EXHIBIT 10.3
SECURITY AGREEMENT
THIS SECURITY AGREEMENT (the "Agreement") is made, executed
and entered into this 12th day of June, 1996, between and among
RANDALL D. SMITH, JEFFREY A. SMITH and JOHN W. ADAMS
(individually and collectively referred to herein as the "Secured
Party") and INLAND RESOURCES INC. ("Pledgor").
W I T N E S S E T H:
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained, and other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
SECURITY INTEREST
Pledgor hereby creates and grants to the Secured Party a
security interest in the property described in Article II hereof
to secure the payment and performance of the obligations of
Pledgor to the Secured Party set forth in Article III hereof.
ARTICLE II
COLLATERAL
The property in which the security interest is created is
all of Pledgor's right, title and interest in and to 100 shares
of common stock, par value $1.00 per share, of Farmout Inc., a
Utah corporation (hereinafter referred to as the "Collateral").
ARTICLE III
OBLIGATION SECURED
This Agreement shall secure the performance of the
obligation of Pledgor to Secured Party to issue and deliver to
Secured Party 1,309,880 post-split shares of Pledgor's common
stock, par value $.001 per share ("Common Stock"), on January 2,
1997 pursuant to that certain Agreement executed effective as of
June 12, 1996 by and between Secured Party, Pledgor and other
parties named therein, subject to earlier delivery of such Common
Stock as provided in Section 1.01 of said Agreement upon the
terms and conditions provided in said Section 1.01 (the
"Obligation").
ARTICLE IV
WARRANTY AND REPRESENTATION OF PLEDGOR
Pledgor represents and warrants that:
(i) Pledgor has full authority and capacity to execute and
deliver this Agreement;
(ii) no financing statement covering the Collateral, or any
part thereof, has been filed with any filing officer;
(iii) no other security agreement covering the
Collateral, or any part thereof, has been made and no security
interest, other than the one herein created, has attached or been
perfected in the Collateral or in any part thereof;
(iv) no dispute, right of setoff, counter-claim or defense
exists with respect to all or any part of the Collateral;
(v) except for matters arising by reason of state or
federal securities laws, there are no restrictions upon the
transfer of any of the Collateral;
(vi) Pledgor has the right to transfer the Collateral free
of any liens, claims or encumbrances and without obtaining the
consent of any other party which has not already been obtained,
and the transfer of the Collateral will not result in a default
under any agreement to which Pledgor or the Company is a party;
and
(vii) Pledgor is the owner of the Collateral.
ARTICLE V
COVENANTS AND OBLIGATIONS OF PLEDGOR
Pledgor covenants and agrees to:
(i) deliver to Randall D. Smith, on behalf of the Secured
Party, the original stock certificate which represents the
Collateral, together with a stock power endorsing the Collateral
to Secured Party in the form attached hereto as Exhibit "A";
(ii) from time to time promptly execute and deliver to
Randall D. Smith, on behalf of the Secured Party, all such other
assignments, certificates, supplemental writings, financing
statements and continuation statements, and do all other acts or
things, as Secured Party may reasonably request in order to more
fully evidence and perfect the security interest herein created;
(iii) promptly furnish Secured Party with any
information which Secured Party may reasonably request concerning
the Collateral;
(iv) allow Secured Party to inspect all records of Pledgor
relating to the Collateral, and to make and take away copies of
such records;
(v) promptly notify Secured Party of any change in any fact
or circumstance warranted or represented by the Pledgor in this
Agreement or in any other writing furnished by Pledgor to Secured
Party in connection with the Collateral;
(vi) promptly notify Secured Party of any claim, action or
proceeding affecting title to the Collateral, or any part
thereof, or the security interest therein, and at the request of
Secured Party, appear in and defend, at Pledgor's expense, any
such action or proceeding;
(vii) promptly notify Secured Party of any change of
address of Pledgor; and
(viii) not merge or consolidate Farmout, Inc. with or
into any other corporation or entity, or enter into any exchange
of stock with any other corporation or entity, prior to delivery
of the Common Stock to Secured Party as required herein.
Pledgor further covenants and agrees that, without the prior
written consent of Secured Party, Pledgor will not: (a) sell,
assign or transfer any of Pledgor's rights in the Collateral; or
(b) create any other security interest in, or otherwise encumber,
the Collateral, or any part thereof, or permit the same to be or
become subject to any lien, attachment, execution, sequestration,
other legal or equitable process, or any encumbrance or security
agreement of any kind or character.
