the acquisition of an oil refinery located in Woods Cross, Utah
(the "Woods Cross Refinery") for $22.9 million. The acquisition of the Woods
Cross Refinery was accounted for as a purchase, therefore the assets purchased
and liabilities assumed are included in the Company's consolidated balance sheet
as of the acquisition date. Since the acquisition of the Woods Cross Refinery
occurred on December 31, 1997, no revenues or expenses have been recorded in the
Company's 1997 consolidated statement of operations.
RESULTS OF OPERATIONS- FISCAL 1997 COMPARED TO 1996
Oil and gas sales - Oil and gas sales during 1997 exceeded the previous
year by $6.5 million or 61%. The increase was attributable to increased oil and
gas sales volumes in the Monument Butte Field offset by lower prices received
for oil production. The increase in oil and gas sales volumes in the Monument
Butte Field is attributable to the acquisition of Enserch and EREC and the 75
oil and gas wells that the Company drilled and completed during 1997. Oil sales
were 855,000 barrels in 1997 compared to 502,000 barrels in 1996 while gas sales
were 1,637 MMcf in 1997 compared to 710 MMcf in 1996. Average oil prices dropped
from $20.18 in 1996 to $16.17 in 1997 while the averaged price received for
natural gas sales increased from $1.49 Mcf in 1996 to $2.19 Mcf in 1997. Oil
sales as a percentage of total oil and gas sales were 80% and 89% in 1997 and
1996, respectively. 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. Crude oil sales were decreased by
$217,000 and $535,000 during 1997 and 1996, respectively, due to the recognition
of hedging contract settlement losses and contract purchase cost amortization.
Lease operating expenses - Lease operating expense increased $2.3 million
or 163% between periods due to the large increase in the number of producing
wells the Company operates. Lease operating expense per barrel of oil equivalent
-19-
<PAGE>
("BOE") increased from $2.29 in 1996 to $3.35 in 1997. The primary increase on a
BOE basis is the result of the Enserch and EREC acquisitions that included a
large number of lower producing wells.
Production taxes - Production taxes as a percentage of sales decreased from
5.4% in 1996 to 2.2% in 1997. The Company's tax expense is comprised primarily
of an ad valorem tax and a severance tax. The ad valorem tax is not tied to the
Company's revenues, as a result, as the Company's revenues have risen, the ad
valorem tax has decreased as a percentage of sales. The amount of severance tax
paid has also decreased as a percentage of sales due to the increasing number of
wells that are allowed exemptions from or credits against severance tax.
Exploration - Exploration expense in 1997 and 1996 represents the Company's
share of costs to retain unproved acreage and drilling costs related to one
uneconomic exploration well in 1996.
Depletion, depreciation and amortization - The increase in depletion,
depreciation and amortization resulted from increased sales volumes and an
increased average depletion rate. Depletion, which is based on the units-of-
production method, comprises the majority of the total charge and varies based
on proved reserves of the Company. The average depletion rate was $5.52 per BOE
during 1997 and $5.17 per BOE during 1996. Based on the December 31, 1997
estimated proved reserves, the Company's depletion rate entering 1998 is $4.90
per BOE.
General and administrative, net - General and administrative expense
increased $448,000 on a net basis between years. General and administrative
expense is reported net of operator fees and reimbursements which were $3.2
million and $1.9 million during 1997 and 1996, respectively. Gross general and
administrative expense increased from $3.6 million in 1996 to $5.3 million in
1997. The changes are related to increased costs and increased reimbursements
associated with the large growth in the Company's operated wells and drilling
program.
Interest expense - Interest expense increased from $1.7 million in 1996 to
$4.8 million in 1997. The increase is a result of new debt associated with the
Enserch and EREC acquisitions and the Company's drilling program. Borrowings
during 1997 averaged approximately $45.0 million at an average effective
interest rate of 10.6%. Borrowings during 1996 averaged approximately $15.0
million at an average effective interest rate of 11%. The change in the
effective interest rate resulted from the various debt refinancings performed
during 1997 as explained further in ("Liquidity and Capital Resources" below.
Other income - Other income in 1997 and 1996 primarily represents interest
earned on the investment of surplus cash balances.
Income taxes - In 1997 and 1996, no income tax provision or benefit was
recognized due to net operating losses incurred and the reversal and recording
of a full valuation allowance.
Extraordinary loss - The extraordinary loss resulted from the write-off of
discount and issue costs associated with certain obligations that were
refinanced during 1997.
Redemption premium preferred Series A stock - During August 1996, the
Company called for redemption its Series A preferred stock. The amount recorded
as a dividend represents the excess of the redemption amount over the carrying
amount for those Series A holders who elected to redeem their shares rather than
convert.
Redemption premium preferred Series B stock - During July 1997, the Company
called for redemption its Series B preferred stock. All Series B holders elected
to convert their holdings to common stock rather than have their shares redeemed
for cash. The amount recorded as a redemption premium represents the excess
consideration paid over the carrying amount of the Series B stock.
Accrued preferred Series C stock dividends - The Company's Series C stock
accrues dividends at 10% or $1,000,000 per year. No dividends have been paid
since the stock was issued on July 21, 1997. The amount accrued represents those
dividends earned during the period from July 21, 1997 to December 31, 1997.
-20-
<PAGE>
DISCONTINUED OPERATIONS. Effective December 30, 1996, the Company sold the
Toiyabe Mine and completely divested itself of any remaining business activities
related to the mining of precious metals. During 1996, the Company focused
reclamation activities on recontouring and revegetating certain disturbed land
areas, lowering constituent levels in leachate solution and certain other
miscellaneous tasks. Costs incurred in performing these operations were $129,000
in 1996. Placer Dome U.S. Inc. ("Placer") purchased the Toiyabe Mine from the
Company and assumed responsibility for all past, present and future
environmental and reclamation activities, liabilities and expenses. The Company
paid Placer $500,000 in consideration of the assumption of such
responsibilities. As a result, the Company has no future liability for the
Toiyabe Mine, unless Placer fails to honor its agreement with the Company to
assume and pay such liabilities.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had $176.0 million of assets. Total
capitalization was $153.8 million of which 20% was represented by stockholders'
equity, 31% was represented by senior debt and 49% by subordinated debt. As of
December 31, 1997, there were no significant commitments for capital
expenditures. The Company anticipates that 1998 net expenditures for development
drilling and water and gas infrastructure expansion will approximate $36.0
million in the Monument Butte Field with an additional $2.4 million to be spent
for upgrades at the Woods Cross Refinery. The $36.0 million budgeted capital
outlay includes the drilling of 130 gross wells and the conversion of 50 wells
to water injection. The level of these and other capital expenditures is largely
discretionary, and the amount of funds devoted to any particular activity may
increase or decrease significantly depending on available opportunities and
market conditions.
The Company plans to finance its ongoing acquisition, development, and
exploration expenditures using internal cash flow, proceeds from borrowings
under its senior credit facility, joint ventures or future public or private
offerings of credit or equity securities. The Company is currently in process of
negotiating an increase in the borrowing base under its senior credit facility.
In addition, future cash flows are subject to a number of variables, including
the level of production and crude oil and natural gas prices. As a result, the
Company cannot give assurance that operations and other capital resources will
provide cash in sufficient amounts to cover working capital requirements and
maintain planned levels of capital expenditures or that increased capital
expenditures will not be undertaken.
During 1997, the Company generated $10.8 million from operations, sold
$10.0 million of preferred Series C stock and had net borrowings of $100.9
million of debt. These sources of cash along with cash on hand at the beginning
of the year were used to fund the Enserch acquisition ($10.4 million), the EREC
acquisition ($56.0 million), the Woods Cross Refinery acquisition ($22.9
million), and the 1997 development of the Monument Butte Field and other capital
expenditures ($29.7 million). The remaining net change in cash was caused by
various smaller acquisitions and changes in working capital account positions.
Debt Financing - On November 29, 1995, the Company entered into a Credit
Agreement (as amended June 12, 1996) ("TCW I") with Trust Company of the West
and affiliated entities. The Company borrowed the entire $25.0 million of
availability under this agreement by February 1997. Principal and interest (10%
annual rate) was payable quarterly. In addition to principal and interest
payments, the note holder was granted an equity yield enhancement in the form of
a 7% overriding royalty interest, proportionately reduced by the Company's
working interest in the oil and gas properties.
On June 30, 1997, the Company entered into a $50.0 million Credit Agreement with
Canadian Imperial Bank of Commerce (the "CIBC Loan Agreement"). The initial
advance of $26.0 million was funded on June 30, 1997. The loan proceeds, along
with cash on hand, were used to retire the TCW I loan obligation and to purchase
the 7% override on the Company's properties. On August 15, 1997 an additional
$9.0 million was drawn under the facility to fund the acquisition of properties
from Enserch. Interest under the CIBC Loan Agreement was calculated at the
London interbank eurodollar rate ("LIBOR") plus a spread of 1.875%, or
approximately 7.5%.
On September 30, 1997, the Company closed separate Credit Agreements with Trust
Company of the West and TCW Asset Management Company in their capacities as
noteholder and agent (collectively "TCW") and ING (U.S.) Capital Corporation
("ING"). The Credit Agreement with TCW ("TCW II") provided the Company with
$75.0 million, all of which was funded at closing. The ING Credit Agreement
provided the Company with an initial borrowing base of $45.0 million of which
$35.0 million was drawn by December 31, 1997 and the remaining $10.0 million was
drawn by March
-21-
<PAGE>
27, 1998. The Company is currently negotiating an increase to the borrowing
base. Subsequent to the closing of the ING Credit Agreement, U.S. Bank National
Association (d/b/a Colorado National Bank) and Meespierson Capital Corp.
(collectively referred to herein with ING as the "Senior Lenders") became loan
participants in the ING Credit Agreement. The borrowing base under the ING
facility is limited to the collateral value of proved reserves as determined
semiannually by the Senior Lenders. The proceeds from the loans were used to
finance the acquisition of the properties purchased from EREC, fund full
repayment of the CIBC Loan Agreement, pay transaction costs and provide the
Company with working capital.
The ING Credit Agreement constitutes a revolving line of credit until March 31,
1999, at which time it converts to a term loan payable in quarterly installments
through March 29, 2003. The quarterly installments, based on a $45.0 million
borrowing base, are $4.0 million for the first three quarters, $3.0 million for
the next four quarters, $2.5 million for the next four quarters, $2.25 million
for the next four quarters, and $2.0 million on March 29, 2003. The ING loan
bears interest, at the Company's option, at either (i) the average prime rates
announced from time to time by The Chase Manhatten Bank, Citibank, N.A. and
Morgan Guaranty Trust Company of New York plus 0.5% per annum; or (ii) at LIBOR
plus 1.75%. The Company has consistently selected the LIBOR rate option
resulting in an effective interest rate of approximately 7.5%. The ING loan is
secured by a first lien on substantially all assets of the Company, except the
Woods Cross Refinery.
TCW II is comprised of a $65.0 million traunche and a $10.0 million traunche and
is payable interest only, at a rate of 9.75% per annum, quarterly until the
earlier of December 31, 2003 or the date on which the ING loan is paid in full.
At that time, the TCW II loan converts to a term loan payable in twelve
quarterly installments of principal and interest. The quarterly principal
installments are $6.25 million for the first four quarters, $8.75 million for
the next four quarters and $3.75 million for the last four quarters. The Company
granted warrants to TCW to purchase 100,000 shares of common stock at an
exercise price of $10.00 per share (subject to anti-dilution adjustments) at any
time after September 23, 2000 and before September 23, 2007. The Company also
granted registration rights in connection with such warrants. TCW is also
entitled to additional interest on the $65.0 million traunche in an amount that
yields TCW a 12.5% internal rate of return, such interest payment to be made
concurrently with the final payment of all principal and interest on the TCW II
loan. For purposes of the internal rate of return calculation, the Company is
given credit for the funding fee of $2.25 million paid to TCW at closing. In
regards to the $10.0 million traunche, upon payment in full of the TCW II loan
by the Company, TCW may elect to "put" their warrant back to the Company and
accept a cash payment which will cause TCW to achieve a 12.5% rate of return.
TCW II restricts any repayment of the TCW II indebtedness until October 1, 1999.
TCW II is secured by a second lien on substantially all assets of the Company,
except the Woods Cross Refinery.
TCW II and the ING Credit Agreement have common covenants that restrict the
payment of cash dividends, borrowings, sale of assets, loans to others,
investment and merger activity and hedging contracts without the prior consent
of the lenders and requires the Company to maintain certain net worth, interest
coverage and working capital ratios. Subsequent to year end, certain covenants
were either amended or waived for a one year period, allowing the Company to
remain in compliance at December 31, 1997. On December 31, 1997, the Company's
outstanding balance was $75.0 million under TCW II and $35.0 million under the
ING Credit Agreement.
On December 31, 1997, the Company borrowed $12.5 million from Banque Paribas in
connection with the acquisition of the Woods Cross Refinery. The Credit
Agreement constitutes a revolving line of credit in an amount not to exceed
$23.75 million. The facility will be used for working capital needs and letters
of credit obligations. The Credit Agreement provides that the aggregate amount
of loans outstanding (not including letter of credit obligations) prior to April
1, 1998 cannot exceed $16.5 million and thereafter the amount of loans
outstanding (not including letter of credit obligations) cannot exceed $8.0
million. All amounts funded under the Credit Agreement must be repaid by January
29, 1999. The Credit Agreement is secured by a first lien on all refining assets
of the Company. The Company's ability to borrow funds or have letters of credit
issued under the Credit Agreement are subject to its compliance with various
financial covenants and ratios. Amounts outstanding bear interest at the prime
rate of The Chase Manhatten Bank in New York, New York, and interest is payable
monthly. The Company has further agreed with Banque Paribas that if the Company
receives proceeds from any equity or capital markets financial transaction, it
will make certain prepayments, if any, required to be made under the Credit
Agreement.
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<PAGE>
Sale of Mandatory Redeemable Preferred Stock - On July 21, 1997, the
Company closed the sale of 100,000 shares of a newly designated Series C
Cumulative Convertible Preferred Stock (the "Series C Stock") to an affiliate of
Enron Corp. for cash of $10.0 million ($9.6 million net of closing fees).
Concurrently with the issuance of the Series C Stock, the Company called for
redemption its outstanding Series B Convertible Preferred Stock (the "Series B
Stock"). The holders of the Series B Stock waived redemption and instead elected
to convert their Series B Stock into 1,977,671 shares of Inland Common Stock.
The Series C Stock is initially convertible at any time by the holder into 8.333
shares of Inland Common Stock, an effective conversion price of $12.00 per
share. The Series C Stock bears a dividend of 10% per annum. Accumulated
dividends may also be converted by the holder at the same ratio as the Series C
Stock. Subsequent to July 21, 2000, (the third anniversary), the Company has the
option to redeem for cash at par value ($100 per share) all outstanding shares
of Series C Stock plus accrued dividends. If not converted by the holder or
redeemed for cash by the Company prior to the later of (i) July 21, 2005 (the
eighth anniversary) or (ii) six months following maturity of any high yield
offering or long-term debt financing in the aggregate amount of at least $25.0
million obtained after July 21, 1997, the Company must redeem the Series C Stock
and all accrued dividends for (i) cash or, at the Company's election, (ii)
Common Stock issued at 80% of the market price of the Common Stock on the day of
redemption.
The Company must also redeem the Series C Stock if (a) the Company enters into
any new line of business (other than exploration, development and production of
oil and gas) and holders of Series C Stock elect to be redeemed prior to the
Company commencing such new line of business (the holders did not elect to be
redeemed in connection with the acquisition of the Woods Cross Refinery), or (b)
the Company proposes to enter into a merger, consolidation or share exchange
pursuant to which holders of Common Stock would receive cash or other property
(rather than stock in the surviving company) in a per share amount less than the
effective conversion price for the Series C Stock (which is initially $12.00 per
share). The Series C Stock votes with common stockholders on all matters based
on the number of shares of Inland Common Stock the Series C Stock is convertible
into; except for the approval of amendments to the Series C Stock, the
authorization of any other series of preferred stock having equal or greater
rights, and the approval of any merger, consolidation or share exchange
involving the Company unless the holder of the Series C Stock receives
equivalent stock with equivalent rights. In these instances, the Series C Stock
votes as a separate class. The Series C Stock also carries anti-dilution
protection, rights to demand registration at the Company's expense and a
liquidation preference equal to par value of all outstanding shares plus accrued
dividends.
Crude Oil Hedging Activities - The Company has a hedge in place with Enron
Capital and Trade Resources Corp. (the "Enron Hedge") that hedges 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 the average monthly price,
based on NYMEX Light Sweet Crude Oil Futures Contracts, is between $18.00 and
$20.55 per barrel. On January 1, 1997, the Company paid $34,170 to enter into a
contract with Koch Gas Services Company ("Koch") that exactly offsets the effect
of the Enron Hedge during the period January 1998 through December 2000. The
Company also has entered into a put contract with Enron for 100,000 barrels per
month from January 1998 through March 1998 at a put price of $16.00 per barrel.
During 1996 and 1997, the Company had various other contracts in place
consisting of puts, calls and collars. Each of the contracts have completely
settled as of December 31, 1997. The effects of all hedging contracts resulted
in losses of $217,000 and $535,000 during 1997 and 1996, respectively.
On March 12, 1998, the Company entered into a cost free collar with Enron
whereby the average monthly price, based on NYMEX Light Sweet Crude Oil Futures
Contracts, is between $14.50 and $17.70 per barrel. The collar covers 75,000
barrels per month for the period from April 1998 through December 1998.
Markets - The availability of a ready market and the prices obtained for
the Company's oil and gas depend on many factors beyond the Company's control,
including the extent of domestic production, imports of oil and gas, the
proximity and capacity of oil and natural gas pipelines and other transportation
facilities, fluctuating demands for oil and gas, the marketing of competitive
fuels, and the effects of governmental regulation of oil and gas production and
sales. Future decreases in the prices of oil and gas would have an adverse
effect on the Company's proved reserves, revenues,
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<PAGE>
profitability and cash flow, although the Company has somewhat mitigated this
risk by entering into certain hedging arrangements. The oil produced from the
Monument Butte Field is called "Black Wax" and is sold at the posted field price
(an industry term of the fair market value of oil in a particular field) less a
deduction of approximately $0.85 to $1.00 per barrel for oil quality
adjustments. The posted field price for the Monument Butte Field has ranged from
$13.50 to $24.25 per barrel during 1997. As the quantity of Black Wax produced
within the Monument Butte Field grows, physical limitations within the regional
refineries, located in Sale Lake City, Utah, will limit the amount of Black Wax
that can be processed. One of the reasons for acquiring the Woods Cross Refinery
was to provide a refining source, if needed, for the Company's Black Wax
production following certain upgrades to the refinery necessary to accommodate
increased Black Wax production. The Company has also held discussions with the
other Salt Lake City refineries to inform them of the outlook for Black Wax
production in this region such that they can propose solutions to existing plant
configurations. Until the upgrading of the Woods Cross Refinery is finished or
refinery modifications at one or more of the other refineries are accomplished,
there may be short-term downward pressure on Black Wax pricing.
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, except as described above.
Environmental Matters - 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. During 1996, the Vernal, Utah office of
the Bureau of Land Management ("BLM") undertook the preparation of an
Environmental Assessment ("EA") relating to certain lands within the Monument
Butte Field. Due to this process, the Company reduced its activities on these
lands during the last six months of 1996 and January 1997 pending issuance of
the EA by the BLM. The formal Record of Decision relating to the EA was issued
by the BLM on February 3, 1997. The Company believes it will be able to comply
with the Record of Decision without causing a material impact on its future
drilling plans in the Monument Butte Field.
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.
YEAR 2000 ISSUES
The Company is aware of the issues associated with the programming code in
many existing computer systems as the millenium approaches. The "Year 2000"
problem is pervasive; virtually every computer operation may be affected in some
way by the rollover of the digit value to 00. The risk is that computer systems
will not properly recognize sensitive information when the year changes to 2000.
Systems that do not properly recognize such information could generate erroneous
data or cause a system to fail, resulting in business interruption.
The Company is conducting a review of its computer systems and is taking
steps to correct Year 2000 compliance issues. The Company benefits from having
relatively new computer systems in most locations and management believes the
Year 2000 issues can be mitigated without a significant potential effect on the
Company's financial position. However, given the complexity of the Year 2000
issue, there can be no assurance that the Company will be able to address the
problem without costs and uncertainties that might affect the future financial
results or cause reported financial information to not be necessarily indicative
of future operating results or future financial condition.
INFLATION AND CHANGES IN PRICES
The Company's revenues and the value of its oil and gas properties have
been and will be affected by changes in oil and gas prices. The Company's
ability to borrow from traditional lending sources and to obtain additional
capital on attractive terms is also substantially dependent on oil and gas
prices. Oil and gas prices are subject to significant seasonal and other
fluctuations that are beyond the Company's ability to control or predict.
Although certain of the Company's costs
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<PAGE>
and expenses are affected by the level of inflation, inflation did not have a
significant effect on the Company's result of operations during 1997 or 1996.
FORWARD LOOKING STATEMENTS
Statements that are not historical facts included in this Form 10-KSB are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 that involve risks and uncertainties that could
cause actual results to differ from projected results. Such statements address
activities, events or developments that the Company expects, believes, projects,
intends or anticipates will or may occur, including such matters as future
capital, development and exploration expenditures (including the amount and
nature thereof), drilling of wells, reserve estimates (including the present
value of future net revenues), future production of oil and gas, business
strategies, expansion and growth of the Company's operations, cash flow,
marketing of crude oil and natural gas, sources of crude oil for refining,
marketing of refined products and refinery maintenance, operations and upgrades.
Factors that could cause actual results to differ materially ("Cautionary
Disclosures") are described throughout this Form 10-KSB. Cautionary Disclosures
include, among others: general economic conditions, the market price of crude
oil and natural gas, the Company's ability to find, acquire, market, develop and
produce new properties, operating hazards attendant to the oil and gas industry
and crude oil refining industry, uncertainties in the estimation of proved
reserves and in the projection of future rates of production and timing of
development expenditures, the strength and financial resources of the Company's
competitors, the Company's ability to find and retain skilled personnel,
climatic conditions, labor relations, availability and cost of material and
equipment, environmental risks and compliance, the results of financing efforts,
and regulatory developments and compliance. All written and oral forward-looking
statements attributable to the Company are expressly qualified in their entirety
by the Cautionary Disclosures. The Company disclaims any obligation to update or
revise any forward-looking statement to reflect events or circumstances
occurring hereafter or to reflect the occurrence of anticipated or unanticipated
events.
ITEM 7. FINANCIAL STATEMENTS
- -----------------------------
The financial statements required by this item begin at page F-1 hereof.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
The information required by this Item was previously reported in the
Company's Current Report on Form 8-K dated October 4, 1996.
PART III
For information called for by Items 9, 10, 11 and 12, reference is made to the
Company's definitive Proxy Statement for its Annual Meeting of Stockholders
scheduled to be held June 30, 1998, which the Company intends to file with the
Securities and Exchange Commission on or before April 30, 1998, which
information is incorporated herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
- -------------------------------------------
(a) The following documents are filed as part of this Annual Report on
Form 10-KSB:
1. Financial Statements: The financial statements filed as part of
this report are listed in the "Index to Financial Statements" on Page F-1
hereof.
