-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, B134m8PloVziEq1ptuOH4XeY4EDyKD28R+TdtJbT+uzqnAjt/kidLvqLHfTcrmqg /83SAzCix9XnudGrPbh61A== 0000033325-96-000002.txt : 19960314 0000033325-96-000002.hdr.sgml : 19960314 ACCESSION NUMBER: 0000033325-96-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960312 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: EQUITY OIL CO CENTRAL INDEX KEY: 0000033325 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 870129795 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-00610 FILM NUMBER: 96533751 BUSINESS ADDRESS: STREET 1: 10 W THIRD S STE 806 CITY: SALT LAKE CITY STATE: UT ZIP: 84101 BUSINESS PHONE: 8015213515 MAIL ADDRESS: STREET 1: P O BOX 959 CITY: SALT LAKE CITY STATE: UT ZIP: 84110 10-K 1 1995 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1995 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) Commission file number 0-610 EQUITY OIL COMPANY [Exact name of registrant as specified in its charter] Colorado 87-0129795 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 10 West Broadway, Suite 806 84101 Salt Lake City, Utah (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (801) 521-3515 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered None None Securities registered pursuant to Section 12(g) of the Act: Common Stock (par value, $1 per share) [Title of class] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not 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-K or any amendment to this Form 10-K. Yes X No As of February 21, 1996, 12,711,100 common shares were outstanding, and the aggregate market value of voting stock held by non-affiliates of the registrant was approximately $53,070,677. Documents Incorporated by Reference 1. Definitive proxy statement to be filed in connection with Issuer's Annual Stockholders' Meeting to be held on May 8, 1996 and more particularly the information contained on pages 2 through 5 are incorporated by reference into Part III of this report. Total Pages 63 PART I ITEM 1. BUSINESS GENERAL DEVELOPMENT OF BUSINESS Equity Oil Company ("Equity" or "the Company") was originally incorporated in the state of Utah in 1923. In 1958, it was merged into its subsidiary, Weber Oil Company, a Colorado corporation. The surviving company adopted the name Equity Oil Company. Equity is an independent oil and gas exploration and production company, currently conducting its business in ten states and two Canadian provinces. Equity is also a 50% shareholder in Symskaya Exploration, Inc., which has operations in Russia. Headquartered in Salt Lake City, Utah, the Company also maintains an exploration office in Denver, Colorado, and a field office in Vernal, Utah. The Company has 17 full-time employees. More than 90% of the Company's revenues come from the sale of crude oil and natural gas. Accordingly, the Company continually seeks to increase its oil and gas reserves through exploration, development of existing properties, and/or the purchase of existing producing properties. The Company's exploration office in Denver is responsible for the generation and review of exploration prospects, and the planning, where necessary, to drill the prospects. These include prospects developed in-house, as well as those presented by independent third parties. The general drilling practice of the Company is to participate in projects on a 25% to 50% working interest basis. Participation varies with each prospect depending on location and the attendant financial and technical risk. In addition to its exploration ventures, the Company works in conjunction with other working interest owners in producing properties to identify and develop projects that will enhance and expand the productive capacities of existing wells and fields. The Company also investigates opportunities to purchase interests in properties with existing production. A discussion of the Company's activities during 1995 is set forth below in ITEM 2. Properties, under the caption Present Activity. NARRATIVE DESCRIPTION OF BUSINESS PRINCIPAL PRODUCTS AND MARKETS The Company produces crude oil and natural gas. During the last five years, revenues from the sales of these products have accounted for more than 90% of the total revenues of the Company, while remaining revenues have come from other sources, including interest income on invested funds, partnership income, operating overhead reimbursements, and the sales of various undeveloped properties. The Company's crude oil production is sold under short-term contracts at current posted prices for each geographic area, less applicable quality or transportation tariffs plus negotiated bonuses. Prices are set by oil purchasers, and their methods of determining prices are not within the knowledge of the registrant, but it is assumed they are influenced by regional, national and international factors relating to oil supply and demand. (See discussion under Major Customers) The bulk of the Company's natural gas production is sold in the Gulf Coast of Texas, in the Canadian province of Alberta, and in Wyoming. In addition to these areas, the Company expects to see an increase in gas production during 1996 in California. In the Gulf Coast of Texas, the majority of the Company's gas production is sold on the spot market. Contracts are typically of short duration, and prices received vary in concert with the futures markets. While the areas in Texas where the Company has its major gas reserves are characterized by large reserves of other companies, the Company has historically been able to sell all of its productive capacity, and expects to be able to continue to do so in the near future. The majority of the natural gas produced in Alberta is taken in kind and sold on the spot market under short term contracts. The Company's contracts do not provide for minimum production amounts; however, the Company has historically been able to produce most of the wells at or near capacity, and has been able to sell all of the gas produced. The majority of gas sold in Wyoming is marketed under a contract at an index price that is subject to renegotiation on a monthly basis. The Company expects to sell gas produced in California on the spot market, where prices also vary on a monthly basis. SEASONALITY The Company experiences some seasonality in gas sales revenues. Net sales prices tend to rise during the winter months compared to the rest of the year. However, since over 80% of the Company's oil and gas revenues come from the sale of oil, the seasonal impact on gas sales is not significant. MAJOR CUSTOMERS All oil and gas produced in the U.S. or Canada is sold to unaffiliated pipeline, refining, or crude oil purchasing companies. These companies are often the operators of the fields where the product is produced, or owners of the pipelines which transport the products. A change of ownership or a change in operator has not resulted in an interruption of production or transportation, and consequently has not had a material adverse effect on the business of the Company. Approximately 60% of the Company's total oil production comes from the Rangely Weber Sand Unit in Rangely, Colorado. This production accounted for approximately 51% of the Company's total revenues in 1995. The Company currently sells its share of oil from the Rangely field through a crude oil marketing company to Phillips Petroleum (Phillips). The Company does not believe that the loss of Phillips as a customer would have any material impact on the Company, as oil production from the Rangely field could readily be sold to other crude oil purchasers. No other customer accounts for more than 10% of the Company's sales. COMPETITION Equity is part of a highly competitive industry composed of many companies that are significantly larger and possess greater resources than the Company. These include major oil companies as well as large independent exploration and production companies. Their size and resources may allow these parties to operate at a greater competitive advantage than Equity. During 1995 the Company did not experience any competitive factors which impaired its production or sale of oil and gas, nor did it experience any difficulties in contracting for drilling and related equipment. GOVERNMENT REGULATION Drilling activities of the Company are regulated by several governmental agencies in the United States, both federal and state, including the Environmental Protection Agency, Forest Service, Department of Wildlife, and Bureau of Land Management, as well as state oil and gas commissions for those states in which the Company has operations. Canadian operations are subject to similar requirements. The Company believes that it is currently in compliance with all federal, state, and local environmental regulations, both domestically and abroad. Further, the Company does not believe that any current environmental regulations will have a material impact on its capital expenditures or earnings, nor will they result in any competitive disadvantage to the Company. FINANCIAL INFORMATION ABOUT FOREIGN OPERATIONS Foreign operations of the Company are currently conducted in the Canadian provinces of Alberta and British Columbia. Financial information concerning these operations can be found in Footnotes 5 and 6 to the financial statements. For financial reporting purposes, the Company does not allocate any general and administrative expenses to its Canadian operations, nor are they burdened with indirect exploration overhead expenses. Direct exploration expenses are charged to the geographic area in which they occur. Because the majority of the Company's exploration efforts occur in the United States, very little exploration expenses are allocated to the Canadian operations. As a result of these and other factors, the operating profit of the Canadian operations is significantly greater than the operating profit in the United States. The Company does not believe that its Canadian operations are attended with any more risk than those in the United States. Symskaya Exploration, Inc., in which the Company owns a 50% interest, is conducting operations in Russia. Further discussion of this venture is found in ITEM 2. Properties, under the caption Present Activity, and in Footnotes 6 and 9 in the financial statements. ITEM 2. PROPERTIES The principal properties of the Company consist of developed and undeveloped oil and gas leasehold interests. Developed leases are comprised of properties with existing production, where lease terms continue as long as oil and/or gas is produced. Undeveloped leases include unproven acreage on both public and private lands. The leases have set terms and terminate at the time specified in each lease unless oil and gas in commercial quantities are discovered prior to that time. The Company also has a fee interest in 3,968 net acres of oil shale lands in Colorado. These properties have not generated significant revenue for the Company. In 1994, the Company entered into a lease agreement with another company for a five year oil and gas lease on these lands. RESERVES The information found in Footnote 9 to the financial statements concerning proved reserves represents the Company's best estimate of product quantities expected to be produced from the properties based on geologic and engineering data, as well as current economic and operating conditions. The presentation is made in accordance with Securities and Exchange Commission guidelines, and is based on prices and costs in effect on December 31, 1995. The calculation of future net cash flows relating to proved oil and gas reserves is sensitive to price variations, and is based on the prices in effect at a specific point in time. The weighted average net prices used for the 1995 reserve calculation were $18.02 per barrel of oil and $1.38 per Mcf of natural gas, which compares to $16.87 and $1.52 in 1994. No estimates of reserves have been filed with or included in any report to any other federal agency during 1995. PRODUCTION The following table sets forth the Company's production, average sales prices, and average lifting costs by geographic area for 1995, 1994, and 1993:
1995 1994 1993 1995 1994 1993 Area Oil Oil Oil Gas Gas Gas Production (Bbls) (Bbls) (Bbls) (MMCF) (MMcf) (MMcf) Colorado 373,766 387,919 435,845 84 27 22 Texas 32,861 42,603 52,045 356 439 574 Montana 23,385 17,889 19,744 9 - 1 Utah 10,069 12,216 11,996 - - - Wyoming 44,283 22,956 24,129 422 398 195 North Dakota 5,869 5,370 11,161 2 1 1 Oklahoma 640 664 631 - - - California - - - 5 - - Other States 6 30 39 2 15 2 Total U.S. 490,879 489,647 555,590 880 880 795 Alberta 116,252 108,466 112,907 568 238 215 B.C. 12,249 11,430 7,881 3 2 2 Total Canada 128,501 119,896 120,788 571 240 217 Grand Total 619,380 609,543 676,378 1,451 1,120 1,012 Average Price U.S. $17.44 $15.88 $16.47 $1.67 $2.18 $2.13 Canada $15.49 $14.30 $13.07 $ .74 $1.57 $1.24 Total $17.00 $15.57 $15.87 $1.31 $2.05 $1.94 Lifting Costs U.S. $ 7.75 $ 6.60 $ 7.30 $ .74 $ .91 $ .94 Canada $ 3.75 $ 4.32 $ 3.44 $ .19 $ .46 $ .31 Total $ 6.85 $ 6.15 $ 6.61 $ .53 $ .81 $ .81
PRODUCTIVE WELLS AND ACREAGE The location and quantity of Equity's productive wells and acreage as of December 31, 1995 are as follows: Productive Wells: Gross Net Oil: United States 729 52.909 Canada 244 12.125 Gas: United States 55 13.289 Canada 11 2.327 Total Productive Wells 1,039 80.650 Developed Acreage United States 122,592 9,161 Canada 128,880 3,402 Total Developed Acreage 251,472 12,563 UNDEVELOPED ACREAGE The following table sets forth the Company's undeveloped oil and gas lease acreage as of December 31, 1995 by geographic area: Gross Net Area Acreage Acreage Colorado 8,520 7,605 Texas 4,362 1,207 Montana 27,572 5,550 Utah 6,760 784 Wyoming 19,705 7,872 California 23,352 5,224 North Dakota 4,998 3,379 Other States 280 38 Total U.S. 95,549 31,659 Alberta 37,040 4,533 Total Canada 37,040 4,533 Grand Total 132,589 36,192 Through its 50% ownership in Symskaya Exploration, Inc., the Company also has an indirect interest in an additional 550,000 net acres in Russia. Further discussion of this venture is found in ITEM 2. Properties, under the caption Present Activity, and in Footnotes 6 and 9 to the financial statements. DRILLING ACTIVITY During 1995, the Company participated in the drilling of 20 gross wells, including 3 drilled under farmout agreements. Of this total, 16 were completed as producing oil and gas wells and 4 were plugged and abandoned as dry holes. Gross exploratory wells drilled: Status 1995 1994 1993 United States Productive 8 7 8 Dry 4 6 7 Canada Productive - - - Dry - - - Gross development wells drilled: United States Productive 3 5 3 Dry - - 3 Canada Productive 5 2 - Dry - - - Net exploratory wells drilled: United States Productive 1.05 1.10 1.13 Dry 1.08 1.48 1.86 Canada Productive - - - Dry - - - Net development wells drilled: United States Productive 1.30 .80 .88 Dry - - .85 Canada Productive 2.14 .90 - Dry - - - PRESENT ACTIVITY In 1994, the Company announced the adoption of a corporate strategy to replace the oil and natural gas reserves of the Company. The four elements of that strategy are: *Focused exploration drilling in North America *Development drilling and exploitation in North America *Acquisition of proved reserves in North America *International exploration in Russia Following is background information concerning the Company's current and expected activities as they relate to this strategy: EXPLORATION Much of the first part of 1995 was devoted to the development and evaluation of exploration prospects. In the second half of 1995, the Company participated in the drilling of twelve exploratory wells, resulting in five gas completions, three oil completions, and four dry holes. Two wells approved at year-end 1995 have both been completed in 1996 as gas wells. The most significant event of the 1995 exploration program was the drilling of the first four wells on the 41.5 square mile Orion 3-D seismic survey in the Sacramento Basin of Northern California. The survey was completed in the spring of 1995, and following processing and evaluation of the survey data, drilling on the survey began in the fourth quarter. Five of the first six wells drilled were completed as gas wells, including two in 1996. All of the Orion wells will be on production in the first quarter of 1996, and the Company currently has plans to drill an additional nine wells on this survey in 1996. Equity has a 25% working interest in this project. The Company will participate in four additional 3-D seismic surveys in the Sacramento Basin in 1996 that may result in the drilling of additional exploratory wells during the year. Exploration activities in the Rocky Mountains in 1995 resulted in one dry hole; however, considerable work was done in prospect generation and development that may result in nine prospects being drilled in 1996. The Company currently has three active prospects in Wyoming, two in Montana, two in Colorado, and two in North Dakota. Included in the Rocky Mountain exploration prospects is a Lodgepole reef test that will be drilled, following a twenty five square mile 3-D seismic program, on a 21,500 acre lease block in Dawson County, Montana. The 3-D survey is scheduled to begin in the first quarter of 1996, and drilling should begin in the third quarter of the year. Equity generated and operates this prospect and has been reimbursed by its partners for 85% of its acreage cost in the prospect and will be carried at no cost for its 15% working interest in the 3-D survey and the first well. DEVELOPMENT DRILLING In 1995, Equity participated in the drilling of eight development wells resulting in four gas wells and four oil wells. In addition to the conversion of 1.37 BCF of gas from proved undeveloped reserves to proved developed reserves, this drilling resulted in the addition of 198,000 barrels and .47 BCF of proved developed reserves to the Company's reserve base. Development drilling during the year focused on the Cessford field in Alberta, Canada and the Siberia Ridge field in Sweetwater County, Wyoming. At Cessford, four wells were completed as oil wells, bringing the total producing wells in this 50% owned property to twenty. Present plans call for the drilling of one additional development well in the field in 1996 and the continuation of the work on a waterflood feasibility study. At the Siberia Ridge field, the Company participated in the drilling of three wells in 1995. Two of the wells were drilled under a farmout agreement at no cost to the Company. Equity will back in for a 40% working interest in the two wells after they payout and will have a 5% royalty interest until that time. These wells are now on production at a combined rate of 700 MCF per day. The third well has been placed on production at a daily rate of 300 MCF per day. Equity has a 50% interest in this well. Present plans call for the drilling of three wells in the Siberia Ridge Field in 1996, one of which will be under a farmout agreement, and two in which Equity will have a 50% working interest. Development drilling and exploitation work in 1996 will begin to focus on certain of the properties purchased in 1995. The most significant of those properties, the Sage Creek Field in Big Horn County, Wyoming, will see the drilling of a well that will test the productive limits of the Madison formation. Equity has a 24% working interest in the field. ACQUISITIONS In