Should the Collateral, or any part thereof, ever be in any
manner converted by the issuer thereof into another type of
property or any money or other proceeds ever be paid or delivered
to Pledgor as a result of Pledgor's rights in the Collateral,
then, in any such event, all such property, money and other
proceeds shall become part of the Collateral, shall be held by
Pledgor in trust for the benefit of Secured Party, and Pledgor
covenants to forthwith pay or deliver to Randall D. Smith, on
behalf of the Secured Party, all of the same and, at the same
time, if Secured Party deems it necessary and so requests,
Pledgor will properly endorse or assign the same; provided,
however, that cash dividends paid on the Collateral to Pledgor
shall be and remain the property of Pledgor, except any dividends
paid during the time after a "default" (as defined below) has
occurred and remains uncured. With respect to any of such
property of a kind requiring an additional security agreement,
financing statement or other writing to perfect a security
interest therein in favor of Secured Party, Pledgor will
forthwith execute and deliver to Randall D. Smith, on behalf of
the Secured Party, whatever the Secured Party shall reasonably
deem necessary or proper for such purpose. Should any covenant
or agreement of Pledgor fail to be performed in accordance with
its terms, Secured Party may, but never shall be obligated to,
perform or attempt to perform such covenant or agreement on
behalf of Pledgor and Pledgor agrees to pay to Secured Party any
such amount reasonably expended by Secured Party in such
performance or attempted performance, together with interest
thereon at the rate specified in the Note.
ARTICLE VI
EVENTS OF DEFAULT; RIGHTS OF SECURED PARTY UPON DEFAULT
The term "default", as used herein, means the occurrence of
any of the following events:
(i) the failure of Pledgor to issue and deliver the
1,309,880 shares of Common Stock to Secured Party on January 2,
1997, which failure continues for fifteen (15) calendar days
after notice thereof from Secured Party to Pledgor; or
(ii) the failure of Pledgor to punctually and properly
perform any material covenant or agreement contained herein,
which failure continues for thirty (30) calendar days after
notice thereof from Secured Party to Pledgor.
Upon the occurrence of a default, in addition to any and all
other rights and remedies which Secured Party may then have
hereunder, or under the Uniform Commercial Code, as adopted in
New York (the "Code"), or otherwise, Secured Party, at Secured
Party's option, may:
(i) bring suit to enforce specific performance of Pledgor's
obligation to issue and deliver the 1,309,880 shares of Common
Stock to Secured Party;
(ii) reduce any claim against Pledgor to judgment and
otherwise enforce collection of the same;
(iii) foreclose or otherwise enforce its security
interest in all or any part of the Collateral by any available
judicial procedure;
(iv) after notification, if any, as provided for herein,
sell or otherwise dispose of, at such location chosen by Secured
Party, all or any part of the Collateral, and any such sale or
other disposition may be as a unit or in parcels, by public or
private proceedings, and for cash or upon credit or otherwise as
Secured Party may reasonably determine, and by way of one or more
contracts (it being agreed that the sale of any part of the
Collateral, shall not exhaust Secured Party's power of sale, but
sales may be made from time to time until all of the Collateral
has been sold or until the Obligation has been paid in full), and
at any such sale it shall not be necessary to exhibit the
Collateral;
(v) apply by appropriate judicial proceedings for
appointment of a receiver for the Collateral, or any part
thereof, and Pledgor hereby consents to any such appointment;
(vi) buy the Collateral at any public sale;
(vii) buy the Collateral at any private sale if the
Collateral is of a type customarily sold in a recognized market
or is a type which is the subject of widely distributed standard
price quotations; and
(viii) without notice to Pledgor, either have the
Collateral registered in Secured Party's name, or in the name of
a nominee, and, with or without such registration, (a) exercise
as to such Collateral all the rights, powers and remedies of an
owner, including the right and power to vote, (b) enter into any
extension, reorganization, merger or consolidation agreement, or
any other agreement in any way relating to or affecting the
Collateral, and in connection therewith may deposit or surrender
control of the Collateral and accept other property in exchange
therefor, and (c) demand of the issuer of the Collateral to
receive any and all dividends and other distributions payable in
respect thereof, regardless of the medium in which paid and
whether they be ordinary or extraordinary, and the issuer of the
Collateral, in making payment to Secured Party hereunder, shall
be fully protected in relying on the written statement of Secured
Party that Secured Party then holds a security interest which
entitles it to receive such payment, and the receipt of Secured
Party for such payment shall be full acquittance therefor to the
issuer of the Collateral and the issuer of the Collateral shall
not be required to see the application of such payment; provided,
however, Secured Party shall have no duty to exercise any of the
foregoing rights, privileges or options and shall not be
responsible for any delay or failure to do so.
Secured Party shall have no duty to fix or preserve the
rights against any other party having an interest in the
Collateral, and shall never be liable for its failure to use
diligence to collect any amount payable in respect to the
Collateral, but shall be liable only to account to Pledgor for
what Secured Party may actually collect or receive thereon.
Pledgor agrees that the Secured Party shall have no
responsibility for ascertaining any maturities, calls,
conversions, exchanges, offers, tenders or similar matters
relating to any of the Collateral, nor for informing Pledgor with
respect to any thereof.