2. Exhibits required to be filed by Item 601 of Regulation S-B:
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<PAGE>
Exhibit
Number Description of Exhibits
- ------ -----------------------
2.1 Agreement and Plan of Merger between the Company, IRI Acquisition
Corp. and Lomax Exploration Company ("IPC") (exclusive of all
exhibits) (Filed as exhibit 2.1 to the Company's Registration
Statement on Form S-4, Registration No. 33-80392, and incorporated
herein by this reference).
3.1 Amended and Restated Articles of Incorporation, as amended through
July 21, 1997 (filed as Exhibit 3.1 to the Company's Form 10-QSB
for the quarter ended June 30, 1997, and incorporated herein by
reference).
3.2 By-Laws of the Company (filed as Exhibit 3.2 to the Company's
Registration Statement on Form S-18, Registration No. 33-11870-F,
and incorporated herein by reference).
3.2.1 Amendment to Article IV, Section 1 of the Bylaws of 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 on 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
on Form S-4, Registration No. 33-80392, and incorporated herein
by reference).
4.1 Credit Agreement dated September 23, 1997 between IPC, the Company,
ING, as Agent, and Certain Financial Institutions, as banks (filed as
Exhibit 4.1 to the Company's Current Report on Form 8-K dated
September 23, 1997, and incorporated herein by reference).
4.2 Credit Agreement dated September 23, 1997, among IPC, the Company,
Trust Company of the West, and TCW Asset Management Company, in the
capacities described therein (filed as Exhibit 4.2 to the Company's
Current Report on Form 8-K dated September 23, 1997, and incorporated
herein by reference).
4.3 Intercreditor Agreement dated September 23, 1997, between IPC, TCW
Asset Management Company, Trust Company of the West and ING (filed as
Exhibit 4.3 to the Company's Current Report on Form 8-K dated
September 23, 1997, and incorporated herein by reference).
4.4 Warrant Agreement by and between the Company and TCW Portfolio No.
1555 DR V Sub-Custody Partnership, L.P. dated September 23, 1997
(filed as Exhibit 4.4 to the Company's Current Report on Form 8-K
dated September 23, 1997, and incorporated herein by reference).
4.5 Warrant issued by the Company pursuant to the Warrant Agreement filed
as Exhibit 4.4, dated September 23, 1997, representing the right to
purchase 100,000 shares of the Company's Common Stock (filed as
Exhibit 4.5 to the Company's Current Report on Form 8-K dated
September 23, 1997, and incorporated herein by reference).
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<PAGE>
Exhibit
Number Description of Exhibits
- ------ -----------------------
4.6 Credit Agreement dated as of December 24, 1997 between Inland
Refining, Inc. ("Refining") and Banque Paribas (without exhibits)
(filed as Exhibit 4.1 to the Company's Current Report on Form 8-K
dated December 31, 1997, and incorporated herein by reference).
10.1 1988 Option Plan of Inland Gold and Silver Corp. (filed as Exhibit
10(15) to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1988, and incorporated herein by reference).
10.1.1 Amended 1988 Option Plan of Inland Gold and Silver Corp. (filed as
Exhibit 10.10.1 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992, and incorporated herein by
reference).
10.1.2 Amended 1988 Option Plan of the Company, as amended through August 29,
1994 (including amendments increasing the number of shares to 212,800
and changing "formula award") (filed as Exhibit 10.1.2 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1994, and incorporated herein by reference).
10.1.3 "Automatic Adjustment to Number of Shares Covered by Amended 1988
Option Plan" executed effective June 3, 1996 (filed as Exhibit 10.1 to
the Company's Quarterly Report on Form 10-QSB for the quarter ended
June 30, 1996, and incorporated herein by reference).
10.2 Warrant Agreement and Warrant Certificate between Kyle R. Miller and
the Company dated February 23, 1993 (filed as Exhibit 10.2 to the
Company's Current Report on Form 8-K dated February 23, 1993, and
incorporated herein by reference).
10.2.1 Warrant Certificate between Kyle R. Miller and the Company dated
October 15, 1993 representing 3,150 shares (filed as Exhibit 10.2.1 to
the Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1994, and incorporated herein by reference).
10.2.2 Warrant Certificate between Kyle R. Miller and the Company dated
March 22, 1994 representing 5,715 shares (filed as Exhibit 10.2.2 to
the Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1994, and incorporated herein by reference).
10.2.3 Warrant Certificate between Kyle R. Miller and the Company dated
September 21, 1994 representing 44,811 shares (filed as Exhibit 10.2.3
to the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1994, and incorporated herein by reference).
10.2.4 Warrant Certificate between Kyle R. Miller and the Company dated
September 21, 1994 representing 38,523 shares (filed as Exhibit 10.2.4
to the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1994, and incorporated herein by reference).
10.2.5 Warrant Certificate between Kyle R. Miller and the Company dated
September 21, 1994 representing 30,000 shares (filed as Exhibit 10.2.5
to the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1994, and incorporated herein by reference).
10.2.6 Amendment to Warrant Certificates filed as Exhibits 10.2, 10.2.1
and 10.2.2 (filed as Exhibit 10.2.6 to the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1994, and
incorporated herein by reference).
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<PAGE>
Exhibit
Number Description of Exhibits
- ------ -----------------------
10.2.7 Warrant Certificate between Kyle R. Miller and the Company dated
November 16, 1993 representing 1,500 shares (filed as Exhibit 10.2.7
to the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1995, and incorporated herein by reference).
10.2.8 Warrant Certificate between Kyle R. Miller and the Company dated
March 15, 1995 representing 1,250 shares (filed as Exhibit 10.2.8 to
the Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1995, and incorporated herein by reference).
10.2.9 Warrant Certificate between Kyle R. Miller and the Company dated
November 6, 1995 representing 30,000 shares (filed as Exhibit 10.2.9
to the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1995, and incorporated herein by reference).
10.2.10 First Amendment to Warrant Agreement between the Company and Kyle
R. Miller dated October 19, 1995 (filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-QSB for the fiscal quarter ended
September 30, 1995, and incorporated herein by reference).
10.2.11 Warrant Certificate between the Company and Kyle R. Miller dated May
22, 1996 (corrected version) (filed as Exhibit 10.2.11 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1996, and incorporated herein by reference).
10.2.12 Warrant Certificate between the Company and Kyle R. Miller dated
January 23, 1997 representing 70,000 shares (filed as Exhibit 10.2.12
to the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1996, and incorporated herein by reference).
*10.2.13 Option Certificate between the Company and Kyle R. Miller dated
November 10, 1997 representing 225,000 shares.
10.3 Employment Agreement between the Company and Kyle R. Miller dated June
1, 1996 (filed as Exhibit 10.2 to the Company's Quarterly Report on
Form 10-QSB for the quarter ended June 30, 1996, and incorporated
herein by reference).
10.4 Cooperative Agreement between IPC and the U.S. Department of Energy,
and related correspondence (filed as Exhibit 10.22 to the Company's
Registration Statement on Form S-4, Registration No. 33-80392, and
incorporated herein by reference).
10.5 Employment Agreement between the Company and Bill I. Pennington dated
June 1, 1996 (corrected version) (filed as Exhibit 10.9.2 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1996, and incorporated herein by reference).
10.6 Subcontract Agreement between IPC and the University of Utah dated
September 25, 1992 (filed as Exhibit 10.27 to the Company's
Registration Statement on Form S-4, Registration No. 33-80392, and
incorporated herein by reference).
10.7 Subcontract Agreement dated October 8, 1992 between IPC and the
University of Utah Research Institute (filed as Exhibit 10.28 to the
Company's Registration Statement on Form S-4, Registration No. 33-
80392, and incorporated herein by reference).
10.8 Chevron Crude Oil Purchase Contract No. 531144 dated October 25, 1988,
as amended by Amendment No. 1 dated November 27, 1989, Amendment No. 2
dated September 12, 1990, Amendment No. 3 dated July 15, 1991,
Amendment No. 4 dated January 22, 1992, Amendment No. 5 dated January
13, 1993, and the March 4, 1992 letter from Chevron U.S.A. Products
Company to
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<PAGE>
Exhibit
Number Description of Exhibits
- ------ -----------------------
all Chevron Products Company customers (filed as Exhibit 10.29 to the
Company's Registration Statement on Form S-4, Registration No.
33-80392, and incorporated herein by reference).
10.9 Subscription Agreement between the Company and Smith Management
Company dated May 12, 1994 (filed as Exhibit 10.34 to the Company's
Registration Statement on Form S-4, Registration No. 33-80392, and
incorporated herein by reference).
10.9.1 Amendment to Subscription Agreement filed as Exhibit 10.32, dated
September 16, 1994 (filed as Exhibit 10.18.1 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1994, and
incorporated herein by reference).
10.10 Registration Rights Agreement dated September 21, 1994 between the
Company and Energy Management Corporation, a wholly owned subsidiary
of Smith Management Company and the assignee of Smith Management
Company under the Subscription Agreement filed as Exhibit 10.9 (filed
as Exhibit 10.19 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1994, and incorporated herein by
reference).
10.10.1 Correspondence constituting an amendment/clarification of the
Registration Rights Agreement filed as Exhibit 10.10 (filed as Exhibit
10.19.1 to the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1994, and incorporated herein by reference).
10.10.2 Registration Rights Agreement dated March 20, 1995 between the Company
and Energy Management Corporation (filed as Exhibit 10.19.2 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1994, and incorporated herein by reference).
10.11 Swap Agreement dated August 4, 1994 between the Company and Enron Risk
Management Services Corp.(filed as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-QSB for the fiscal quarter ended September
30, 1994, and incorporated herein by reference).
10.12 Swap Agreement dated August 26, 1994 between the Company and Joint
Energy Development Investments Limited Partnership ("JEDI") (filed as
Exhibit 10.2 to the Company's Quarterly Report on Form 10-QSB for the
fiscal quarter ended September 30, 1994, and incorporated herein by
reference).
10.13 Swap Agreement dated August 4, 1994 between IPC and Enron Risk
Management Services Corp. (filed as Exhibit 10.3 to the Company's
Quarterly Report on Form 10-QSB for the fiscal quarter ended September
30, 1994, and incorporated herein by reference).
10.14 Subscription Agreement between the Company and Pengo Securities Corp.
dated October 23, 1995, without exhibits (filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K dated November 6, 1995, and
incorporated herein by reference).
10.14.1 Registration Rights Agreement between the Company and Pengo Securities
Corp. dated November 6, 1995 (filed as Exhibit 10.2 to the Company's
Current Report on Form 8-K dated November 6, 1995, and incorporated
herein by reference).
10.15 Combined Hydrocarbon Lease between IPC and the U.S. Department of the
Interior, Bureau of Land Management ("Bureau") dated effective October
18, 1995 relating to 677.36 acres (filed as Exhibit 10.3 to the
Company's Current Report on Form 8-K dated November 6, 1995, and
incorporated herein by reference).
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<PAGE>
Exhibit
Number Description of Exhibits
- ------ -----------------------
10.16 Combined Hydrocarbon Lease between IPC and the Bureau dated effective
October 18, 1995 relating to 2,879.94 acres (filed as Exhibit 10.4 to
the Company's Current Report on Form 8-K dated November 6, 1995, and
incorporated herein by reference).
10.17 Combined Hydrocarbon Lease between IPC and the Bureau dated effective
October 18, 1995 relating to 647.32 acres (filed as Exhibit 10.5 to
the Company's Current Report on Form 8-K dated November 6, 1995, and
incorporated herein by reference).
10.18 Combined Hydrocarbon Lease between IPC and the Bureau dated effective
October 18, 1995 relating to 1,968.01 acres (filed as Exhibit 10.6 to
the Company's Current Report on Form 8-K dated November 6, 1995, and
incorporated herein by reference).
10.19 Farmout Agreement between IPC, the Company and Randall D. Smith, dated
effective July 1, 1995 (filed as Exhibit 10.3 to the Company's
Quarterly Report on Form 10-QSB for the fiscal quarter ended June 30,
1995, and incorporated herein by reference).
10.20 Option Agreement dated November 22, 1995 between the Company, IPC and
Randall D. Smith (filed as Exhibit 10.29 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1995, and
incorporated herein by reference).
10.20.1 Warrant Certificate dated November 22, 1995 granted by the Company to
Randall D. Smith, together with Exhibit "A", a Registration Rights
Agreement (filed as Exhibit 10.29.1 to the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1995, and
incorporated herein by reference).
10.20.2 Form of Agreement dated June 12, 1996 between the Company, IPC, Smith
Management Company, Inc. ("Smith Management"), Farmout, Inc.
("Farmout") and Randall D. Smith, Jeffrey A. Smith and John W. Adams
(the "Farmout Stockholders") (filed as Exhibit 10.1 to the Company's
Current Report on Form 8-K dated June 12, 1996, and incorporated
herein be reference).
10.20.3 Form of Registration Rights Agreement dated June 12, 1996 between the
Company, Smith Management and the Farmout Stockholders (filed as
Exhibit 10.2 to the Company's Current Report on Form 8-K dated June
12, 1996, and incorporated herein by reference).
10.20.4 Security Agreement dated June 12, 1996 between the Farmout
Stockholders and the Company (filed as Exhibit 10.3 to the Company's
Current Report on Form 8-K dated June 12, 1996, and incorporated
herein by reference).
10.20.5 Form of Agreement dated June 12, 1996 between the Company and Arthur
J. Pasmas (filed as Exhibit 10.4 to the Company's Current Report on
Form 8-K dated June 12, 1996, and incorporated herein by reference).
10.20.6 Form of Registration Rights Agreement entered into as of July 31, 1996
between the Company and Arthur J. Pasmas (filed as Exhibit 10.5 to the
Company's Current Report on Form 8-K dated June 12, 1996, and
incorporated herein by reference).
10.20.7 Form of Amendment to Registration Rights Agreement filed as Exhibit
10.29.6 (filed as Exhibit 10.29.7 to the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1996, and
incorporated herein by reference).
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Exhibit
Number Description of Exhibits
- ------ -----------------------
10.21 Crude Oil Call/Put Option (Costless Collar) between IPC and Koch Gas
Services Company dated November 20, 1995 (filed as Exhibit 10.30 to
the Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1995, and incorporated herein by reference).
10.22 Swap Agreement dated November 22, 1994 between the Company and JEDI
(filed as Exhibit 10.1 to the Company's Quarterly Report on Form
10-QSB for the fiscal quarter ended June 30, 1995, and incorporated
herein by reference).
10.22.1 Termination Agreement Revised dated January 18, 1996 between the
Company and Enron Capital & Trade Resources Corp. ("ECT") relating to
Exhibit 10.22 (filed as Exhibit 10.31.1 to the Company's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1995, and
incorporated herein by reference).
10.23 Swap Agreement dated January 18, 1995 between the Company and ECT
(filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-
QSB for the fiscal quarter ended June 30, 1995, and incorporated
herein by reference).
10.24 Put Option dated January 18, 1996 between the Company and ECT (filed
as Exhibit 10.33 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1995, and incorporated herein by
reference).
10.25 Commodity Option dated January 18, 1996 between IPC and ECT (filed as
Exhibit 10.34 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1995, and incorporated herein by
reference).
10.26 Employment Agreement between the Company and John E. Dyer dated June
1, 1996 (corrected version) (filed as Exhibit 10.35 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended December 31,
1996, and incorporated herein by reference).
10.26.1 Amendment to Employment Agreement filed as Exhibit 10.26 (filed as
Exhibit 10.35.1 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1996, and incorporated herein by
reference).
10.27 Crude Oil Call Option between IPC and Enron Capital & Trade Resources
dated April 3, 1996 (without exhibits) (filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-QSB for the quarter ended March
31, 1996, and incorporated herein by reference).
10.28 Warrant Certificate between the Company and John E. Dyer dated May 22,
1996 representing 50,000 shares (corrected version) (filed as Exhibit
10.37 to the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1996, and incorporated herein by reference).
10.28.1 Warrant Certificate between the Company and John E. Dyer dated January
23, 1997 representing 70,000 shares (filed as Exhibit 10.37.1 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1996, and incorporated herein by reference).
*10.28.2 Option Certificate between the Company and John E. Dyer dated November
10, 1997 representing 150,000 shares.
10.29 Warrant Certificate between the Company and Bill I. Pennington dated
May 22, 1996 representing 50,000 shares (corrected version) (filed as
Exhibit 10.38 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1996, and incorporated herein by
reference).
-31-
<PAGE>
Exhibit
Number Description of Exhibits
- ------ -----------------------
10.29.1 Warrant Certificate between the Company and Bill I. Pennington dated
January 23, 1997 representing 60,000 shares (filed as Exhibit 10.38.1
to the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1996, and incorporated herein by reference).
*10.29.2 Option Certificate between the Company and Bill I. Pennington dated
November 10, 1997 representing 125,000 shares.
*10.30 Option Certificate between the Company and Michael J. Stevens dated
November 10, 1997 representing 100,000 shares.
10.31 Agreement - Option to Purchase Inland's Toiyabe Property, Lander
County, Nevada (without exhibits) (filed as Exhibit 10.4 to the
Company's Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1996, and incorporated herein by reference).
10.31.1 Form of Release of Claim between Placer Dome U.S. Inc. ("Placer Dome")
and the Company (filed as Exhibit 10.39.1 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1996, and
incorporated herein by reference).
10.31.2 Form of Assignment of Lease (Unpatented Mining Claims) between the
Company and Placer Dome (filed as Exhibit 10.39.2 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended December 31,
1996, and incorporated herein by reference).
10.31.3 Form of Corporation Grant, Bargain and Sale Deed (Unpatented Mining
Claims) between the Company and Placer Dome (filed as Exhibit 10.39.3
to the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1996, and incorporated herein by reference).
10.31.4 Assignment and Bill of Sale between the Company and Placer Dome (filed
as Exhibit 10.39.4 to the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1996, and incorporated herein by
reference).
10.32 Swap Agreement dated July 8, 1996 between IPC and Koch Gas Services
Company (filed as Exhibit 10.5 to the Company's Quarterly Report on
Form 10-QSB for the quarter ended September 30, 1996, and incorporated
herein by reference).
10.33 Letter agreement dated October 30, 1996 between the Company and
Johnson Water District (filed as Exhibit 10.41 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1996, and
incorporated herein by reference).
10.34 Collar between Koch Oil Company and the Company effective January 1,
1997 (filed as Exhibit 10.42 to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1996, and incorporated
herein by reference).
10.35 Securities Purchase Agreement dated July 21, 1997 between the Company
and JEDI (filed as Exhibit 10.1 to the Company's Quarterly Report on
Form 10-QSB for the quarter ended June 30, 1997, and incorporated
herein by reference).
10.35.1 Registration Rights Agreement dated July 21, 1997 between the Company
and JEDI (filed as Exhibit 10.2 to the Company's Quarterly Report on
Form 10-QSB for the quarter ended June 30, 1997, and incorporated
herein by reference).
-32-
<PAGE>
Exhibit
Number Description of Exhibits
- ------ -----------------------
10.36 Purchase and Sale Agreement between Enserch Exploration, Inc. and IPC
dated July 10, 1997 (filed as Exhibit 10.1 to the Company's Current
Report on Form 8-K dated August 15, 1997, and incorporated herein by
reference).
10.37 Agreement of Sale and Purchase dated July 24, 1997 between Equitable
Resources Energy Company and IPC (filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K dated September 23, 1997, and
incorporated herein by reference).
10.38 Asset Purchase and Sale Agreement dated as of July 14, 1997 between
Crysen Corporation, Crysen Refining, Inc., Sound Refining, Inc. and
the Company, as amended by the first, second and third amendments
thereto (filed as Exhibit 10.1 to the Company's Current Report on Form
8-K dated December 31, 1997, and incorporated herein by reference).
10.38.1 Assignment and Assumption Agreement dated as of December 24, 1997
between the Company and Inland Refining, Inc. (filed as Exhibit 10.2
to the Company's Current Report on Form 8-K dated December 31, 1997,
and incorporated herein by reference).
10.38.2 Assignment and Assumption Agreement dated as of December 24, 1997
between the Company and Refinery Technologies, Inc. (filed as Exhibit
10.3 to the Company's Current Report on Form 8-K dated December 31,
1997, and incorporated herein by reference).
10.38.3 Assignment and Assumption Agreement dated as of December 24, 1997
between the Company and San Jacinto Carbon Company (filed as Exhibit
10.4 to the Company's Current Report on Form 8-K dated December 31,
1997, and incorporated herein by reference).
*10.39 Employment Agreement between the Company and Michael J. Stevens dated
May 1, 1997.
*21.1 Subsidiaries of the Company.
*23.1 Consent of Arthur Andersen LLP.
*23.2 Consent of Ryder Scott Company Petroleum Engineers.
*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 December 31, 1997
reporting information under the following Form 8-K Items:
Item 2. Acquisition or Disposition of Assets
Item 7. Financial Statements and Exhibits
No financial statements were included in the December 31, 1997 Form 8-K, but
financial statements were filed by amendment to this Current Report filed as
Form 8-K/A (Amendment No. One) dated December 31, 1997, filed with the
Securities and Exchange Commission on March 16, 1998, reporting information
under the following Form 8-K Items and financial statements:
Item 7. Financial Statements and Exhibits
The following financial statements and pro forma financial information
regarding the Woods Cross Refinery were filed:
-33-
<PAGE>
(a) AUDITED FINANCIAL STATEMENTS
Report of Independent Public Accountants
Independent Auditors' Report
Balance Sheets as of November 30, 1997 and 1996
Statements of Operations and Retained Earnings (Deficit) for the Years
Ended November 30, 1997 and 1996
Statements of Cash Flows for the Years Ended November 30, 1997 and
1996
Notes to Consolidated Financial Statements
(b) UNAUDITED PRO FORMA FINANCIAL INFORMATION
Introduction to Pro Forma Financial Information
Pro Forma Condensed Consolidated Balance Sheet as of September 30,
1997
Pro Forma Condensed Consolidated Statement of Operations for the Nine
Month Period Ended September 30, 1997
Pro Forma Condensed Consolidated Statement of Operations for the
Twelve Month Period Ended December 31, 1996
Notes to Unaudited Pro Forma Financial Statements
No other reports on Form 8-K were filed during the fourth quarter of 1997.
-34-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INLAND RESOURCES INC.
March 27, 1998 By: /s/ Kyle R. Miller
-----------------------------------
Kyle R. Miller,
Director, President
and Chief Executive Officer
(Principal Executive Officer)
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated.