Equity's first year as an acquiror of producing properties, the Company purchased a total of approximately 761,000 barrels of oil and 1.29 Bcf of natural gas reserves for a total purchase price of $3.1 million dollars, or $3.18 per BOE. The purchases were made using funds from the $20 million borrowing base revolving credit facility established by the Company in March of 1995. The specific purchases included: The purchase of an average 30% working interest in seven fields and fifty wells from Mountain Oil and Gas of Wyoming and Mountain Oil and Gas of Montana for a total purchase price of $2.2 million This acquisition added proved developed reserves of approximately 700,000 barrels of oil and 197 million cubic feet of natural gas, equivalent to 733,000 BOE's, at a purchase price of $3.01 per BOE. The purchase was effective July 1, 1995. The purchase of an additional 5% interest in the Cessford field in Alberta, Canada, effective May 1, 1995, added 72,000 barrels of oil and 127.5 million cubic feet of natural gas, equivalent to 93,000 BOE's, at a purchase price of $412,000, or $4.42 per BOE. The purchase of a 25% average working interest in three gas wells in the Meteetsee field in Park County, Wyoming from Exxon for $494,000. Proved developed reserves associated with the wells total 938 million cubic feet of natural gas for an acquisition cost of $.52 per MCF. The purchase was effective on December 1, 1995. Each of the properties acquired have upside potential in the form of infill development drilling, additional exploration, equipment upgrades, and/or possible waterflooding In 1996, the Company will continue to focus its producing property acquisition efforts in Wyoming, Montana and Alberta, and will continue to investigate and pursue appropriate corporate acquisition opportunities. INTERNATIONAL EXPLORATION The drilling of the Lemok No. 1 well by Symskaya Exploration, Inc. on its 1.1 million acre License area in Eastern Siberia, is continuing. Although recent drilling problems related to deviation control of the borehole have slowed the drilling process, evaluation of the drilling results to date are encouraging. As reported previously, oil shows were encountered in the well between 6,890 and 6,985 feet in a dolomite section of probable Cambrian age. The cores taken in this interval, and the western logs run from 2,460 to 8,793 feet, the point at which intermediate casing has been set, have been evaluated. Evaluation of log and sample data to date indicates that, in addition to the zone previously reported, at least two other zones between 7,760 and 8,793 feet may be potentially productive. The core and log data is inferential only, and the extent and productivity of any of the zones must await testing, which will follow the completion of drilling in the well. The well has continued to encounter periodic hydrocarbon shows in the drill cuttings below the intermediate casing depth of 8,793 feet. All shows are in dolomites of probable Cambrian age. The well is now expected to reach total estimated depth of 14,500 feet during the first quarter of 1996. The License area is located in a country that may be considered economically and politically unstable. As a result, the Symskaya project is subject to all the risks of an exploratory well in addition to the economic and political risks associated with the Russian Federation and local government, including but not necessarily limited to the cancellation or renegotiation of contracts, expropriation, tax and royalty increases, foreign exchange controls, import and export regulations, environmental regulations and other laws that may have an adverse impact on the operation. There are also increased logistical problems and costs associated with exploration activities in such a remote region. Further information concerning the Company's investment in Symskaya Exploration, Inc. may be found in Footnote 6 to the financial statements. DELIVERY COMMITMENTS The Company is not obligated to provide any fixed or determinable quantity of oil or gas in the future under any existing contracts or agreements. ITEM 3. LEGAL PROCEEDINGS No material legal proceedings are pending. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of the fiscal year covered by this report, no matters were submitted to the security holders for a vote, and no proxies were solicited. PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED MATTERS The Company's stock is traded on the over-the-counter market and quoted over the NASDAQ National Market System using the symbol EQTY. High and low prices for 1995 and 1994 are as follows: Quarter High Low 1995 - 4th 6 1/8 3 3/4 3rd 7 1/8 4 2nd 4 5/8 3 1/8 1st 4 3 3/8 1994 - 4th 5 3/8 3 7/8 3rd 5 5/8 3 1/2 2nd 4 1/4 3 1/2 1st 4 3/4 3 7/8 The approximate number of stockholders of the Company as of February 22, 1996 is 2,250. ITEM 6. SELECTED FINANCIAL DATA 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------- Net Sales $12,259,739 $11,713,498 $12,729,899 $15,222,887 $15,286,707 Other Income 457,837 196,431 43,096 277,289 148,388 Lease Operating Costs 5,093,782 4,658,115 5,293,628 5,481,102 7,505,337 DD&A 3,843,442 5,011,155 5,090,744 4,868,084 4,108,950 Impairment of Proved Oil and Gas Properties 2,471,146 -0- -0- -0- -0- Property Writedowns -0- -0- 3,292,624 -0- -0- 3-D Seismic 237,604 -0- -0- -0- -0- Exploration Expense 1,633,612 1,718,339 1,737,923 2,459,873 1,927,424 General and Administrative 1,908,778 1,560,675 1,607,892 1,939,682 1,752,816 Income (Loss) Before Cumulative Effect of Accounting Changes (1,254,812) (360,830) (2,476,631) 801,440 314,444 Income (Loss) Per Common Share Before Cumulative Effect of Accounting Changes (.10) (.03) (.20) .07 .03 Total Assets 53,947,050 51,908,336 53,322,749 58,154,880 56,832,462 Long Term Debt 4,918,830 460,000 920,000 1,380,000 1,840,000 Cash dividends per share .00 .00 .05 .20 .20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ADOPTION OF SFAS NO 121. As discussed in Note 2 to the financial statements, the Company adopted SFAS No. 121, Accounting for the Impairment of Long Lived Assets and Assets Held for Disposal, effective July 1, 1995. The adoption of this new accounting standard resulted in non-cash charges for the impairment of proved oil and gas properties in the amount of $2,471,146 ($1,557,563 after tax). Primarily as a result of this charge, the Company recorded a net loss for 1995 in the amount of $(1,254,812), or $(.10) per share, on revenues of $13,250,556. This compares to a net loss of $(360,830), or ($.03) per share, on revenues of $12,460,204 for 1994. This is a non-cash financial statement event only. There has been no decrease in the quantity or expected future net revenue from the Company's reserves, nor is there any impact on the Company's cash flows. OIL AND GAS RESERVES. In February of 1995, the Company announced a new growth strategy aimed at replacing and increasing the reserve base of the Company which encompassed a balanced approach in four areas. Those areas included 1) focused exploration drilling in North America, 2) development drilling and exploitation in North America, 3) acquisition of proved reserves in North America, and 4) international exploration in Russia. As a result of the implementation of this new growth strategy, in 1995 the Company added 1.06 million barrels of oil and 2.26 billion cubic feet of natural gas reserves, equivalent to 171% of 1995 oil production, and 156% of 1995 gas production. When natural gas is converted at a ratio of 6 million cubic feet per barrel the reserve replacement totaled 1.44 million barrels of oil equivalent (BOE) or 167% of 1995 production. Year end 1995 proved reserves of oil increased to 7.75 million barrels, an increase of 6% over year end 1994 reserves of 7.31 million barrels. Natural gas proved reserves at year end 1995 were 18.02 billion cubic feet, 5% higher than at year end 1994. Barrel equivalent reserves of 10.75 million barrels were 6% higher on a year to year basis. RESULTS OF OPERATIONS COMPARISON OF 1995 WITH 1994 OIL AND GAS PRODUCTION AND SALES. The Company recorded increases in oil and gas production and sales during 1995. Oil production rose 2%, from 609,543 barrels in 1994 to 619,380 barrels in 1994. Gas production rose 30%, from 1.12 Bcf in 1994 to 1.45 Bcf in 1995. The production increases were a direct result of the Company's successful development drilling and acquisition programs. While increased gas production was offset by falling gas prices, oil prices rose slightly during the year. The Company's average gas price received during 1995 was $1.31, down 36% from $2.05 received during 1994. Conversely, oil prices increased 9% from $15.57 in 1994 to $17.00 in 1995. The increases in production and oil prices were able to more than offset lower gas prices, resulting in an increase of 5% in oil and gas sales for 1995. Net oil and gas sales for the year were $12,259,739, compared to $11,713,498 in 1994. Further details of production and pricing are found in Item 2. Properties, under the caption Production. Other income. Other income in 1995 includes the recognition of $178,553 of lease revenue deferred in 1994. In addition, the Company has begun to operate a greater number of properties, and 1995 figures include increased overhead fees. LEASE OPERATING COSTS. Lease operating costs increased 9% over 1994 levels. The increase was directly attributable to the increases in production discussed above, along with a greater number of wells on production. Through it's successful acquisition and drilling programs, the Company acquired interests in more than 50 additional wells, most of which were added as of July 1, 1995. DEPRECIATION, DEPLETION, AND AMORTIZATION (DD&A). Decreased DD&A charges in 1995 are a direct reflection of the adoption of SFAS No. 121 discussed above. The Company removed almost $2.5 million from its depletion base effective July 1, 1995, most of which was associated with high cost, marginally economic wells. IMPAIRMENT OF PROVED OIL AND GAS PROPERTIES. As discussed previously, included in the Statement of Operations for 1995 is a non-cash charge for the impairment of proved oil and gas properties in the amount of $2,471,146 ($1,557,563 after tax), which results from the Company's adoption of SFAS No. 121, effective July 1, 1995. SFAS No, 121 requires successful efforts companies to evaluate the recoverability of the carrying costs of their proved oil and gas properties at a field level, rather than on a company-wide level as previously allowed by the Securities and Exchange Commission. The SFAS No. 121 test compares the expected undiscounted future net revenues from each producing field with the related net capitalized costs at the end of each period. When the net capitalized costs exceed the undiscounted future net revenues, the cost of the property is written down to fair value, which is determined using discounted future net revenues from the producing field. 3-D SEISMIC AND EXPLORATION EXPENSES. Total exploration expenses increased 9% from 1994 levels due mainly to Company's participation in its 3-D seismic programs in California. These expenses are charged to operations in the period incurred. During 1995, the Company incurred $237,000 of 3-D seismic costs, while no such costs were incurred in 1994. Exploration expenses decreased due to fewer dry holes. The Company drilled 4 dry holes in 1995, compared to 6 in 1994. GENERAL AND ADMINISTRATIVE EXPENSES. The Company recorded increases in insurance expenses, research expenses, and legal fees associated with its increased activities during 1995, causing general and administrative expenses to increase 22% over 1994 levels. INCOME TAX EXPENSE. The Company's income tax benefit is a function of the loss in 1995. Details concerning the components of the tax benefit can be found in Footnote 3 to the financial statements. COMPARISON OF 1994 WITH 1993 OIL AND GAS PRODUCTION AND SALES. Lower oil prices and production in 1994 offset increases in both gas prices and production, causing an 8% decline in oil and gas sales from 1993 levels. Oil production decreased 10% to 609,543 barrels, down from 676,378 barrels in 1993. Gas production increased 11%, to 1,120 MMCF, compared to 1,012 MMCF in the prior year. INTEREST AND OTHER INCOME. Increases in interest income in 1994 are attributable to the Note Receivable from Symskaya Exploration, Inc. discussed in Footnote 7 to the financial statements. In addition, the Company recognized income in 1994 from the sale of various undeveloped leasehold interests to other oil and gas companies. LEASEHOLD OPERATING COSTS. Lower production and lower product prices combined with unanticipated refunds of prior years production taxes to produce a 12% drop in lease operating costs from 1993 to 1994. A significant amount of these costs are value-based production taxes, which vary with product prices. DEPRECIATION, DEPLETION, AND AMORTIZATION. Decreased DD&A charges reflect lower production volumes and the positive impact on reserve volumes of the somewhat higher year-end product prices used for the reserve valuation as of December 31, 1994. Lower year-end oil prices in 1993 produced abnormally high DD&A charges for that year. PROPERTY WRITEDOWNS. Included in the net loss of $(2,476,631) for 1993 is a non-cash writedown for oil and gas properties in the amount of $3,292,624 ($2,085,130 after tax). As a result of the severely depressed oil prices in 1993, the Company wrote down the costs of certain properties whose carrying value was no longer considered recoverable. These properties consisted of older wells, drilled between the 1950's and the early 1980's. INCOME TAX EXPENSE. The Company's income tax benefit is a function of the loss in 1994. Details concerning the components of the tax benefit can be found in Footnote 3 to the financial statements. LIQUIDITY AND CAPITAL RESOURCES 1995 1994 1993 - ---------------------------------------------------------------- Cash, cash equivalents, and temporary cash investments $1,467,219 $ 2,830,070 $ 5,194,013 Working capital 3,721,049 4,841,243 6,533,528 Cash provide by operating activities 4,143,390 3,747,669 4,081,193 Cash used in investing activities 8,414,086 8,092,488 4,473,456 Cash provided by (used in) financing activities 4,418,606 (485,852) 329,844 CASH AND WORKING CAPITAL. Total cash balances dropped by 48% from 1994, as a result of a combination of several events discussed in the following paragraphs. Working capital decreased by 21%. The Company's ratio of current assets to current liabilities was 3.26 to 1 at December 31, 1995. The Company believes it has adequate resources to properly fund all currently contemplated exploration, development, and/or acquisition projects. CASH FLOW FROM OPERATING ACTIVITIES. Higher oil and gas sales, which were mainly a function of increased oil and gas production, were the principal factor behind an 11% increase in cash flow from operating activities. Cash flow from operating activities during 1995 was $4,143,390, up from $3,747,669 during 1994. Lower oil revenues, resulting from depressed oil prices, and decreases in oil production caused the decline in cash flow from operating activities from 1993 to 1994. The Company is unable to accurately predict future cash flows because of oil and gas price fluctuations. CASH FLOWS FROM INVESTING ACTIVITIES. Primarily as a result of the Company's new acquisition program, 1995 capital expenditures increased 78% over 1994 levels to $7,179,528. While capitalized exploration and development spending remained constant from 1993 to 1995, the Company spent approximately $3.1 million on proved property acquisitions in 1995. Funds advanced to Symskaya Exploration increased from $1,696,261 in 1994 to $2,745,319 in 1995, an increase of 62%, which represents the increased level of drilling activity in Russia. Funds advanced to Symskaya were $582,479 in 1993. CASH FLOWS FROM FINANCING ACTIVITIES. The Company paid a dividend amounting to $.05 per share in 1993. In October of 1993, the Company announced that following a careful review of anticipated costs in connection with its Russian exploration project and the demands of domestic exploration, the Company's Board of Directors determined it would be prudent to suspend the payment of a cash dividend. The payment of any future dividends will be the subject of review at the Company's regularly scheduled Board meetings. The Company did not pay a dividend in 1995 or 1994. During 1995, current and former employees of the Company exercised both Incentive and Non-Qualified Stock Options for 171,000 shares of common stock under the Company's Incentive Stock Option Plans. These exercises generated $681,525 in cash for the Company. There were no option exercises in 1994. Similar option exercise generated $1.4 million in cash during 1993. In March of 1995, the Company obtained a $20 million Borrowing Base Credit Facility (the Facility), with an initial commitment of $10 million. The Facility calls for interest payments only, at the lower of prime or LIBOR plus 2%, for 2 years, at which time it converts to a 3 year term note. An unused commitment fee of 3/8% will be charged to the Company based on the average daily unused portion of the Facility. The Facility is collateralized by all assets of the Company. The Company used proceeds from the Facility to retire its previous outstanding Note Payable in the amount of $920,000. During 1994 and 1993, the Company made principal payments on this Note Payable of $460,000. As of December 31, 1995 the outstanding balance under the Facility was $4,918,830. Further information on the Facility can be found in Footnote 7 to the financial statements. COMMITMENTS. Under the terms of Symskaya's License and Production Sharing Contract (PSC), Equity is committed to advance Symskaya a minimum of $6 million during the first 5 contract years, representing 50% of the minimum expenditures called for in the License and PSC, with the remainder being funded by Leucadia National Corporation, Symskaya's other 50% shareholder. The first contract year began November 15, 1993. The amounts spent by Equity and Leucadia in 1994 and 1995 more than equal the minimum commitments for expenditures under the License and PSC for the first three contract years. Further discussion of this venture is found under Item 2, Properties under the caption Present Activity. OTHER ITEMS. The Company has reviewed all recently issued, but not yet adopted, accounting standards in order to determine their effects, if any, on the results of operations or financial position of the Company. Based on that review, except for SFAS No. 121, which was adopted early in 1995, the Company believes that none of these pronouncements will have any significant effects on current or future earnings or operations. The Company expects to use the disclosure method when it adopts SFAS No. 123, Accounting for Stock-Based Compensation in 1996. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Accountants To the Stockholders and Board of Directors of Equity Oil Company: We have audited the financial statements of Equity Oil Company as listed in Item 14(a) of this Form 10-K. 