Secured Party shall be entitled to apply the proceeds of any
sale or other disposition of the Collateral in the following
order: first, to the payment of all of Secured Party's reasonable
expenses, including, without limitation, attorneys' fees and
other legal expenses, incurred in holding and preparing the
Collateral, or any part thereof, for sale or other disposition,
in arranging for such sale or other disposition, and in actually
selling the same; and next, toward payment of the balance of the
Obligation in such order and manner as Secured Party, in its
discretion, may deem advisable. Secured Party shall account to
Pledgor for any surplus after making the foregoing application
and, if any Collateral remains unsold, shall return such
Collateral to Pledgor. If the proceeds are not sufficient to pay
the Obligation in full, Pledgor shall be liable for any
deficiency and shall be required to pay the same to Secured
Party.
ARTICLE VII
RIGHTS OF PLEDGOR
Unless and until occurrence of an event of "default" as
herein defined, Pledgor shall have the right to vote the
Collateral. If requested by Pledgor, Secured Party shall execute
and deliver to Pledgor such proxies and authorizations as are
reasonably required to confirm the voting rights of Pledgor.
ARTICLE VIII
SECURITIES LAW
The Secured Party is authorized, at any sale, if it deems it
desirable so to do, to restrict the prospective bidders or
purchasers to persons who will represent and agree that they are
purchasing for their own account, for investment, and not with a
view to distribution or sale of any of the Collateral.
If any default shall have occurred and if Secured Party
determines to exercise its rights to sell all or any of the
Collateral, upon request the Pledgor shall from time to time
furnish to Secured Party all such information as Secured Party
may request in order to determine the number of shares included
in the Collateral which may be sold by Pledgor in exempt
transactions under Section 4(1) of the Securities Act of 1933, as
amended, and Rule 144 of the Securities and Exchange Commission
thereunder (or any statutory provisions or rules in effect in
lieu thereof), as the same are from time to time in effect.
Pledgor recognizes and acknowledges that Secured Party may
be unable to effect a public sale of all or a part of the
Collateral (time being of the essence) and may elect to resort to
one or more private sales to purchasers who will be obligated to
agree, among other things, to acquire the Collateral for their
own account, for investment, and not with a view to the
distribution or resale thereof. Pledgor acknowledges that any
such private sales may be at prices and on terms less favorable
to Secured Party than those of public sales, provided such
private sales shall be made in a commercially reasonable manner.
ARTICLE IX
NOTIFICATION OF SALE
Reasonable notification of the time and place of any public
sale of the Collateral, or reasonable notification of the time
after which any private sale or other intended disposition of the
Collateral is to be made, shall be sent to Pledgor at the address
set forth on the signature page hereof, and to any other person
entitled under the Code to notice.
ARTICLE X
FINANCING STATEMENT
Secured Party shall have the right at any time to file this
Agreement, or a photographic or other reproduction hereof, as a
financing statement, and to attach to the same a description of
all Collateral at the time subject to this Agreement, but the
failure of Secured Party to do so shall not impair the validity
or enforceability of this Agreement.
ARTICLE XI
REMEDIES CUMULATIVE
All rights and remedies of Secured Party hereunder are
cumulative of each other and of every other right or remedy which
Secured Party may otherwise have at law or in equity or under any
other contract or other writing for the enforcement of the
security interest herein or the collection of the Obligation, and
the exercise of one or more rights or remedies shall not
prejudice or impair the concurrent or subsequent exercise by
Secured Party of other rights or remedies.
ARTICLE XII
TRANSFER AND ASSIGNMENT BY SECURED PARTY
The rights, powers and interests held by Secured Party
hereunder, together with the Collateral, may be transferred and
assigned by Secured Party, in whole or in part, at such time and
upon such terms as he may deem advisable to any person who shall
acquire any part of the Obligation, and upon any such transfer or
assignment, the transferee or assignee shall succeed to all the
rights and powers of, and be subject to the duties and
obligations of, Secured Party hereunder to the extent of any such
transfer and assignment.
ARTICLE XIII
NO WAIVER OF RIGHTS OR REMEDIES
Should any part of the Obligation be payable in
installments, the acceptance by Secured Party at any time and
from time to time of part payment of the aggregate amount of all
installments then matured shall not be deemed to be a waiver of
the default, if any, then existing. No waiver by Secured Party
of any default shall be deemed to be a wavier of any other
subsequent default, nor shall any such waiver by Secured Party be
deemed to be a continuing waiver. No modification or waiver of
any provision of this agreement or of any promissory note or
other security agreement, mortgage, deed of trust, assignment or
contract of any kind evidencing or securing payment of the
Obligation, or any part thereof, shall be effective unless the
same shall be in writing and signed by Secured Party. No delay
or omission by Secured Party in exercising any right or power
hereunder, or under any other writings executed by Pledgor as
security for or in connection with the Obligation, shall impair
any such right or power or be construed as a waiver thereof or
any acquiescence therein, nor shall any single or partial
exercise of any such right or power preclude other or further
exercise thereof, or the exercise of any other right or power of
Secured Party hereunder or under such other writings.