March 27, 1998 /s/ Arthur J. Pasmas
-------------------------------------------
ARTHUR J. PASMAS
Director
March 27, 1998 /s/ Thomas J. Trzanowski
-------------------------------------------
THOMAS J. TRZANOWSKI
Director
March 27, 1998 /s/ Paul C. Schorr IV
-------------------------------------------
PAUL C. SCHORR IV
Director
March __, 1998
-------------------------------------------
GREGORY S. ANDERSON
Director
March __, 1998
-------------------------------------------
BRUCE SCHNELWAR
Director
March 27, 1998 /s/ Bill I. Pennington
-------------------------------------------
BILL I. PENNINGTON
Vice President and Chief Financial
Officer (Principal Financial Officer)
March 27, 1998 /s/ Michael J. Stevens
-------------------------------------------
MICHAEL J. STEVENS
Secretary, Treasurer and Controller
(Principal Accounting Officer)
-35-
<PAGE>
INLAND RESOURCES INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants F-2
Consolidated Balance Sheets, December 31, 1997 and 1996 F-3
Consolidated Statements of Operations for the years ended
December 31, 1997 and 1996 F-5
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997 and 1996 F-7
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1996 F-8
Notes to Consolidated Financial Statements F-9
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Inland Resources Inc.:
We have audited the accompanying consolidated balance sheets of Inland Resources
Inc. (a Washington corporation) and subsidiaries as of December 31, 1997 and
1996 and the related consolidated statements of operations, stockholders' equity
and cash flows for each of the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Inland Resources Inc. and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years then ended in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
March 18, 1997.
F-2
<PAGE>
INLAND RESOURCES INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
------ ------------ -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 604,619 $10,030,982
Accounts receivable 11,725,899 641,961
Accrued oil and gas sales 1,875,200 1,435,700
Inventory 6,973,890 862,229
Other current assets 2,086,819 242,022
------------ -----------
Total current assets 23,266,427 13,212,894
------------ -----------
PROPERTY AND EQUIPMENT, AT COST:
Oil and gas properties (successful efforts method) 143,828,550 46,832,811
Accumulated depletion, depreciation and amortization (10,009,165) (3,834,517)
------------ -----------
Total oil and gas properties, net 133,819,385 42,998,294
Other property and equipment, net 14,698,611 779,161
------------ -----------
Total property and equipment, net 148,517,996 43,777,455
DEBT ISSUE COSTS, net 1,068,185 338,262
NOTES RECEIVABLE 3,100,000 -
------------ -----------
Total assets $175,952,608 $57,328,611
============ ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated balance sheets.
F-3
<PAGE>
INLAND RESOURCES INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
------------------------------------ ------------ -----------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 6,238,515 $ 2,865,387
Accrued expenses 3,613,829 1,371,347
Current portion of long-term debt 166,989 1,148,000
------------ -----------
Total current liabilities 10,019,333 5,384,734
LONG-TERM DEBT 122,943,904 19,972,014
ENVIRONMENTAL LIABILITY 1,000,000 -
COMMITMENTS AND CONTINGENCIES (Note 11)
MANDATORILY REDEEMABLE PREFERRED SERIES C
STOCK, 100,000 and 0 shares issued and
outstanding, respectively 9,567,500 -
ACCRUED PREFERRED SERIES C DIVIDENDS 450,000 -
WARRANTS OUTSTANDING 1,300,000 -
STOCKHOLDERS' EQUITY:
Preferred Class A stock, par value $.001; 20,000,000
shares authorized;
Series B: 0 and 1,000,000 shares issued and
outstanding, liquidation preference of $12,400,000 - 10,000,000
Accrued Preferred Series B dividends - 670,000
Common stock, par value $.001; 25,000,000
shares authorized, 8,359,830 and 6,312,059
issued and outstanding, respectively 8,360 6,312
Additional paid-in capital 41,856,053 29,129,185
Accumulated deficit (11,192,542) (7,833,634)
------------ -----------
Total stockholders' equity 30,671,871 31,971,863
------------ -----------
Total liabilities and stockholders' equity $175,952,608 $57,328,611
============ ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated balance sheets.
F-4
<PAGE>
INLAND RESOURCES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
REVENUES:
Oil and gas sales $17,181,842 $10,704,463
OPERATING EXPENSES:
Lease operating expenses 3,780,200 1,434,860
Production taxes 382,670 610,130
Exploration 60,633 166,616
Depletion, depreciation and amortization 6,480,265 3,428,513
General and administrative, net 2,117,955 1,669,638
----------- -----------
Total operating expenses 12,821,723 7,309,757
----------- -----------
OPERATING INCOME 4,360,119 3,394,706
INTEREST EXPENSE (4,759,195) (1,633,229)
INTEREST AND OTHER INCOME 379,899 383,060
----------- -----------
NET INCOME (LOSS) BEFORE EXTRAORDINARY LOSS (19,177) 2,144,537
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT
OF DEBT (Note 7) (1,159,731) -
----------- -----------
NET INCOME (LOSS) (1,178,908) 2,144,537
REDEMPTION PREMIUM - PREFERRED SERIES A
STOCK - (214,000)
REDEMPTION PREMIUM PREFERRED SERIES B
STOCK (580,000) -
ACCRUED PREFERRED SERIES C STOCK DIVIDENDS (450,000) -
----------- -----------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS $(2,208,908) $ 1,930,537
=========== ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-5
<PAGE>
INLAND RESOURCES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
BASIC NET INCOME (LOSS) PER SHARE:
Continuing operations $ (0.14) $ 0.38
Extraordinary loss (0.16) -
---------- ----------
Total $ (0.30) $ 0.38
========== ==========
Basic weighted average common
shares outstanding 7,377,944 5,148,056
========== ==========
DILUTED NET INCOME (LOSS) PER SHARE:
Continuing operations $ (0.14) $ 0.30
Extraordinary loss (0.16) -
---------- ----------
Total $ (0.30) $ 0.30
========== ==========
Diluted weighted average common
shares outstanding 7,377,944 6,499,098
========== ==========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-6
<PAGE>
INLAND RESOURCES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Accrued Additional
Preferred Stock Series B Common Stock Paid-In Accumulated
Shares Amount Dividend Shares Amount Capital Deficit
---------- ------------ ---------- ----------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1995 106,850 $ 4,100,368 $ - 40,927,999 $ 40,928 $19,146,284 $(9,308,171)
One-for-ten reverse stock split - - - (36,835,151) (36,835) 36,835 -
Purchase of Farmount Inc. - - - 1,309,880 1,310 6,541,190 -
Redemption of Preferred Series A (13,713) (739,708) - - - - -
Conversion of Preferred Series A (93,137) (3,360,660) - 900,831 901 3,359,759 -
Issuance of Preferred Series B 1,000,000 10,000,000 - - - - -
Exercise of employee stock options - - - 8,500 8 45,117 -
Accrued Preferred Series B dividend - - 670,000 - - - (670,000)
Net income - - - - - - 2,144,537
---------- ------------ ---------- ----------- -------- ----------- ------------
BALANCES, December 31, 1996 1,000,000 10,000,000 670,000 6,312,059 6,312 29,129,185 (7,833,634)
Accrued Preferred Series B dividend - - 1,150,000 - - - (1,150,000)
Conversion of Preferred Series B (1,000,000) (10,000,000) (1,820,000) 1,977,671 1,978 12,398,022 (580,000)
Preferred Series C dividends - - - - - - (450,000)
Exercise of employee stock options - - - 70,100 70 328,846 -
Net loss - - - - - - (1,178,908)
---------- ------------ ---------- ----------- -------- ----------- ------------
BALANCES, December 31, 1997 - $ - $ - 8,359,830 $ 8,360 $41,856,053 $(11,192,542)
========== ============ ========== =========== ======== =========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE>
INLAND RESOURCES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(See Note 10)
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,178,908) $ 2,144,537
Adjustments to reconcile net income (loss) to net cash
provided by operating activities-
Net cash used by discontinued operations - (129,433)
Loss on disposal of discontinued operations - 30,000
Depletion, depreciation and amortization 6,480,265 3,428,513
Amortization of debt issue costs and debt discount 264,900 198,603
Loss on early extinguishment of debt 1,159,731 -
Effect of changes in current assets and liabilities--
Accounts receivable and accrued sales (950,464) (1,375,705)
Inventory (1,131,564) (444,564)
Other current assets 405,203 (222,684)
Accounts payable and accrued expenses 618,391 1,376,959
------------- ------------
Net cash provided by operating activities 5,667,554 5,006,226
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Development expenditures and equipment purchases (29,739,600) (23,251,672)
Acquisition of oil and gas properties (69,532,315) -
Acquisition of Woods Cross Refinery, net (22,950,000) -
Payment to sell discontinued operations - (500,000)
------------- ------------
Net cash used in investing activities (122,221,915) (23,751,672)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of preferred stock 9,567,500 10,000,000
Proceeds from sale of common stock 328,916 45,125
Proceeds from issuance of long-term debt 161,000,000 16,578,192
Payments of long-term debt (60,099,355) (73,415)
Debt issue costs (3,669,063) (4,071)
Redemption of Preferred Series A stock - (739,708)
------------- ------------
Net cash provided by financing activities 107,127,998 25,806,123
------------- ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (9,426,363) 7,060,677
CASH AND CASH EQUIVALENTS, at beginning of period 10,030,982 2,970,305
------------- ------------
CASH AND CASH EQUIVALENTS, at end of period $ 604,619 $ 10,030,982
============= ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-8
<PAGE>
INLAND RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1996
(1) BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Inland Resources Inc. (the "Company") is an independent energy company with
substantially all of its producing oil and gas property interests located in the
Monument Butte Field within the Uinta Basin of Northeastern Utah.
On December 31, 1997, the Company closed on the purchase of certain assets and
liabilities consisting of crude and refined product inventory, trade
receivables, refining property, plant and equipment, crude payables and accrued
liabilities associated with a refinery located in Woods Cross, Utah ("Woods
Cross Refinery"). The refinery has a processing capacity of approximately
12,500 barrels per day and tankage capacity of 485,000 barrels (see Note 5).
Consolidation
The accompanying financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly-owned. All intercompany activity has
been eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and amounts due from banks and
other investments with original maturities of less than three months.
Concentrations of Credit Risk
The Company regularly has cash in a single financial institution which exceeds
depository insurance limits. The Company places such deposits with high credit
quality institutions and has
F-9
<PAGE>
not experienced any credit losses. Substantially all of the Company's
receivables are within the oil and gas industry, primarily from its oil and gas
purchasers, joint interest owners and refined product purchasers. Although
diversified within many companies, collectibility is dependent upon the general
economic conditions of the industry. To date, write-offs of uncollectable
accounts have been minimal.
Fair Value of Financial Instruments
The Company's financial investments consist of cash, trade receivables, trade
payables, accrued liabilities and long-term debt. The carrying value of cash
and cash equivalents, trade receivables and trade payables are considered to be
representative of their fair market value, due to the short maturity of these
instruments. The fair value for long-term debt is estimated based on current
rates available for similar debt with similar maturities and securities and
approximates its carrying value.
Inventories and Exchanges
Inventories consist of crude oil, unfinished oil and all finished products
recorded at the lower of cost on a first-in, first-out basis or market. Also
included in inventory is tubular goods valued at the lower of average cost or
market. Materials and supplies inventories are stated at cost and are charged
to capital or expense, as appropriate, when used.
The Company has product exchange agreements with other companies. Exchange
transactions are considered asset exchanges, with deliveries offset against
receipts. The net exchange balance is included in inventory.
Accounting for Oil and Gas Operations
The Company uses the "successful efforts" method of accounting for oil and gas
operations. The use of this method results in the capitalization of those costs
associated with the acquisition, exploration and development of properties that
produce revenue or are anticipated to produce future revenue. The Company does
not capitalize general and administrative expenses directly identifiable with
such activities or lease operating expenses associated with secondary recovery
startup projects. Costs of unsuccessful exploration efforts are expensed in the
period it is determined that such costs are not recoverable through future
revenues. Geological and geophysical costs are expensed as incurred. The cost
of development wells are capitalized whether productive or nonproductive. Upon
the sale of proved properties, the cost and accumulated depletion are removed
from the accounts and any gain or loss is charged to income. Interest is
capitalized during the drilling and completion period of wells and on other
major projects. The amount of interest capitalized was $135,000 during both
1997 and 1996.
The provision for depletion, depreciation and amortization of developed oil and
gas properties is based on the units of production method, based on proved oil
and gas reserves. Dismantlement, restoration and abandonment costs are in
management's opinion offset by residual values of lease and well equipment. As
a result, no accrual for such costs is needed.
F-10
<PAGE>
Effective October 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." Under this statement, a calculation of
the aggregate before-tax undiscounted future net revenues (the "Ceiling") is
performed for each distinct proved property pool in which the Company
participates. If the net capitalized cost of each proved property pool exceeds
the applicable Ceiling calculation, the excess is recorded as a charge to
operations. There was no charge to the consolidated statements of operations as
a result of adopting this statement.
The Company also periodically assesses unproved oil and gas properties for
impairment. Impairment represents management's estimate of the decline in
realizable value experienced during the period.
Property and Equipment
Property and equipment is recorded at cost. Replacements and major improvements
are capitalized while maintenance and repairs are charged to expense as
incurred. Upon sale or retirement, the asset cost and accumulated depreciation
are removed from the accounts and any resulting gain or loss is reflected in
operations. Depreciation is provided using the straight-line method over the
estimated useful lives of the related assets, generally ranging from three to
twenty years. Maintenance and repairs are expensed as incurred for major
scheduled repairs and maintenance (turnaround) of the refinery operating units.
Major improvements are capitalized, and the assets replaced, are retired.
Environmental
Environmental costs are expensed or capitalized based upon their future economic
benefit. Costs which are improvements are capitalized. Costs related to
environmental remediation and reclamation are expensed. Liabilities for
remediation and reclamation costs are accrued when it is determined that an
obligation exists and the amount of the costs can be reasonably estimated.
Income Taxes
The Company uses the liability method of accounting for income taxes. Under the
liability method, deferred income taxes are recorded for differences between the
book and tax basis of assets and liabilities at tax rates in effect when the
balances are expected to reverse.
Revenue Recognition
Sales of oil and gas are recorded upon delivery to purchasers.
Earnings Per Share
In February 1997, Statement of Financial Accounting Standard No. 128 ("SFAS No.
128"), "Earnings per Share" was issued. SFAS No. 128 specifies the computation,
presentation and disclosure requirements for earnings per share. SFAS No. 128
is effective for periods ending after December 15, 1997 and requires retroactive
restatement of prior period earnings per share. The statement replaces the
"primary earnings per share" calculation with a "basic earnings per share",
F-11
<PAGE>
and replaces the "fully diluted earnings per share" calculation with "diluted
earnings per share." Adoption of SFAS No. 128 required restatement of the
Company's 1996 primary earnings per share of $0.37 per share and its fully
diluted earnings per share of $0.29 per share to comply with SFAS No. 128 (see
Note 4).
Recent Accounting Pronouncements
The FASB issued SFAS No. 130 "Reporting Comprehensive Income" in June 1997 which
established standards for reporting and displaying comprehensive income and its
components in a full set of general purpose financial statements. In addition
to net income, comprehensive income includes all changes in equity during a
period, except those resulting from investments by and distributions to owners.
The adoption of SFAS No. 130 in the first quarter of 1998 will not have any
impact on the Company.
The FASB also recently issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" which establishes standards for reporting
information about operating segments in annual and interim financial statements.
SFAS No. 131 also establishes standards for related disclosures about products
and services, geographic areas and major customers. SFAS No. 131 is effective
for fiscal years beginning after December 15, 1997.
(2) FINANCIAL INSTRUMENTS
Periodically, the Company enters into commodity contracts to hedge or otherwise
reduce the impact of oil and gas price fluctuations and to help ensure the
repayment of indebtedness. The amortized cost and the monthly settlement gain
or loss are reported as adjustments to revenue in the period in which the
related oil or gas is sold. Hedging activities do not affect the actual sales
price for the Company's crude oil and natural gas . The Company is subject to
the creditworthiness of its counterparties since the contracts are not
collateralized.
Crude Oil Hedging Activities
The Company has a hedge in place with Enron Capital and Trade Resources Corp.
(the "Enron Hedge") that hedges 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 in December 2000. The hedge is structured as a cost free
collar whereby the average monthly price, based on NYMEX Light Sweet Crude Oil
Futures Contracts, is between $18.00 and $20.55 per barrel. On January 1, 1997,
the Company paid $34,170 to enter into a contract with Koch Gas Services Company
("Koch") that exactly offsets the effect of the Enron Hedge during the period
January 1998 through December 2000. The Company has also entered into a put
contract with Enron for 100,000 barrels per month from January 1998 through
March 1998 at a put price of $16.00 per barrel. The Company paid $33,000 for
this contract and will amortize this cost over the period of the contract.
During 1996 and 1997, the Company had various other contracts in place
consisting of puts, calls and collars. Each of the contracts have completely
settled as of December 31, 1997. The effects of all hedging contracts resulted
in losses of approximately $217,000 and $535,000 during 1997 and 1996,
respectively.
F-12
<PAGE>
On March 12, 1998, the Company entered into a cost free collar with Enron
whereby the average monthly price, based on NYMEX Light Sweet Crude Oil Futures
Contracts, is between $14.50 and $17.70 per barrel. This collar covers 75,000
barrels per month for the period from April 1998 through December 1998.
(3) INVENTORIES
Inventories at December 31, 1997 and 1996 consist of the following:
<TABLE>
<CAPTION>
1997 1996
---------- --------
<S> <C> <C>
Crude oil $1,006,380 $ -
Refined product 3,685,290 -
Tubular goods 1,993,793 862,229
Material and supplies 288,427 -
---------- --------
Total $6,973,890 $862,229
========== ========
</TABLE>
(4) EARNINGS PER SHARE
The calculation of earnings per share for the years ended December 31, 1997 and
1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------------- --------------------------------
Per Share Per Share
Loss Shares Amount Income Shares Amount
----------- --------- --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before extraordinary
item $(1,178,908) $2,144,537
Less: Preferred Series A redemption
premium - (214,000)
Preferred Series B redemption
premium (580,000) -
Preferred Series C stock
premium (450,000) -
----------- ----------
BASIC EPS
Income attributable to common
stockholders (2,208,908) 7,377,944 $(0.30) 1,930,537 5,148,056 $0.38
====== =====
EFFECT OF DILUTIVE SECURITIES
Options and warrants - - - 110,843
Convertible preferred stock - - - 666,719
Stock dividend on convertible
preferred stock - - - 573,480
----------- --------- ---------- ---------
DILUTED EPS
Income attributable to common
stockholders plus assumed
conversion $(2,208,908) 7,377,944 $(0.30) $1,930,537 6,499,098 $0.30
=========== ========= ====== ========== ========= =====
</TABLE>
F-13
<PAGE>
(5) ACQUISITIONS
Farmout Inc.
On June 12, 1996, the Company entered into an agreement to acquire one hundred
percent (100%) of the outstanding capital stock of Farmout Inc., a company
affiliated with the majority shareholder of the Company ("Randall D. Smith" or
"Smith"), in exchange for 1,309,880 shares of the Company's common stock. Under
the terms of the agreement, the Company did not issue the common stock until
January 2, 1997. Since no contingencies existed as to the common stock
issuance, the 1,309,880 shares are considered outstanding for purposes of
reporting in the accompanying consolidated financial statements. The purchase
was valued at $6.55 million for accounting purposes. The only assets of Farmout
Inc. were the twenty producing farmout wells. Farmout Inc. had no liabilities
at the purchase date. Income tax liabilities arising prior to June 12, 1996 are
the responsibility of the prior owners and income tax liabilities from June 12,
1996 forward are the responsibility 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.
The following presents unaudited, pro forma operating results as if the purchase
of Farmout Inc. had occurred at the beginning of 1996.
<TABLE>
<CAPTION>
December 31, 1996
------------------------------------
(In thousands except per share data)
<S> <C>
Revenues $12,391
Net income $ 3,163
Earnings per share-basic $ 0.57
Earnings per share-diluted $ 0.45
</TABLE>
Enserch
On August 15, 1997, the Company purchased producing oil and gas properties and
undeveloped acreage allocated in the Monument Butte region from Enserch
Exploration, Inc. ("Enserch") for $10.4 million. The acquisition was accounted
for as a purchase, therefore assets and results of operations of the Enserch
properties are included in the Company's consolidated financial statements from
the acquisition date forward. Inland funded this acquisition with debt.
EREC
On September 30, 1997, the Company purchased producing oil and gas properties
and undeveloped acreage, in the same region as the Enserch acquisition, from
Equitable Resources Energy Company ("EREC") for a purchase price of $56 million.
The acquisition was also accounted for as a purchase, and therefore the assets
and results of operations of the EREC properties are included in the Company's
consolidated financial statements from the acquisition date forward. Inland
also funded the acquisition with debt.
F-14
<PAGE>
Woods Cross Refinery
On December 31, 1997, the Company purchased certain assets and liabilities of
the refining business of Crysen Refining, Inc. for a purchase price of $22.9
million. The acquisition was funded with bank debt. The acquisition of the
Woods Cross Refinery was accounted for as a purchase as of December 31, 1997,
and the assets and liabilities assumed are included in the Company's
consolidated balance sheet as of that date. Because the purchase was closed on
December 31, 1997, no revenues or expenses have been recorded in the Company's
1997 consolidated statement of operations.
In order to facilitate the purchase of the Woods Cross Refinery, the Company
issued a $1.5 million note to a company to assist them in acquiring a refinery
located in Tacoma, Washington. A director of Inland Refining, Inc. (a wholly
owned subsidiary of the Company), is also a director of the company to which the
$1.5 million note was issued. This note bears interest at a rate of 10% and is
due in full on June 30, 1999.
The following presents unaudited, pro forma operating results as if the purchase
of EREC and the Woods Cross Refinery (the two acquisitions defined to be
significant) had occurred at the beginning of 1996 and the beginning of 1997.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------- -----------------
(In thousands except per share data)
<S> <C> <C>
Revenues $136,495 $145,299
Net loss before extraordinary loss $ (5,568) $ (653)
Net loss $ (6,728) $ (653)
Loss per sharebasic and diluted $ (1.05) $ (0.17)
</TABLE>
The pro forma operating results have been prepared for comparative purposes
only. They do not purport to present actual operating results that would have
been achieved had the acquisitions been made at the beginning of each period
presented, nor are they necessarily indicative of future operations.
F-15
<PAGE>
(6) OTHER PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
----------- ----------
<S> <C> <C>
Vehicles $ 1,053,837 $ 393,412
Land and buildings 1,698,741 290,041
Refining plant and equipment 11,619,483 -
Furniture and fixtures 939,682 439,682
Leasehold improvements 24,300 -
----------- ----------
15,336,043 1,123,125
Less accumulated depreciation (637,432) (343,974)
----------- ----------
Total $14,698,611 $ 779,161
=========== ==========
</TABLE>
(7) LONG-TERM DEBT
TCW I Agreement
On November 29, 1995, the Company entered into a Credit Agreement (the "TCW I")
with Trust Company of the West and affiliated entities (collectively "TCW"),
which provided a recourse loan facility to the Company of up to $25 million for
the development of the Monument Butte Field. The Company was advanced $5
million at closing and used the proceeds to repay $4,123,500 of principal and
interest in full satisfaction of outstanding debt, to pay $400,000 of closing
costs associated with the TCW I and the balance of funds increasing working
capital. During 1996, $16.5 million of the $20 million of remaining loan
availability was drawn to fund development drilling in the Monument Butte Field.