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 Equity Oil Company as of December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. As discussed in Note 2 to the financial statements, in 1995 the Company changed its method of measuring impairment of proved oil and gas properties. Salt Lake City, Utah January 12, 1996 EQUITY OIL COMPANY BALANCE SHEET December 31, 1995 and 1994 ASSETS 1995 1994 ---- ---- Current assets: Cash and cash equivalents $ 511,252 $ 363,342 Temporary cash investments 955,967 2,466,728 Accounts receivable 2,620,865 2,475,351 Operator advances 633,000 959,604 Federal, state and foreign income taxes receivable 264,300 293,440 Deferred income taxes - 48,281 Other current assets 378,594 389,613 ------------- ------------ Total current assets 5,363,978 6,996,359 ------------ ----------- Property and equipment, at cost (successful efforts method): Unproved oil and gas properties 2,468,412 2,369,478 Proved oil and gas properties: Developed leaseholds 8,622,146 6,235,344 Intangible drilling costs 62,346,421 61,799,689 Equipment 25,127,047 24,052,203 Other property and equipment 678,728 591,791 ----------- ----------- 99,242,754 95,048,505 Less accumulated depreciation, depletion and amortization (57,549,855) (54,236,588) ----------- ---------- 41,692,899 40,811,917 ----------- ---------- Other assets: Investment in Raven Ridge Pipeline Partnership 540,220 684,937 Investment in and note receivable from Symskaya Exploration 6,160,442 3,415,123 Other assets 189,511 ---------- ---------- 6,890,173 4,100,060 ---------- ---------- Total assets $53,947,050 $51,908,336 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994 ---- ---- Current liabilities: Accounts payable $ 1,182,877 $ 1,156,611 Accrued liabilities 145,422 151,948 Federal, state and foreign income taxes payable 155,063 50,931 Accrued profit-sharing contribution 148,771 157,073 Current portion - note payable - 460,000 Deferred income taxes 10,796 - Deferred lease rental revenue - 178,553 ---------- ---------- Total current liabilities 1,642,929 2,155,116 ---------- ---------- Note payable - 460,000 Revolving credit facility 4,918,830 - Deferred income taxes 8,654,698 10,088,189 ---------- ---------- 13,573,528 10,548,189 ---------- ---------- Commitments (Note 6) Stockholders' equity: Common stock, $1 par value: Authorized: 25,000,000 shares Issued: 12,711,100 shares in 1995 and 12,593,631 shares in 1994 12,711,100 12,593,631 Paid in capital 3,485,487 2,934,792 Retained earnings 22,534,006 23,788,818 ---------- ---------- 38,730,593 39,317,241 Less treasury stock, at cost - (112,210) ---------- ---------- 38,730,593 39,205,031 ---------- ---------- Total liabilities and stockholders' equity $53,947,050 $51,908,336 ========== ========== The accompanying notes are an integral part of the financial statements. EQUITY OIL COMPANY STATEMENT OF OPERATIONS for the years ended December 31, 1995, 1994 and 1993 1995 1994 1993 ---- ---- ---- Revenues: Oil and gas sales $12,259,739 $11,713,498 $12,729,899 Partnership income 311,960 306,221 304,821 Interest 221,020 244,054 138,476 Other income 457,837 196,431 43,096 ---------- ---------- ---------- 13,250,556 12,460,204 13,216,292 ---------- ---------- ---------- Expenses: Oil and gas leasehold operating costs 5,093,782 4,658,115 5,293,628 Depreciation, depletion and amortization 3,843,442 5,011,155 5,090,744 Impairment of proved oil and gas properties 2,471,146 Property writedowns 3,292,624 Leasehold abandonments 30,597 60,545 87,867 3-D seismic 237,604 Exploration 1,633,612 1,718,339 1,737,923 General and administrative 1,908,778 1,560,675 1,607,892 Interest, net of interest capitalized of $70,000 at December 31, 1995 72,625 87,308 102,728 ---------- ---------- ---------- 15,291,586 13,096,137 17,213,406 ---------- ---------- ---------- Loss before income taxes (2,041,030) (635,933) (3,997,114) Benefit from income taxes (786,218) (275,103) (1,520,483) ----------- --------- ---------- Net Loss $ (1,254,812) $ (360,830) $(2,476,631) =========== ========== ========== Net loss per common share $(0.10) $(.03) $(.20) ===== ==== ==== Weighted average shares outstanding 12,597,238 12,540,594 12,317,119 ========== ========== ========== The accompanying notes are an integral part of the financial statements. EQUITY OIL COMPANY STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY for the years ended December 31, 1995, 1994 and 1993
Common Stock Paid in Retained Treasury Stock Shares Amount Capital Earnings Shares Cost ---------- ---------- --------- ---------- ------- --------- Balance at December 31, 1992 12,583,631 $12,583,631 $ 2,401,352 $27,238,210 344,871 $(1,081,997) Net loss (2,476,631) Cash dividends paid on common stock, $.05 per share (611,931) Treasury stock purchased, $3.95 per share 4,600 (18,173) Treasury stock issued on exercise of incentive stock options, $3.34 per share 406,135 (303,540) 1,013,812 Income tax benefit from exercise of incentive stock options 97,305 ---------- ---------- --------- ---------- ------- --------- Balance at December 31, 1993 12,583,631 12,583,631 2,904,792 24,149,648 45,931 (86,358) Net loss (360,830) Treasury stock purchased, $4.24 per share 6,100 (25,852) Common stock issued for services, $4.00 per share 10,000 10,000 30,000 ----------- ---------- --------- ---------- ------- --------- Balance at December 31, 1994 12,593,631 12,593,631 2,934,792 23,788,818 52,031 (112,210) Net loss (1,254,812) Treasury stock purchased, $3.79 per share 13,500 (51,181) Common stock issued for services, $3.88 per share 12,000 12,000 34,500 Treasury stock canceled, $2.49 per share (65,531) (65,531) (97,860) (65,531) 163,391 Common stock issued on exercise of stock options 171,000 171,000 510,525 Income tax benefit from exercise of incentive stock options 103,530 ---------- ---------- --------- ---------- --------- ---------- Balance at December 31, 1995 12,711,100 $12,711,100 $ 3,485,487 $22,534,006 - $ - ========== ========== ========= ========== ========= ==========
The accompanying notes are an integral part of the financial statements. EQUITY OIL COMPANY STATEMENT OF CASH FLOWS for the years ended December 31, 1995, 1994 and 1993
1995 1994 1993 ---- ---- ---- Cash flows from operating activities: Net loss $ (1,254,812) $ (360,830) $(2,476,631) Adjustments to reconcile net loss to net cash provided by operating activities: Impairment of proved oil and gas properties 2,471,146 Property writedowns 3,292,624 Depreciation, depletion and amortization 3,843,442 5,011,155 5,090,744 Partnership distributions in excess of income 144,717 137,023 142,852 Property dispositions 43,227 60,545 270,684 Change in other assets 21,057 Decrease in deferred income taxes (1,374,414) (474,950) (1,745,280) Common stock issued for services 46,500 40,000 Increase (decrease) from changes in: Accounts receivable and operator advances 133,624 (471,691) 145,004 Other current assets (784) (78,015) (6,629) Accounts payable and accrued liabilities 11,438 (368,649) (386,493) Deferred lease rental revenue (178,553) 178,553 Income taxes payable/receivable 236,802 74,528 (245,682) --------- --------- --------- Net cash provided by operating activities 4,143,390 3,747,669 4,081,193 --------- --------- --------- Cash flows from investing activities: Sale of temporary cash investments 1,510,761 Purchase of temporary cash investments (2,466,728) Advances to Symskaya Exploration (2,745,319) (1,696,261) Capital expenditures (7,179,528) (4,027,752) (4,532,669) Proceeds from sale of property 98,253 59,213 --------- --------- --------- Net cash used in investing activities (8,414,086) (8,092,488) (4,473,456) --------- --------- --------- Cash flows from financing activities: Exercise of incentive stock options 681,525 1,419,948 Increase in other assets (210,568) Purchase of treasury stock (51,181) (25,852) (18,173) Borrowings under revolving credit facility 4,918,830 Payments on note payable (920,000) (460,000) (460,000) Payment of dividends (611,931) --------- --------- --------- Net cash provided by (used in) financing activities 4,418,606 (485,852) 329,844 --------- --------- --------- Net increase (decrease) in cash and cash equivalents 147,910 (4,830,671) (62,419) Cash and cash equivalents at beginning of year 363,342 5,194,013 5,256,432 --------- --------- --------- Cash and cash equivalents end of year $ 511,252 $ 363,342 $ 5,194,013 ========= ========= ========= Cash, cash equivalents and temporary cash investments at end of year $ 1,467,219 $ 2,830,070 $ 5,194,103 ========= ========= ========= Supplemental disclosures of cash flow information: Cash paid during the year for: Income taxes $ 355,993 $ 103,745 $ 384,000 Interest 142,625 87,308 102,728
The accompanying notes are an integral part of the financial statements. NOTES TO FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES: A. Equity Oil Company (the Company) is a Colorado corporation engaged in oil and gas exploration, development and production in the United States, Canada and Russia. B. Principles of Consolidation: The 1993 financial statements include the financial statements of the Company and an 80% owned subsidiary (see Note 6). The Company's investment in the Raven Ridge Pipeline Partnership is carried on the equity basis. C. Temporary Cash Investments and Cash Equivalents: Temporary cash investments consist of U.S. Treasury Notes stated at cost which approximates market. The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. D. Accounting for Oil and Gas Operations: The Company reports using the "successful efforts" method of accounting for oil and gas operations. The use of this method results in capitalization of those costs identified with the acquisition, exploration, and development of properties that produce revenue or, if in the development stage, are anticipated to produce future revenue. Costs of unsuccessful exploration efforts are expensed in the period in which it is determined that such costs are not recoverable through future revenues. Geological and geophysical costs are expensed as incurred. The costs of development wells are capitalized whether productive or nonproductive. The Company annually assesses undeveloped oil and gas properties for impairment. The annual impairment represents management's estimate of the decline in realizable value experienced during the year. The costs of proved properties which management determines are not recoverable are written down in the period such determination is made. The provision for depreciation, depletion and amortization of proved oil and gas properties is computed using the units of production method, based on proved oil and gas reserves. Estimated dismantlement, restoration, and abandonment costs are expected to be offset by estimated residual values of lease and well equipment. Thus, no accrual for such costs has been recorded. 1. SIGNIFICANT ACCOUNTING POLICIES, continued: The net capitalized costs of proved oil and gas properties are measured for impairment in accordance with SFAS No. 121 (see Note 2). E. Concentration of Credit Risk: Substantially all of the Company's accounts receivable are within the oil and gas industry, primarily from purchasers of oil and gas (see Note 6). Although diversified within many companies, collectibility is dependent upon the general economic conditions of the industry. The receivables are not collateralized and, to date, the Company has experienced minimal bad debts. The majority of the Company's cash, cash equivalents and temporary cash investments is held by three financial institutions located in Salt Lake City, Utah. F. Equipment: The provision for depreciation of equipment (other than oil and gas equipment) is based on the straight-line method using asset lives as follows: Office equipment 10 years Automobiles 3 years When equipment is retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the statement of operations. G. Foreign Operations: Operations and investments in Canada have been translated into U.S. dollar equivalents at the average rate of exchange in effect at the transaction date. Foreign exchange gains or losses during 1995, 1994 and 1993 were not material. Through December 31, 1995, the Company's investment in Russia was composed of U.S. dollar expenditures (see Note 6). 1. SIGNIFICANT ACCOUNTING POLICIES, continued: H. Income (Loss) Per Common Share: Net income (loss) per common share is computed based on the weighted average number of common shares and common share equivalents outstanding duting the year. Primary and fully diluted net income (loss) per common share are essentially the same I. Estimates: 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. J. Reclassifications: Certain balances in the December 31, 1994 and 1993 financial statements have been reclassified to conform with the current year presentation. These changes had no effect on the previously reported net loss, total assets, liabilities or stockholders' equity. 2. IMPAIRMENT OF PROVED OIL AND GAS PROPERTIES: Included in the Statement of Operations for 1995 is a non-cash charge for the impairment of proved oil and gas properties in the amount of $2,471,146 ($1,557,563 after tax), which results from the Company's adoption of SFAS No.121, Accounting for the Impairment of Long Lived Assets and for Assets Held for Disposal (SFAS No. 121), effective July 1, 1995. SFAS No.121 requires successful efforts companies to evaluate the recoverability of the net capitalized costs of their proved oil and gas properties at a field level, rather than on a company-wide level as previously allowed by the Securities and Exchange Commission. The SFAS No.121 impairment test compares the expected undiscounted future net revenues from each producing field with the related net capitalized costs at the end of each period. When the net capitalized costs exceed the undiscounted future net revenues, the cost of the property is written down to fair value, which is determined using discounted future net revenues from the producing field. 3. INCOME TAXES: The benefit for income taxes consists of the following: 1995 1994 1993 ---- ---- ---- Currently payable (receivable): U.S. income taxes (including alternative minimum tax) $ (188,666) $ (92,726) $ (43,661) State income taxes 26,262 36,058 35,862 Canadian income taxes 373,268 256,515 232,596 Deferred tax benefit (1,374,414) (474,950) (1,745,280) ---------- ----------- ----------- $ (786,218) $ (275,103) $ (1,520,483) =========== =========== =========== The Company accounts for income taxes in accordance with SFAS No. 109. Deferred income taxes are provided on the difference between the tax basis of an asset or liability and its reported amount in the financial statements that will result in taxable or deductible amounts in future years when the reported amount of the asset or liability is recovered or settled, respectively. The components of the net deferred tax liability as of December 31, 1995 and 1994 were as follows: 1995 1994 ---- ---- Deferred tax assets: AMT credit and ITC carryforwards $ 670,771 $ 458,667 State income taxes 9,709 13,330 Deferred compensation - 55,455 Geological and geophysical costs 181,989 - Other 43,253 - Foreign tax credit (FTC) carryforward 442,942 88,279 ---------- ---------- 1,348,664 615,731 Valuation allowance for FTC carryforward (442,942) (88,279) ---------- ---------- Total deferred tax asset $ 905,722 $ 527,452 ========== ========== Deferred tax liabilities: Deferred income 20,505 20,505 Property and equipment 9,420,819 10,363,513 Pipeline partnership 129,892 183,342 ---------- ---------- Total deferred tax liability 9,571,216 10,567,360 ---------- ---------- Net deferred tax liability $ 8,665,494 $10,039,908 ========== ========== 3. INCOME TAXES, continued: The net deferred tax liability as of December 31, 1995 and 1994 is reflected in the balance sheet as follows: Current deferred tax liability $ 10,796 - Current deferred tax asset - $ (48,281) Long-term deferred tax liability 8,654,698 10,088,189 --------- ---------- $8,665,494 $10,039,908 ========= ========== The benefit for income taxes differs from the amount that would be provided by applying the statutory U.S. Federal income tax rate to the loss before income taxes for the following reasons: 1995 1994 1993 ---- ---- ---- Federal statutory tax benefit $ (693,948) $ (216,217) $(1,357,697) Increase (reduction) in taxes resulting from: State taxes (net of federal benefit) (68,376) (11,161) (118,599) Canadian taxes (net of foreign tax credits) 287,670 169,300 74,282 Excess allowable percentage depletion (166,509) (186,418) (104,129) Investment tax and other credits (145,055) (30,607) (14,340) ----------- ----------- ------------ Benefit for income taxes $ (786,218) $ (275,103) $(1,520,483) =========== ========== =========== At December 31, 1995, the Company had approximately $122,000 of investment tax credit carryforwards that will expire in 2001, approximately $549,000 of alternative minimum tax credit carryforwards which can be carried forward indefinitely, and approximately $443,000 of foreign tax credit carryforwards which expire in 1996, 1999 and 2000. 4. EMPLOYEE BENEFIT PLANS: The Company has a contributory profit-sharing plan for the benefit of its full-time employees as defined. There are no benefits under this plan which require funding. The Company's contributions to the plan were $148,771, $157,073, and $152,550 for 1995, 1994 and 1993, respectively. The Company has an Incentive Stock Option Plan with 1,400,000 shares of common stock reserved for issuance to employees. Options are granted at market price at the date of grant and are exercisable upon issuance. Options terminate ten years from the date of issuance. Transactions under this plan are as follows: 4. EMPLOYEE BENEFIT PLANS, continued: Number of Weighted Average Options Price Per Share Outstanding December 31, 1992 691,690 $ 5.10 Granted 141,000 3.56 Exercised (303,540) 4.69 Expired (92,150) 7.17 ---------- Outstanding December 31, 1993 437,000 4.38 Granted 125,000 4.25 Expired (5,000) 3.56 ---------- Outstanding December 31, 1994 557,000 4.22 Granted 60,500 3.63 Exercised (132,000) 4.11 Expired (90,000) 4.68 ---------- ---- Outstanding December 31, 1995 395,500 $4.31 ========== ==== Under the terms of the Incentive Stock Option Plan, the Company may also grant non-qualified stock options and tandem stock appreciation rights, either of which, but not both, may be exercised at the end of required vesting periods, which vary from 1 to 6 years. During 1995, 39,000 non-qualified options were exercised by former employees of the Company. At December 31, 1995, there were 509,000 non-qualified stock options outstanding, at an average exercise price of $4.11 per share. There were also 159,500 tandem stock appreciation rights outstanding, at an average exercise price of $3.81. In 1992, the Company's Compensation Committee voted to increase the deferred compensation payable to the Company's President from $33,333 to $300,000. One-half of this amount was paid in 1994. The remaining amount was paid during 1995. 