ARTICLE XIV
BINDING EFFECT
This Agreement shall be binding on Pledgor and Pledgor's
successors and assigns and shall inure to the benefit of Secured
Party and Secured Party's successors and assigns.
ARTICLE XV
LAW GOVERNING
All obligations of Pledgor under this Agreement are
performable in New York, New York. This Agreement shall be
deemed made in New York, New York and shall be governed by, and
construed in accordance with, the laws of the State of New York.
ARTICLE XVI
HEADINGS
All headings set forth in this Agreement are intended for
convenience only and shall not control or affect the meaning,
construction or effect of this Agreement or any of the provisions
hereof.
ARTICLE XVII
SEVERABILITY
All agreements and covenants contained herein are severable
and in the event that any of them shall be held to be invalid by
any court of competent jurisdiction, this Agreement shall be
interpreted as if such invalid agreements or covenants were not
contained herein.
ARTICLE XVIII
TERMINATION OF SECURITY AGREEMENT
Upon the issuance and delivery to Secured Party of the
1,309,880 shares of Common Stock, this Agreement shall terminate.
Upon such termination, Secured Party shall promptly return to
Pledgor the stock certificates representing the Collateral,
together with the stock power executed by Pledgor in favor of
Secured Party.
ARTICLE XIX
NOTICES
Any notice shall be conclusively deemed to have been
received by a party hereto and to be effective on the day on
which delivered to such party at the address set forth below
beside each party's signature hereto (or at such other address as
such party shall specify to the other parties in writing), or if
sent by registered mail, on the third business day after the day
on which mailed, addressed to such party at the same address.
ARTICLE XX
ENTIRE AGREEMENT
This Agreement supersedes any and all other agreements,
either
oral or in writing, between the parties hereto with respect to
the
subject matter hereof and contains all of the covenants and
agreements between the parties with respect to the subject matter
hereof.
ARTICLE XXI
WAIVERS AND AMENDMENTS
No term or condition of this Agreement shall be deemed to
have
been waived nor shall there be any estoppel to enforce any
provision of this Agreement except by written instrument of the
party charged with such waiver or estoppel. No amendment or
modification of this Agreement shall be deemed effective unless
and
until executed in writing by the parties hereto.
ARTICLE XXII
MULTIPLE COUNTERPARTS
This Agreement may be executed in two (2) or more
counterparts, each of which shall constitute an original, but all
of which when taken together shall constitute one and the same
instrument and any of the parties hereto may execute this
Agreement
by signing any such counterpart.
EXECUTED by Pledgor and Secured Party effective the date and
year first above written.
ADDRESS AND TELECOPY NUMBER PLEDGOR:
FOR NOTICES TO PLEDGOR:
INLAND RESOURCES INC.
475 17th Street, Suite 1500
Denver, Colorado 80202
Fax: (303) 296-4070 By: /s/ Kyle R. Miller
Kyle R. Miller, President
ADDRESS AND TELECOPY NUMBER SECURED PARTY:
FOR NOTICES TO SECURED PARTY:
c/o Smith Management Company, Inc. /s/ Randall D. Smith
885 Third Avenue Randall D. Smith
34th Floor
New York, New York 10022
Fax: (212) 751-9503
c/o Smith Management Company, Inc. /s/ Jeffrey A. Smith
885 Third Avenue Jeffrey A. Smith
34th Floor
New York, New York 10022
Fax: (212) 751-9503
c/o Smith Management Company, Inc. /s/ John W. Adams
885 Third Avenue John W. Adams
34th Floor
New York, New York 10022
Fax: (212) 751-9503
Exhibit "A"
to
Security Agreement
STOCK POWER
FOR VALUE RECEIVED, INLAND RESOURCES INC. hereby sells,
assigns and transfers unto Randall D. Smith, Jeffrey A. Smith and
John W. Adams, jointly, _________ shares of common stock, par
value $_________ per share, of Farmout Inc., a Utah corporation,
in the name of Inland Resources Inc. on the books of said Farmout
Inc. represented by Certificate No. _______, and hereby
irrevocably constitutes and appoints Randall D. Smith, Jeffrey A.
Smith and John W. Adams, jointly, attorney to transfer the said
stock on the books of Farmout Inc. with full power of
substitution in the premises.
DATED: June 12, 1996.
INLAND RESOURCES INC.
By: /s/ Kyle R. Miller
Kyle R. Miller, President