The remaining amount was drawn in January 1997. The TCW I bore interest at 10%
per annum. Interest was payable quarterly beginning March 1996 and minimum
payments of principal were required quarterly beginning March 1997. In addition
to these payments, the Company granted TCW an initial 7% overriding royalty
interest, proportionately reduced to the Company's working interest in the oil
and gas properties, commencing November 29, 1995 and continuing until the
internal annual rate of return to TCW equaled 16%, at which time it reduced to
3%, proportionately reduced to the Company's working interest, until TCW's
internal rate of return equaled 22%.
The TCW I subjected the Company to penalties on the overriding royalty interest
if the loan was prepaid prior to November 29, 1997. The Company paid a $250,000
commitment fee at closing and recorded an $800,000 loan discount relating to the
7% override which was being amortized over the term of the loan using the
effective interest method. During 1997, the Company refinanced the TCW I and
expensed the unamortized discount and debt issuance costs totaling approximately
$864,000 as an extraordinary loss.
F-16
<PAGE>
CIBC Loan Agreement
On June 30, 1997, the Company entered into a $50 million Credit Agreement with
Canadian Imperial Bank of Commerce (the "CIBC Loan Agreement"). The initial
advance of $26 million was funded on June 30, 1997. The loan proceeds, along
with cash on hand, were used to retire The TCW I loan obligation and to purchase
the override on the Company's properties held by TCW. On August 15, 1997, an
additional $9 million was drawn under the facility to fund the acquisition of
properties from Enserch. Interest under the CIBC Loan Agreement was calculated
at the London interbank eurodollar rate ("LIBOR") plus a spread of 1.875% or
approximately 7.5%.
TCW II and ING Credit Agreements
On September 30, 1997, the Company closed separate Credit Agreements with Trust
Company of the West and TCW Asset Management Company in their capacities as
noteholder and agent (collectively "TCW") and ING (U.S.) Capital Corporation
("ING"). The TCW Credit Agreement ("TCW II") provided the Company with $75
million, all of which was funded at closing. The ING Credit Agreement provided
the Company with an initial borrowing base of $45 million of which $17.8 million
was drawn at closing. Subsequent to closing of the ING Credit Agreement, a
portion of this loan was participated to Meespierson Capital Corp. and U.S. Bank
National Association. The proceeds from the loans were used to finance the
acquisition of the properties purchased from EREC, fund full repayment of the
CIBC Loan Agreement, pay transaction costs and provide the Company with working
capital. The repayment of the CIBC Loan Agreement resulted in the Company
expensing the unamortized debt issuance costs of approximately $296,000 as an
extraordinary loss. An additional $17.2 million was drawn under the ING Credit
Agreement before December 31, 1997 to fund operating capital and the acquisition
of the Woods Cross Refinery
The ING Credit Agreement constitutes a revolving line of credit until March 31,
1999, at which time it converts to a term loan payable in quarterly installments
through March 29, 2003. The quarterly installments, based on a $45 million
borrowing base, are $4 million for the first three quarters, $3 million for the
next four quarters, $2.5 million for the next four quarters, $2.25 million for
the next four quarters, and $2 million on March 29, 2003. The ING loan bears
interest, at the Company's option, at either (i) the average prime rates
announced from time to time by The Chase Manhattan Bank, Citibank, N.A. and
Morgan Guaranty Trust Company of New York plus 0.5% per annum; or (ii) at LIBOR
plus 1.75%. The Company selected a 60 day LIBOR rate resulting in an interest
rate of 7.5% subsequent to closing. The ING loan is secured by a first lien on
substantially all assets of the Company except the Woods Cross Refinery. The
borrowing base under the ING facility is limited to the collateral value of
proved reserves as determined semiannually by the lender.
TCW II is comprised of a $65 million traunche and a $10 million traunche and is
payable interest only, at a rate of 9.75% per annum, quarterly until the earlier
of December 31, 2003 or the date on which the ING loan is paid n full. At that
time, the TCW II loan converts to a term loan payable in twelve quarterly
installments of principal and interest. The quarterly principal installments
are $6.25 million for the first four quarters, $8.75 million for the next four
quarters and $3.75 million for the last four quarters. The Company granted
warrants to TCW to purchase 100,000 shares of common stock (subject to anti-
dilution adjustments) at an exercise price of $10.00 per share (also subject to
anti-dilution adjustments) at any time after September 23, 2000 and before
September 23, 2007 (see Note 12). The Company also granted registration rights
in connection with such
F-17
<PAGE>
warrants. TCW is also entitled to additional interest on the $65 million
traunche in an amount that yields TCW a 12.5% internal rate of return, such
interest payment to be made concurrently with the final payment of all principal
and interest on the TCW loan. For purposes of the internal rate of return
calculation, the Company is given credit for the funding fee of $2.25 million
paid to TCW at closing. Upon payment of the $10 million traunche by the Company,
TCW may elect to "put" their warrant back to the Company and accept a cash
payment which will cause TCW to achieve a 12.5% rate of return on this traunche.
TCW II restricts repayment of the TCW II indebtedness until October 1, 1999. The
TCW loan is secured by a second lien on substantially all assets of the Company
except the Woods Cross Refinery.
The TCW II and ING Credit Agreements have common covenants that restrict the
payment of cash dividends, borrowings, sale of assets, loans to others,
investment and merger activity and hedging contracts without the prior consent
of the lenders and also requires the Company to maintain certain net worth,
interest coverage and working capital ratios. Subsequent to yearend, certain
covenants were either amended or waived for a one year period, allowing the
Company to remain in compliance as of December 31, 1997.
Banque Paribas
The Company's Credit Agreement with Banque Paribas constitutes a revolving line
of credit in an amount not to exceed $23.75 million. The Company initially drew
$12.5 million to partially fund the Crysen acquisition on December 31, 1997.
The facility will be used to fund working capital requirements and for letters
of credit obligations. The Credit Agreement provides that the aggregate amount
of loans outstanding (not including letter of credit obligations) prior to April
1, 1998 cannot exceed $16.5 million and thereafter the amount of loans
outstanding (not including letter of credit obligations) cannot exceed $8
million. All amounts funded under the Credit Agreement must be repaid by
January 29, 1999. The Credit Agreement is secured by all refining assets of the
Company. The Company's ability to borrow funds or have letters of credit issued
under the Credit Agreement is subject to its compliance with various financial
covenants and ratios. Amounts outstanding bear interest at the prime rate of
The Chase Manhattan Bank in New York, New York, and interest is payable monthly.
The Company has further agreed with Banque Paribas that if the Company receives
proceeds from any equity or capital markets financial transaction, that it will
make certain prepayments, if any, required to be made under the Credit
Agreement.
Phillips
The Company also assumed a note payable to Phillips Petroleum Company
("Phillips") in the amount of $1.7 million in connection with the Crysen
transaction. This note is unsecured and is repayable based on quantities of
Phillips crude oil processed through the Woods Cross Refinery, on a monthly
basis. This agreement includes provisions for minimum refining requirements per
month. If the note is not repaid by June 2003, the remaining principal
outstanding at that date is repayable in equal monthly installments over 5
years. Subsequent to June 2003, the remaining principal outstanding bears
interest at prime plus 3%, with a cap of 12%.
F-18
<PAGE>
A summary of the Company's long-term debt follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1996
------------ -----------
<S> <C> <C>
TCW II $ 75,000,000 $ -
Less discount on TCW II (1,231,000) -
------------ -----------
73,769,000 -
------------ -----------
TCW I - 21,500,000
Less discount on TCW I - (666,000)
------------ -----------
- 20,834,000
------------ -----------
ING 35,000,000 -
Banque Paribas 12,481,000 -
Phillips debt 1,660,000 -
Other 201,000 286,000
------------ -----------
Total 123,111,000 21,120,000
Current portion (167,000) (1,148,000)
------------ -----------
Long-term portion $122,944,000 $19,972,000
============ ===========
</TABLE>
As of December 31, 1997, the annual principal payments on long-term debt for the
next five years are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 167,000
1999 24,634,000
2000 12,155,000
2001 10,156,000
2002 1,157,000
Thereafter 74,841,000
------------
$123,111,000
============
</TABLE>
F-19
<PAGE>
(8) INCOME TAXES
In 1997 and 1996, no income tax provision or benefit was recognized due to the
effect of net operating losses and the recording of a valuation allowance
against portions of the deferred tax assets that did not meet the utilization
criteria of more likely than not. Deferred income taxes reflect the impact of
temporary differences between amounts of assets and liabilities for financial
reporting purposes and such amounts as measured by tax laws. The tax effect of
the temporary differences and carryforwards giving rise to the Company's
deferred tax assets and liabilities at December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Deferred
December 31, Expense December 31,
1996 (Benefit) 1997
------------ ----------- -------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $5,504,000 $ 1,397,000 $ 6,901,000
Other 32,000 (32,000) -
----------- ----------- -------------
Total 5,536,000 1,365,000 6,901,000
Valuation allowance (1,107,000) (540,000) (1,647,000)
----------- ----------- -------------
Deferred tax assets 4,429,000 825,000 5,254,000
----------- ----------- -------------
Deferred tax liabilities:
Depletion, depreciation and
amortization of property and
equipment (4,175,000) (1,079,000) (5,254,000)
Other (254,000) 254,000 -
----------- ----------- ------------
Deferred tax liabilities (4,429,000) (825,000) ( 5,254,000)
----------- ----------- ------------
Net deferred tax assets $ - $ - $ -
=========== =========== ============
</TABLE>
Income tax expense for 1997 and 1996 differed from amounts computed by applying
the statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1996
--------- ---------
<S> <C> <C>
Expected statutory tax expenses at 34% $(401,000) $ 729,000
Change in valuation allowance, net 540,000 (740,000)
Other (139,000) 11,000
--------- ---------
Net tax expense $ - $ -
========= =========
</TABLE>
F-20
<PAGE>
No state or federal income taxes are payable at December 31, 1997 or 1996, and
the Company did not pay any income taxes in 1997 or 1996. In 1996, $1,772,000
of the valuation allowance was reversed upon the acquisition of Farmout Inc. as
the book basis in the purchased assets was greater than the associated tax
basis.
A valuation allowance is to be provided if it is more likely than not that some
portion or all of a deferred tax asset will not be realized. The Company's
ability to realize the benefit of its tax assets depends on the generation of
future taxable income through profitable operations and expansion of the
Company's oil and gas producing properties. The market, capital and
environmental risks associated with that growth requirement caused the Company
to conclude that a valuation allowance should be provided, except to the extent
that the benefit of operating loss carryforwards can be used to offset future
reversals of existing deferred tax liabilities. The Company will continue to
monitor the need for the valuation allowance that has been provided.
At December 31, 1997, the Company had tax basis net operating loss carryforwards
available to offset future regular and alternative taxable income of $16.5
million, that expire from 1999 to 2012. Utilization of the net operating loss
carryforwards are limited under the change of ownership tax rules.
(9) CAPITAL STOCK
Common Stock
On May 22, 1996, the Company's shareholders 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 and reduce
outstanding common shares from 40,927,999 to 4,092,800. The shareholders
further approved an increase in the number of post-split authorized shares from
10,000,000 to 25,000,000. 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.
Preferred Stock
On July 31, 1996, the Company sold an affiliate of Smith 950,000 shares of a
newly designated series of preferred stock of the Company (the "Series B Stock")
which has 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 Stock. The Series B Stock was issued by the Company for cash
of $10 per share (an aggregate of $10 million). Concurrently with the issuance
of the Series B Stock, the Company called for redemption of its outstanding
Series A Convertible Preferred Stock (the "Series A Stock"). Each record holder
of Series A Stock had the right to elect to receive either (i) cash in the
amount of $54.00 per share, or (ii) 9.6726 shares of common stock for each share
of Series A Stock. During 1996, 93,137 shares of Series A Stock elected to
convert into 900,831 shares of common stock. The remaining 13,713 shares of
Series A Stock were redeemed for $739,708.
F-21
<PAGE>
The Series B Stock bears a dividend of 12% per annum on the Redemption Price
(defined below); has 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 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 Stock or creating another
series of preferred stock with rights equal to or greater than the rights of the
Series B 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 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 Stock will be entitled to a
full two years of accumulated dividends in calculating amounts payable upon
liquidation, redemption or conversion to a number of calculated common shares.
On July 21, 1997, the Company closed the sale of 100,000 shares of a newly
designated Series C Cumulative Convertible Preferred Stock (the "Series C Stock
") to an affiliate of Enron Corp. for cash of $10 million ($9.6 million net of
closing fees). Concurrently with the issuance of the Series C Stock, the
Company called for redemption its outstanding Series B Stock. The holders of
the Series B Stock waived redemption and instead elected to convert their Series
B Stock into 1,977,671 shares of the Company's common stock.
The Series C Stock is initially convertible at any time by the holder into 8.333
shares of the Company common stock, an effective conversion price of $12.00 per
share. The Series C Stock bears a dividend of 10% per annum. Accumulated
dividends may also be converted by the holder at the same ratio as the Series C
Stock. Subsequent to July 21, 2000, (the third anniversary), the Company has
the option to redeem for cash at par value ($100 per share) all outstanding
shares of Series C Stock plus accrued dividends. If not converted by the holder
or redeemed for cash by the Company prior to the later of (i) July 21, 2005 (the
eighth anniversary) or (ii) six months following maturity of any high yield
offering or long-term debt financing in the aggregate amount of at least $25
million obtained after July 21, 1997, the Company must redeem the Series C Stock
and all accrued dividends for (i) cash or, at the Company's election, (ii)
common stock issued at 80% of the market price of the common stock on the day of
redemption.
The Company must also redeem the Series C Stock if (i) the Company enters into
any new line of business (other than exploration, development and production of
oil and gas) and holders of Series C Stock elect to be redeemed prior to the
Company commencing such new line of business, (the holder however waived its
right to redeem its shares as a result of closing on the purchase of the Woods
Cross Refinery) or (ii) the Company proposes to enter into a merger,
consolidation or share exchange pursuant to which holders of common stock would
receive cash or other property (rather than stock in the surviving company) in a
per share amount less than the effective conversion price for the Series C Stock
(which is initially $12 per share). The Series C Stock votes with common
stockholders on all matters based on the number of shares of Company common
stock the Series C Stock is convertible into; except for the approval of
amendments to the Series C Stock, the authorization of any other series of
preferred stock having equal or greater rights, and
F-22
<PAGE>
the approval of any merger, consolidation or share exchange involving the
Company unless the holder of the Series C Stock receives equivalent stock with
equivalent rights. In these instances, the Series C Stock votes as a separate
class. The Series C Stock also carries anti-dilution protection, rights to
demand registration at the Company's expense and a liquidation preference equal
to par value of all outstanding shares plus accrued dividends.
(10) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest during 1997 and 1996 was approximately $4,092,000 and
$1,616,000, respectively.
During 1996, the Company purchased Farmout Inc. by issuing common stock valued
at $6,542,500.
(11) COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases office space, railcars, catalyst and equipment under
noncancellable operating leases. The Company has sublet office space under a
previous office lease to a third party. The difference between the sublease
income over the life of the previous lease and the required rental payments to
be made by the Company was charged to expense in 1997. Lease payments under
these outstanding leases, net of the sublease income, are approximately as
follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 761,000
1999 695,000
2000 453,000
2001 455,000
2002 346,000
----------
Total $2,710,000
==========
</TABLE>
Total lease expense during 1997 and 1996 was $148,000 and $108,000,
respectively.
Environmental Laws and Regulations
The Company is subject to increasingly demanding environmental standards imposed
by federal, state and local laws and regulations. It is the policy of the
Company to comply with applicable environmental laws and regulations.
Governmental regulations covering environmental issues are very complex and are
subject to continual change. Accordingly, changes in the regulations or
interpretations thereof, and the ultimate settlement of the amounts sought from
other parties, could result in material future costs to the Company in excess of
the amounts accrued. In connection with the Crysen acquisition, the Company
established a reserve of $1,000,000 to accrue for environmental obligations.
F-23
<PAGE>
401(k) Plan
The Company provides a voluntary 401(k) employee savings plan which covers all
full-time employees who meet certain eligibility requirements. Voluntary
contributions are made to the 401(k) Plan by participants. In addition, the
Company matches 100% of the first 6% of salary contributed by each employee.
Matching contributions of $49,900 and $16,700 were made by the Company during
1997 and 1996, respectively.
(12) STOCK OPTIONS AND WARRANTS
1988 Stock Option Plan
On August 25, 1988, the Company's Board of Directors adopted an incentive stock
option plan (the "1988 Plan") for key employees and directors of the Company. A
total of 212,800 shares of common stock are reserved for issuance under the 1988
Plan. All options under the Plan are granted and become exercisable 90 days
after grant date and expire 10 years from the date of grant. All options were
exercisable at December 31, 1997.
1997 Stock Option Plan
On April 30, 1997, another incentive stock option plan (the "1997 Plan") was
adopted by the Board of Directors for the benefit of key employees and directors
of the Company. Options under the 1997 Plan vest based upon the determination
made by the Company's Compensation Committee at the time of grant, and expire 10
years from the date of grant. The Company reserved 500,000 shares for grant
under the 1997 Plan of which 88,500 options (determined to vest immediately)
were granted during 1997 at prices equal to the market value of the Company's
stock on the date of grant. There are 411,500 shares available for grant as of
December 31, 1997.
A summary of option grants, exercise and average prices under both the plans is
presented below:
<TABLE>
<CAPTION>
Weighted Option Weighted
Average Exercise Fair Value
Number of Exercise Price of Options
Options Price Range Granted
-------- --------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 150,460 $ 4.74 $2.50 - $11.50
Granted 62,340 6.54 5.00 - 6.87 $2.99
Exercised (8,500) 5.31 3.13 - 6.50
------- ------ --------------- -----------
Balance, December 31 1996 204,300 5.26 2.50 - 11.50
Granted 88,500 10.36 8.50 - 11.00 $5.54
Exercised (70,100) 4.69 3.13 - 6.87
------- ------ --------------- -----------
Balance, December 31, 1997 222,700 $ 7.58 $2.50 $11.50
======= ====== ===============
</TABLE>
F-24
<PAGE>
Non-Plan Grants
On May 22, 1996, the Warrant Agreement entered into on February 23, 1993, with
the president and chief executive officer of the Company was terminated. The
Warrant Agreement provided for the automatic grant of five-year warrants equal
to 5% of the number of shares issued by the Company with an exercise price equal
to the price at which such shares were issued. In consideration for the
termination of the Warrant Agreement, the Compensation Committee extended the
term of all warrants granted under the agreement (a total of 201,911 warrants)
to June 1, 2003. All such warrants were outstanding and exercisable at
December 31, 1997.
From time to time the Company grants nonqualified warrants and options to
purchase common stock to its executive officers. The grants have vesting
periods ranging from immediate to three years. The grants' lives vary from five
to ten years. The table below summarizes the activities associated with these
grants to executive officers.
<TABLE>
<CAPTION>
Weighted
Weighted Warrant Fair Value
Number of Average Exercise of Options
Options and Exercise Price and Warrants
Warrants Price Range Granted
-------- ------- ---------------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 201,911 $ 4.93 $5.00 - $ 6.51
Terminated (201,911) 4.93 5.00 - 6.51
Granted 401,911 5.36 3.13 - 6.50 $2.51
-------- ------ --------------- -----
Balance, December 31 1996 401,911 5.36 3.13 - 6.50
Granted 545,000 10.33 9.00 - 11.00 $4.89
-------- ------ --------------- -----
Balance, December 31, 1997 946,911 $ 8.21 $3.13 - $11.00
======== ====== ================
Warrants exercisable as of
December 31, 1997 401,911 $ 5.36
======== ======
</TABLE>
As discussed in Note 7, during 1997, 100,000 warrants were issued to TCW in
conjunction with the debt offering. These warrants vest on September 23, 2000
and have a ten year life. The discounted value ascribed to these warrants was
$1,300,000 and was recorded as warrants outstanding on the date of grant.
During 1997, the Company also issued 300,000 warrants to purchase common stock
to four officers of the Company at a grant price of $16.00 per warrant. These
grants are not actually considered outstanding until certain performance targets
have been met by the Company. The grant period begins on November 11, 2000 and
extends over a three year period. As a result of the unknown market price at
the time of actual grant, these warrants are accounted for as a variable option
plan and the value of the grant is marked-to-market. As of December 31, 1997,
no compensation expense has been recorded associated with these warrants.
F-25
<PAGE>
On March 15, 1995, the Company issued a consultant a warrant to purchase 25,000
shares of Common Stock at $6.50 per share. The warrant expired February 1,
1998.
The Company has elected to account for grants of stock options and warrants
granted to employees and non-employee directors of the Company under APB Opinion
No. 25. If compensation expense for grants of stock options and warrants had
been determined consistent with Statement on Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," the Company's net income (loss)
and earnings per share ("EPS") would have been reduced to the following pro
forma amounts:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C> <C>
Net income (loss) As reported $(1,178,908) $2,144,537
Pro forma (5,733,544) 1,451,334
Basic EPS As reported (0.30) 0.38
Pro forma (0.92) 0.29
Diluted EPS As reported (0.30) 0.30
Pro forma (0.92) 0.23
</TABLE>
Due to the requirements of Statement No. 123, the calculated compensation
expense in 1997 and 1996 as adjusted in the pro forma amounts above, may not be
representative of compensation expense to be calculated in future years. The
pro forma adjustments are calculated using an estimate of the fair value of each
option and warrant on the date of grant. The Company used the following
assumptions within the Black-Scholes pricing model to estimate the fair value of
stock option and warrant grants in 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------ -------------
<S> <C> <C>
Weighted average remaining life 4.9 years 4.8 years
Risk-free interest rate 5.7% to 6.5% 5.1% to 7.3%
Expected dividend yield 0% 0%
Expected lives 3 to 5 years 3 to 5 years
Expected volatility 54.3% 57.1%
</TABLE>
F-26
<PAGE>
(13) QUARTERLY EARNINGS
Per Share (Unaudited)
Summarized unaudited quarterly financial data for 1997 is as follows (in
thousands except per share date):
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------------
December 31, September 30, June 30, March 31,
1997 1997 1997 1997
-------------- ------------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues $ 6,780,000 $3,915,000 $2,885,000 $3,602,000
Operating income 1,798,000 860,000 588,000 1,114,000
Net income (loss) before
extraordinary loss (1,051,000) 323,000 78,000 631,000
Net income (loss) (1,051,000) 28,000 (786,000) 631,000
Basic earnings per share before
extraordinary loss (0.15) (0.03) 0.01 0.10
Diluted earnings per share before
extraordinary loss (0.15) (0.03) 0.01 0.08
Basic earnings per share (0.15) (0.07) (0.12) 0.10
Diluted earnings per share (0.15) (0.07) (0.12) 0.08
</TABLE>
(14) OIL AND GAS PRODUCING ACTIVITIES
Major Customers
The following companies purchased 10% or more of the Company's oil and gas
production:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Chevron U.S.A. $12,320,000 $10,129,000
Wasatch Energy Corporation 3,086,000 1,196,000
</TABLE>
Cost Incurred in Oil and Gas Producing Activities
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Unproved property acquisition cost $12,543,000 $ 189,000
Proved property acquisition cost 56,989,000 363,000
Development cost 28,563,000 21,577,000
Exploration cost 61,000 875,000
----------- -----------
Total $98,156,000 $23,004,000
=========== ===========
</TABLE>
F-27
<PAGE>
Net Capital Costs
Net capitalized costs related to the Company's oil and gas producing activities
are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Unproved properties $ 13,806,000 $ 6,165,000
Proved properties 127,500,000 39,693,000
Gas and water transportation 2,522,000 975,000
facilities ------------ -----------
Total 143,828,000 46,833,000
Accumulated depletion,
depreciation and
amortization (10,009,000) (3,835,000)
------------ -----------
Total $133,819,000 $42,998,000
============ ===========
</TABLE>
Standardized Measure of Discounted
Future Net Cash Flows (Unaudited)
Statement of Financial Accounting Standards No. 69 prescribes guidelines for
computing a standardized measure of future net cash flow and changes therein
relating to estimated proved reserves. The Company has followed these
guidelines which are briefly discussed below.