5. GEOGRAPHIC SEGMENT INFORMATION: The Company has oil and gas operations in the U.S. and Canada. Through December 31, 1993, the Company had oil and gas operations in Russia through an 80% owned subsidiary (see Note 6). Operating profit is total revenue less operating expenses. In computing operating profit, general and administrative expenses and interest expense have not been deducted. Identifiable assets are those assets of the Company that are identifiable with the operations of each geographical area. 5. GEOGRAPHIC SEGMENT INFORMATION, continued: Revenue from a major U.S. oil company accounted for approximately 51 percent of total revenues in 1995, 50 percent of total revenues in 1994, and 56 percent of total revenues in 1993. Information about the Company's operations in the U.S., Canada and Russia for the years ended December 31, 1995, 1994, and 1993 is as follows: United 1995: States Canada Russia Total ---------- --------- --------- ---------- Revenues 10,819,553 $2,431,003 $13,250,556 ========== ========= ========== Operating profit (loss)$(1,391,469) $1,331,842 $ (59,627) General and administrative expenses (1,908,778) (1,908,778) Interest expense (72,625) (72,625) ---------- ---------- ---------- Loss before income taxes $(3,372,872) $1,331,842 $(2,041,030) ========== ========= ========= Identifiable assets at December 31, 1995 $43,512,850 $4,273,758 $6,160,442 $53,947,050 ========== ========= ========= ========== Additions to property and equipment $ 6,127,455 $1,052,073 $ 7,179,528 ========== ========= ========== Depreciation, depletion and amortization $ 3,406,947 $ 436,495 $ 3,843,442 ========== ========= ========== United 1994: States Canada Russia Total ---------- --------- --------- ---------- Revenues $10,414,683 $2,045,521 $12,460,204 ========== ========= ========== Operating profit (loss) $ (38,477) $1,050,527 $ 1,012,050 General and administrative expenses (1,560,675) (1,560,675) Interest expense (87,308) (87,308) ---------- --------- ---------- Income (loss) before income taxes $(1,686,460) $1,050,527 $ (635,933) ========== ========= ========== Identifiable assets at December 31, 1994 $45,066,213 $3,427,000 $3,415,123 $51,908,336 ========== ========= ========= ========== Additions to property and equipment $ 3,576,119 $ 451,633 $ 4,027,752 ========== ========= ========== Depreciation, depletion and amortization $ 4,668,497 $ 342,658 $ 5,011,155 ========== ========= ========== 5. GEOGRAPHIC SEGMENT INFORMATION, continued: United 1993: States Canada Russia Total ---------- --------- --------- ---------- Revenues $11,563,666 $1,652,626 $13,216,292 ========== ========= ========== Operating profit (loss)$(3,000,346) $ 713,852 $(2,286,494) General and administrative Expenses (1,607,892) (1,607,892) Interest expense (102,728) (102,728) ---------- --------- ---------- Income (loss) before income taxes $ (4,710,966) $ 713,852 $ (3,997,114) ========== ========= ========== Identifiable assets at December 31, 1993 $48,204,538 $3,399,349 $1,718,862 $53,322,749 ========== ========= ========= ========== Additions to property and equipment $ 3,789,594 $ 160,596 $ 582,479 $ 4,532,669 ========== ========= ========= ========== Depreciation, depletion and amortization $ 4,658,829 $ 431,915 $ 5,090,744 ========== ========= ========== 6. SYMSKAYA EXPLORATION: On December 18, 1994, Symskaya Exploration, Inc. (Symskaya) commenced drilling the Lemok #1, an exploratory well, in the Krasnoyarsk Krai in the Russian Federation. The well is being drilled pursuant to a License which grants Symskaya the exclusive right to explore, develop and produce hydrocarbons on a contract area totaling approximately 1,100,000 acres in the Yenisysk District. The License has a primary term of twenty five (25) years. The work to be performed and the obligations and rights of Symskaya are set forth in a License Agreement and a Production Sharing Contract (PSC) which are integral parts of the License. Under the License and PSC, Symskaya will provide funding for all exploration and development and will recover these costs from 80% of hydrocarbon production after payment of an 8% royalty. The remaining 20% of the hydrocarbon production, net of royalty, will be shared by Symskaya and the Russian government based on the rate of production. Minimum expenditures required under the License and PSC total $12,000,000 during the first five years of the License term, which began on November 15, 1993. As of December 31, 1995, Symskaya had satisfied the minimum expenditures required for the contract years ending November 15, 1994 and 1995, and has already exceeded the amount required for the contract year ending November 15, 1996. Symskaya has the right to relinquish all acreage under the 6. SYMSKAYA EXPLORATION, continued: contract at the end of any contract year, thereby canceling the obligation for minimum payments in subsequent years. Prior to January 1, 1994, Symskaya was an eighty (80%) percent owned subsidiary of the Company. The other twenty (20%) percent was owned by Coastline Exploration, Inc., a Texas corporation (Coastline). Coastline introduced the Symskaya project to the Company in the latter part of 1991. Under the initial agreement with Coastline, the Company was required to advance all funds in connection with the project. These initial funds are evidenced by a Loan Agreement between the Company and Symskaya in the amount of $1,740,519. Amounts advanced by the Company under the Loan Agreement are to be repaid to the Company by Symskaya out of one hundred (100%) percent of Symskaya's proceeds, if any, resulting from the sale, exploration, development and/or production of oil and gas from the Symskaya project. The agreement also provided that upon payment of the loan amount, Coastline was entitled to an additional 15% stock interest in Symskaya. In the early part of 1994, the Company acquired all of Coastline's interest in Symskaya in exchange for a ten (10) year option to purchase two hundred thousand (200,000) shares of the Company's common stock at Five Dollars ($5.00) per share, and a one (1%) percent royalty on the Company's share of gross revenues on production from the Symskaya project, net of all Russian royalties and taxes. There was no value assigned to the stock option or royalty. During 1995, the Company repurchased 100,000 of Coastline's option for a total price of $120,000. Following the purchase of Coastline's shares, the Company sold fifty percent (50%) of its stock in Symskaya to Leucadia National Corporation, a New York based company (Leucadia), in exchange for their commitment to spend up to $6,000,000, in an amount equal to that spent by the Company, towards the Symskaya project through the drilling, completion and/or plugging and abandonment of the Lemok #1 well. No gain or loss was recognized on the sale of Symskaya stock to Leucadia. Pursuant to a Shareholders' Agreement, Leucadia is not required to pay any part of the amounts advanced by the Company under the Loan Agreement with Symskaya, with the exception of one-half (1/2) of the interest on the $1,740,519 loan between the Company and Symskaya. The interest rate on the loan was fixed by the Company and Leucadia at prime plus two percent (2%), with a cap of twelve percent (12%) from and after January 1, 1994. The interest rate in effect at December 31, 1995 was 10.5%. Amounts advanced by the Company and Leucadia after January 1, 1994 will be treated as interest-bearing advances or equity, as mutually agreed upon by the respective 6. SYMSKAYA EXPLORATION, continued: companies. The agreement with Leucadia also requires that Leucadia share equally in the payment of the one (1%) percent royalty obligation in favor of Coastline on future revenues from the Symskaya project. The Company's President ,erves on Leucadia's Board of Directors. As a result of the Company's change of ownership in Symskaya from eighty percent (80%) to fifty percent (50%), the investment in Symskaya is being accounted for using the equity method of accounting effective January 1, 1994. Accordingly, as of December 31, 1995 and 1994, the Company's investment in Symskaya is reflected on the balance sheet as an investment in and note receivable from Symskaya, rather than as undeveloped leaseholds. Summarized financial information concerning Symskaya Exploration, Inc. Is as follows: As of As of December 31, 1995 December 31, 1994 ----------------- ----------------- Current assets $550,258 $311,263 Non-current assets 10,329,991 5,274,234 Total assets 10,880,249 5,584,497 Current Liabilities 334,573 336,621 Non-current liabilities 10,018,204 4,722,158 Retained earnings (128,205) (126,911) Total liabilities and equity $10,880,249 $5,584,497 For the year ended For the year ended December 31, 1995 December 31, 1994 ----------------- ----------------- Gross revenues $69,423 $5,663 Net income (loss) $(1,294) $ (605) The Company's policy with respect to impairment of proved oil and gas properties is to evaluate the recoverability of a property's net capitalized costs based on the undiscounted future net revenues from the related property. As of December 31, 1995, Symskaya's first well was still in progress. If Symskaya discovers proved reserves, any impairment of the Company's investment in Symskaya would be calculated in accordance with the Company's policy. If Symskaya does not discover any proved reserves, or is unable for whatever other reason to realize any future revenues from its project, the Company's entire investment in Symskaya will be charged to expense in the period such a determination is made. At December 31, 1995, the Company had $6,160,442 invested in the project. 7. NOTE PAYABLE: In March of 1995, the Company obtained a $20 million Borrowing Base Credit Facility (the Facility), with an initial commitment of $10 million. The Facility calls for interest payments only, at the lower of prime or LIBOR plus 2%, for 2 years, at which time it converts to a 3 year term note. An unused commitment fee of 3/8% will be charged to the Company based on the average daily unused portion of the Facility. The Facility is collateralized by all assets of the Company. The Company used proceeds from the Facility to retire its previous outstanding Note Payable in the amount of $920,000. As of December 31, 1995 the outstanding balance under the Facility was $4,918,830 at an average interest rate of 7.47%. Future maturities on the Facility as of December 31, 1995 are as follows: 1996 $ - 1997 1,229,708 1998 1,639,610 1999 1,639,610 2000 409,902 --------- $4,918,830 ========= The Facility contains provisions relating to maintenance of certain financial ratios, as well as restrictions governing its use. Under covenants contained in the Facility, the Company has agreed, among other things, not to advance any proceeds from the Facility to Symskaya, not to pay dividends, and not to merge with or acquire any other company without the prior approval of the bank. As of December 31, 1995, the Company was in compliance with all covenants contained in the Facility. Facility fees, which are reflected as other assets in the accompanying Balance Sheet, are being amortized on a straight line basis over 60 months. 8. QUARTERLY FINANCIAL DATA (Unaudited): Quarterly financial information for the years ended December 31, 1995 and 1994 is as follows: 1995 Quarter Ended: December 31 September 30 June 30 March 31 ----------- ------------ -------- -------- Net revenues $ 3,230,759 $ 3,062,833 $ 3,180,505 $ 3,097,602 Gross margin 148,738 (1,594,099) 469,916 236,961 Net income (loss) (168,165) (1,258,857) 62,105 110,105 Net income (loss) per common share $(.01) $(.10) $.00 $.01 ==== ==== === === Note: Third quarter gross margin includes the effects of the adoption of SFAS No. 121, which was adopted as of July 1, 1995. See Note 2. 1994 Quarter Ended: December 31 September 30 June 30 March 31 ----------- ------------ -------- -------- Net revenues $ 3,217,446 $ 3,096,350 $ 3,009,181 $ 2,696,742 Gross margin 84,712 144,415 312,760 29,678 Net income (loss) (274,228) 126,141 24,215 (236,958) Net income (loss) per common share $(.02) $.01 $.00 $(.02) ==== === === ==== 9. DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES: Capitalized Costs: United 1995: States Canada Russia Total - ---- ------ ------ ------ ----- Unproved oil and gas properties $ 2,378,122 $ 90,290 $2,468,412 Proved oil and gas properties 87,200,659 8,894,955 96,095,614 ---------- ---------- ---------- 89,578,781 8,985,245 98,564,026 Accumulated depreciation, depletion and amortization (51,531,172)(5,601,882) (57,133,054) ---------- ---------- ---------- Net capitalized costs $ 38,047,609 $3,383,363 $41,430,972 ========== ========== ========== Symskaya, equity method (see note 6) $6,160,442 $ 6,160,442 ========= ========== 1994: Unproved oil and gas properties $ 2,270,014 $ 99,464 $ 2,369,478 Proved oil and gas properties 84,234,955 7,852,281 92,087,236 ---------- --------- ---------- 86,504,969 7,951,745 94,456,714 Accumulated depreciation, depletion and amortization (48,686,141)(5,174,561) (53,860,702) ---------- ---------- ---------- Net capitalized costs $37,818,828 $2,777,184 $40,596,012 ========== ========== =========== Symskaya, equity method (See Note 6) $3,415,123 $ 3,415,123 ========= =========== 1993: Unproved oil and gas properties $ 2,006,943 $ 99,464 $1,718,862 $ 3,825,269 Proved oil and gas properties 82,600,757 7,401,184 90,001,941 ---------- ---------- --------- ---------- 84,607,700 7,500,648 1,718,862 93,827,210 Accumulated depreciation, depletion and amortization (45,498,789)(4,832,439) (50,331,228) ---------- ---------- --------- ---------- Net capitalized costs $39,108,911 $2,668,209 $1,718,862 $43,495,982 ========== ========== ========= =========== 9. DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES, Continued: Costs Incurred in Oil and Gas Property Acquisition, Exploration and Development Activities: United 1995: States Canada Russia Total - ---- ------ ------ ------ ----- Acquisition of properties: Proved $2,654,651 $405,410 $3,060,061 Unproved 674,146 674,146 Exploration costs 1,654,022 30,969 1,684,991 Development costs 2,709,192 835,415 3,544,607 Symskaya, equity method $2,745,319 2,745,319 1994: Acquisition of properties: Proved $ 2,791 $ 2,791 Unproved 601,836 601,836 Exploration costs 1,568,654 $439,805 2,008,459 Development costs 2,803,694 174,639 2,978,333 Symskaya, equity method $1,696,261 1,696,261 1993: Acquisition of properties: Proved Unproved $ 296,632 $ 582,479 $ 879,111 Exploration costs 2,328,936 $ 29,195 2,358,131 Development costs 2,821,023 193,927 3,014,950 RESULTS OF OPERATIONS, (UNAUDITED): 1995: United States Canada Total ---------- --------- --------- Oil and gas sales $ 9,803,677 $ 2,456,062 $12,259,739 Production costs (4,455,069) (638,713) (5,093,782) Exploration expenses, including leasehold abandonments and 3-D seismic (1,877,840) (23,973) (1,901,813) Depreciation, depletion and amortization (3,406,947) (436,495) (3,843,442) Impairment of proved oil and gas properties (2,471,146) (2,471,146) ---------- ---------- ---------- (2,407,325) 1,356,881 (1,050,444) Imputed income tax benefit (expense) 1,056,755 534,319 522,436 ---------- ---------- ---------- Results of operations from producing activities $(1,350,570) $ 822,562 $ (528,008) ========== ========= ========== RESULTS OF OPERATIONS (UNAUDITED), continued: 1994: United States Canada Total ---------- --------- --------- Oil and gas sales $ 9,648,390 $ 2,065,108 $11,713,498 Production costs (4,031,030) (627,085) (4,658,115) Exploration expenses, including leasehold rentals and abandonments (1,753,632) (25,252) (1,778,884) Depreciation, depletion and amortization (4,668,497) (342,658) (5,011,155) ----------- ---------- ----------- (804,769) 1,070,113 265,344 Imputed income tax benefit (expense) 625,718 (476,200) 149,518 ----------- ---------- ----------- Results of operations from producing activities $ (179,051) $ 593,913 $ 414,862 =========== ========== =========== 1993: Oil and gas sales $11,077,273 $ 1,652,626 $12,729,899 Production costs (4,810,946) (482,682) (5,293,628) Exploration expenses, including leasehold rentals and abandonments (1,801,613) (24,177) (1,825,790) Depreciation, depletion and amortization (4,658,829) (431,915) (5,090,744) Property writedowns (3,292,624) (3,292,624) ----------- ---------- ----------- (3,486,739) 713,852 (2,772,887) Imputed income tax benefit (expense) 1,365,693 (276,369) 1,089,324 ----------- ---------- ----------- Results of operations from producing activities $(2,121,046) $ 437,483 $(1,683,563) =========== ========== =========== The imputed income tax benefit (expense) is hypothetical and determined without regard to the Company's deduction for general and administrative and interest expense. RESERVES AND FUTURE NET CASH FLOWS (UNAUDITED): Estimates of Proved Oil and Gas Reserves The following tables present the Company's estimates of its proved oil and gas reserves. 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. Accordingly, the estimates are expected to change as future information becomes available. Reserve estimates are prepared by the Company, and audited by the Company's independent petroleum reservoir engineers, Fred S. Reynolds and Associates, who have issued a report expressing their opinion that the reserve information in the following tables complies with the applicable rules promulgated by the Securities and Exchange Commission and the Financial Accounting Standards Board. The volumes presented on the following pages are in thousands of barrels for oil and thousands of mcf for gas. United States Canada Total ----------- ------ ----- December 31, 1995: Oil Gas Oil Gas Oil Gas - ----------------- --- --- --- --- --- --- Proved developed and undeveloped reserves: Beginning of year 6,252 13,673 1,055 3,539 7,307 17,212 Revisions of previous estimates 98 (23) 4 (189) 102 (213) Acquisition of minerals in place 701 1,129 61 152 762 1,281 Extensions and discoveries 3 920 196 274 198 1,195 Production (491) (880) (129) (571) (619) (1,451) ------ ------ ------ ------ ------ ------ End of year 6,563 14,819 1,187 3,205 7,750 18,024 ====== ====== ====== ====== ====== ====== Proved developed reserves: Beginning of year 6,185 8,490 1,042 3,539 7,227 12,029 End of year 6,527 11,238 1,139 3,068 7,666 14,306 December 31, 1994: Proved developed and undeveloped reserves: Beginning of year 6,644 12,969 958 3,798 7,602 16,767 Revisions of previous estimates 80 (482) 139 (131) 219 (613) Acquisition of minerals in place 56 56 Extensions and discoveries 18 2,010 78 112 96 2,122 Production (490) (880) (120) (240) (610) (1,120) ------ ------ ------ ------ ------ ------ End of year 6,252 13,673 1,055 3,539 7,307 17,212 ====== ====== ====== ====== ====== ====== Proved developed reserves: Beginning of year 6,584 8,374 919 3,798 7,503 12,172 End of year 6,185 8,490 1,042 3,539 7,227 12,029 December 31, 1993: Proved developed and undeveloped reserves: Beginning of year 8,010 13,809 945 3,848 8,955 17,657 Revisions of previous estimates (179) (544) 134 167 (45) (377) Revisions to improved recovery reserves (740) (740) Extensions and discoveries 109 499 109 499 Production (556) (795) (121) (217) (677)(1,012) ------ ------ ------ ------ ------ ------ End of year 6,644 12,969 958 3,798 7,602 16,767 ====== ====== ====== ====== ====== ====== Proved developed reserves: Beginning of year 7,963 9,215 926 3,848 8,889 13,063 End of year 6,584 8,374 919 3,798 7,503 12,172 STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND CHANGES THEREIN RELATING TO PROVED OIL AND GAS RESERVES(UNAUDITED): Thousands of Dollars --------------------------------------- 1995: United States Canada Total --------- ------- ------ Future cash inflows $148,257 $20,381 $168,638 Future production and development costs (76,234) (4,705) (80,939) Future income taxes (16,654) (6,033) (22,687) -------- ------- -------- Future net cash flows 55,369 9,643 65,012 10% annual discount for estimated timing of cash flows ($10,361 related to future income taxes) (30,540) (4,025) (34,565) -------- ------- -------- Standardized measure of discounted future net cash flows $ 24,829 $ 5,618 $ 30,447 ======== ======= ======== 1994: Future cash inflows $132,638 $20,304 $ 152,942 Future production and development costs (75,306) (5,476) (80,782) Future income taxes (12,531) (5,887) (18,418) -------- -------- -------- Future net cash flows 44,801 8,941 53,742 10% annual discount for estimated timing of cash flows ($8,567 related to future income taxes) (25,688) (3,832) (29,520) -------- ------- -------- Standardized measure of discounted future net cash flows $ 19,113 $ 5,109 $ 24,222 ======== ======= ======== 1993: Future cash inflows $110,305 $15,635 $ 125,940 Future production and development costs (72,992) (6,334) (79,326) Future income taxes (6,790) (3,714) (10,504) --------- -------- -------- Future net cash flows 30,523 5,587 36,110 10% annual discount for estimated timing of cash flows ($5,083 related to future income taxes) (17,585) (2,120) (19,705) -------- -------- -------- Standardized measure of discounted future net cash flows $ 12,938 3,467 $ 16,405 ======== ======== ======== STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND CHANGES THEREIN RELATING TO PROVED OIL AND GAS RESERVES(UNAUDITED), continued: Future net cash flows were computed using year-end prices and costs, and year-end statutory tax rates with consideration of future tax rates already legislated (adjusted for permanent differences that related to proved oil and gas reserves). Principal sources of change in the standardized measure of discounted future net cash are as follows: (Thousands of Dollars) -------------------- 1995 1994 1993 ---- ---- ---- Sales and transfers of oil and gas produced, net of production costs $(7,166) $(7,055) $(7,436) Net changes in prices and production costs 3,147 6,363 (17,606) Extensions, discoveries, and improved recovery, less related costs 1,274 1,016 388 Purchases of minerals in place 3,804 18 Changes in estimated future development costs (203) 6,126 596 Revisions of previous quantity estimates 369 592 (2,088) Accretion of discount 3,409 2,192 4,418 Net change in income taxes (1,969) (1,812) 14,214 Changes in production rates (timing) and other 3,561 377 (7,295) ------ ------ ------ $ 6,226 $ 7,817 $ (14,809) ====== ====== ====== ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES: None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF COMPANY: The information contained under the headings Election of Directors and Continuing Directors and Executive Officers contained on pages 2 and 3 in the definitive proxy statement to be filed in connection with the Company's annual meeting on May 8, 1996 is incorporated herein by reference in answer to this item. ITEM 11. EXECUTIVE COMPENSATION The information contained under the heading Executive Compensation on pages 2 through 3 in the definitive proxy statement to be filed in connection with the Company's annual meeting on May 8, 1996 is incorporated herein by reference in answer to this item. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT: The information contained under the headings Security Ownership of Management and Voting Securities & Principal Holders Thereof, contained on pages 4 and 11 in the definitive proxy statement to be filed in connection with the Company's annual meeting on May 8, 1996 is incorporated herein by reference in answer to this item. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K: Page (a) (1) Financial Statements: Report of Independent Accountants 19 Financial Statements: 20 Balance Sheet as of December 31, 1995 and 1994 20 Statement of Operations for the years ended December 31, 1995, 1994 and 1993 22 Statement of Changes in Stockholders' Equity for the years ended December 31, 1995, 1994 and 1993 23 Statement of Cash Flows for the years ended December 31, 1995, 1994 and 1993 24 Notes to Financial Statements 25 (3) Exhibits (3) (i) Restated Articles of Incorporation. 45 (ii) By-Laws. 50 (21) Subsidiaries. 61 (23) Consent of Experts. Consent of Coopers & Lybrand L.L.P. regarding Form S-8 Registration 62 (27) Financial Data Schedule 63 (b) Reports on Form 8-K None SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. EQUITY OIL COMPANY By /s/Paul M. Dougan President Chief Executive Officer By /s/Clay Newton Treasurer Chief Financial Officer Principal Accounting Officer Date: February 27, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/Josepch C. Bennett /s/Douglas W. Brandrup ------------------- ------------------- Signature Signature ------------------- ------------------- Director Director ------------------- ------------------- Title Title March 8, 1996 March 8, 1996 ------------------- ------------------- Date Date /s/Mirvin B. Borthick /s/William D. Forster ------------------- ------------------- Signature Signature ------------------- ------------------- Director Director ------------------- ------------------- Title Title March 8, 1996 March 8, 1996 ------------------- ------------------- Date Date EX-3.(I) 2 RESTATED ARTICLES OF INCORPORATION RESTATED ARTICLES OF INCORPORATION OF EQUITY OIL COMPANY Pursuant to the laws of Colorado, the undersigned corporation, Equity Oil Company hereby adopts the following Restated Articles of Incorporation and certifies (1) that the Articles of Incorporation restated herein correctly set forth the provisions of the Articles of Incorporation as heretofore amended and supersede the original Articles of Incorporation of the corporation and all amendments thereto, and (2) the Articles of Incorporation as restated herein were duly adopted by the board of directors of the corporation on January 25, 1996. Shareholder approval was not required: ARTICLE I The name of the corporation shall be Equity Oil Company. ARTICLE II The purpose for which the corporation is organized shall be the transaction of all lawful business for which corporations may be incorporated pursuant to the Colorado Corporation Code. It is the express intent of the stockholders and Directors that the business purposes of this corporation shall not be limited except as provided by Colorado law. By way of example, and not in any way limiting the purpose of the corporation, it may engage in the business of exploration, development, research, production and marketing of oil, gas, and minerals, in all their natural or artificial forms and any and all products and by-products derived therefrom. ARTICLE III The authorized capital of this corporation shall be $25,000,000 consisting of 25,000,000 shares of the par value of One ($1.00) Dollar per share. The stock of this corporation shall be non-assessable. Cumulative voting shall not be allowed in the election of Directors and preemptive rights of the stockholders are denied. ARTICLE IV The term of existence of this corporation is perpetual. ARTICLE V a. Number, election and terms. The business and affairs of the Corporation shall be managed by a Board of Directors consisting of not less than six nor more than nine persons. The exact number of directors within the minimum and maximum limitations specified in the preceding sentence shall be fixed from time to time by the Board of Directors pursuant to a resolution adopted by a majority of the entire Board of Directors. At the 1983 Annual Meeting of Shareholders, the directors shall be divided into three classes, as nearly equal in number as possible, with the term of office of the first class to expire at the 1984 Annual Meeting of Shareholders, the term of office of the second class to expire at the 1985 Annual Meeting of Shareholders and the term of office of the third class to expire at the 1986 Annual Meeting of Shareholders. At each Annual Meeting of Shareholders following such initial classification and election, directors elected to succeed those directors whose terms expire shall be elected for a term of office to expire at the third succeeding Annual Meeting of Shareholders after their election. b. Newly created directorships and vacancies. Vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause may be filled by a majority vote of the directors then in office, though less than a quorum of the Board of Directors. A director elected by the Board to fill a vacancy shall be elected for the unexpired term of his predecessor in office. Subject to the rights of the holders of any series of preferred stock then outstanding, newly created directorships resulting from any increase in the authorized number of directors shall be filled by the affirmative vote of a majority of the directors then in office or by an election at an annual meeting or at a special meeting of shareholders called for that purpose. A director chosen to fill a position resulting from an increase in number of directors shall hold office until the next annual meeting of stockholders and until his successor has been elected and qualified. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. c. Removal. Subject to the rights of the holders of any series of Preferred Stock then outstanding, any director, or the entire Board of Directors, may be removed from office at any time, but only by the affirmative vote of the holders of at least 80% of the voting power of all the shares of the Corporation entitled to vote for the election of directors. d. Amendment, repeal, etc. Notwithstanding anything contained in these Articles of Amendment to the contrary, the affirmative vote of the holders of at least 80% of the voting power of all the shares of the Corporation entitled to vote for the election of directors shall be required to amend, modify or repeal, this Article V. ARTICLE VI This corporation shall maintain an office as its principal place of business in Salt Lake City, Utah. ARTICLE VII To the full extent permitted by the laws of Colorado, as the same exist or may hereafter be amended, a director of the corporation shall not be personally liable to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director. Any repeal or modification of this Article by the shareholders of the corporation shall be prospective only and shall not adversely affect any right or protection of a director of the corporation existing at the time of such repeal or modification. ARTICLE VIII SECTION 1. VOTE REQUIRED FOR CERTAIN BUSINESS COMBINATIONS. A. Higher Vote for Certain Business Combinations. In addition to any affirmative vote required by law or these Articles of Incorporation, and except as otherwise expressly provided in section 2 of this Article VIII: (i) any merger or consolidation of the Corporation or any Subsidiary (as hereinafter defined) with (a) any Interested Stockholder (as hereinafter defined) or (b) any other corporation (whether or not itself an Interested Stockholder) which is, or after such merger or consolidation would be, an Affiliate (as hereinafter defined) of an Interested Stockholder; or (ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Stockholder or any Affiliate of any Interested Stockholder of any assets of the Corporation or any Subsidiary having an aggregate Fair Market Value (as hereinafter defined) of $1,000,000 or more; or (iii) the issuance or transfer of by the Corporation or any Subsidiary (in one transaction or a series of transactions) of any securities of the Corporation or any Subsidiary to any Interested Stockholder or any Affiliate of any Interested Stockholder in exchange for cash, securities or other property (or a combination thereof) having an aggregate Fair Market Value of $1,000,000 or more; or (iv) the adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of an Interested Stockholder or any Affiliate of any Interested Stockholder; or (v) any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving an Interested Stockholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of the Corporation or any Subsidiary which is directly or indirectly owned by any Interested Stockholder or any Affiliate of any Interested Stockholder; Shall require the affirmative vote of the holders of at least 80% of the voting power of the then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (the "Voting Stock"), voting together as a single class. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law or in any agreement with any national securities exchange or otherwise. B. Definition of "Business Combination". The term "Business Combination" as used in this Article VIII shall mean any transaction or series of transactions which is referred to in any one or more of clauses (i) through (v) of paragraph A of this section 1. SECTION 2. WHEN HIGHER VOTE IS NOT REQUIRED. The provisions of Section 1 of this Article VIII shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote as is required by law and any other provision of these Articles of Incorporation, if all of the conditions specified in either of the following paragraphs A and B are met: A. Approval by Continuing Directors. The Business Combination shall have been approved by a majority of the Continuing Directors (as hereinafter defined). B. Price and Procedure Requirements. All of the following conditions shall have been met. (i) The aggregate amount of the cash and the Fair Market Value (as hereinafter defined) as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of Common Stock in such Business Combination shall be at least equal to the highest of the following: (a) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Stockholder for any shares of Common Stock acquired by it (1) within the two-year period immediately prior to the first public announcement of the proposal of the Business Combination (the "Announcement Date") or (2) in the transaction in which it became an Interested Stockholder, whichever is higher; (b) the Fair Market Value per share of Common Stock on the day after the Announcement Date or on the date on which the Interested Stockholder became an Interested Stockholder (such latter date is referred to in this Article VIII as the "Determination Date"), whichever is higher; (c) (if applicable) the price per share equal to the Fair Market Value per share of Common Stock determined pursuant to paragraph B(i)(b) above, multiplied by the ratio of (1) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Stockholder for any shares of Common Stock acquired by it within the two-year period immediately prior to the Announcement Date to (2) the Fair Market Value per share of Common Stock on the first day in such two-year period upon which the Interested Stockholder acquired any shares of Common Stock. (ii) The aggregate amount of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of shares of any other class of outstanding Voting Stock (other than Institutional Voting Stock, as hereinafter defined) shall be at least equal to the highest of the following (it being intended that the requirements of this paragraph B(ii) shall be required to be met with respect to every class of outstanding Voting Stock (other than Institutional Voting Stock), whether or not the Interested Stockholder has previously acquired any shares of a particular class of Voting Stock): (a) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Stockholder for any shares of such class of Voting Stock acquired by it (1) within the two-year period immediately prior to the day after the Announcement Date or (2) in the transaction in which it became an Interested Stockholder, whichever is higher; (b) (if applicable) the highest preferential amount per share to which the holders of shares of such class of Voting Stock are entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation; (c) the Fair Market Value per share of such class of Voting Stock on the day after the Announcement Date or on the Determination Date, whichever is higher; and (d) (if applicable) the price per share equal to the Fair Market Value per share of such class of Voting Stock determined pursuant to paragraph B(ii)(c) above, multiplied by the ratio of (1) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Stockholder for any shares of such class of Voting Stock acquired by it within the two-year period immediately prior to the Announcement Date to (2) the Fair Market Value per share of such class of Voting Stock on the first day in such two-year period upon which the Interested Stockholder acquired any shares of such class of Voting Stock. (iii) The consideration to be received by holders of a particular class of outstanding Voting Stock (including Common Stock) shall be in cash or in the same form as the Interested Stockholder has previously paid for shares of such class of Voting Stock. If the Interested Stockholder has paid for shares of any class of Voting Stock with varying forms of consideration, the form of consideration for such class of Voting Stock shall be either cash or the form used to acquire the largest number of shares of such class of Voting Stock previously acquired by it. (iv) After such Interested Stockholder has become an Interested Stockholder and prior to the consummation of such Business Combination: (a) except as approved by a majority of the Continuing Directors, there shall have been no failure to declare and pay at the regular date therefor any full quarterly dividends (whether or not cumulative) on the outstanding Preferred Stock, if any; (b) there shall have been (1) no reduction in the annual rate of dividends paid on the Common Stock (except as necessary to reflect any subdivision of the Common Stock), except as approved by a majority of the Continuing Directors, and (2) an increase in such annual rate of dividends as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction which has the effect of reducing the number of outstanding shares of the Common Stock, unless the failure so to increase such annual rate is approved by a majority of the Continuing Directors; and (c) such Interested Stockholder shall have not become the beneficial owner of any additional shares of Voting Stock except as part of the transaction which results in such interested Stockholder becoming an Interested Stockholder. (v) After such Interested Stockholder has become an Interested Stockholder, such Interested Stockholder shall not have received the benefit, directly or indirectly (except proportionately as stockholder), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the Corporation, whether in anticipation of or in connection with such Business Combination or otherwise. (vi) A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall be mailed to public stockholders of the Corporation at lease 30 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act or subsequent provisions). SECTION 3. CERTAIN DEFINITIONS. For the purposes of this Article VIII: 1. A "person" shall mean any individual, firm, corporation or other entity. 