Future cash inflows and future production and development costs are determined
by applying yearend prices and costs to the estimated quantities of oil and gas
to be produced. Estimated future income taxes are computed using current
statutory income tax rates including consideration for estimated future
statutory depletion. The resulting future net cash flows are reduced to present
value amounts by applying a 10% annual discount factor.
The assumptions used to compute the standardized measure are those prescribed by
the Financial Accounting Standards Board and, as such, do not necessarily
reflect the Company's expectations of actual revenues to be derived from those
reserves nor their present worth. The limitations inherent in the reserve
quantity estimation process, as discussed previously, are equally applicable to
the standardized measure computations since these estimates are the basis for
the valuation process.
F-28
<PAGE>
The following summary sets forth the Company's future net cash flows relating to
proved oil and gas reserves based on the standardized measure prescribed in
Statement of Financial Accounting Standards No. 69:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
In thousands
<S> <C> <C>
Future cash inflows $ 694,065 $210,473
Future production costs (251,434) (63,007)
Future development costs (232,087) (31,941)
Future income tax provision (33,394) (27,174)
--------- --------
Future net cash flows 177,150 88,351
Less effect of 10% discount factor (98,528) (35,368)
--------- --------
Standardized measure of discounted
future net
cash flows $ 78,622 $ 52,983
========= ========
</TABLE>
The principal sources of changes in the standardized measure of discounted
future net cash flows are as follows for the years ended December 31, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
-------- --------
In thousands
<S> <C> <C>
Standardized measure, beginning of $ 52,983 $ 9,431
year
Purchase of reserves in place 45,747 5,398
Sales of oil and gas produced, net of
production costs (13,019) (8,659)
Net change in prices, net production (42,277) 13,448
cost
Extensions, discoveries and improved 12,922 96,807
recovery, net
Revisions of previous quantity 12,351 1,428
estimates
Change in future development costs 9,557 (16,122)
Net change in income taxes 3,706 (22,954)
Accretion of discount 7,190 (13,838)
Changes in production rates and other (10,538) (11,956)
-------- --------
Standardized measure, end of year $ 78,622 $ 52,983
======== ========
</TABLE>
Oil and Gas Reserve Quantities (Unaudited)
The reserve information presented below is based upon reports prepared by the
Company's in-house petroleum engineer and reviewed by the independent petroleum
engineering firm of Ryder Scott Company. The Company emphasizes that reserve
estimates are inherently imprecise and that estimates of new discoveries are
more imprecise than those of producing oil and gas properties. As
F-29
<PAGE>
a result, revisions to previous estimates are expected to occur as additional
production data becomes available or economic factors change.
Proved oil and gas reserves are estimated quantities of crude oil, natural gas
and natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions. Proved developed oil and gas
reserves are those expected to be recovered through existing wells with existing
equipment and operating methods.
Presented below is a summary of the changes in estimated proved reserves of the
Company, all of which are located in the United States, for the years ended
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---------------------- ----------------------
Oil (MBbl) Gas (MMcf) Oil (MBbl) Gas (MMcf)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Proved reserves, beginning of year 7,312 10,188 3,016 5,663
Purchase of reserves in place 15,071 26,387 485 1,202
Extensions and discoveries 12,836 34,744 3,950 5,807
Improved recoveries 1,723 (1,870) - -
Production (855) (1,637) (502) (710)
Revisions of previous estimates 1,048 7,671 363 (1,774)
Proved reserves, end of year 37,135 75,483 7,312 10,188
====== ====== ===== ======
Proved developed reserves, beginning
of year 4,385 5,409 1,227 1,223
====== ====== ===== ======
Proved developed reserves, end of year 12,980 15,224 4,385 5,409
====== ====== ===== ======
</TABLE>
F-30
<PAGE>
INDEX TO DOCUMENTS
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description of Exhibits Numbered Page
- ------ ----------------------- -------------
<S> <C> <C>
2.1 Agreement and Plan of Merger between the Company, IRI Acquisition
Corp. and Lomax Exploration Company ("IPC") (exclusive of all
exhibits) (Filed as exhibit 2.1 to the Company's Registration
Statement on Form S-4, Registration No. 33-80392, and incorporated
herein by this reference).
3.1 Amended and Restated Articles of Incorporation, as amended through
July 21, 1997 (filed as Exhibit 3.1 to the Company's Form 10-QSB for
the quarter ended June 30, 1997, and incorporated herein by
reference).
3.2 By-Laws of the Company (filed as Exhibit 3.2 to the Company's
Registration Statement on Form S-18, Registration No. 33-11870-F, and
incorporated herein by reference).
3.2.1 Amendment to Article IV, Section 1 of the Bylaws of 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 on 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 on Form S-4,
Registration No. 33-80392, and incorporated herein by reference).
4.1 Credit Agreement dated September 23, 1997 between IPC, the Company,
ING, as Agent, and Certain Financial Institutions, as banks (filed as
Exhibit 4.1 to the Company's Current Report on Form 8-K dated
September 23, 1997, and incorporated herein by reference).
4.2 Credit Agreement dated September 23, 1997, among IPC, the Company,
Trust Company of the West, and TCW Asset Management Company, in the
capacities described therein (filed as Exhibit 4.2 to the Company's
Current Report on Form 8-K dated September 23, 1997, and incorporated
herein by reference).
4.3 Intercreditor Agreement dated September 23, 1997, between IPC, TCW
Asset Management Company, Trust Company of the West and ING (filed as
Exhibit 4.3 to the Company's Current Report on Form 8-K dated
September 23, 1997, and incorporated herein by reference).
4.4 Warrant Agreement by and between the Company and TCW Portfolio No.
1555 DR V Sub-Custody Partnership, L.P. dated September 23, 1997
(filed as Exhibit 4.4 to the Company's Current Report on Form 8-K
dated September 23, 1997, and incorporated herein by reference).
</TABLE>
i
<PAGE>
<TABLE>
Exhibit Sequentially
Number Description of Exhibits Numbered Page
- ------ ----------------------- -------------
<S> <C> <C>
4.5 Warrant issued by the Company pursuant to the Warrant Agreement filed
as Exhibit 4.4, dated September 23, 1997, representing the right to
purchase 100,000 shares of the Company's Common Stock (filed as
Exhibit 4.5 to the Company's Current Report on Form 8-K dated
September 23, 1997, and incorporated herein by reference).
4.6 Credit Agreement dated as of December 24, 1997 between Inland
Refining, Inc. ("Refining") and Banque Paribas (without exhibits)
(filed as Exhibit 4.1 to the Company's Current Report on Form 8-K
dated December 31, 1997, and incorporated herein by reference).
10.1 1988 Option Plan of Inland Gold and Silver Corp. (filed as Exhibit
10(15) to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1988, and incorporated herein by reference).
10.1.1 Amended 1988 Option Plan of Inland Gold and Silver Corp. (filed as
Exhibit 10.10.1 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992, and incorporated herein by
reference).
10.1.2 Amended 1988 Option Plan of the Company, as amended through August 29,
1994 (including amendments increasing the number of shares to 212,800
and changing "formula award") (filed as Exhibit 10.1.2 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1994, and incorporated herein by reference).
10.1.3 "Automatic Adjustment to Number of Shares Covered by Amended 1988
Option Plan" executed effective June 3, 1996 (filed as Exhibit 10.1 to
the Company's Quarterly Report on Form 10-QSB for the quarter ended
June 30, 1996, and incorporated herein by reference).
10.2 Warrant Agreement and Warrant Certificate between Kyle R. Miller and
the Company dated February 23, 1993 (filed as Exhibit 10.2 to the
Company's Current Report on Form 8-K dated February 23, 1993, and
incorporated herein by reference).
10.2.1 Warrant Certificate between Kyle R. Miller and the Company dated
October 15, 1993 representing 3,150 shares (filed as Exhibit 10.2.1 to
the Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1994, and incorporated herein by reference).
10.2.2 Warrant Certificate between Kyle R. Miller and the Company dated March
22, 1994 representing 5,715 shares (filed as Exhibit 10.2.2 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1994, and incorporated herein by reference).
10.2.3 Warrant Certificate between Kyle R. Miller and the Company dated
September 21, 1994 representing 44,811 shares (filed as Exhibit 10.2.3
to the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1994, and incorporated herein by reference).
10.2.4 Warrant Certificate between Kyle R. Miller and the Company dated
September 21, 1994 representing 38,523 shares (filed as Exhibit 10.2.4
to the Company's Annual
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description of Exhibits Numbered Page
- ------ ----------------------- -------------
<S> <C> <C>
Report on Form 10-KSB for the fiscal year ended December 31, 1994, and
incorporated herein by reference).
10.2.5 Warrant Certificate between Kyle R. Miller and the Company dated
September 21, 1994 representing 30,000 shares (filed as Exhibit 10.2.5
to the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1994, and incorporated herein by reference).
10.2.6 Amendment to Warrant Certificates filed as Exhibits 10.2, 10.2.1 and
10.2.2 (filed as Exhibit 10.2.6 to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1994, and incorporated
herein by reference).
10.2.7 Warrant Certificate between Kyle R. Miller and the Company dated
November 16, 1993 representing 1,500 shares (filed as Exhibit 10.2.7
to the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1995, and incorporated herein by reference).
10.2.8 Warrant Certificate between Kyle R. Miller and the Company dated
March 15, 1995 representing 1,250 shares (filed as Exhibit 10.2.8 to
the Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1995, and incorporated herein by reference).
10.2.9 Warrant Certificate between Kyle R. Miller and the Company dated
November 6, 1995 representing 30,000 shares (filed as Exhibit 10.2.9
to the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1995, and incorporated herein by reference).
10.2.10 First Amendment to Warrant Agreement between the Company and Kyle R.
Miller dated October 19, 1995 (filed as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-QSB for the fiscal quarter ended September
30, 1995, and incorporated herein by reference).
10.2.11 Warrant Certificate between the Company and Kyle R. Miller dated May
22, 1996 (corrected version) (filed as Exhibit 10.2.11 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1996, and incorporated herein by reference).
10.2.12 Warrant Certificate between the Company and Kyle R. Miller dated
January 23, 1997 representing 70,000 shares (filed as Exhibit 10.2.12
to the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1996, and incorporated herein by reference).
*10.2.13 Option Certificate between the Company and Kyle R. Miller dated
November 10, 1997 representing 225,000 shares.
10.3 Employment Agreement between the Company and Kyle R. Miller dated June
1, 1996 (filed as Exhibit 10.2 to the Company's Quarterly Report on
Form 10-QSB for the quarter ended June 30, 1996, and incorporated
herein by reference).
10.4 Cooperative Agreement between IPC and the U.S. Department of Energy,
and related correspondence (filed as Exhibit 10.22 to the Company's
Registration
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description of Exhibits Numbered Page
- ------ ----------------------- -------------
<S> <C> <C>
Statement on Form S-4, Registration No. 33-80392, and incorporated
herein by reference).
10.5 Employment Agreement between the Company and Bill I. Pennington dated
June 1, 1996 (corrected version) (filed as Exhibit 10.9.2 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1996, and incorporated herein by reference).
10.6 Subcontract Agreement between IPC and the University of Utah dated
September 25, 1992 (filed as Exhibit 10.27 to the Company's
Registration Statement on Form S-4, Registration No. 33-80392, and
incorporated herein by reference).
10.7 Subcontract Agreement dated October 8, 1992 between IPC and the
University of Utah Research Institute (filed as Exhibit 10.28 to the
Company's Registration Statement on Form S-4, Registration No.
33-80392, and incorporated herein by reference).
10.8 Chevron Crude Oil Purchase Contract No. 531144 dated October 25, 1988,
as amended by Amendment No. 1 dated November 27, 1989, Amendment No. 2
dated September 12, 1990, Amendment No. 3 dated July 15, 1991,
Amendment No. 4 dated January 22, 1992, Amendment No. 5 dated January
13, 1993, and the March 4, 1992 letter from Chevron U.S.A. Products
Company to all Chevron Products Company customers (filed as Exhibit
10.29 to the Company's Registration Statement on Form S-4,
Registration No. 33-80392, and incorporated herein by reference).
10.9 Subscription Agreement between the Company and Smith Management
Company dated May 12, 1994 (filed as Exhibit 10.34 to the Company's
Registration Statement on Form S-4, Registration No. 33-80392, and
incorporated herein by reference).
10.9.1 Amendment to Subscription Agreement filed as Exhibit 10.32, dated
September 16, 1994 (filed as Exhibit 10.18.1 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1994, and
incorporated herein by reference).
10.10 Registration Rights Agreement dated September 21, 1994 between the
Company and Energy Management Corporation, a wholly owned subsidiary
of Smith Management Company and the assignee of Smith Management
Company under the Subscription Agreement filed as Exhibit 10.9 (filed
as Exhibit 10.19 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1994, and incorporated herein by
reference).
10.10.1 Correspondence constituting an amendment/clarification of the
Registration Rights Agreement filed as Exhibit 10.10 (filed as
Exhibit 10.19.1 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1994, and incorporated herein by
reference).
10.10.2 Registration Rights Agreement dated March 20, 1995 between the
Company and Energy Management Corporation (filed as Exhibit 10.19.2 to
the Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1994, and incorporated herein by reference).
10.11 Swap Agreement dated August 4, 1994 between the Company and Enron Risk
Management Services Corp.(filed as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-QSB for the fiscal quarter ended September
30, 1994, and incorporated herein by reference).
</TABLE>
iv
<PAGE>
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description of Exhibits Numbered Page
- ------ ----------------------- -------------
<S> <C> <C>
10.12 Swap Agreement dated August 26, 1994 between the Company and Joint
Energy Development Investments Limited Partnership ("JEDI") (filed as
Exhibit 10.2 to the Company's Quarterly Report on Form 10-QSB for the
fiscal quarter ended September 30, 1994, and incorporated herein by
reference).
10.13 Swap Agreement dated August 4, 1994 between IPC and Enron Risk
Management Services Corp. (filed as Exhibit 10.3 to the Company's
Quarterly Report on Form 10-QSB for the fiscal quarter ended September
30, 1994, and incorporated herein by reference).
10.14 Subscription Agreement between the Company and Pengo Securities Corp.
dated October 23, 1995, without exhibits (filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K dated November 6, 1995, and
incorporated herein by reference).
10.14.1 Registration Rights Agreement between the Company and Pengo Securities
Corp. dated November 6, 1995 (filed as Exhibit 10.2 to the Company's
Current Report on Form 8-K dated November 6, 1995, and incorporated
herein by reference).
10.15 Combined Hydrocarbon Lease between IPC and the U.S. Department of the
Interior, Bureau of Land Management ("Bureau") dated effective October
18, 1995 relating to 677.36 acres (filed as Exhibit 10.3 to the
Company's Current Report on Form 8-K dated November 6, 1995, and
incorporated herein by reference).
10.16 Combined Hydrocarbon Lease between IPC and the Bureau dated effective
October 18, 1995 relating to 2,879.94 acres (filed as Exhibit 10.4 to
the Company's Current Report on Form 8-K dated November 6, 1995, and
incorporated herein by reference).
10.17 Combined Hydrocarbon Lease between IPC and the Bureau dated effective
October 18, 1995 relating to 647.32 acres (filed as Exhibit 10.5 to
the Company's Current Report on Form 8-K dated November 6, 1995, and
incorporated herein by reference).
10.18 Combined Hydrocarbon Lease between IPC and the Bureau dated effective
October 18, 1995 relating to 1,968.01 acres (filed as Exhibit 10.6 to
the Company's Current Report on Form 8-K dated November 6, 1995, and
incorporated herein by reference).
10.19 Farmout Agreement between IPC, the Company and Randall D. Smith, dated
effective July 1, 1995 (filed as Exhibit 10.3 to the Company's
Quarterly Report on Form 10-QSB for the fiscal quarter ended June 30,
1995, and incorporated herein by reference).
10.20 Option Agreement dated November 22, 1995 between the Company, IPC and
Randall D. Smith (filed as Exhibit 10.29 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1995, and
incorporated herein by reference).
10.20.1 Warrant Certificate dated November 22, 1995 granted by the Company to
Randall D. Smith, together with Exhibit "A", a Registration Rights
Agreement (filed as Exhibit 10.29.1 to the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1995, and
incorporated herein by reference).
10.20.2 Form of Agreement dated June 12, 1996 between the Company , IPC, Smith
Management Company, Inc. ("Smith Management"), Farmout, Inc.
("Farmout") and Randall D. Smith, Jeffrey A. Smith and John W. Adams
(the "Farmout
</TABLE>
v
<PAGE>
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description of Exhibits Numbered Page
- ------ ----------------------- -------------
<S> <C> <C>
Stockholders") (filed as Exhibit 10.1 to the Company's Current Report
on Form 8-K dated June 12, 1996, and incorporated herein be
reference).
10.20.3 Form of Registration Rights Agreement dated June 12, 1996 between the
Company, Smith Management and the Farmout Stockholders (filed as
Exhibit 10.2 to the Company's Current Report on Form 8-K dated June
12, 1996, and incorporated herein by reference).
10.20.4 Security Agreement dated June 12, 1996 between the Farmout
Stockholders and the Company (filed as Exhibit 10.3 to the Company's
Current Report on Form 8-K dated June 12, 1996, and incorporated
herein by reference).
10.20.5 Form of Agreement dated June 12, 1996 between the Company and
Arthur J. Pasmas (filed as Exhibit 10.4 to the Company's Current
Report on Form 8-K dated June 12, 1996, and incorporated herein by
reference).
10.20.6 Form of Registration Rights Agreement entered into as of July 31, 1996
between the Company and Arthur J. Pasmas (filed as Exhibit 10.5 to the
Company's Current Report on Form 8-K dated June 12, 1996, and
incorporated herein by reference).
10.20.7 Form of Amendment to Registration Rights Agreement filed as Exhibit
10.29.6 (filed as Exhibit 10.29.7 to the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1996, and
incorporated herein by reference).
10.21 Crude Oil Call/Put Option (Costless Collar) between IPC and Koch Gas
Services Company dated November 20, 1995 (filed as Exhibit 10.30 to
the Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1995, and incorporated herein by reference).
10.22 Swap Agreement dated November 22, 1994 between the Company and JEDI
(filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-
QSB for the fiscal quarter ended June 30, 1995, and incorporated
herein by reference).
10.22.1 Termination Agreement Revised dated January 18, 1996 between the
Company and Enron Capital & Trade Resources Corp. ("ECT") relating to
Exhibit 10.22 (filed as Exhibit 10.31.1 to the Company's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1995, and
incorporated herein by reference).
10.23 Swap Agreement dated January 18, 1995 between the Company and ECT
(filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-
QSB for the fiscal quarter ended June 30, 1995, and incorporated
herein by reference).
10.24 Put Option dated January 18, 1996 between the Company and ECT (filed
as Exhibit 10.33 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1995, and incorporated herein by
reference).
10.25 Commodity Option dated January 18, 1996 between IPC and ECT (filed as
Exhibit 10.34 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1995, and incorporated herein by
reference).
10.26 Employment Agreement between the Company and John E. Dyer dated June
1, 1996 (corrected version) (filed as Exhibit 10.35 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended December 31,
1996, and incorporated herein by reference).
</TABLE>
vi
<PAGE>
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description of Exhibits Numbered Page
- ------ ----------------------- -------------
<S> <C> <C>
10.26.1 Amendment to Employment Agreement filed as Exhibit 10.26 (filed as
Exhibit 10.35.1 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1996, and incorporated herein by
reference).
10.27 Crude Oil Call Option between IPC and Enron Capital & Trade Resources
dated April 3, 1996 (without exhibits) (filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-QSB for the quarter ended March
31, 1996, and incorporated herein by reference).
10.28 Warrant Certificate between the Company and John E. Dyer dated May 22,
1996 representing 50,000 shares (corrected version) (filed as Exhibit
10.37 to the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1996, and incorporated herein by reference).
10.28.1 Warrant Certificate between the Company and John E. Dyer dated January
23, 1997 representing 70,000 shares (filed as Exhibit 10.37.1 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1996, and incorporated herein by reference).
*10.28.2 Option Certificate between the Company and John E. Dyer dated November
10, 1997 representing 150,000 shares.
10.29 Warrant Certificate between the Company and Bill I. Pennington dated
May 22, 1996 representing 50,000 shares (corrected version) (filed as
Exhibit 10.38 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1996, and incorporated herein by
reference).
10.29.1 Warrant Certificate between the Company and Bill I. Pennington dated
January 23, 1997 representing 60,000 shares (filed as Exhibit 10.38.1
to the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1996, and incorporated herein by reference).
*10.29.2 Option Certificate between the Company and Bill I. Pennington dated
November 10, 1997 representing 125,000 shares.
*10.30 Option Certificate between the Company and Michael J. Stevens
dated November 10, 1997 representing 100,000 shares.
10.31 Agreement - Option to Purchase Inland's Toiyabe Property, Lander
County, Nevada (without exhibits) (filed as Exhibit 10.4 to the
Company's Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1996, and incorporated herein by reference).
10.31.1 Form of Release of Claim between Placer Dome U.S. Inc. ("Placer Dome")
and the Company (filed as Exhibit 10.39.1 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1996, and
incorporated herein by reference).
10.31.2 Form of Assignment of Lease (Unpatented Mining Claims) between the
Company and Placer Dome (filed as Exhibit 10.39.2 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended December 31,
1996, and incorporated herein by reference).
10.31.3 Form of Corporation Grant, Bargain and Sale Deed (Unpatented Mining
Claims) between the Company and Placer Dome (filed as Exhibit 10.39.3
to the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1996, and incorporated herein by reference).
</TABLE>
vii
<PAGE>
<TABLE>
Exhibit Sequentially
Number Description of Exhibits Numbered Page
- ------ ----------------------- -------------
<S> <C> <C>
10.31.4 Assignment and Bill of Sale between the Company and Placer Dome (filed
as Exhibit 10.39.4 to the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1996, and incorporated herein by
reference).
10.32 Swap Agreement dated July 8, 1996 between IPC and Koch Gas Services
Company (filed as Exhibit 10.5 to the Company's Quarterly Report on
Form 10-QSB for the quarter ended September 30, 1996, and incorporated
herein by reference).
10.33 Letter agreement dated October 30, 1996 between the Company and
Johnson Water District (filed as Exhibit 10.41 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1996, and
incorporated herein by reference).
10.34 Collar between Koch Oil Company and the Company effective January 1,
1997 (filed as Exhibit 10.42 to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1996, and incorporated
herein by reference).
10.35 Securities Purchase Agreement dated July 21, 1997 between the Company
and JEDI (filed as Exhibit 10.1 to the Company's Quarterly Report on
Form 10-QSB for the quarter ended June 30, 1997, and incorporated
herein by reference).
10.35.1 Registration Rights Agreement dated July 21, 1997 between the Company
and JEDI (filed as Exhibit 10.2 to the Company's Quarterly Report on
Form 10-QSB for the quarter ended June 30, 1997, and incorporated
herein by reference).
10.36 Purchase and Sale Agreement between Enserch Exploration, Inc. and IPC
dated July 10, 1997 (filed as Exhibit 10.1 to the Company's Current
Report on Form 8-K dated August 15, 1997, and incorporated herein by
reference).
10.37 Agreement of Sale and Purchase dated July 24, 1997 between Equitable
Resources Energy Company and IPC (filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K dated September 23, 1997, and
incorporated herein by reference).
10.38 Asset Purchase and Sale Agreement dated as of July 14, 1997 between
Crysen Corporation, Crysen Refining, Inc., Sound Refining, Inc. and
the Company, as amended by the first, second and third amendments
thereto (filed as Exhibit 10.1 to the Company's Current Report on Form
8-K dated December 31, 1997, and incorporated herein by reference).
10.38.1 Assignment and Assumption Agreement dated as of December 24, 1997
between the Company and Inland Refining, Inc. (filed as Exhibit 10.2
to the Company's Current Report on Form 8-K dated December 31, 1997,
and incorporated herein by reference).
10.38.2 Assignment and Assumption Agreement dated as of December 24, 1997
between the Company and Refinery Technologies, Inc. (filed as Exhibit
10.3 to the Company's Current Report on Form 8-K dated December 31,
1997, and incorporated herein by reference).
10.38.3 Assignment and Assumption Agreement dated as of December 24, 1997
between the Company and San Jacinto Carbon Company (filed as Exhibit
10.4 to the Company's Current Report on Form 8-K dated December 31,
1997, and incorporated herein by reference).
*10.39 Employment Agreement between the Company and Michael J. Stevens dated
May 1, 1997.
*21.1 Subsidiaries of the Company.
</TABLE>
viii
<PAGE>
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description of Exhibits Numbered Page
- ------ ----------------------- -------------
<S> <C> <C>
*23.1 Consent of Arthur Andersen LLP.
*23.2 Consent of Ryder Scott Company Petroleum Engineers.
*27.1 Financial Data Schedule required by Item 601 of Regulation S-B.
________________________
* Filed herewith.
</TABLE>
ix
<PAGE>
EXHIBIT 10.2.13
OPTION CERTIFICATE
TO PURCHASE SHARES OF COMMON STOCK OF
INLAND RESOURCES INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF WASHINGTON
CERTIFICATE EVIDENCING THE NUMBER OF OPTIONS
SET FORTH IN SECTION 1
1. BASIC TERMS. This certifies that, for good and valuable
consideration, Kyle R. Miller (the "Holder"), is entitled, subject to the terms
and conditions of this Option Certificate (the "Certificate"), to purchase
225,000 shares of the common stock, $.001 par value (the "Common Stock"), of
Inland Resources Inc. (the "Company"), subject to adjustment as provided in this
Certificate, from the Company at the applicable Exercise Price (as defined
below), on delivery of this Certificate to the Company with the exercise form
duly executed and payment of the Exercise Price payable to the Company by
cashier's check or other immediately available funds, for all shares purchased.
One Option (herein so called) is required for the purchase of one share of
Common Stock, subject to adjustment as provided herein. Holder and Company
acknowledge and agree that the Options granted hereby are nonqualified stock
options.
2. EXPIRATION DATE. The right to exercise the Options evidenced by this
Certificate shall expire at 12:00 a.m. PST on the tenth (10th) anniversary of
the effective date of this Certificate, provided, however, that if Holder's
employment by the Company or a subsidiary is terminated for any reason by Holder
or the Company (with or without cause), other than as a result of the death or
disability of Holder, then the vested Options evidenced by this Certificate
shall expire sixty (60) days after such termination, but if termination is as a
result of the death or disability of Holder then the vested Options may be
exercised at any time within one year after the termination of employment for
such reason (the "Expiration Date").
3. EXERCISE PRICE. The purchase price per share of the Common Stock upon
exercise of the Options (the "Exercise Price") shall be equal to $11.00 per
share, which is equal to or greater than the fair market value per share on the
date hereof, for the first 112,500 Options vesting under this Certificate and
$16.00 per share for the remaining 112,500 Options vesting under this
Certificate. The applicable Exercise Price may be adjusted from time to time
pursuant to the terms of this Certificate.
4. VESTING OF OPTIONS. Subject to the other terms and conditions of this
Agreement, the Options granted hereby shall vest in accordance with the
following schedule: (i) 37,500 of the Options granted hereby shall vest on each
of the first, second and third anniversary dates of the effective date of this
Certificate, provided Holder is employed by the Company or a subsidiary on such
date (except as otherwise provided below); and (ii) 37,500 of the Options
granted hereby shall vest on each of the fourth, fifth and sixth anniversary
dates of the effective date of this Certificate, provided Holder is employed by
the Company or a subsidiary on such date (except as otherwise provided below)
and provided, further, that the Company had "EBITDA" of $40,000,000 for the
twelve (12) months ended on the October 31 immediately preceding such
anniversary date. For purposes of this Certificate, "EBITDA" shall mean the net
income of the
-1-
<PAGE>
Company before deductions for interest, income taxes, depreciation
and amortization. Notwithstanding any provision hereof to the contrary, the
Options granted hereby shall vest immediately upon a sale of all or
substantially all of the assets of the Company or a cash merger involving the
Company pursuant to which the shareholders of the Company are cashed out in such
merger and cease to be shareholders of the Company or the surviving entity. Any
non-vested Options granted hereby shall be immediately forfeited if Holder's
employment by the Company or a subsidiary is terminated for any reason by the
Company (with or without cause) or Holder (including as a result of the death or
disability of Holder); provided, however, that notwithstanding the vesting
schedule set forth above, if Holder's employment is terminated prior to May 10
in any year, the Options which would have otherwise vested on November 10th of
that year shall be forfeited, but if such termination occurs on or after May
10th in any such year, any Options which would otherwise have vested on November
10th of such year shall not be forfeited and shall be deemed vested
notwithstanding such termination. Once an Option has vested, it may be
exercised at any time by Holder, subject to the other terms and conditions of
this Certificate.
5. COMPANY'S WARRANTIES, REPRESENTATIONS AND COVENANTS. The Company
warrants, represents and covenants to the Holder that:
(a) The Company has been duly incorporated and organized and is
validly existing as a corporation in good standing under the laws of its
state of organization.
(b) The Options have been duly authorized and are the validly issued,
fully paid and binding obligation of the Company. The Common Stock of the
Company issuable upon exercise of the Options are validly authorized and
upon payment of the Exercise Price shall be validly issued, fully paid and
nonassessable Common Stock of the Company.
(c) Common Stock deliverable on the exercise of the Options shall, at
delivery, be fully paid and nonassessable, free from all taxes, liens, and
charges with respect to the purchase.
(d) The Company shall take any necessary steps to assure that the par
value per share of the Common Stock is at all times equal to or less than
the then current Exercise Price of the Common Stock issuable pursuant to
this Certificate.
(e) The Company shall at all times reserve and hold available
sufficient shares of its Common Stock to satisfy the Common Stock issuable
upon exercise of the Options.
(f) The Company shall maintain its books and records in accordance
with generally accepted accounting principles applied on a consistent
basis.
(g) The Company shall permit the Holder through his designated
representatives to visit and inspect any of the properties of the Company,
to examine its books and records, and to discuss its affairs, finances and
accounts
-2-
<PAGE>
with and be advised as to the same by the officers of the Company at
reasonable times and intervals, on the same basis as any other shareholder.
The provisions of this Section shall continue for so long as the Holder
owns this Certificate.
6. METHOD OF EXERCISE; SHARES ISSUED UPON EXERCISE. Exercise may be made
of all or any part of the Options evidenced by this Certificate by surrendering
it, with the exercise form provided for herein duly executed by or on behalf of
the Holder, at the executive office of the Company, accompanied by payment in
full of the Exercise Price payable in respect of the Options being exercised.
The Options are exercisable at the option of the Holder in whole or in part at
any time prior to the Expiration Date. If less than all of the Options
evidenced by this Certificate are exercised, the Company will, upon such
exercise, execute and deliver to the Holder a new certificate (dated the date
hereof) evidencing the Options not so exercised. Unless the Common Stock
issuable upon exercise of the Options has been registered under the Securities
Act of 1933, as amended (the "1933 Act"), the certificates evidencing the Common
Stock issuable on exercise of the Options will bear the following legend or a
substantially similar legend:
"The shares of stock of Inland Resources Inc. (the "Company") represented
by this certificate have not been registered under the Securities Act of
1933, as amended (the "1933 Act"), or under the securities laws of any
state, and the Holder hereof cannot make any sale, assignment, or other
transfer of any shares of such stock except pursuant to an offering of such
shares duly registered under the 1933 Act and the applicable state
securities laws, or under such other circumstances that, in the opinion of
counsel of the Holder hereof, does not require registration under the 1933
Act and any state securities laws. Said shares are restricted securities
within the meaning of Rule 144 promulgated under the 1933 Act and may be
subject to the limitations upon resale set forth therein or in other rules
and regulations under the 1933 Act;"
provided, however, that the Company agrees that whenever the shares of Common
Stock issuable upon exercise or conversion of the Options shall have been
beneficially held for two (2) years within the meaning of Rule 144(k) of the
1933 Act or any successor rule or statute or any shorter period of time allowed
by such successor rule or statute, and so long as the Holder is not an affiliate
of the Company within the meaning of Rule 144, if required by Rule 144 or such
successor rule or statute, then the Company shall remove all restrictive legends
and stop transfer restrictions at the written request of the owner of the shares
of Common Stock issuable on exercise or conversion of the Options.
7. INVESTMENT REPRESENTATION OF HOLDER. Holder represents and warrants
that the Options evidenced by this Certificate, and any Option Shares (herein so
called) purchased upon exercise of the Options, have been, or will be, acquired
or purchased as an investment for Holder's own account and not with a view
toward further distribution thereof. It is expressly understood that the
Options cannot be transferred except pursuant to Section 10 hereof, and that the
Option Shares cannot be sold or transferred except pursuant to an effective
registration statement or an exemption from applicable securities laws.
-3-
<PAGE>
8. ADJUSTMENT OF SHARES PURCHASABLE. The number of shares of Common
Stock purchasable hereunder and the applicable Exercise Price per share are
subject to adjustment from time to time as specified in this Certificate.
9. EXCHANGE FOR OTHER DENOMINATIONS. This Certificate is exchangeable,
on its surrender by the Holder to the Company, for new Certificates of like
tenor and date representing in the aggregate the number of Options and the right
to purchase the number of shares of Common Stock purchasable hereunder in
denominations designated by the Holder at the time of surrender.
10. RESTRICTIONS ON TRANSFER. During the lifetime of Holder, this
Certificate shall be exercisable only by the Holder in person, by attorney or by
mail, on surrender of this Certificate, properly endorsed. Neither this
Certificate nor the Options are transferable by Holder by operation of law or
otherwise, except that in the event of death or disability of Holder while
employed by the Company or a subsidiary, the vested Options may be exercised at
any time within one year after such death or disability by the duly appointed
personal representative of Holder, or by any person or persons who shall acquire
the Options directly from Holder by bequest or inheritance.
11. ADJUSTMENT OF SHARES. Wherever this Certificate specifies a number of
shares of Common Stock or an Exercise Price per share, the specified number of
shares of Common Stock to be received on exercise and the applicable Exercise
Price per share shall be changed to reflect adjustments (which may require that
additional securities or other property be delivered on exercise) required by
this section, as follows:
(a) If a stock or property dividend is declared to the holders of
shares of the same class of securities of the Company as is issuable upon
exercise of Options, there shall be added with respect to each share of
Common Stock issuable upon exercise of Options the amount of the dividend,
stock or property, which would have been issued to the Holder had the
Holder been the holder of record of such issuable share at the dividend
record date. Such additional stock or property resulting from such
dividend shall be delivered without additional cost upon the exercise of
Options. Any distribution to the holders of Common Stock of the Company of
any kind, other than a distribution of cash as a dividend out of profits of
the Company for the current year of the dividend, shall be treated as a
stock or property dividend for purposes of this Subsection 11(a). If the
Holder is entitled to receive cash upon exercise of Options under this
Subsection 11(a), the Holder may, at the Holder's option, elect to reduce
the applicable Exercise Price by all or part of the cash to be received by
the Holder upon exercise under this Subsection 11(a).
(b) If an increase has been effected in the number of outstanding
shares of the same class of securities of the Company as is issuable upon
exercise of Options by reason of a subdivision of such shares, the number
of shares which may thereafter be purchased upon exercise of Options shall
be increased with respect to each share issuable upon exercise of Options
by the number of shares which could have been received by the Holder at the
time of such subdivision had it been
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<PAGE>
the holder of record of such issuable shares at the record and/or effective
date of the subdivision. In such event, the Exercise Price per share of
Options shall be proportionately reduced.
(c) If a decrease has been effected in the number of outstanding
shares of the same class of securities of the Company as is issuable upon
exercise of Options by reason of a reverse stock split, the number of
shares which may thereafter be purchased upon exercise of Options shall be
changed with respect to each share issuable upon exercise of Options to the
number of shares which would have been held by the Holder at the time of
said reverse stock split had the Holder been the holder of such issuable
share at the record and/or effective date of the reverse stock split. In
such event, the Exercise Price per share shall be proportionately
increased.
(d) If there is a capital reorganization, reclassification of the
capital stock of the Company, or any consolidation or merger of the Company
with any other corporation or corporations, or if there is a sale or
distribution of all or substantially all of the Company's property and
assets, the Company shall make adequate provision so that there shall
remain and be substituted under this Certificate with respect to each share
issuable upon exercise of Options the stock, securities and/or assets which
would have been issuable or payable in respect of or in exchange for such
issuable shares if the Holder had been the owner of such share on the
applicable record date. All other provisions of this Certificate shall
remain in full force and effect.
12. NOTICE OF ADJUSTMENT. On the happening of any event requiring an
adjustment of the Exercise Price or the shares purchasable hereunder, the
Company shall immediately give written notice to the Holder stating the adjusted
Exercise Price and the adjusted number and kind of securities or other property
purchasable hereunder resulting from the event and setting forth in reasonable
detail the method of calculation and the facts upon which the calculation is
based.
13. NOTICE REQUIREMENT. If at any time the Company proposes or is aware
of any of the following transactions, the Company shall give written notice to
the Holder at least 30 days prior to the proposed transaction: an anticipated
voluntary or involuntary dissolution, liquidation or winding up of the Company;
a merger or consolidation of the Company; the payment or declaration of a
dividend or distribution to shareholders of the Company; or the vote of
shareholders of the Company to amend the certificate or articles of
incorporation of the Company. Such notice shall contain: (a) the date on which
the proposed transaction is to take place; (b) the record date (which shall be
at least 30 days after the giving of the notice) of the proposed transaction;
(c) a brief description of the proposed transaction; (d) a brief description of
any dividends or other distributions to be made to holders of Common Stock as a
result of the proposed transaction; (e) a brief description of any other effect
of the proposed transaction on holders of Common Stock or this Certificate; and
(f) an estimate of the fair value of any dividends or other distributions to be
made to shareholders.
-5-
<PAGE>
14. FRACTIONAL SHARES. The Company shall not be required upon the
exercise of any of the Options evidenced hereby to issue any fractional shares,
but shall make an adjustment therefore in cash on the basis of the mean between
the low bid and high asked prices on the over-the-counter market as reported by
the NASD Automated Quotation System or the closing market price on a national
securities exchange on the trading day immediately prior to exercise, whichever
is applicable, or if neither is applicable, then on the basis of the market
value of any such fractional interest as shall be reasonably determined by the
Company.
15. NOTICE. Any notice required or permitted by any party to this
Certificate shall be in writing and may be delivered personally to the party
being given notice or to the person in charge of the office of the party being
given notice or by facsimile, national overnight courier service or by mail, at
the party's address indicated below, and any notice will be effective only upon
actual receipt by the party. The addresses of the parties are as follows:
Holder: 475 17th Street, Suite 1500
Denver, Colorado 80202
Company: 475 17th Street, Suite 1500
Denver, Colorado 80202
The names and addresses of persons to receive notice as stated in this Section
may be changed by notice given in accordance with this Section.
16. PARTIES. This Certificate shall bind the respective successors and
assigns of the parties.
17. ENTIRE AGREEMENT. This Certificate represents the entire agreement of
the parties with respect to the subject matter hereof and supersedes any prior
or contemporaneous oral or written agreements or understandings. The terms of
this Certificate may be amended only by a written instrument executed by the
Company and the Holder.
WITNESS the signature of the Company's authorized representative and the
acceptance of the terms hereof by the signature of the Holder dated effective
November 10, 1997.
COMPANY:
INLAND RESOURCES INC.
By:
-------------------------------
John E. Dyer, Vice President
HOLDER:
-------------------------------
Kyle R. Miller
-6-
<PAGE>
EXERCISE FORM
(To be executed by the Holder to purchase
Common Stock pursuant to the within Options)
_______________________________
_______________________________
_______________________________
The undersigned hereby: (1) irrevocably elects to purchase ______ shares
of the Company's Common Stock issuable upon the exercise of the within Options,
and encloses payment of $________________ therefor; (2) requests that a
certificate for the shares be issued in the name of the undersigned and
delivered to the undersigned at the address below; and (3) if such number of
shares is not all of the shares purchasable hereunder, that a new Certificate of
like tenor for the balance of the remaining Options be issued in the name of the
undersigned and delivered to the undersigned at the address below.
Date:_____________________ _____________________________________
(Please sign exactly as name appears on
Option Certificate)
______________________________________
Address
______________________________________
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<PAGE>
EXHIBIT 10.28.2
OPTION CERTIFICATE
TO PURCHASE SHARES OF COMMON STOCK OF
INLAND RESOURCES INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF WASHINGTON
CERTIFICATE EVIDENCING THE NUMBER OF OPTIONS
SET FORTH IN SECTION 1
1. BASIC TERMS. This certifies that, for good and valuable
consideration, John E. Dyer (the "Holder"), is entitled, subject to the terms
and conditions of this Option Certificate (the "Certificate"), to purchase
150,000 shares of the common stock, $.001 par value (the "Common Stock"), of
Inland Resources Inc. (the "Company"), subject to adjustment as provided in this
Certificate, from the Company at the applicable Exercise Price (as defined
below), on delivery of this Certificate to the Company with the exercise form
duly executed and payment of the Exercise Price payable to the Company by
cashier's check or other immediately available funds, for all shares purchased.
One Option (herein so called) is required for the purchase of one share of
Common Stock, subject to adjustment as provided herein. Holder and Company
acknowledge and agree that the Options granted hereby are nonqualified stock
options.
2. EXPIRATION DATE. The right to exercise the Options evidenced by this
Certificate shall expire at 12:00 a.m. PST on the tenth (10th) anniversary of
the effective date of this Certificate, provided, however, that if Holder's
employment by the Company or a subsidiary is terminated for any reason by Holder
or the Company (with or without cause), other than as a result of the death or
disability of Holder, then the vested Options evidenced by this Certificate
shall expire sixty (60) days after such termination, but if termination is as a
result of the death or disability of Holder then the vested Options may be
exercised at any time within one year after the termination of employment for
such reason (the "Expiration Date").
3. EXERCISE PRICE. The purchase price per share of the Common Stock upon
exercise of the Options (the "Exercise Price") shall be equal to $11.00 per
share, which is equal to or greater than the fair market value per share on the
date hereof, for the first 75,000 Options vesting under this Certificate and
$16.00 per share for the remaining 75,000 Options vesting under this
Certificate. The applicable Exercise Price may be adjusted from time to time
pursuant to the terms of this Certificate.
4. VESTING OF OPTIONS. Subject to the other terms and conditions of this
Agreement, the Options granted hereby shall vest in accordance with the
following schedule: (i) 25,000 of the Options granted hereby shall vest on each
of the first, second and third anniversary dates of the effective date of this
Certificate, provided Holder is employed by the Company or a subsidiary on such
date (except as otherwise provided below); and (ii) 25,000 of the Options
granted hereby shall vest on each of the fourth, fifth and sixth anniversary
dates of the effective date of this Certificate, provided Holder is employed by
the Company or a subsidiary on such date (except as otherwise provided below)
and provided, further, that the Company had "EBITDA" of $40,000,000 for the
twelve (12) months ended on the October 31 immediately preceding such
anniversary date. For purposes of this Certificate, "EBITDA" shall mean the net
income of the
1
<PAGE>
Company before deductions for interest, income taxes, depreciation and
amortization. Notwithstanding any provision hereof to the contrary, the Options
granted hereby shall vest immediately upon a sale of all or substantially all of
the assets of the Company or a cash merger involving the Company pursuant to
which the shareholders of the Company are cashed out in such merger and cease to
be shareholders of the Company or the surviving entity. Any non-vested Options
granted hereby shall be immediately forfeited if Holder's employment by the
Company or a subsidiary is terminated for any reason by the Company (with or
without cause) or Holder (including as a result of the death or disability of
Holder); provided, however, that notwithstanding the vesting schedule set forth
above, if Holder's employment is terminated prior to May 10 in any year, the
Options which would have otherwise vested on November 10th of that year shall be
forfeited, but if such termination occurs on or after May 10th in any such year,
any Options which would otherwise have vested on November 10th of such year
shall not be forfeited and shall be deemed vested notwithstanding such
termination. Once an Option has vested, it may be exercised at any time by
Holder, subject to the other terms and conditions of this Certificate.
5. COMPANY'S WARRANTIES, REPRESENTATIONS AND COVENANTS. The Company
warrants, represents and covenants to the Holder that:
(a) The Company has been duly incorporated and organized and is
validly existing as a corporation in good standing under the laws of its
state of organization.
(b) The Options have been duly authorized and are the validly issued,
fully paid and binding obligation of the Company. The Common Stock of the
Company issuable upon exercise of the Options are validly authorized and
upon payment of the Exercise Price shall be validly issued, fully paid and
nonassessable Common Stock of the Company.
(c) Common Stock deliverable on the exercise of the Options shall, at
delivery, be fully paid and nonassessable, free from all taxes, liens, and
charges with respect to the purchase.