2. "Interested Stockholder" shall mean any person (other than the Corporation or any Subsidiary) who or which: (i) is the beneficial owner, directly or indirectly, of more than 10% of the voting power of the outstanding Voting Stock; or (ii) is an Affiliate of the Corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then outstanding Voting Stock; or (iii) is an assignee of or has otherwise succeeded to any shares of Voting Stock which were at any time within the two-year period immediately prior to the date in question beneficially owned by any Interested Stockholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933. C. A person shall be a "beneficial owner" of any Voting Stock: (i) which such person or any of its Affiliates or Associates (as hereinafter defined) beneficially owns, directly or indirectly; or (ii) which such person or any of its Affiliates or Associates has (a) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (b) the right to vote pursuant to any agreement, arrangement or understanding; or (iii) which are beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of Voting Stock. D. For the purposes of determining whether a person is an Interested Stockholder pursuant to paragraph B of this Section 3, the number of shares of Voting Stock deemed to be outstanding shall include shares deemed owned through application of paragraph C of this Section 3 but shall not include any other shares of Voting Stock which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. E. "Affiliate" or "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on January 1, 1983. F. "Subsidiary" means any corporation of which a majority of any class of equity security is owned, directly or indirectly, by the Corporation; provided, however, that for the purposes of the definition of Interested Stockholder set forth in paragraph B of this section 3, the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is owned, directly or indirectly, by the Corporation. G. "Continuing Director" means any member of the Board of Directors of the Corporation (the "Board") who is unaffiliated with the Interested Stockholder and was a member of the Board prior to the time that the Interested Stockholder became an Interested Stockholder and is recommended to succeed a Continuing Director by a majority of Continuing Directors then on the Board. H. "Fair Market Value means: (i) in the case of stock, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of such stock on the Composite Tape for New York Stock Exchange-Listed Stocks, or, if such stock is not quoted on the Composite Tape, on the New York Stock Exchange, or, if such stock is not listed on such Exchange, on the principle United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such stock during the 30-day period preceding the date in question on the National Association of Securities Dealers, Inc., Automated Quotations System or any system then in use, or if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by a majority of the Continuing Directors; and (ii) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined by a majority of the Continuing Directors. I. "Institutional Voting Stock" shall mean any class of Voting Stock which was issued to and continues to be held solely by one or more insurance companies, pensions funds, commercial banks, savings banks or similar financial institutions or institutional investors. J. In the event of any Business Combination in which the Corporation survives, the phrase "other consideration to be received" as used in paragraphs B(i) and (ii) of Section 2 of this Article VIII shall include the shares of Common Stock and/or the shares of any other class of outstanding Voting Stock retained by the holders of such shares. SECTION 4. CERTAIN POWERS OF THE CONTINUING DIRECTORS. A majority of the Continuing Directors of the Corporation shall have the power and duty to determine for the purposes of this Article VIII, on the basis of information known to them after reasonable inquiry, (A) whether a person is an Interested Stockholder, (B) the number of shares of Voting Stock beneficially owned by any person, (C) whether a person is an Affiliate or Associate of another, (D) whether a class of Voting Stock is Institutional Voting Stock, (E) whether a transaction or a series of transactions constitutes a Business Combination, and (F) whether the assets which are the subject of any Business Combination have, or the consideration to be received for the issuance or transfer of securities by the Corporation or any Subsidiary in any Business Combination has, an aggregate Fair Market Value of $1,000,000 or more. SECTION 5. NO EFFECT ON FIDUCIARY OBLIGATIONS OF INTERESTED STOCKHOLDERS. Nothing contained in this Article VIII shall be construed to relieve any Interested Stockholder from any fiduciary obligation imposed by law. SECTION 6. AMENDMENT, REPEAL, ETC. Notwithstanding any other provisions of these Articles of Incorporation or the By-Laws of the Corporation (and notwithstanding the fact that a lesser percentage may be specified by law, these Articles of Incorporation or the By-Laws of the Corporation), the affirmative vote of the holders of 80% or more of the voting power of the shares of the then outstanding Voting Stock, voting together as a single class, shall be required to amend or repeal, or adopt any provisions inconsistent with, this Article VIII of these Articles of Incorporation. DATED this 25th day of January, 1996. EQUITY OIL COMPANY By: /S/ CLAY NEWTON CLAY NEWTON, Secretary EX-3.(II) 3 BY-LAWS BYLAWS OF EQUITY OIL COMPANY ARTICLE I SHAREHOLDERS 1.01 Annual Meeting. The corporation shall hold an annual meeting of the shareholders on the second Wednesday of May of each year, at such time and place as designated by the board of directors for the purpose of electing directors and for the transaction of such other business as may properly come before the meeting. If the annual meeting cannot be held on the day designated as provided herein for any reason or at any adjournment thereof, the board of directors shall cause such meeting to be held as soon thereafter as convenient. 1.02 Special Meetings. Special meetings of the shareholders, for any purpose or purposes, may be called by the president or the chairman of the board, if there be one, or by the board of directors. The corporation shall also hold a special meeting of the shareholders in the event it receives one or more written demands for the meeting stating the purpose or purposes for which it is to be held, signed and dated by the holders of shares representing at least ten percent of all the votes entitled to be cast on any issue proposed to be considered at the meeting. Special meetings shall be held at the principal office of the corporation or at such other place as the board of directors, president or chairman of the board, if there be one, may determine. 1.03 Notice of Meeting. Except as otherwise required by law, the articles of incorporation or these bylaws, notice of each meeting of shareholders stating the date, time and place of the meeting shall be given (and shall be effective), in accordance with Section 6.03, to each shareholder of record entitled to vote at such meeting not less than ten nor more than sixty days before the date of the meeting, except that if the authorized capital stock is to be increased, at least thirty days notice shall be given. Notice of each meeting and, if required by law, of each annual meeting of shareholders shall include a description of the purpose or purposes for which the meeting is called. If a meeting is adjourned to another date, time or place, notice need not be given of the new date, time or place if the new date, time or place is announced at the meeting at which the adjournment is taken. If after the adjournment a new record date is or must be fixed under Section 1.05 for the adjourned meeting, notice of the adjourned meeting shall be given to each shareholder of record entitled thereto as of the new record date. 1.04 Waiver of Notice. A shareholder may waive any notice required by law, the articles of incorporation or these bylaws before, at or after the date or time stated in the notice as the date or time when any action will occur or has occurred. Any such waiver must be in writing, signed by the shareholder entitled thereto and delivered to the corporation for inclusion in the minutes or filing with the corporate records, but such delivery and filing shall not be conditions to its effectiveness. By attending a meeting, a shareholder (a) waives objection to lack of notice or defective notice of such meeting unless the shareholder, at the beginning of the meeting, objects to the holding of the meeting or the transacting of business at the meeting because of lack of notice or defective notice, and (b) waives objection to consideration at such meeting of a particular matter not within the purpose or purposes described in the notice of such meeting unless, when the matter is presented for consideration, the shareholder objects to its consideration. 1.05 Record Date. In order to make a determination of shareholders entitled to notice of or to vote at any meeting of shareholders, entitled to demand a special meeting of shareholders pursuant to Section 1.02, entitled to take any other action, entitled to receive a distribution or payment of a share dividend, or for any other purpose, the board of directors may fix a future date as the record date for any such determination of shareholders, except that the record date for determining shareholders entitled to take action without a meeting pursuant to Section 1.12 shall be determined as provided in such Section. A record date fixed under this Section shall be not more than seventy and, in the case of a meeting of shareholders, not less than ten (thirty if the authorized stock is to be increased) days before the meeting or action requiring the determination of shareholders. Unless otherwise specified when the record date is fixed, any such determination of shareholders shall be made as of the corporation's close of business on the record date. If a record date is not otherwise fixed under this Section, the record date shall be (a) for the determination of shareholders entitled to notice of or to vote at a meeting, the day before the first notice of the meeting is given to shareholders, (b) for the determination of shareholders entitled to demand a special meeting pursuant to Section 1.02, the date of the earliest of any of the demands pursuant to which the meeting is called or the date that is sixty days before the date the first of such demands is received by the corporation, whichever is later, (c) for the determination of shareholders entitled to a distribution, payment of a share dividend or for any other purpose determined by the board of directors, the date the board of directors authorized the distribution, payment or action; and (d) for the determination of shareholders for any other purpose, the date the action requiring such determination is first taken. A determination of shareholders entitled to be given notice of or to vote at any meeting of shareholders made as provided in this Section is effective for any adjournment thereof unless the board of directors fixes a new record date, which it must do if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting. 1.06 Shareholders' List for Meeting. Prior to each meeting of shareholders, the corporation shall prepare a list of the names of the shareholders who are entitled to be given notice of the meeting. The list shall be arranged by voting groups, if there be voting groups, and within each voting group by class or series of shares, shall be alphabetical within each class or series and shall show the address of, and the number of shares of each class and series that are held by, each shareholder. This list shall be kept on file at the corporation's principal office or at a place identified in the notice of the meeting in the city where the meeting will be held beginning the earlier of ten days before the meeting for which the list was prepared or two business days after notice of the meeting is given and continuing through the meeting, and any adjournment thereof. Subject to any restrictions and conditions imposed or allowed by law, any shareholder or such shareholder's agent or attorney, on written demand, may inspect or copy the shareholders' list for any purpose reasonably related to the shareholder's interest as a shareholder during regular business hours and during the period it is available for inspection. The corporation shall make the shareholders' list available at the meeting and, notwithstanding the foregoing, any shareholder or agent or attorney of a shareholder may inspect the list at any time during the meeting or any adjournment. 1.07 Voting Entitlement of Shares. Except as otherwise provided by law or the articles of incorporation and subject to the provisions of Sections 1.05 and 1.09, each outstanding share, regardless of class, is entitled to one vote on each matter submitted to a vote of shareholders. 1.08 Quorum. Except as otherwise provided by law or the articles of corporation, at all meetings of shareholders, a majority of the votes entitled to be cast on a matter shall constitute a quorum for action on such matter. Once a share is represented for any purpose at a meeting, including the purpose of determining that a quorum exists, it is deemed present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting, unless otherwise provided in the articles of incorporation or unless a new record date is or must be fixed for that adjourned meeting as provided in Section 1.05. If a quorum does not exist the presiding officer or any shareholder or proxy that is present at the meeting may adjourn the meeting to a different date, time or place, and (subject to the next sentence) notice need not be given of the new date, time or place if the new date, time or place is announced at the meeting before adjournment. If a new record date for the adjourned meeting is or must be fixed pursuant to Section 1.05, notice of the adjourned meeting shall be given pursuant to Section 1.03 to persons that are shareholders as of the new record date. At any adjourned meeting at which a quorum exists, any matter may be acted upon that could have been acted upon at the meeting originally called; provided, however, if new notice is given of the adjourned meeting, then such notice shall state the purpose or purposes of the adjourned meeting sufficiently to permit action on such matter. 1.09 Manner of Acting. If a quorum is present at a meeting of shareholders as required by Section 1.08, action on a matter is approved if the votes favoring the action exceed the votes opposing the action, unless a greater number of affirmative votes, is required by law or the articles of incorporation. Notwithstanding the foregoing and unless the articles of incorporation provide otherwise, in the election of directors each shareholder entitled to vote at such election shall have the right to vote the number of shares owned by such shareholder for as many persons as there are directors to be elected, and for whose election the shareholder has the right to vote. Those candidates receiving the highest number of votes cast in their favor (equal to the number of directors to be elected) are elected to the board of directors. Cumulative voting is not allowed. 1.10 Proxies. Subject to applicable provisions of law, a shareholder may vote by proxy appointed by a writing signed by the shareholder or by the shareholder's duly authorized attorney-in-fact or otherwise appointed as allowed by law. An appointment of a proxy is effective against the corporation when received by the corporation in any manner permitted by law. An appointment is effective for 11 months, unless otherwise provided in the appointment form. 1.11 Organization. The president shall act as chairman of all meetings of shareholders. In the absence of the president, the chairman of the board, if there be one, shall act as chairman. In the absence of the chairman of the board, the vice president, if there be one, shall act as chairman of such meeting. In the absence of the president, chairman of the board, and vice president, any stockholder or the proxy of any stockholder may call the meeting to order and a chairman shall be elected. The secretary of the corporation shall act as secretary of all meetings of the stockholders, but in his absence the chairman of the meeting may appoint any person to act as secretary thereof. ARTICLE II BOARD OF DIRECTORS 2.01 General Powers. All corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation shall be managed under the direction of, a board of directors, except as otherwise provided by law, the articles of incorporation or these bylaws. 2.02 Number, Tenure and Qualifications. The number of directors of the corporation shall be not less than six nor more than nine, as may be fixed from time to time within such range by resolution of the board of directors. Directors shall be elected at each annual meeting of shareholders and hold office for staggered terms as provided in the Articles of Incorporation. Each director shall hold office until the director's successor shall have been elected and qualified, or until the director's earlier death, resignation or removal. No decrease in the number of directors shall have the effect of shortening the term of any incumbent director. Directors must be the holders of record of at least one share of stock in the company and natural persons eighteen years of age or older. 2.03 Removal and Resignation. Subject to the rights of the holders of any series of preferred shares then outstanding, any director or the entire board, director, may be removed from office at any time, but only by its affirmative vote of the holders of at least 80% of the voting power of all of the shares of the corporation entitled to vote for the election of directors. Any director may resign at any time by giving written notice of resignation to the chairman of the board, if there be one, any other director or (if the director is not also that officer) to the president or the secretary. Such resignation shall be effective when it is received by the chairman, other director, the president or the secretary, as the case may be, unless the notice of resignation specifies a later effective date. Unless otherwise specified in the notice of resignation, acceptance of such resignation shall not be necessary to make it effective. 2.04 Vacancies. Any vacancy occurring on the board of directors, including a vacancy resulting from an increase in the number of directors, may be filled by the directors as provided in the articles of incorporation or by the shareholders at an annual meeting or at a special meeting of shareholders called for that purpose. If the directors remaining in office constitute fewer than a quorum, they may fill the vacancy by the affirmative vote of a majority of all of those remaining. 2.05 Meetings. The board of directors may hold regular or special meetings, in or out of Colorado. The board of directors may provide, by resolution, the time and place for holding regular meetings without other notice than such resolution. Special meetings may be called by or at the request of the chairman of the board, if there be one, or by the president or by two or more directors and shall be held at the principal office of the corporation unless otherwise specified in the notice of the meeting. 2.06 Notice. Notice of each meeting of the board of directors (except those regular meetings for which notice is not required) stating the place, date and time of the meeting shall be given (and shall be effective) in accordance with Section 6.03, to all directors at least three days before the date of the meeting. The method of notice need not be the same for each director. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the board of directors need be specified in the notice or waiver of notice of such meeting. 