(d) The Company shall take any necessary steps to assure that the par
value per share of the Common Stock is at all times equal to or less than
the then current Exercise Price of the Common Stock issuable pursuant to
this Certificate.
(e) The Company shall at all times reserve and hold available
sufficient shares of its Common Stock to satisfy the Common Stock issuable
upon exercise of the Options.
(f) The Company shall maintain its books and records in accordance
with generally accepted accounting principles applied on a consistent
basis.
(g) The Company shall permit the Holder through his designated
representatives to visit and inspect any of the properties of the Company,
to examine its books and records, and to discuss its affairs, finances and
accounts
2
<PAGE>
with and be advised as to the same by the officers of the Company at
reasonable times and intervals, on the same basis as any other shareholder.
The provisions of this Section shall continue for so long as the Holder
owns this Certificate.
6. Method of Exercise; Shares Issued Upon Exercise. Exercise may be made
of all or any part of the Options evidenced by this Certificate by surrendering
it, with the exercise form provided for herein duly executed by or on behalf of
the Holder, at the executive office of the Company, accompanied by payment in
full of the Exercise Price payable in respect of the Options being exercised.
The Options are exercisable at the option of the Holder in whole or in part at
any time prior to the Expiration Date. If less than all of the Options
evidenced by this Certificate are exercised, the Company will, upon such
exercise, execute and deliver to the Holder a new certificate (dated the date
hereof) evidencing the Options not so exercised. Unless the Common Stock
issuable upon exercise of the Options has been registered under the Securities
Act of 1933, as amended (the "1933 Act"), the certificates evidencing the Common
Stock issuable on exercise of the Options will bear the following legend or a
substantially similar legend:
"The shares of stock of Inland Resources Inc. (the "Company") represented
by this certificate have not been registered under the Securities Act of
1933, as amended (the "1933 Act"), or under the securities laws of any
state, and the Holder hereof cannot make any sale, assignment, or other
transfer of any shares of such stock except pursuant to an offering of such
shares duly registered under the 1933 Act and the applicable state
securities laws, or under such other circumstances that, in the opinion of
counsel of the Holder hereof, does not require registration under the 1933
Act and any state securities laws. Said shares are restricted securities
within the meaning of Rule 144 promulgated under the 1933 Act and may be
subject to the limitations upon resale set forth therein or in other rules
and regulations under the 1933 Act;"
provided, however, that the Company agrees that whenever the shares of Common
Stock issuable upon exercise or conversion of the Options shall have been
beneficially held for two (2) years within the meaning of Rule 144(k) of the
1933 Act or any successor rule or statute or any shorter period of time allowed
by such successor rule or statute, and so long as the Holder is not an affiliate
of the Company within the meaning of Rule 144, if required by Rule 144 or such
successor rule or statute, then the Company shall remove all restrictive legends
and stop transfer restrictions at the written request of the owner of the shares
of Common Stock issuable on exercise or conversion of the Options.
7. INVESTMENT REPRESENTATION OF HOLDER. Holder represents and warrants
that the Options evidenced by this Certificate, and any Option Shares (herein so
called) purchased upon exercise of the Options, have been, or will be, acquired
or purchased as an investment for Holder's own account and not with a view
toward further distribution thereof. It is expressly understood that the
Options cannot be transferred except pursuant to Section 10 hereof, and that the
Option Shares cannot be sold or transferred except pursuant to an effective
registration statement or an exemption from applicable securities laws.
3
<PAGE>
8. ADJUSTMENT OF SHARES PURCHASABLE. The number of shares of Common
Stock purchasable hereunder and the applicable Exercise Price per share are
subject to adjustment from time to time as specified in this Certificate.
9. EXCHANGE FOR OTHER DENOMINATIONS. This Certificate is exchangeable,
on its surrender by the Holder to the Company, for new Certificates of like
tenor and date representing in the aggregate the number of Options and the right
to purchase the number of shares of Common Stock purchasable hereunder in
denominations designated by the Holder at the time of surrender.
10. RESTRICTIONS ON TRANSFER. During the lifetime of Holder, this
Certificate shall be exercisable only by the Holder in person, by attorney or by
mail, on surrender of this Certificate, properly endorsed. Neither this
Certificate nor the Options are transferable by Holder by operation of law or
otherwise, except that in the event of death or disability of Holder while
employed by the Company or a subsidiary, the vested Options may be exercised at
any time within one year after such death or disability by the duly appointed
personal representative of Holder, or by any person or persons who shall acquire
the Options directly from Holder by bequest or inheritance.
11. ADJUSTMENT OF SHARES. Wherever this Certificate specifies a number of
shares of Common Stock or an Exercise Price per share, the specified number of
shares of Common Stock to be received on exercise and the applicable Exercise
Price per share shall be changed to reflect adjustments (which may require that
additional securities or other property be delivered on exercise) required by
this section, as follows:
(a) If a stock or property dividend is declared to the holders of
shares of the same class of securities of the Company as is issuable upon
exercise of Options, there shall be added with respect to each share of
Common Stock issuable upon exercise of Options the amount of the dividend,
stock or property, which would have been issued to the Holder had the
Holder been the holder of record of such issuable share at the dividend
record date. Such additional stock or property resulting from such
dividend shall be delivered without additional cost upon the exercise of
Options. Any distribution to the holders of Common Stock of the Company of
any kind, other than a distribution of cash as a dividend out of profits of
the Company for the current year of the dividend, shall be treated as a
stock or property dividend for purposes of this Subsection 11(a). If the
Holder is entitled to receive cash upon exercise of Options under this
Subsection 11(a), the Holder may, at the Holder's option, elect to reduce
the applicable Exercise Price by all or part of the cash to be received by
the Holder upon exercise under this Subsection 11(a).
(b) If an increase has been effected in the number of outstanding
shares of the same class of securities of the Company as is issuable upon
exercise of Options by reason of a subdivision of such shares, the number
of shares which may thereafter be purchased upon exercise of Options shall
be increased with respect to each share issuable upon exercise of Options
by the number of shares which could have been received by the Holder at the
time of such subdivision had it been
4
<PAGE>
the holder of record of such issuable shares at the record and/or effective
date of the subdivision. In such event, the Exercise Price per share of
Options shall be proportionately reduced.
(c) If a decrease has been effected in the number of outstanding
shares of the same class of securities of the Company as is issuable upon
exercise of Options by reason of a reverse stock split, the number of
shares which may thereafter be purchased upon exercise of Options shall be
changed with respect to each share issuable upon exercise of Options to the
number of shares which would have been held by the Holder at the time of
said reverse stock split had the Holder been the holder of such issuable
share at the record and/or effective date of the reverse stock split. In
such event, the Exercise Price per share shall be proportionately
increased.
(d) If there is a capital reorganization, reclassification of the
capital stock of the Company, or any consolidation or merger of the Company
with any other corporation or corporations, or if there is a sale or
distribution of all or substantially all of the Company's property and
assets, the Company shall make adequate provision so that there shall
remain and be substituted under this Certificate with respect to each share
issuable upon exercise of Options the stock, securities and/or assets which
would have been issuable or payable in respect of or in exchange for such
issuable shares if the Holder had been the owner of such share on the
applicable record date. All other provisions of this Certificate shall
remain in full force and effect.
12. NOTICE OF ADJUSTMENT. On the happening of any event requiring an
adjustment of the Exercise Price or the shares purchasable hereunder, the
Company shall immediately give written notice to the Holder stating the adjusted
Exercise Price and the adjusted number and kind of securities or other property
purchasable hereunder resulting from the event and setting forth in reasonable
detail the method of calculation and the facts upon which the calculation is
based.
13. NOTICE REQUIREMENT. If at any time the Company proposes or is aware
of any of the following transactions, the Company shall give written notice to
the Holder at least 30 days prior to the proposed transaction: an anticipated
voluntary or involuntary dissolution, liquidation or winding up of the Company;
a merger or consolidation of the Company; the payment or declaration of a
dividend or distribution to shareholders of the Company; or the vote of
shareholders of the Company to amend the certificate or articles of
incorporation of the Company. Such notice shall contain: (a) the date on which
the proposed transaction is to take place; (b) the record date (which shall be
at least 30 days after the giving of the notice) of the proposed transaction;
(c) a brief description of the proposed transaction; (d) a brief description of
any dividends or other distributions to be made to holders of Common Stock as a
result of the proposed transaction; (e) a brief description of any other effect
of the proposed transaction on holders of Common Stock or this Certificate; and
(f) an estimate of the fair value of any dividends or other distributions to be
made to shareholders.
5
<PAGE>
14. FRACTIONAL SHARES. The Company shall not be required upon the
exercise of any of the Options evidenced hereby to issue any fractional shares,
but shall make an adjustment therefore in cash on the basis of the mean between
the low bid and high asked prices on the over-the-counter market as reported by
the NASD Automated Quotation System or the closing market price on a national
securities exchange on the trading day immediately prior to exercise, whichever
is applicable, or if neither is applicable, then on the basis of the market
value of any such fractional interest as shall be reasonably determined by the
Company.
15. NOTICE. Any notice required or permitted by any party to this
Certificate shall be in writing and may be delivered personally to the party
being given notice or to the person in charge of the office of the party being
given notice or by facsimile, national overnight courier service or by mail, at
the party's address indicated below, and any notice will be effective only upon
actual receipt by the party. The addresses of the parties are as follows:
Holder: 475 17th Street, Suite 1500
Denver, Colorado 80202
Company: 475 17th Street, Suite 1500
Denver, Colorado 80202
The names and addresses of persons to receive notice as stated in this Section
may be changed by notice given in accordance with this Section.
16. PARTIES. This Certificate shall bind the respective successors and
assigns of the parties.
17. ENTIRE AGREEMENT. This Certificate represents the entire agreement of
the parties with respect to the subject matter hereof and supersedes any prior
or contemporaneous oral or written agreements or understandings. The terms of
this Certificate may be amended only by a written instrument executed by the
Company and the Holder.
WITNESS the signature of the Company's authorized representative and the
acceptance of the terms hereof by the signature of the Holder dated effective
November 10, 1997.
COMPANY:
INLAND RESOURCES INC.
By:
-------------------------------------
Kyle R. Miller, President and Chief
Executive Officer
HOLDER:
----------------------------------------
JOHN E. DYER
6
<PAGE>
EXERCISE FORM
(To be executed by the Holder to purchase
Common Stock pursuant to the within Options)
_______________________________
_______________________________
_______________________________
The undersigned hereby: (1) irrevocably elects to purchase ______ shares
of the Company's Common Stock issuable upon the exercise of the within Options,
and encloses payment of $________________ therefor; (2) requests that a
certificate for the shares be issued in the name of the undersigned and
delivered to the undersigned at the address below; and (3) if such number of
shares is not all of the shares purchasable hereunder, that a new Certificate of
like tenor for the balance of the remaining Options be issued in the name of the
undersigned and delivered to the undersigned at the address below.
Date:_____________________ ________________________________
(Please sign exactly as name
appears on Option Certificate)
_________________________________
Address
_________________________________
7
<PAGE>
EXHIBIT 10.29.2
OPTION CERTIFICATE
TO PURCHASE SHARES OF COMMON STOCK OF
INLAND RESOURCES INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF WASHINGTON
CERTIFICATE EVIDENCING THE NUMBER OF OPTIONS
SET FORTH IN SECTION 1
1. BASIC TERMS. This certifies that, for good and valuable
consideration, Bill I. Pennington (the "Holder"), is entitled, subject to the
terms and conditions of this Option Certificate (the "Certificate"), to purchase
125,000 shares of the common stock, $.001 par value (the "Common Stock"), of
Inland Resources Inc. (the "Company"), subject to adjustment as provided in this
Certificate, from the Company at the applicable Exercise Price (as defined
below), on delivery of this Certificate to the Company with the exercise form
duly executed and payment of the Exercise Price payable to the Company by
cashier's check or other immediately available funds, for all shares purchased.
One Option (herein so called) is required for the purchase of one share of
Common Stock, subject to adjustment as provided herein. Holder and Company
acknowledge and agree that the Options granted hereby are nonqualified stock
options.
2. EXPIRATION DATE. The right to exercise the Options evidenced by this
Certificate shall expire at 12:00 a.m. PST on the tenth (10th) anniversary of
the effective date of this Certificate, provided, however, that if Holder's
employment by the Company or a subsidiary is terminated for any reason by Holder
or the Company (with or without cause), other than as a result of the death or
disability of Holder, then the vested Options evidenced by this Certificate
shall expire sixty (60) days after such termination, but if termination is as a
result of the death or disability of Holder then the vested Options may be
exercised at any time within one year after the termination of employment for
such reason (the "Expiration Date").
3. EXERCISE PRICE. The purchase price per share of the Common Stock upon
exercise of the Options (the "Exercise Price") shall be equal to $11.00 per
share, which is equal to or greater than the fair market value per share on the
date hereof, for the first 62,500 Options vesting under this Certificate and
$16.00 per share for the remaining 62,500 Options vesting under this
Certificate. The applicable Exercise Price may be adjusted from time to time
pursuant to the terms of this Certificate.
4. VESTING OF OPTIONS. Subject to the other terms and conditions of this
Agreement, the Options granted hereby shall vest in accordance with the
following schedule: (i) 20,833 of the Options granted hereby shall vest on each
of the first and second anniversary dates of the effective date of this
Certificate and 20,834 of the Options shall vest on the third anniversary date
of the effective date of this Certificate, provided Holder is employed by the
Company or a subsidiary on such date (except as otherwise provided below); and
(ii) 20,833 of the Options granted hereby shall vest on each of the fourth and
fifth anniversary dates of the effective date of this Certificate and 20,834 of
the Options shall vest on the sixth anniversary date of the effective date of
this Certificate, provided Holder is employed by the Company or a subsidiary on
such date (except as otherwise provided below) and provided, further, that the
Company had "EBITDA" of
-1-
<PAGE>
$40,000,000 for the twelve (12) months ended on the October 31 immediately
preceding such anniversary date. For purposes of this Certificate, "EBITDA"
shall mean the net income of the Company before deductions for interest, income
taxes, depreciation and amortization. Notwithstanding any provision hereof to
the contrary, the Options granted hereby shall vest immediately upon a sale of
all or substantially all of the assets of the Company or a cash merger involving
the Company pursuant to which the shareholders of the Company are cashed out in
such merger and cease to be shareholders of the Company or the surviving entity.
Any non-vested Options granted hereby shall be immediately forfeited if Holder's
employment by the Company or a subsidiary is terminated for any reason by the
Company (with or without cause) or Holder (including as a result of the death or
disability of Holder); provided, however, that notwithstanding the vesting
schedule set forth above, if Holder's employment is terminated prior to May 10
in any year, the Options which would have otherwise vested on November 10th of
that year shall be forfeited, but if such termination occurs on or after May
10th in any such year, any Options which would otherwise have vested on November
10th of such year shall not be forfeited and shall be deemed vested
notwithstanding such termination. Once an Option has vested, it may be exercised
at any time by Holder, subject to the other terms and conditions of this
Certificate.
5. COMPANY'S WARRANTIES, REPRESENTATIONS AND COVENANTS. The Company
warrants, represents and covenants to the Holder that:
(a) The Company has been duly incorporated and organized and is
validly existing as a corporation in good standing under the laws of its
state of organization.
(b) The Options have been duly authorized and are the validly issued,
fully paid and binding obligation of the Company. The Common Stock of the
Company issuable upon exercise of the Options are validly authorized and
upon payment of the Exercise Price shall be validly issued, fully paid and
nonassessable Common Stock of the Company.
(c) Common Stock deliverable on the exercise of the Options shall, at
delivery, be fully paid and nonassessable, free from all taxes, liens, and
charges with respect to the purchase.
(d) The Company shall take any necessary steps to assure that the par
value per share of the Common Stock is at all times equal to or less than
the then current Exercise Price of the Common Stock issuable pursuant to
this Certificate.
(e) The Company shall at all times reserve and hold available
sufficient shares of its Common Stock to satisfy the Common Stock issuable
upon exercise of the Options.
(f) The Company shall maintain its books and records in accordance
with generally accepted accounting principles applied on a consistent
basis.
-2-
<PAGE>
(g) The Company shall permit the Holder through his designated
representatives to visit and inspect any of the properties of the Company,
to examine its books and records, and to discuss its affairs, finances and
accounts with and be advised as to the same by the officers of the Company
at reasonable times and intervals, on the same basis as any other
shareholder.
The provisions of this Section shall continue for so long as the Holder
owns this Certificate.
6. METHOD OF EXERCISE; SHARES ISSUED UPON EXERCISE. Exercise may be made
of all or any part of the Options evidenced by this Certificate by surrendering
it, with the exercise form provided for herein duly executed by or on behalf of
the Holder, at the executive office of the Company, accompanied by payment in
full of the Exercise Price payable in respect of the Options being exercised.
The Options are exercisable at the option of the Holder in whole or in part at
any time prior to the Expiration Date. If less than all of the Options
evidenced by this Certificate are exercised, the Company will, upon such
exercise, execute and deliver to the Holder a new certificate (dated the date
hereof) evidencing the Options not so exercised. Unless the Common Stock
issuable upon exercise of the Options has been registered under the Securities
Act of 1933, as amended (the "1933 Act"), the certificates evidencing the Common
Stock issuable on exercise of the Options will bear the following legend or a
substantially similar legend:
"The shares of stock of Inland Resources Inc. (the "Company") represented
by this certificate have not been registered under the Securities Act of
1933, as amended (the "1933 Act"), or under the securities laws of any
state, and the Holder hereof cannot make any sale, assignment, or other
transfer of any shares of such stock except pursuant to an offering of such
shares duly registered under the 1933 Act and the applicable state
securities laws, or under such other circumstances that, in the opinion of
counsel of the Holder hereof, does not require registration under the 1933
Act and any state securities laws. Said shares are restricted securities
within the meaning of Rule 144 promulgated under the 1933 Act and may be
subject to the limitations upon resale set forth therein or in other rules
and regulations under the 1933 Act;"
provided, however, that the Company agrees that whenever the shares of Common
Stock issuable upon exercise or conversion of the Options shall have been
beneficially held for two (2) years within the meaning of Rule 144(k) of the
1933 Act or any successor rule or statute or any shorter period of time allowed
by such successor rule or statute, and so long as the Holder is not an affiliate
of the Company within the meaning of Rule 144, if required by Rule 144 or such
successor rule or statute, then the Company shall remove all restrictive legends
and stop transfer restrictions at the written request of the owner of the shares
of Common Stock issuable on exercise or conversion of the Options.
7. INVESTMENT REPRESENTATION OF HOLDER. Holder represents and warrants
that the Options evidenced by this Certificate, and any Option Shares (herein so
called) purchased upon exercise of the Options, have been, or will be, acquired
or purchased as an investment for Holder's own account and not with a view
toward further distribution thereof. It is expressly
-3-
<PAGE>
understood that the Options cannot be transferred except pursuant to Section 10
hereof, and that the Option Shares cannot be sold or transferred except pursuant
to an effective registration statement or an exemption from applicable
securities laws.
8. ADJUSTMENT OF SHARES PURCHASABLE. The number of shares of Common
Stock purchasable hereunder and the applicable Exercise Price per share are
subject to adjustment from time to time as specified in this Certificate.
9. EXCHANGE FOR OTHER DENOMINATIONS. This Certificate is exchangeable,
on its surrender by the Holder to the Company, for new Certificates of like
tenor and date representing in the aggregate the number of Options and the right
to purchase the number of shares of Common Stock purchasable hereunder in
denominations designated by the Holder at the time of surrender.
10. RESTRICTIONS ON TRANSFER. During the lifetime of Holder, this
Certificate shall be exercisable only by the Holder in person, by attorney or by
mail, on surrender of this Certificate, properly endorsed. Neither this
Certificate nor the Options are transferable by Holder by operation of law or
otherwise, except that in the event of death or disability of Holder while
employed by the Company or a subsidiary, the vested Options may be exercised at
any time within one year after such death or disability by the duly appointed
personal representative of Holder, or by any person or persons who shall acquire
the Options directly from Holder by bequest or inheritance.
11. ADJUSTMENT OF SHARES. Wherever this Certificate specifies a number of
shares of Common Stock or an Exercise Price per share, the specified number of
shares of Common Stock to be received on exercise and the applicable Exercise
Price per share shall be changed to reflect adjustments (which may require that
additional securities or other property be delivered on exercise) required by
this section, as follows:
(a) If a stock or property dividend is declared to the holders of
shares of the same class of securities of the Company as is issuable upon
exercise of Options, there shall be added with respect to each share of
Common Stock issuable upon exercise of Options the amount of the dividend,
stock or property, which would have been issued to the Holder had the
Holder been the holder of record of such issuable share at the dividend
record date. Such additional stock or property resulting from such
dividend shall be delivered without additional cost upon the exercise of
Options. Any distribution to the holders of Common Stock of the Company of
any kind, other than a distribution of cash as a dividend out of profits of
the Company for the current year of the dividend, shall be treated as a
stock or property dividend for purposes of this Subsection 11(a). If the
Holder is entitled to receive cash upon exercise of Options under this
Subsection 11(a), the Holder may, at the Holder's option, elect to reduce
the applicable Exercise Price by all or part of the cash to be received by
the Holder upon exercise under this Subsection 11(a).
(b) If an increase has been effected in the number of outstanding
shares of the same class of securities of the Company as is issuable upon
exercise of
-4-
<PAGE>
Options by reason of a subdivision of such shares, the number of shares
which may thereafter be purchased upon exercise of Options shall be
increased with respect to each share issuable upon exercise of Options by
the number of shares which could have been received by the Holder at the
time of such subdivision had it been the holder of record of such issuable
shares at the record and/or effective date of the subdivision. In such
event, the Exercise Price per share of Options shall be proportionately
reduced.
(c) If a decrease has been effected in the number of outstanding
shares of the same class of securities of the Company as is issuable upon
exercise of Options by reason of a reverse stock split, the number of
shares which may thereafter be purchased upon exercise of Options shall be
changed with respect to each share issuable upon exercise of Options to the
number of shares which would have been held by the Holder at the time of
said reverse stock split had the Holder been the holder of such issuable
share at the record and/or effective date of the reverse stock split. In
such event, the Exercise Price per share shall be proportionately
increased.
(d) If there is a capital reorganization, reclassification of the
capital stock of the Company, or any consolidation or merger of the Company
with any other corporation or corporations, or if there is a sale or
distribution of all or substantially all of the Company's property and
assets, the Company shall make adequate provision so that there shall
remain and be substituted under this Certificate with respect to each share
issuable upon exercise of Options the stock, securities and/or assets which
would have been issuable or payable in respect of or in exchange for such
issuable shares if the Holder had been the owner of such share on the
applicable record date. All other provisions of this Certificate shall
remain in full force and effect.
12. NOTICE OF ADJUSTMENT. On the happening of any event requiring an
adjustment of the Exercise Price or the shares purchasable hereunder, the
Company shall immediately give written notice to the Holder stating the adjusted
Exercise Price and the adjusted number and kind of securities or other property
purchasable hereunder resulting from the event and setting forth in reasonable
detail the method of calculation and the facts upon which the calculation is
based.
13. NOTICE REQUIREMENT. If at any time the Company proposes or is aware
of any of the following transactions, the Company shall give written notice to
the Holder at least 30 days prior to the proposed transaction: an anticipated
voluntary or involuntary dissolution, liquidation or winding up of the Company;
a merger or consolidation of the Company; the payment or declaration of a
dividend or distribution to shareholders of the Company; or the vote of
shareholders of the Company to amend the certificate or articles of
incorporation of the Company. Such notice shall contain: (a) the date on which
the proposed transaction is to take place; (b) the record date (which shall be
at least 30 days after the giving of the notice) of the proposed transaction;
(c) a brief description of the proposed transaction; (d) a brief description of
any dividends or other distributions to be made to holders of Common Stock as a
result of the proposed transaction; (e) a brief description of any other effect
of the proposed transaction on
-5-
<PAGE>
holders of Common Stock or this Certificate; and (f) an estimate of the fair
value of any dividends or other distributions to be made to shareholders.
14. FRACTIONAL SHARES. The Company shall not be required upon the
exercise of any of the Options evidenced hereby to issue any fractional shares,
but shall make an adjustment therefore in cash on the basis of the mean between
the low bid and high asked prices on the over-the-counter market as reported by
the NASD Automated Quotation System or the closing market price on a national
securities exchange on the trading day immediately prior to exercise, whichever
is applicable, or if neither is applicable, then on the basis of the market
value of any such fractional interest as shall be reasonably determined by the
Company.
15. NOTICE. Any notice required or permitted by any party to this
Certificate shall be in writing and may be delivered personally to the party
being given notice or to the person in charge of the office of the party being
given notice or by facsimile, national overnight courier service or by mail, at
the party's address indicated below, and any notice will be effective only upon
actual receipt by the party. The addresses of the parties are as follows:
Holder: 475 17th Street, Suite 1500
Denver, Colorado 80202
Company: 475 17th Street, Suite 1500
Denver, Colorado 80202
The names and addresses of persons to receive notice as stated in this Section
may be changed by notice given in accordance with this Section.
16. PARTIES. This Certificate shall bind the respective successors and
assigns of the parties.
17. ENTIRE AGREEMENT. This Certificate represents the entire agreement of
the parties with respect to the subject matter hereof and supersedes any prior
or contemporaneous oral or written agreements or understandings. The terms of
this Certificate may be amended only by a written instrument executed by the
Company and the Holder.
WITNESS the signature of the Company's authorized representative and the
acceptance of the terms hereof by the signature of the Holder dated effective
November 10, 1997.
COMPANY:
HOLDER: INLAND RESOURCES INC.
________________________________ By:________________________________
BILL I. PENNINGTON Kyle R. Miller, President and
Chief Executive Officer
-6-
<PAGE>
EXERCISE FORM
(To be executed by the Holder to purchase
Common Stock pursuant to the within Options)
_______________________________
_______________________________
_______________________________
The undersigned hereby: (1) irrevocably elects to purchase ______ shares
of the Company's Common Stock issuable upon the exercise of the within Options,
and encloses payment of $________________ therefor; (2) requests that a
certificate for the shares be issued in the name of the undersigned and
delivered to the undersigned at the address below; and (3) if such number of
shares is not all of the shares purchasable hereunder, that a new Certificate of
like tenor for the balance of the remaining Options be issued in the name of the
undersigned and delivered to the undersigned at the address below.
Date:_____________________ ________________________________
(Please sign exactly as name
appears on Option Certificate)
________________________________
Address
________________________________
-7-
<PAGE>
EXHIBIT 10.30
OPTION CERTIFICATE
TO PURCHASE SHARES OF COMMON STOCK OF
INLAND RESOURCES INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF WASHINGTON
CERTIFICATE EVIDENCING THE NUMBER OF OPTIONS
SET FORTH IN SECTION 1
1. BASIC TERMS. This certifies that, for good and valuable
consideration, Michael J. Stevens (the "Holder"), is entitled, subject to the
terms and conditions of this Option Certificate (the "Certificate"), to purchase
100,000 shares of the common stock, $.001 par value (the "Common Stock"), of
Inland Resources Inc. (the "Company"), subject to adjustment as provided in this
Certificate, from the Company at the applicable Exercise Price (as defined
below), on delivery of this Certificate to the Company with the exercise form
duly executed and payment of the Exercise Price payable to the Company by
cashier's check or other immediately available funds, for all shares purchased.
One Option (herein so called) is required for the purchase of one share of
Common Stock, subject to adjustment as provided herein. Holder and Company
acknowledge and agree that the Options granted hereby are nonqualified stock
options.
2. EXPIRATION DATE. The right to exercise the Options evidenced by this
Certificate shall expire at 12:00 a.m. PST on the tenth (10th) anniversary of
the effective date of this Certificate, provided, however, that if Holder's
employment by the Company or a subsidiary is terminated for any reason by Holder
or the Company (with or without cause), other than as a result of the death or
disability of Holder, then the vested Options evidenced by this Certificate
shall expire sixty (60) days after such termination, but if termination is as a
result of the death or disability of Holder then the vested Options may be
exercised at any time within one year after the termination of employment for
such reason (the "Expiration Date").
3. EXERCISE PRICE. The purchase price per share of the Common Stock upon
exercise of the Options (the "Exercise Price") shall be equal to $11.00 per
share, which is equal to or greater than the fair market value per share on the
date hereof, for the first 50,000 Options vesting under this Certificate and
$16.00 per share for the remaining 50,000 Options vesting under this
Certificate. The applicable Exercise Price may be adjusted from time to time
pursuant to the terms of this Certificate.
4. VESTING OF OPTIONS. Subject to the other terms and conditions of this
Agreement, the Options granted hereby shall vest in accordance with the
following schedule: (i) 16,667 of the Options granted hereby shall vest on each
of the first and second anniversary dates of the effective date of this
Certificate and 16,666 of the Options shall vest on the third anniversary date
of the effective date of this Certificate, provided Holder is employed by the
Company or a subsidiary on such date (except as otherwise provided below); and
(ii) 16,667 of the Options granted hereby shall vest on each of the fourth and
fifth anniversary dates of the effective date of this Certificate and 16,666 of
the Options shall vest on the sixth anniversary date of the effective date of
this Certificate, provided Holder is employed by the Company or a subsidiary on
such date (except as otherwise provided below) and provided, further, that the
Company had "EBITDA" of $40,000,000 for the twelve (12) months ended on the
October 31 immediately preceding such
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anniversary date. For purposes of this Certificate, "EBITDA" shall mean the net
income of the Company before deductions for interest, income taxes, depreciation
and amortization. Notwithstanding any provision hereof to the contrary, the
Options granted hereby shall vest immediately upon a sale of all or
substantially all of the assets of the Company or a cash merger involving the
Company pursuant to which the shareholders of the Company are cashed out in such
merger and cease to be shareholders of the Company or the surviving entity. Any
non-vested Options granted hereby shall be immediately forfeited if Holder's
employment by the Company or a subsidiary is terminated for any reason by the
Company (with or without cause) or Holder (including as a result of the death or
disability of Holder); provided, however, that notwithstanding the vesting
schedule set forth above, if Holder's employment is terminated prior to May 10
in any year, the Options which would have otherwise vested on November 10th of
that year shall be forfeited, but if such termination occurs on or after May
10th in any such year, any Options which would otherwise have vested on November
10th of such year shall not be forfeited and shall be deemed vested
notwithstanding such termination. Once an Option has vested, it may be exercised
at any time by Holder, subject to the other terms and conditions of this
Certificate.
5. COMPANY'S WARRANTIES, REPRESENTATIONS AND COVENANTS. The Company
warrants, represents and covenants to the Holder that:
(a) The Company has been duly incorporated and organized and is
validly existing as a corporation in good standing under the laws of its
state of organization.
(b) The Options have been duly authorized and are the validly issued,
fully paid and binding obligation of the Company. The Common Stock of the
Company issuable upon exercise of the Options are validly authorized and
upon payment of the Exercise Price shall be validly issued, fully paid and
nonassessable Common Stock of the Company.
(c) Common Stock deliverable on the exercise of the Options shall, at
delivery, be fully paid and nonassessable, free from all taxes, liens, and
charges with respect to the purchase.
(d) The Company shall take any necessary steps to assure that the par
value per share of the Common Stock is at all times equal to or less than
the then current Exercise Price of the Common Stock issuable pursuant to
this Certificate.
(e) The Company shall at all times reserve and hold available
sufficient shares of its Common Stock to satisfy the Common Stock issuable
upon exercise of the Options.
(f) The Company shall maintain its books and records in accordance
with generally accepted accounting principles applied on a consistent
basis.
(g) The Company shall permit the Holder through his designated
representatives to visit and inspect any of the properties of the Company,
to
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examine its books and records, and to discuss its affairs, finances and
accounts with and be advised as to the same by the officers of the Company
at reasonable times and intervals, on the same basis as any other
shareholder.
The provisions of this Section shall continue for so long as the Holder
owns this Certificate.
6. METHOD OF EXERCISE; SHARES ISSUED UPON EXERCISE. Exercise may be made
of all or any part of the Options evidenced by this Certificate by surrendering
it, with the exercise form provided for herein duly executed by or on behalf of
the Holder, at the executive office of the Company, accompanied by payment in
full of the Exercise Price payable in respect of the Options being exercised.
The Options are exercisable at the option of the Holder in whole or in part at
any time prior to the Expiration Date. If less than all of the Options
evidenced by this Certificate are exercised, the Company will, upon such
exercise, execute and deliver to the Holder a new certificate (dated the date
hereof) evidencing the Options not so exercised. Unless the Common Stock
issuable upon exercise of the Options has been registered under the Securities
Act of 1933, as amended (the "1933 Act"), the certificates evidencing the Common
Stock issuable on exercise of the Options will bear the following legend or a
substantially similar legend:
"The shares of stock of Inland Resources Inc. (the "Company") represented
by this certificate have not been registered under the Securities Act of
1933, as amended (the "1933 Act"), or under the securities laws of any
state, and the Holder hereof cannot make any sale, assignment, or other
transfer of any shares of such stock except pursuant to an offering of such
shares duly registered under the 1933 Act and the applicable state
securities laws, or under such other circumstances that, in the opinion of
counsel of the Holder hereof, does not require registration under the 1933
Act and any state securities laws. Said shares are restricted securities
within the meaning of Rule 144 promulgated under the 1933 Act and may be
subject to the limitations upon resale set forth therein or in other rules
and regulations under the 1933 Act;"
provided, however, that the Company agrees that whenever the shares of Common
Stock issuable upon exercise or conversion of the Options shall have been
beneficially held for two (2) years within the meaning of Rule 144(k) of the
1933 Act or any successor rule or statute or any shorter period of time allowed
by such successor rule or statute, and so long as the Holder is not an affiliate
of the Company within the meaning of Rule 144, if required by Rule 144 or such
successor rule or statute, then the Company shall remove all restrictive legends
and stop transfer restrictions at the written request of the owner of the shares
of Common Stock issuable on exercise or conversion of the Options.
7. INVESTMENT REPRESENTATION OF HOLDER. Holder represents and warrants
that the Options evidenced by this Certificate, and any Option Shares (herein so
called) purchased upon exercise of the Options, have been, or will be, acquired
or purchased as an investment for Holder's own account and not with a view
toward further distribution thereof. It is expressly understood that the
Options cannot be transferred except pursuant to Section 10 hereof, and that
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<PAGE>
the Option Shares cannot be sold or transferred except pursuant to an effective
registration statement or an exemption from applicable securities laws.
8. ADJUSTMENT OF SHARES PURCHASABLE. The number of shares of Common
Stock purchasable hereunder and the applicable Exercise Price per share are
subject to adjustment from time to time as specified in this Certificate.
9. EXCHANGE FOR OTHER DENOMINATIONS. This Certificate is exchangeable,
on its surrender by the Holder to the Company, for new Certificates of like
tenor and date representing in the aggregate the number of Options and the right
to purchase the number of shares of Common Stock purchasable hereunder in
denominations designated by the Holder at the time of surrender.
10. RESTRICTIONS ON TRANSFER. During the lifetime of Holder, this
Certificate shall be exercisable only by the Holder in person, by attorney or by
mail, on surrender of this Certificate, properly endorsed. Neither this
Certificate nor the Options are transferable by Holder by operation of law or
otherwise, except that in the event of death or disability of Holder while
employed by the Company or a subsidiary, the vested Options may be exercised at
any time within one year after such death or disability by the duly appointed
personal representative of Holder, or by any person or persons who shall acquire
the Options directly from Holder by bequest or inheritance.
11. ADJUSTMENT OF SHARES. Wherever this Certificate specifies a number of
shares of Common Stock or an Exercise Price per share, the specified number of
shares of Common Stock to be received on exercise and the applicable Exercise
Price per share shall be changed to reflect adjustments (which may require that
additional securities or other property be delivered on exercise) required by
this section, as follows:
(a) If a stock or property dividend is declared to the holders of
shares of the same class of securities of the Company as is issuable upon
exercise of Options, there shall be added with respect to each share of
Common Stock issuable upon exercise of Options the amount of the dividend,
stock or property, which would have been issued to the Holder had the
Holder been the holder of record of such issuable share at the dividend
record date. Such additional stock or property resulting from such
dividend shall be delivered without additional cost upon the exercise of
Options. Any distribution to the holders of Common Stock of the Company of
any kind, other than a distribution of cash as a dividend out of profits of
the Company for the current year of the dividend, shall be treated as a
stock or property dividend for purposes of this Subsection 11(a). If the
Holder is entitled to receive cash upon exercise of Options under this
Subsection 11(a), the Holder may, at the Holder's option, elect to reduce
the applicable Exercise Price by all or part of the cash to be received by
the Holder upon exercise under this Subsection 11(a).
(b) If an increase has been effected in the number of outstanding
shares of the same class of securities of the Company as is issuable upon
exercise of Options by reason of a subdivision of such shares, the number
of shares which may
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<PAGE>
thereafter be purchased upon exercise of Options shall be increased with
respect to each share issuable upon exercise of Options by the number of
shares which could have been received by the Holder at the time of such
subdivision had it been the holder of record of such issuable shares at the
record and/or effective date of the subdivision. In such event, the
Exercise Price per share of Options shall be proportionately reduced.
(c) If a decrease has been effected in the number of outstanding
shares of the same class of securities of the Company as is issuable upon
exercise of Options by reason of a reverse stock split, the number of
shares which may thereafter be purchased upon exercise of Options shall be
changed with respect to each share issuable upon exercise of Options to the
number of shares which would have been held by the Holder at the time of
said reverse stock split had the Holder been the holder of such issuable
share at the record and/or effective date of the reverse stock split. In
such event, the Exercise Price per share shall be proportionately
increased.
(d) If there is a capital reorganization, reclassification of the
capital stock of the Company, or any consolidation or merger of the Company
with any other corporation or corporations, or if there is a sale or
distribution of all or substantially all of the Company's property and
assets, the Company shall make adequate provision so that there shall
remain and be substituted under this Certificate with respect to each share
issuable upon exercise of Options the stock, securities and/or assets which
would have been issuable or payable in respect of or in exchange for such
issuable shares if the Holder had been the owner of such share on the
applicable record date. All other provisions of this Certificate shall
remain in full force and effect.
12. NOTICE OF ADJUSTMENT. On the happening of any event requiring an
adjustment of the Exercise Price or the shares purchasable hereunder, the
Company shall immediately give written notice to the Holder stating the adjusted
Exercise Price and the adjusted number and kind of securities or other property
purchasable hereunder resulting from the event and setting forth in reasonable
detail the method of calculation and the facts upon which the calculation is
based.
13. NOTICE REQUIREMENT. If at any time the Company proposes or is aware
of any of the following transactions, the Company shall give written notice to
the Holder at least 30 days prior to the proposed transaction: an anticipated
voluntary or involuntary dissolution, liquidation or winding up of the Company;
a merger or consolidation of the Company; the payment or declaration of a
dividend or distribution to shareholders of the Company; or the vote of
shareholders of the Company to amend the certificate or articles of
incorporation of the Company. Such notice shall contain: (a) the date on which
the proposed transaction is to take place; (b) the record date (which shall be
at least 30 days after the giving of the notice) of the proposed transaction;
(c) a brief description of the proposed transaction; (d) a brief description of
any dividends or other distributions to be made to holders of Common Stock as a
result of the proposed transaction; (e) a brief description of any other effect
of the proposed transaction on
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<PAGE>
holders of Common Stock or this Certificate; and (f) an estimate of the fair
value of any dividends or other distributions to be made to shareholders.
14. FRACTIONAL SHARES. The Company shall not be required upon the
exercise of any of the Options evidenced hereby to issue any fractional shares,
but shall make an adjustment therefore in cash on the basis of the mean between
the low bid and high asked prices on the over-the-counter market as reported by
the NASD Automated Quotation System or the closing market price on a national
securities exchange on the trading day immediately prior to exercise, whichever
is applicable, or if neither is applicable, then on the basis of the market
value of any such fractional interest as shall be reasonably determined by the
Company.
15. NOTICE. Any notice required or permitted by any party to this
Certificate shall be in writing and may be delivered personally to the party
being given notice or to the person in charge of the office of the party being
given notice or by facsimile, national overnight courier service or by mail, at
the party's address indicated below, and any notice will be effective only upon
actual receipt by the party. The addresses of the parties are as follows:
Holder: 475 17th Street, Suite 1500
Denver, Colorado 80202
Company: 475 17th Street, Suite 1500
Denver, Colorado 80202
The names and addresses of persons to receive notice as stated in this Section
may be changed by notice given in accordance with this Section.
16. PARTIES. This Certificate shall bind the respective successors and
assigns of the parties.
17. ENTIRE AGREEMENT. This Certificate represents the entire agreement of
the parties with respect to the subject matter hereof and supersedes any prior
or contemporaneous oral or written agreements or understandings. The terms of
this Certificate may be amended only by a written instrument executed by the
Company and the Holder.
WITNESS the signature of the Company's authorized representative and the
acceptance of the terms hereof by the signature of the Holder dated effective
November 10, 1997.
COMPANY:
HOLDER: INLAND RESOURCES INC.
By:
- ------------------------------ -------------------------------------
Michael J. Stevens Kyle R. Miller, President and Chief
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<PAGE>
EXERCISE FORM
(To be executed by the Holder to purchase
Common Stock pursuant to the within Options)
- ------------------------------
- ------------------------------
- ------------------------------
The undersigned hereby: (1) irrevocably elects to purchase ______ shares
of the Company's Common Stock issuable upon the exercise of the within Options,
and encloses payment of $________________ therefor; (2) requests that a
certificate for the shares be issued in the name of the undersigned and
delivered to the undersigned at the address below; and (3) if such number of
shares is not all of the shares purchasable hereunder, that a new Certificate of
like tenor for the balance of the remaining Options be issued in the name of the
undersigned and delivered to the undersigned at the address below.
Date:
------------------------------ ---------------------------------------
(Please sign exactly as name appears on
Option Certificate)
---------------------------------------
Address
---------------------------------------
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<PAGE>
EXHIBIT 10.39
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is entered into by and between INLAND RESOURCES
INC. (hereinafter referred to as "Employer") and MICHAEL J. STEVENS (hereinafter
referred to as "Employee").
WHEREAS, Employer has employed Employee as its Secretary and Treasurer; and
WHEREAS, Employer desires to retain Employee as its Secretary and Treasurer
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 Secretary
and Treasurer 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 Eighty-Five Thousand Eight Hundred and No/100 Dollars
($85,800.00) 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
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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
Committee 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 Committee, 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 effective 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 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
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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;
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<PAGE>
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 such Employee's full Base Salary that was in effect for the six
(6) months immediately preceding the date of such notice together with a
prorated bonus in an amount equal to the most recent annual bonus, if any,
paid to Employee divided by two (2).
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 six (6) months 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
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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 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:
----------------
Board of Directors
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
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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) 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 May, 1997.
EMPLOYER:
INLAND RESOURCES INC.
By: /s/ Kyle R. Miller
---------------------------------
Kyle R. Miller, President
and Chief Executive Officer
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EMPLOYEE:
/s/ Michael J. Stevens
---------------------------------
Michael J. Stevens
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EXHIBIT 21.1
SUBSIDIARIES OF INLAND RESOURCES INC.
STATE OF
PERCENTAGE INCORPORATION
NAME OWNERSHIP OR ORGANIZATION
---- ----------- ---------------
- --------------------------------------------------------------------------
Inland Production Company 100% Texas
- --------------------------------------------------------------------------
Inland Refining, Inc. 100% Utah
- --------------------------------------------------------------------------
West Monument Butte Pipeline Company 83.86% Utah
- --------------------------------------------------------------------------
Castle Peak Pipeline Company 49.43% Utah
- --------------------------------------------------------------------------
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report included in this Form 10-KSB, into the Company's previously filed
Registration Statements on Form S-8 (File No. 33-41662), Form S-8 (File No.
333-27449), Form S-8 (File No. 33-84640) and Form S-3 (File No. 33-84766).
/s/ Arthur Andersen LLP
Denver, Colorado,
March 27, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT CONSULTANT PETROLEUM ENGINEERS
We consent to the incorporation by reference in the registration statements
of Inland Resources Inc. on Form S-8 (File No. 33-41662), Form S-8 (File No.
33-84640), Form S-8 (File No. 333-27449) and Form S-3 (File No. 33-84766) of our
estimated proved reserves reviews, dated January 27, 1997 and March 3, 1998,
respectively, relating to the estimated oil and gas reserves and future net
income attributable to certain oil and gas interests of Inland Resources Inc. as
of January 1, 1997, and January 1, 1998, respectively, which estimated proved
reserves reviews are included in this Annual Report on Form 10-KSB.
/s/ Ryder Scott Company Petroleum Engineers
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
Denver, Colorado
March 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1997 AND THE CONSOLIDATED STATEMENTS
OF OPERATIONS AND CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1997, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 604,619
<SECURITIES> 0
<RECEIVABLES> 13,601,099
<ALLOWANCES> 0
<INVENTORY> 6,973,890
<CURRENT-ASSETS> 23,266,427
<PP&E> 158,527,161
<DEPRECIATION> 10,009,165
<TOTAL-ASSETS> 175,952,608
<CURRENT-LIABILITIES> 10,019,333
<BONDS> 122,943,904
9,567,500
0
<COMMON> 41,864,413
<OTHER-SE> (11,192,542)
<TOTAL-LIABILITY-AND-EQUITY> 175,952,608
<SALES> 17,181,842
<TOTAL-REVENUES> 17,181,842
<CGS> 4,162,870
<TOTAL-COSTS> 12,821,723
<OTHER-EXPENSES> (379,899)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,759,195
<INCOME-PRETAX> (19,177)
<INCOME-TAX> 0
<INCOME-CONTINUING> (19,177)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,159,731)
<CHANGES> 0
<NET-INCOME> (1,178,908)
<EPS-PRIMARY> (0.30)
<EPS-DILUTED> (0.30)
</TABLE>