2.07 Waiver of Notice. A director may waive any notice of a meeting required by these bylaws before, at or after the date or time of the meeting stated in the notice. Except as provided in the next sentence, any such waiver must be in writing, signed by the director entitled thereto and delivered to the corporation for filing with the corporate records, but such delivery and filing shall not be conditions to its effectiveness. A director's attendance at or participation in a meeting waives any required notice to such director of the meeting unless, at the beginning of the meeting or promptly upon the director's later arrival, the director objects to holding the meeting or transacting business at the meeting because of lack of notice or defective notice and does not thereafter vote for or assent to action taken at the meeting. 2.08 Quorum and Manner of Acting. Except as otherwise may be required by law, the articles of incorporation or these bylaws, a majority of the directors fixed in accordance with Section 2.02, present in person, shall constitute a quorum for the transaction of business at any meeting of the board of directors. Except as otherwise required by law, the act of a majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors. No director may vote or act by proxy or power of attorney at any meeting of directors. 2.09 Presumption of Assent. A director who is present at a meeting of the board of directors at which action on any corporate matter is taken is deemed to have assented to all action taken at the meeting unless the director (a) objects at the beginning of the meeting, or promptly upon the director's arrival, to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to any action taken at the meeting; (b) contemporaneously requests that his or her dissent or abstention as to any specific action taken be entered in the minutes of the meeting; or (c) causes written notice of such dissent or abstention as to any specific action to be received by the presiding officer of the meeting before adjournment of the meeting or by the corporation promptly after adjournment of the meeting. The right of dissent or abstention pursuant to this Section as to specific action is not available to a director who votes in favor of the action taken. 2.10 Meetings by Telecommunication. One or more directors may participate in any meeting of the board by, or the meeting may be conducted through the use of, any means of communication by which all directors participating can hear each other during the meeting. Such participation shall constitute presence in person at the meeting. 2.11 Director Action without a Meeting. Any action required or permitted to be taken at a meeting of the board of directors may be taken without a meeting if all members of the board consent to such action in writing. The action shall be deemed to have been so taken by the board at the time the last director signs a writing describing the action taken, unless, before such time, any director has revoked his or her consent by a writing signed by the director and received by the president or secretary or any other person authorized by the board of directors to receive such a revocation. Such action shall be effective at the time and date it is taken unless the directors establish a different effective time or date. Such action has the same effect as action taken at a meeting of directors and may be described as such in any document. 2.12 Committees. The Company shall have an executive committee, audit committee, compensation committee, and nominating committee as provided in these bylaws. Subject to applicable provisions of law, the board of directors, by resolution adopted by a majority of all directors then in office, may create other committees and appoint one or members of the board of directors to serve on them. The provisions of these bylaws governing meetings, action without meetings, notice, waiver of notice and quorum and voting requirements of the board of directors shall apply to any committees so created or established under these bylaws and to the members appointed thereto. Each committee created by the board or established under these bylaws shall have and may exercise the authority of the board of directors to the extent specified in the resolution creating such committee, except that no such committee shall have authority to: (a) Declare dividends or distributions; (b) Approve or recommend to shareholders actions or proposals required by Colorado law to be approved by shareholders; (c) Fill vacancies on the board of directors or any of its committees; (d) Adopt, amend or repeal by-laws; (e) Approve a plan of merger not requiring shareholder approval; (f) Authorize or approve reacquisition of shares except according to a formula or method prescribed by the board of directors; and (g) Authorize or approve the issuance or sale of shares or a contract for the sale of shares or determine the designation and relative rights preferences and class or series of shares; except that the board of directors may authorize a committee or an officer to do so within the limits specifically prescribed by the board of directors. (h) Any other action prohibited under the Colorado Corporation Act as the same may be amended from time to time. 2.13 Executive Committee. The executive committee shall consist of the president, chairman of the board, if there be one, and such other directors as the board may determine. The president shall act as chairman of the committee. The executive committee shall have and may exercise all authority of the board of directors subject to such limitations, if any, as may be prescribed by resolution of the board and by-laws of the corporation, and except as provided by law. 2.14 Audit Committee. The board of directors shall, by resolution or resolutions, designate three or more of its independent outside directors to serve on the audit committee of the board. The board shall designate one person from the members so selected to act as chairman of the committee. The audit committee shall implement and support the oversight function of the board by reviewing on a periodic basis the corporation's processes for producing financial data, its internal controls, and the independence of the corporation's external auditor. In addition, it shall: (a) Recommend the firm to be employed as the corporation's external auditor and review the proposed discharge of any such firm; (b) Review the external auditor's compensation and the proposed terms of its engagement; (c) Review the appointment and replacement of the chief financial officer of the company; (d) Serve as a channel of communication between the external auditor and the board and between the chief financial officer of the company, and the board; (e) Review the results of each external audit of the corporation and any recommendations made by the external auditor and the responses of management to such recommendations; and (f) Such other matters as the audit committee, in its sole discretion, deems advisable and necessary. 2.15 Compensation Committee. The compensation committee shall be comprised of all of the independent outside directors of the company. Each year following the annual meeting of shareholders, the board of directors shall appoint a chairman of the compensation committee. The compensation committee shall: (a) Review and recommend to the board, or determine, the annual salary, bonus, stock options, and other benefits, direct and indirect, of the officers of the company; (b) Review new executive compensation programs; review on a periodic basis the operation of the corporation's executive compensation programs to determine whether they are properly coordinated; establish and periodically review policies for the administration of executive compensation programs; and take steps to modify any executive compensation programs that yield payments and benefits that are not reasonably related to executive performance; (c) Establish and periodically review policies in the area of management perquisites; (d) Be responsible for insuring that a proper system of compensation is in place to provide performance oriented incentives to management; and (e) Evaluate the president and chief financial officer's performance for incentive purposes. 2.16 Nominating Committee. The whole board of directors shall act as a nominating committee for the election of new directors of the company. The nominating committee shall: (a) By February 1 of each year, nominate candidates for all directorships to be filled by the shareholders or the board; (b) Consider, in making its selection, candidates for directorships proposed by the chief executive officer, the chairman of the board, if any, and within the bounds of practicability, by any other senior executive or any director or shareholder; (c) In selecting a candidate, consideration should be given to the skills and characteristics required of board members in the context of the current makeup of the board and the business of the company. The assessment should include, but not be limited to, issues of diversity, age and skills such as an understanding of exploration, production, marketing, finance, regulation, public and international markets; (d) Each proposed nominee shall provide the corporation with such information concerning himself as is required under law, to be included in the corporation's proxy statement soliciting proxies for his election as director; and (e) Substitution of Nominees. In the event that a person is validly designated as a nominee in accordance with paragraph (b) hereof and shall thereafter become unable or unwilling to stand for the election to the board of directors may designate a substitute nominee. 2.17 Compensation. The members of the board of directors shall be entitled to reasonable compensation for their personal services as such, and shall be paid such compensation as the directors may from time to time determine. However, no director who is also a salaried, full time officer of the corporation shall receive compensation for his services as a director. 2.18 Extra Services. If any director performs extra services for the corporation at the request of the board of directors, the corporation may remunerate the director for so doing in such manner as may be determined by the board including the payment of expenses incurred in connection with such extra services. ARTICLE III OFFICERS 3.01 General. The corporation shall have as officers a president, a secretary, and a treasurer, who shall be appointed by the board of directors. The board of directors may designate and appoint a chairman and other officers of the board. The board of directors may also designate, as additional offices, those of vice presidents, assistant secretaries, assistant treasurers, and such other offices as it may deem necessary or appropriate; and the board of directors, the president, and such other officers as the board of directors may authorize, acting singly, may make appointments to such offices. The officers of the corporation shall exercise such authority and perform such duties as shall be determined by these by-laws or the board of directors. Any two or more offices may be held by the same person. The officers of the corporation shall be natural persons at least eighteen years old. 3.02 Term of Office. The officers of the corporation shall be appointed by the board of directors at each annual meeting of the board of directors held after each annual meeting of the shareholders. If the appointment of officers is not made at such meeting, or if an officer or officers are to be appointed by another officer or officers of the corporation, such appointments shall be made as soon thereafter as convenient . Except as otherwise provided in Section 3.03, each officer shall hold office for the term specified in the officer's appointment and, if applicable, until the officer's successor shall have been appointed and qualified, or until the officer's earlier death, resignation or removal. 3.03 Removal and Resignation. Any officer appointed by the board of directors may be removed at any time by the board of directors. Any officer appointed by the president or other person may be removed at any time by the board of directors or by the appointing person. Any officer may resign at any time by giving written notice of resignation to any director (or to any director other than the resigning officer if the officer is also a director), to the president, to the secretary, or to the officer who appointed. Acceptance of such resignation shall not be necessary to make it effective, unless the notice so provides. 3.04 Compensation. Officers shall receive such compensation for their services as may be fixed by the board of directors or by any officer authorized by the board of directors to fix compensation of other officers. No officer shall be prevented from receiving compensation by reason of the fact that he or she is also a director of the corporation. Appointment as an officer shall not of itself create a contract or other right to compensation for services performed by such officer. 3.05 Chairman of the Board. The board of directors may elect from its number a chairman of the board. The chairman of the board, if there be one, shall be an independent outside director and shall preside at all meetings of the board of directors. The chairman shall act in a non-executive capacity; shall have access to all corporate information; monitor officers' performance; aid and consult with the president; assist the president in setting board meeting agendas; facilitate communications among other members of the board as the president and chairman mutually agree. He shall have such other powers and duties as may be prescribed by these by-laws and by the board of directors from time to time. 3.06 President. Subject to the direction and control of the board of directors, the president shall be the chief executive officer of the corporation and as such shall have general and active control of its affairs and business and general supervision of its officers, agents and employees and shall see that all orders and resolutions of the board of directors are carried into effect. The president may negotiate, execute, and deliver such contracts, deeds, and other instruments on behalf of the corporation as are necessary and appropriate to the conduct of the business and affairs of the corporation or as are approved by the board of directors. The president shall preside at all meetings of shareholders, and the executive committee. The president shall also preside at all meetings of the board of directors unless the board of directors has appointed a chairman of the board. The president shall have such additional authority and duties as are appropriate and customary for the office of president and chief executive officer, except as the same may be expanded or limited by the board of directors from time to time. 3.07 Vice Presidents. The vice president, if any (or if there is more than one, then each vice president), shall assist the president and shall perform such duties as may be assigned by the president or the board of directors. The vice president, if there is one (or if there is more than one, then the vice president designated by the board of directors, or if there is no such designation, then the vice presidents in the order of their appointment) shall, at the request of the president, or in the president's absence or inability or refusal to act, have the powers and perform the duties of the president. 3.08 Secretary. The secretary shall, except to the extent delegated by the board of directors to another officer or officers: (a) be responsible for the preparation and maintenance of the minutes of the proceedings of the shareholders, the board of directors and any committees of the board and of the other records and information required to be kept by the corporation under Section 7-116-101 of the Colorado Business Corporation Act, or any successor provision, and for authenticating records of the corporation ; (b) see that all notices to the shareholders and directors are duly given in accordance with the provisions of these bylaws or as required by law; (c) have charge of the corporate seal and authority to affix the corporate seal to any instrument requiring it and attest to such affixment; (d) be responsible for the maintenance of other corporate records and files and for the preparation and filing of reports to governmental agencies (other than tax returns), except to the extent any of such duties is delegated to another officer or agent of the corporation; and (e) perform all other duties incident or customary to the office of secretary and such other duties as from time to time may be assigned by the president or the board of directors. Assistant secretaries, if any, shall have the same duties and powers, subject to supervision by the secretary. 3.09 Treasurer. The treasurer shall: (a) be the principal financial officer of the corporation and have the care and custody of all funds, securities, evidences of indebtedness and other personal property of the corporation and deposit the same in accordance with the instructions of the board of directors; (b) subject to any limits imposed by the board of directors, receive and give receipts and acquittances for moneys paid in on account of the corporation, and pay out of the funds on hand all bills, payrolls, and other just debts of the corporation of whatever nature upon maturity; (c) be the principal accounting officer of the corporation; (d) prescribe and maintain the methods and systems of accounting to be followed; (e) keep complete books and records of account; (f) prepare and file all local, state and federal tax returns; (g) prepare and furnish to the president and the board of directors statements of account showing the financial position of the corporation and the results of its operations; and (h) perform all other duties incident or customary to the office of treasurer and such other duties as may be from time to time prescribed by the president or the board of directors. Assistant treasurers, if any, shall have the same powers and duties, subject to supervision by the treasurer. ARTICLE IV SHARES 4.01 Issuance of Shares. The issuance or sale by the corporation of any shares of its authorized capital stock of any class shall be made only upon authorization of the board of directors. No shares shall be issued until full consideration has been received therefor. Every issuance of shares shall be recorded on books maintained for such purpose by or on behalf of the corporation. 4.02 Certificates. Shares of stock issued by the corporation shall be represented by certificates. Certificates shall be consecutively numbered, shall be signed, either manually or by facsimile, in the name of the corporation by the president or a vice president and by the secretary or an assistant secretary or by such other officer or officers as may be designated by the board of directors, and shall otherwise be in such form and contain such information, consistent with law, as shall be prescribed by the board of directors. Certificates may, but need not be, sealed with the seal of the corporation, or with a facsimile thereof. In case any officer who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the corporation with the same effect as if he or she were such officer at the date of its issue. 4.03 Consideration for Shares. Shares shall be issued for such consideration, expressed in dollars, as shall be fixed from time to time by the board of directors. Such consideration may consist, in whole or in part, of any tangible or intangible property or benefit to the corporation, including cash, promissory notes, services performed and other securities of the corporation. Future services shall not constitute payment or partial payment for shares. The promissory note of a subscriber or an affiliate of a subscriber shall not constitute payment or partial payment for shares unless the note is negotiable, with recourse against the maker and secured by collateral, other than the shares, having a fair market value at least equal to the principal amount of the note. 4.04 Lost Certificates. In case of the alleged loss, destruction or mutilation of a certificate of stock, the board of directors may direct the issuance of a new certificate in lieu thereof upon such terms and conditions in conformity with law as it may prescribe. Before issuing a new certificate, the board of directors may in its discretion require a bond in such form and amount and with such surety as it may determine. 4.05 Transfer of Shares. Upon surrender to the corporation or to a transfer agent of the corporation of a certificate of stock duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, payment of all transfer taxes, if any, and the satisfaction of any other requirements of law, including without limitation evidence of compliance with all applicable securities laws, the corporation shall issue a new certificate to the person entitled thereto, and cancel the old certificate. Every such transfer of stock shall be entered on the books of the corporation maintained for such purpose by or on behalf of the corporation. The corporation or the corporation's transfer agent may require a signature guaranty or other reasonable evidence that any signature is genuine and effective before making any transfer. Transfers of uncertificated shares shall be made in accordance with applicable provisions of law. 4.06 Holders of Record. Except to the extent the corporation otherwise provides pursuant to Section 4.07, and except for the assertion of dissenters' rights to the extent permitted in the Colorado Business Corporation Act, the corporation shall be entitled to treat the registered holder of any shares of the corporation as the owner thereof for all purposes and shall not be bound to recognize any equitable or other claim to, or interest in, the shares on the part of any other person, whether or not the corporation shall have notice of such claim or interest. 4.07 Recognition Procedure for Beneficial Owners. The board of directors may establish, by resolution, a procedure by which the beneficial owner of shares that are registered in the name of a nominee is recognized by the corporation as the shareholder. The procedure established pursuant to this Section may set forth the types of nominees to which it applies, the rights or privileges that the corporation recognizes in a beneficial owner (which may include rights or privileges other than voting), the manner in which the procedure may be used by the nominee, the information that must be provided by the nominee when the procedure is used, the period for which the nominee's use of the procedure is effective, and any other aspects of the rights and duties created thereby. ARTICLE V INDEMNIFICATION 5.01 Right to Indemnification. The corporation shall indemnify, to the fullest extent permitted by law (including without limitation in circumstances in which, in the absence of this Section 5.01, indemnification would be discretionary under the laws of Colorado or limited or subject to particular standards of conduct under such laws), each of its directors and officers (hereinafter, for purposes of this Article V, individually referred to as a "party") against all expenses, liabilities and losses (including without limitation expenses of investigation and preparation, fees and disbursements of counsel, accountants and other experts, judgments, fines and amounts paid in settlement) incurred in, relating to or as a result of any action, suit or proceeding (collectively referred to herein as a "proceeding") to which such person may be involved or made a party by reason of serving or having served as a director or officer of the corporation or, at the request of the corporation, as a director, officer, manager, member, partner, trustee, employee, fiduciary, functionary or agent of any other corporation, limited liability company, partnership, joint venture, trust, association, employee benefit plan or other entity or enterprise. 5.02 Advance of Expenses. In the event of any proceeding in which a party is involved or which may give rise to a right of indemnification under Section 5.01, following written request to the corporation by the party, the corporation shall pay to the party, to the fullest extent permitted by law (including without limitation in circumstances in which, in the absence of this Section 5.02, advance of expenses would be discretionary under the laws of Colorado or limited or subject to particular standards of conduct under such laws), amounts to cover expenses incurred by the party in, relating to or as a result of such proceeding in advance of its final disposition. 5.03 Settlements. The corporation shall not be liable under this Article for any amounts paid in settlement of any proceeding effected without its written consent. The corporation shall not settle any proceeding in any manner that would impose any personal penalty or limitation on a party without the party's written consent. Consent to a proposed settlement of any proceeding shall not be unreasonably withheld by either the corporation or the party. 5.04 Burden of Proof. If under applicable law the entitlement of a party to be indemnified or advanced expenses pursuant to this Article depends upon whether a standard of conduct has been met, the burden of proof of establishing that the party did not act in accordance with such standard shall rest with the corporation. A party shall be presumed to have acted in accordance with such standard and to be entitled to indemnification or advance of expenses (as the case may be) unless, based upon a preponderance of the evidence, it shall be determined that the party has not met such standard. Such determination and any evaluation as to the reasonableness of amounts claimed by a party shall be made by the board of directors or such other body or persons as may be permitted by law. 5.05 Notification and Defense of Claim. Promptly after receipt by a party of notice of the commencement of any proceeding, the party shall, if a claim for indemnification in respect thereof may or will be made against the corporation under this Article, notify the corporation in writing of the commencement thereof; provided, however, that delay in so notifying the corporation shall not constitute a waiver or release by the party of any rights under this Article. With respect to any such proceeding: (a) the corporation shall be entitled to participate therein at its own expense; (b) any counsel representing the party to be indemnified in connection with the defense or settlement thereof shall be counsel mutually agreeable to the party and to the corporation; and (c) if the corporation admits that such party would be entitled to indemnification under this Article in connection with such proceeding, the corporation shall have the right, at its option, to assume and control the defense or settlement thereof, with counsel satisfactory to the party. If the corporation assumes the defense of the proceeding, the party shall have the right to employ its own counsel, but the fees and expenses of such counsel incurred after notice from the corporation of its assumption of the defense of such proceeding shall be at the expense of the party unless (i) the employment of such counsel has been specifically authorized by the corporation, (ii) the party shall have reasonably concluded that there may be a conflict of interest between the corporation and the party in the conduct of the defense of such proceeding, or (iii) the corporation shall not in fact have employed counsel to assume the defense of such proceeding. Notwithstanding the foregoing, if an insurance carrier has supplied directors and officers liability insurance covering a proceeding and is entitled to retain counsel for the defense of such proceeding, then the insurance carrier shall retain counsel to conduct the defense of such proceeding unless the party and the corporation concur in writing that the insurance carrier's doing so is undesirable. 5.06 Payment Procedures; Enforcement. The corporation shall promptly act upon a party's written request for indemnification or advance of expenses. The right to indemnification and advance of expenses granted by this Article shall be enforceable in any court of competent jurisdiction if the corporation denies the claim, in whole or in part, or if no disposition of such claim is made within sixty days after the written request for indemnification or advance of expenses is made. If successful in whole or in part in such suit, the party's expenses incurred in bringing and prosecuting such claim shall also be paid by the corporation. 5.07 Other Payments. The corporation shall not be liable under this Article to make any payment in connection with any proceeding against or involving a party to the extent the party has otherwise actually received payment (under any insurance policy, agreement or otherwise) of the amounts otherwise indemnifiable hereunder. A party shall repay to the corporation the amount of any payment the corporation makes to the party under this Article in connection with any proceeding against or involving the party, to the extent the party has otherwise actually received payment (under any insurance policy, agreement or otherwise) of such amount. In the event of any payment under this Article, the corporation shall be subrogated to the extent of such payment to all of the rights of recovery of the indemnified party, who shall execute all papers and do everything that may be necessary to assure such rights of subrogation to the corporation. 5.08 Liability Insurance. The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, fiduciary or agent of the corporation or who is or was serving at the request of the corporation as a director, officer, manager, member, partner, trustee, employee, fiduciary, functionary or agent of any other corporation, limited liability company, partnership, joint venture, trust, association, employee benefit plan or other entity or enterprise against any liability asserted against and incurred by such person in any such capacity or arising out of such person's status as such, whether or not the corporation would have the power to indemnify such person against such liability under the provisions of this Article. 5.09 Other Rights and Remedies. The rights to indemnification and advance of expenses provided by this Article shall be in addition to, and shall not be in limitation of, any other rights a party may have or hereafter acquire under any law, provision of the articles of incorporation, any other or further provision of these bylaws, vote of the shareholders or directors, agreement or otherwise. The corporation shall have the right, but shall not be obligated, to indemnify or advance expenses to any employee, fiduciary or agent of the corporation not otherwise covered by this Article to the fullest extent permitted by law. Unless otherwise provided in any separate indemnification arrangement, any such indemnification or advance of expenses shall be made only as authorized in the specific case by the board of directors. 5.10 Applicability; Effect. The rights to indemnification and advance of expenses provided by this Article shall be applicable to acts or omissions that occurred prior to the adoption of this Article, shall continue as to any party entitled to indemnification under this Article during the period such party serves in any one or more of the capacities covered by this Article, shall continue thereafter so long as the party may be subject to any possible proceeding by reason of the fact that the party served in any one or more of the capacities covered by this Article, and shall inure to the benefit of the estate and personal representatives of each such person. Any repeal or modification of this Article or of any Section or provision hereof shall not adversely affect any rights or obligations then existing. All rights to indemnification under this Article shall be deemed to be provided by a contract between the corporation and each party covered hereby. 5.11 Severability. If any provision of this Article shall be held to be invalid, illegal or unenforceable for any reason whatsoever (a) the validity, legality and enforceability of the remaining provisions of this Article shall not in any way be affected or impaired thereby, and (b) to the fullest extent possible, the remaining provisions of this Article shall be construed so as to give effect to the intent of this Article that each party covered hereby is entitled to the fullest protection permitted by law. 5.12 Expenses as a Witness. The Corporation may pay or reimburse expenses incurred by a director, officer, employee, fiduciary, or agent in connection with an appearance as a witness in a Proceeding at a time when he or she has not been made a named defendant or respondent in the Proceeding. 5.13 Notice to Shareholders. If the corporation indemnifies or advances Expenses to a director under this Article in connection with a Proceeding by or in the right of the corporation, the corporation shall give written notice of the indemnification for advance to the shareholders with or before the notice of the next shareholder's meeting. If the next shareholder action is taken without a meeting at the instigation of the board of directors, such notice shall be given to the shareholders at or before the time the first shareholder signs a writing consenting to such action. ARTICLE VI MISCELLANEOUS 6.01 Corporate Seal. The corporate seal of the corporation shall be circular in form and shall contain the name of the corporation and the words "Seal, Colorado." The seal may be used by causing it or a facsimile thereof to be impressed, affixed, manually reproduced or rubber stamped with indelible ink. 6.02 Fiscal Year. The fiscal year of the corporation shall be on a calendar year basis or as otherwise established by resolution of the board of directors. 6.03 Manner of Giving Notice; Effectiveness. Whenever notice is required by law, the articles of incorporation or these bylaws to be given to any shareholder or director, such notice shall be in writing (unless oral notice is reasonable under the circumstances) and may be given in person or by telephone, telegraph, teletype, electronically transmitted facsimile or other form or wire or wireless communication, first class, certified or registered mail, private courier or in any other manner permitted by law. If written, notice shall be effective as to each such shareholder or director, as the case may be may, as follows: (a) in the case of notice mailed by the corporation to the shareholders, upon deposit in the United States mail, addressed to the shareholder at the address as it appears in the corporation's current record of shareholders and with first class postage prepaid; and (b) in all other cases, the earliest of (i) the date received, (ii) five days after deposit in the United States mail (properly addressed and with first class postage prepaid), and (iii) the date shown on the return receipt, if mailed by registered or certified mail, return receipt requested, and the receipt is signed by or on behalf of the addressee. Oral notice is effective when communicated. If three successive notices (whether with respect to a meeting of shareholders or otherwise) are given by the corporation to a shareholder and are returned as undeliverable, no further notices to such shareholder shall be necessary until another address for the shareholder is made known to the corporation. 6.04 Receipt of Notices by the Corporation. Except as otherwise expressly provided herein, notices, shareholder writings consenting to action and other documents and writings shall be deemed to be received by the corporation when they are actually received: (a) at the registered office of the corporation addressed to the registered agent; (b) at the principal office of the corporation (as that office is designated in the most recent document filed by the corporation with the Colorado Secretary of State providing such information) addressed to the corporation or to the secretary; (c) by the president or the secretary wherever that officer may be found; or (d) by any other person authorized from time to time by the board of directors, the president or the secretary to receive such writings, wherever such person is found. 6.05 Amendments. The board of directors or shareholders may make, amend and repeal the bylaws of the corporation at any time and from time to time as provided by law. 6.06 Voting of Securities by the Corporation. Unless otherwise provided by resolution of the board of directors, on behalf of the corporation, the president or any vice president shall, unless otherwise directed by the board or directors, attend in person or by substitute appointed by him or her, or shall execute on behalf of the corporation written instruments appointing a proxy or proxies to represent the corporation at, all meetings of the shareholders or members of any other corporation or entity in which the corporation holds an interest, and may, on behalf of the corporation, in person or by substitute or by proxy, execute written waivers of notice and consents with respect to any such meetings. At all such meetings or otherwise, the president or any vice president, in person or by substitute or by proxy, may vote and execute written consents and other instruments with respect to such interest and may exercise any and all rights and powers incident to the ownership of such interest, subject, however, to the instructions, if any, of the board of directors. The undersigned, being the duly elected and acting secretary of Equity Oil Company, hereby certifies that the foregoing bylaws were adopted as the bylaws of the corporation by the board of directors on January 25, 1996. /S/ CLAY NEWTON CLAY NEWTON, Secretary EX-21 4 LIST OF SUBSIDIARIES Subsidiaries Symskaya Exploration, Inc, a Texas corporation, is owned 50% each by Equity Oil Company and Leucadia National Corporation. EX-23 5 CONSENT OF EXPERTS Consent of Independent Accountants We consent to the incorporation by reference in the registration statment of Equity Oil Company on Form S-8 of our report dated January 12, 1996, on our audits of the financial statements of Equity Oil Company as of December 31, 1995 and 1994, and for each of the three years in the period ended December 31, 1995, which report is included in this Annual Report on Form 10-K. /s/ Coopers & Lybrand, L.L.P. - ----------------------------- Signature Salt Lake City, Utah March 8, 1996 EX-27 6 ART 5 FDS FOR 1995 10-K
5 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 511,252 0 2,620,865 0 0 5,363,978 99,242,754 57,549,855 53,947,050 1,642,929 0 12,711,100 0 0 0 53,947,050 12,259,739 13,250,556 0 15,291,586 0 0 72,625 (2,041,030) (786,218) (1,254,812) 0 0 0 (1,254,812) (.10) (.10)
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